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    WISCONSIN PUBLIC SERVICE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS


    May 5, 2022 - Edgar Glimpses

     

      CORPORATE DEVELOPMENTS

       The following discussion should be read in conjunction with the accompanying unaudited financial statements and related notes and our 2021 Annual Report on Form 10-K. Introduction We are an electric and natural gas utility and an indirect wholly owned subsidiary of WEC Energy Group. We derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers in Wisconsin. We also provide wholesale electric service to numerous utilities and cooperatives for resale. We conduct our business primarily through our utility reportable segment. See Note 16, Segment Information, for more information on our reportable business segments. 

      Corporate Strategy

       Our goal is to continue to build and sustain long-term value for our customers and WEC Energy Group's shareholders by focusing on the fundamentals of our business: environmental stewardship; reliability; operating efficiency; financial discipline; exceptional customer care; and safety. WEC Energy Group's capital investment plan for efficiency, sustainability and growth, referred to as its ESG Progress Plan, provides a roadmap to achieve this goal. It is an aggressive plan to cut emissions, maintain superior reliability, deliver significant savings for customers, and grow WEC Energy Group's and our investment in the future of energy. Throughout its strategic planning process, WEC Energy Group takes into account important developments, risks and opportunities, including new technologies, customer preferences and affordability, energy resiliency efforts, and sustainability. WEC Energy Group published the results of a priority sustainability issue assessment in 2020, identifying the issues that are most important to the company and its stakeholders over the short and long terms. This risk and priority assessment has formed WEC Energy Group's direction as a company. Creating a Sustainable Future WEC Energy Group's ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fired generation at its electric utilities including us. When taken together, the retirements and new investments should better balance supply with demand, while maintaining reliable, affordable energy for our customers. The retirements will contribute to meeting WEC Energy Group's and our goals to reduce CO2 emissions from electric generation. In May 2021, WEC Energy Group announced goals to achieve reductions in carbon emissions from its electric generation fleet by 60% by the end of 2025 and by 80% by the end of 2030, both from a 2005 baseline. WEC Energy Group expects to achieve these goals by making operating refinements, retiring less efficient generating units and executing its capital plan. Over the longer term, the target for its generation fleet is net-zero CO2 emissions by 2050. As part of our path toward these goals, by the end of 2030, WEC Energy Group expects its use of coal will account for less than 5% of the power it supplies to its customers, and WEC Energy Group believes it will be in a position to eliminate coal as an energy source by the end of 2035. WEC Energy Group already has retired more than 1,800 MWs of coal-fired generation since the beginning of 2018, which included the 2018 retirement of the Pulliam power plant as well as the jointly-owned Edgewater Unit 4 generating units. Through the ESG Progress Plan, WEC Energy Group expects to retire approximately 1,600 MW of additional fossil-fueled generation by the end of 2025, which includes the planned retirement in 2023-2024 of the jointly-owned Columbia Units 1-2. In addition to retiring these older, fossil-fueled plants, WEC Energy Group expects to invest approximately $3.5 billion from 2022-2026 in regulated renewable energy in Wisconsin. WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning zero-carbon-emitting renewable generation facilities that are anticipated to include the following new investments made by either us or WE based on specific customer needs: 

      •1,400 MW of utility-scale solar (amount does not include WE's Badger Hollow Solar Park II, which is currently under construction); •800 MW of battery storage; and

      03/31/2022 Form 10-Q 22 Wisconsin Public Service Corporation

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       Table of Contents •100 MW of wind. 

      WEC Energy Group also plans on investing in a combination of clean, natural gas-fired generation, made by either us or WE based on specific customer needs, including:

       •100 MW of RICE natural gas-fueled generation; •the planned purchase of 200 MW of capacity in West Riverside - a new, combined-cycle natural gas plant recently completed by Alliant Energy in Wisconsin; and •the planned purchase of Whitewater, a natural gas-fired combined cycle electric generating facility with a capacity of 236.5 MW. The new investments discussed above are in addition to the renewable projects currently underway. For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects. 

      In addition, we invested in 200 MW of utility-scale solar. We partnered with an unaffiliated utility to construct two solar projects now in service in Wisconsin: Two Creeks Solar Park and Badger Hollow I. We own 100 MW of each project for a total of 200 MW.

       In August 2021, the PSCW approved pilot programs for us to install and maintain EV charging equipment for customers at their homes or businesses. The programs provide direct benefits to customers by removing cost barriers associated with installing EV equipment. In October 2021, subject to the receipt of any necessary regulatory approvals, WEC Energy Group pledged to expand the EV charging network within its utilities' electric service territories. In doing so, WEC Energy Group joined a coalition of utility companies in a unified effort to make EV charging convenient and widely available throughout the Midwest. The coalition WEC Energy Group joined is planning to help build and grow EV charging corridors, enabling the general public to safely and efficiently charge their vehicles. WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution system. WEC Energy Group set a target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030. WEC Energy Group plans to achieve its net-zero goal through an effort that includes both continuous operational improvements and equipment upgrades, as well as the use of RNG throughout its utility systems. As part of WEC Energy Group's effort to look for new opportunities in sustainable energy, it is testing the effects of blending hydrogen, a clean generating fuel, with natural gas at one of its RICE generating units in the Upper Peninsula of Michigan. WEC Energy Group is partnering with the Electric Power Research Institute in this research that could help create another viable option for decarbonizing the economy. The project will be carried out in 2022, and the results will be shared across the industry. 

      Reliability

      We have made significant reliability-related investments in recent years, and in accordance with the ESG Progress Plan, expect to continue strengthening and modernizing our generation fleet, as well as our electric and natural gas distribution networks to further improve reliability.

      For more details, see Liquidity and Capital Resources - Cash Requirements - Significant Capital Projects.

      Operating Efficiency

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

      WEC Energy Group continues to focus on integrating the resources of its businesses and finding the best and most efficient processes while meeting all applicable legal and regulatory requirements.

      03/31/2022 Form 10-Q 23 Wisconsin Public Service Corporation

      --------------------------------------------------------------------------------

       Table of Contents Financial Discipline 

      A strong adherence to financial discipline is essential to meeting our earnings projections and maintaining a strong balance sheet, stable cash flows, and quality credit ratings.

       We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer strategic to operations, are not performing as intended, or have an unacceptable risk profile. See Note 2, Acquisition, for more information on our acquisition of Whitewater. Exceptional Customer Care Our approach is driven by an intense focus on delivering exceptional customer care every day. We strive to provide the best value for our customers by demonstrating personal responsibility for results, leveraging our capabilities and expertise, and using creative solutions to meet or exceed our customers' expectations. A multiyear effort is driving a standardized, seamless approach to digital customer service across all of the WEC Energy Group companies. It has moved all utilities, including us, to a common platform for all customer-facing self-service options. Using common systems and processes reduces costs, provides greater flexibility and enhances the consistent delivery of exceptional service to customers. Safety Safety is one of our core values and a critical component of our culture. We are committed to keeping our employees and the public safe through a comprehensive corporate safety program that focuses on employee engagement and elimination of at-risk behaviors. Under our "Target Zero" mission, we have an ultimate goal of zero incidents, accidents, and injuries. Management and union leadership work together to reinforce the Target Zero culture. We set annual goals for safety results as well as measurable leading indicators, in order to raise awareness of at-risk behaviors and situations and guide injury-prevention activities. All employees are encouraged to report unsafe conditions or incidents that could have led to an injury. Injuries and tasks with high levels of risk are assessed, and findings and best practices are shared across the WEC Energy Group companies. Our corporate safety program provides a forum for addressing employee concerns, training employees and contractors on current safety standards, and recognizing those who demonstrate a safety focus. 

      RESULTS OF OPERATIONS

      THREE MONTHS ENDED MARCH 31, 2022

      Earnings

       Our earnings for the first quarter of 2022 were $76.6 million, compared with $69.3 million for the same quarter in 2021. See below for additional information on the $7.3 million increase in earnings. 

      Expected 2022 Annual Effective Tax Rate

       We expect our 2022 annual effective tax rate to be between 23% and 24%. Our effective tax rate calculations are revised every quarter based on the best available year-end tax assumptions, adjusted in the following year after returns are filed. Tax accrual estimates are trued-up to the actual amounts claimed on the tax returns and further adjusted after examinations by taxing authorities, as needed. Non-GAAP Financial Measures The discussion below addresses the contribution of our utility segment to net income. The discussion includes financial information prepared in accordance with GAAP, as well as electric margins and natural gas margins, which are not measures of financial performance under GAAP. Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural 

      03/31/2022 Form 10-Q 24 Wisconsin Public Service Corporation

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       Table of Contents gas revenues less cost of natural gas sold) are non-GAAP financial measures because they exclude other operation and maintenance expense, depreciation and amortization, and property and revenue taxes. We believe that electric and natural gas margins provide a useful basis for evaluating utility operations since the majority of prudently incurred fuel and purchased power costs, as well as prudently incurred natural gas costs, are passed through to customers in current rates. As a result, management uses electric and natural gas margins internally when assessing the operating performance of our utility segment as these measures exclude the majority of revenue fluctuations caused by changes in these expenses. Similarly, the presentation of electric and natural gas margins herein is intended to provide supplemental information for investors regarding our operating performance. Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the three months ended March 31, 2022 and 2021 was $107.1 million and $85.6 million, respectively. The discussion below includes a table that provides the calculation of electric margins and natural gas margins, along with a reconciliation to the most directly comparable GAAP measure, operating income. 

      Utility Segment Contribution to Net Income

      The following table compares our utility segment's contribution to net income for the first quarter of 2022, with the same quarter in 2021, including favorable or better, "B", and unfavorable or worse, "W", variances.

       Three Months Ended March 31 (in millions) 2022 2021 B (W) Electric revenues $ 311.6 $ 272.7 $ 38.9 Fuel and purchased power 106.6 78.6 (28.0) Total electric margins 205.0 194.1 10.9 Natural gas revenues 167.3 132.6 34.7 Cost of natural gas sold 120.9 89.5 (31.4) Total natural gas margins 46.4 43.1 3.3 Total electric and natural gas margins 251.4 

      237.2 14.2

       Other operation and maintenance 83.7 95.4 11.7 Depreciation and amortization 49.7 46.0 (3.7) Property and revenue taxes 10.9 10.2 (0.7) Operating income 107.1 85.6 21.5 Other income, net 9.7 8.2 1.5 Interest expense 16.6 16.2 (0.4) Income before income taxes 100.2 77.6 22.6 Income tax expense 23.9 8.6 (15.3) Net income $ 76.3 $ 69.0 $ 7.3 

      The following table shows a breakdown of other operation and maintenance:

       Three Months Ended March 31 (in millions) 2022 2021 B (W) Operation and maintenance not included in line items below $ 45.8 $ 48.7 $ 2.9 Transmission (1) 33.3 38.0 4.7 Regulatory amortizations and other pass through expenses (2) 10.0 8.7 (1.3) Earnings sharing mechanism (3) (5.4) - 5.4 Total other operation and maintenance $ 83.7 

      $ 95.4 $ 11.7

       (1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting for American Transmission Company LLC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference 

      03/31/2022 Form 10-Q 25 Wisconsin Public Service Corporation

      --------------------------------------------------------------------------------

       Table of Contents 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 2022 and 2021, $38.0 million and $38.4 million, respectively, of costs were billed to us by transmission providers. During the first quarter of 2022 we amortized $4.7 million of the regulatory liabilities associated with our transmission escrow to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase. This amortization drove the decrease in transmission expense in the first quarter of 2022, compared with the same quarter in 2021. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on 2022 base rates. 

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

       (3)Represents amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism to offset certain 2022 revenue deficiencies, as approved by the PSCW in order to forego filing for a 2022 base rate increase. See Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on 2022 base rates. The following tables provide information on delivered sales volumes by customer class and weather statistics: Three Months Ended March 31 MWh (in thousands) Electric Sales Volumes 2022 2021 B (W) Customer class Residential 791.3 758.6 32.7 Small commercial and industrial 993.7 968.0 

      25.7

       Large commercial and industrial 970.8 957.5 13.3 Other 7.5 7.6 (0.1) Total retail 2,763.3 2,691.7 71.6 Wholesale 394.5 413.2 (18.7) Resale 91.5 90.1 1.4 Total sales in MWh 3,249.3 3,195.0 54.3 Three Months Ended March 31 Therms (in millions) Natural Gas Sales Volumes 2022 2021 B (W) Customer class Residential 130.7 115.8 14.9 Commercial and industrial 88.6 75.1 13.5 Total retail 219.3 190.9 28.4 Transportation 152.8 143.8 9.0 Total sales in therms 372.1 334.7 37.4 Three Months Ended March 31 Degree Days Weather (1) 2022 2021 B (W) Heating (3,647 Normal) 3,843 3,482 10.4 % 

      (1)Normal degree days are based on a 20-year moving average of monthly temperatures from the Green Bay, Wisconsin weather station.

      Electric Revenues

       Electric revenues increased $38.9 million during the first quarter of 2022, compared with the same quarter in 2021. To the extent that changes in fuel and purchased power costs are passed through to customers, the changes are offset by comparable changes in revenues. See the discussion of electric utility margins below for more information related to the recovery of fuel and purchased power costs and the remaining drivers of the changes in electric revenues. 

      03/31/2022 Form 10-Q 26 Wisconsin Public Service Corporation

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       Table of Contents Electric Utility Margins Electric utility margins increased $10.9 million during the first quarter of 2022, compared with the same quarter in 2021. The significant factors impacting the higher electric utility margins were: •A $12.5 million increase in margins related to the impact of unprotected excess deferred taxes in the first quarter of 2021, which we agreed to return to customers in our PSCW-approved Wisconsin rate orders. This increase in margins is offset in income taxes. •A $4.5 million net increase in margins related to higher retail sales volumes, driven by the impact of colder winter weather during the first quarter of 2022, compared with the same quarter in 2021. As measured by heating degree days, the first quarter of 2022 was 10.4% colder than the same quarter in 2021. These increases in margins were partially offset by a $6.6 million quarter-over-quarter negative impact from collections of fuel and purchased power costs compared with costs approved in rates. Under the Wisconsin fuel rules, our margins are impacted by under- or over-collections of certain fuel and purchased power costs that are 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. 

      Natural Gas Revenues

       Natural gas revenues increased $34.7 million during the first quarter of 2022, compared with the same quarter in 2021. Because prudently incurred natural gas costs are passed through to our customers in current rates, the changes are offset by comparable changes in revenues. The average per-unit cost of natural gas increased 19.4% during the first quarter of 2022, compared with the same quarter in 2021. The remaining drivers of changes in natural gas revenues are described in the discussion of natural gas utility margins below. 

      Natural Gas Utility Margins

       Natural gas utility margins increased $3.3 million during the first quarter of 2022, compared with the same quarter in 2021. The most significant factor impacting the higher natural gas utility margins was an increase from higher sales volumes, primarily driven by colder winter weather during the first quarter of 2022, compared with the same quarter in 2021, as well as the continued economic recovery in Wisconsin from the COVID-19 pandemic. 

      Other Operating Expenses (includes other operation and maintenance, depreciation and amortization, and property and revenue taxes)

      Other operating expenses at the utility segment decreased $7.3 million during the first quarter of 2022, compared with the same quarter in 2021. The significant factors impacting the decrease in operating expenses were:

       •A $5.4 million decrease in expense driven by the amortization of a certain portion of our regulatory liability associated with our 2020 earnings sharing mechanism, as discussed in the notes under the other operation and maintenance table above. 

      •A $4.7 million decrease in transmission expense driven by the amortization of a certain portion of our regulatory liabilities associated with transmission escrow balances, as discussed in the notes under the other operation and maintenance table above.

      •A $2.6 million decrease related to a gain on land sales during the first quarter of 2022.

      These decreases in other operating expenses were substantially offset by:

      •A $3.7 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan.

       •A $3.2 million increase in electric and natural gas distribution expenses, primarily driven by increased maintenance expense related to significant winter storms in 2022. •A $1.3 million increase in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above. 

      03/31/2022 Form 10-Q 27 Wisconsin Public Service Corporation

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       Table of Contents Other Income, Net Other income, net increased $1.5 million during the first quarter of 2022, compared with the same quarter in 2021, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs. See Note 14, Employee Benefits, for more information on our benefit costs. This increase was partially offset by a decrease in allowance for funds used during construction-equity, driven by Badger Hollow I being placed in service in November 2021. 

      Income Tax Expense

       Income tax expense increased $15.3 million during the first quarter of 2022, compared with the same quarter in 2021. The increase in income tax expense was due to an approximate $12.5 million negative impact related to lower quarter-over-quarter amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with the Wisconsin rate orders approved by the PSCW, effective January 1, 2020. The impact due to the benefit from the amortization of the unprotected excess deferred tax benefits from the Tax Legislation did not impact earnings as there was an offsetting positive impact in operating income. Also contributing to this increase in income tax expense was an increase in pretax income. See Note 10, Income Taxes, and Note 23, Regulatory Environment, in our 2021 Annual Report on Form 10-K for additional information on unprotected tax benefits. 

      Other Segment Contribution to Net Income

       Three Months Ended March 31 (in millions) 2022 2021 B (W) Net income $ 0.3 $ 0.3 $ - 

      LIQUIDITY AND CAPITAL RESOURCES

      Overview

       We expect to maintain adequate liquidity to meet our cash requirements for the operation of our business and implementation of our corporate strategy through the internal generation of cash from operations and access to the capital markets. 

      Cash Flows

       The following table summarizes our cash flows during the three months ended March 31: (in millions) 2022 2021 Change in 2022 Over 2021 Cash provided by (used in): Operating activities $ 163.6 $ 117.0 $ 46.6 Investing activities (62.6) (77.2) 14.6 Financing activities (101.4) (40.0) (61.4) Operating Activities 

      Net cash provided by operating activities increased $46.6 million during the first quarter of 2022, compared with the same quarter in 2021, driven by:

       •A $54.6 million increase in cash related to higher overall collections from customers as a result of an increase in retail sales volumes during the first quarter of 2022, compared with the same quarter in 2021. This increase was driven by colder winter weather and the continued economic recovery from the COVID-19 pandemic. •A $26.5 million increase in cash due to realized gains on derivative instruments as well as higher collateral received from counterparties during the first quarter of 2022, driven by an increase in the fair value of our natural gas derivative assets during the first quarter of 2022, compared with the same quarter in 2021. 

      03/31/2022 Form 10-Q 28 Wisconsin Public Service Corporation

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       Table of Contents These increases in net cash provided by operating activities were partially offset by a $37.8 million decrease in cash related to higher payments for fuel and purchased power at our plants during the first quarter of 2022, compared with the same quarter in 2021. We incurred higher natural gas costs during the first quarter of 2022, compared with the same quarter in 2021, as a result of an increase in the price of natural gas. 

      Investing Activities

      Net cash used in investing activities decreased $14.6 million during the first quarter of 2022, compared with the same quarter in 2021, driven by:

      •Payments of $5.1 million to affiliates for assets transferred related to a customer billing system during the first quarter of 2021.

      •Proceeds of $4.4 million received for the cash surrender of life insurance during the first quarter of 2022.

       •A $3.2 million decrease in cash paid for capital expenditures during the first quarter of 2022, compared with the same quarter in 2021, which is discussed in more detail below. Capital Expenditures 

      Capital expenditures for the three months ended March 31 were as follows:

       (in millions) 2022 2021 Change in 2022 Over 2021 Capital expenditures $ 68.0 $ 71.2 $ (3.2) The decrease in cash paid for capital expenditures during the first quarter of 2022, compared with the same quarter in 2021, was driven by lower payments for upgrades of automated meter reading devices. This decrease was partially offset by higher payments for capital expenditures related to renewable energy projects during the first quarter of 2022. 

      See Capital Resources and Requirements - Capital Requirements - Significant Capital Projects for more information.

      Financing Activities

       Net cash used in financing activities increased $61.4 million during the first quarter of 2022, compared with the same quarter in 2021, driven by a $186.0 million decrease in cash related to higher net repayments of commercial paper during the first quarter of 2022, compared with the same quarter in 2021. This increase in net cash used in financing activities was partially offset by a $125.0 million equity contribution received from our parent during the first quarter of 2022, to balance our capital structure. We did not receive any equity contributions during the same quarter in 2021. 

      For more information on our financing activities, see Note 8, Short-Term Debt and Lines of Credit.

       Cash Requirements We require funds to support and grow our business. Our significant cash requirements primarily consist of capital and investment expenditures, payments to retire and pay interest on long-term debt, the payment of common stock dividends to our parent, and the funding of our ongoing operations. See the discussion below and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Cash Requirements in our 2021 Annual Report on Form 10-K for additional information regarding our significant cash requirements. 

      03/31/2022 Form 10-Q 29 Wisconsin Public Service Corporation

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       Table of Contents 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 17, Commitments and Contingencies. (in millions) 2022 $ 627.2 (1) 2023 537.3 2024 621.6 Total $ 1,786.1 

      (1)This includes actual capital expenditures already incurred in 2022, as well as estimated capital expenditures for the remainder of the year.

      We continue to upgrade our electric and natural gas distribution systems to enhance reliability. These upgrades include the AMI program. AMI is an integrated system of smart meters, communication networks, and data management systems that enable two-way communication between utilities and customers.

      WEC Energy Group is committed to investing in solar, wind, battery storage, and clean natural gas-fired generation. Below are examples of projects that are proposed or currently underway.

       •We, along with WE and an unaffiliated utility, received PSCW approval to acquire and construct the Paris Solar-Battery Park, 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 constructed, we will own 30 MW of solar generation and 17 MW of battery storage of this project. Our share of the cost of this project is estimated to be approximately $65 million, with construction expected to be completed by the end of 2023. •We, along with WE, received approval to accelerate capital investments in two wind parks. Our share of the investment is expected to be approximately $69 million to repower major components of Crane Creek Wind Park, which is expected to be completed by the end of 2022. •In March 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire and construct the Darien Solar-Battery Park, 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 constructed, we will own 37 MW of solar generation and 12 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $65 million with construction expected to be completed by the end of 2023. •We, 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, we will own 82 MW of this project. Our share of the cost of this project is estimated to be approximately $160 million, with construction expected to be completed by the end of 2022. •In April 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire the Koshkonong Solar-Battery Park, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Dane County, Wisconsin and once constructed, we will own 45 MW of solar generation and 25 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $97 million, with construction expected to be completed by the second quarter of 2024. •We, along with WE, received PSCW approval to construct a natural gas-fired generation facility at our existing Weston power plant site in northern Wisconsin. The new facility will consist of seven RICE units. Once constructed, we will own 64 MW of this project. Our share of the cost of this project is estimated to be approximately $85 million, with construction expected to be completed in 2023. 

      03/31/2022 Form 10-Q 30 Wisconsin Public Service Corporation

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       Table of Contents •In November 2021, we, along with WE, signed an asset purchase agreement to acquire Whitewater, a commercially operational 236.5 MW dual fueled (natural gas and low sulfur fuel oil) combined cycle electrical generation facility in Whitewater, Wisconsin. In December 2021, we, along with WE, filed an application with the PSCW for approval to acquire Whitewater. If approved, our share of the cost of this facility is estimated to be $36.3 million for 50% of the capacity, with the transaction expected to close in January 2023. •In January 2022, we, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire a portion of West Riverside's nameplate capacity. We are also requesting approval to assign the option to purchase part of West Riverside to WE. If approved, we or WE would acquire 100 MW of capacity, in the first of two potential option exercises. West Riverside is a new, combined-cycle natural gas plant recently completed by an unaffiliated utility in Rock County, Wisconsin. If approved, and we don't assign the option to WE, our share of the cost of this ownership interest would be approximately $91 million, with the transaction expected to close in the second quarter of 2023. In 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, which could impact the timing and cost of our planned solar projects. 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 - Withhold Release Order Related to Silica-Based Products for information on the DOC investigation and potential impacts to our solar projects as a result of CBP actions related to solar panels, respectively. 

      Long-Term Debt

      There were no material changes in our outstanding long-term debt during the three months ended March 31, 2022.

      Common Stock Dividends

      During the three months ended March 31, 2022, we paid common stock dividends of $30.0 million to the sole holder of our common stock, Integrys.

      Other Significant Cash Requirements

      See Note 17, Commitments and Contingencies, for information regarding our minimum future commitments related to purchase obligations for the procurement of fuel, power, and gas supply, as well as the related storage and transportation. There were no material changes to our other significant commitments outside the ordinary course of business during the three months ended March 31, 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. See Note 8, Short-Term Debt and Lines of Credit, and Note 13, Guarantees, for more information. Sources of Cash Liquidity We anticipate meeting our short-term and long-term cash requirements to operate our business and implement our corporate strategy through internal generation of cash from operations, equity contributions from our parent, and access to the capital markets, which allows us to obtain external short-term borrowings, including commercial paper, and intermediate or long-term debt securities. Cash generated from operations is primarily driven by sales of electricity and natural gas to our utility customers, reduced by costs of operations. Our access to the capital markets is critical to our overall strategic plan and allows us to supplement cash flows from operations with external borrowings to manage seasonal variations, working capital needs, commodity price fluctuations, unplanned expenses, and unanticipated events. 

      03/31/2022 Form 10-Q 31 Wisconsin Public Service Corporation

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       Table of Contents We maintain a bank back-up credit facility, which provides liquidity support for our obligations with respect to commercial paper and for general corporate purposes. We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The amount, type, and timing of any financings 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, and other factors. We plan to maintain a capital structure consistent with that approved by the PSCW. For more information on our approved capital structure, see Item 1. Business - D. Regulation in our 2021 Annual Report on Form 10-K. 

      The issuance of our securities is subject to the approval of the PSCW. Additionally, with respect to the public offering of securities, we file registration statements with the SEC under the Securities Act of 1933, as amended (1933 Act). The amounts of securities authorized by the PSCW, as well as the securities registered under the 1933 Act, are closely monitored and appropriate filings are made to ensure flexibility in the capital markets.

      Although not the case as of March 31, 2022, our current liabilities sometimes exceed our current assets. We do not expect this to have any impact on our liquidity as we currently believe that our cash and cash equivalents, our available capacity of $263.7 million under our existing revolving credit facility, cash generated from ongoing operations, and access to the capital markets are adequate to meet our short-term and long-term cash requirements.

      See Note 8, Short-Term Debt and Lines of Credit, for more information about our credit facility and commercial paper.

      Investments in Outside Trusts

       We maintain investments in outside trusts to fund the obligation to provide pension and certain OPEB benefits to current and future retirees. These trusts had investments consisting of fixed income and equity securities that are subject to the volatility of the stock market and interest rates. For more information, see Investments in Outside Trusts in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Sources of Cash in our 2021 Annual Report on Form 10-K. Debt Covenants 

      At March 31, 2022, we were in compliance with all 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.

      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 March 31, 2022. From time to time, we may enter into commodity contracts that could require collateral or a termination payment in the event of a credit rating change to below BBB- at S&P Global Ratings, a division of S&P Global Inc., and/or Baa3 at Moody's Investors Service, Inc. We also have other commodity contracts that, in the event of a credit rating downgrade, could result in a reduction of our unsecured credit granted by counterparties. 

      In addition, access to capital markets at a reasonable cost is determined in large part by credit quality. Any credit ratings downgrade could impact our ability to access capital markets.

       Subject to other factors affecting the credit markets as a whole, we believe our current ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agency only. An explanation of the significance of these ratings may be obtained from the rating agency. Such ratings are not a recommendation to buy, sell, or hold securities. Any rating can be revised upward or downward or withdrawn at any time by a rating agency. 

      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 

      03/31/2022 Form 10-Q 32 Wisconsin Public Service Corporation

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       Table of Contents 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

      Withhold Release Order Related to Silica-Based Products

       The CBP issued a WRO in June 2021, applicable to certain silica-based products originating from the Xinjiang Uyghur Autonomous Region of China, such as polysilicon, included in the manufacturing of solar panels. The WRO was issued over allegations of widespread, state-backed forced labor in the region. A significant percentage of the world's polysilicon supply comes from China, and as a result of the WRO, many solar panels imported into the United States are being held by the CBP on suspicion that they originated from, or contain components that originated from, this region in China. Solar panels will only be released after the importer provides satisfactory evidence to the contrary, which can be an arduous process. We cannot currently predict what, if any, impact this supply disruption will have on our future solar projects included in WEC Energy Group's capital plan. 

      United States Department of Commerce Complaint

       In August 2021, a group of anonymous domestic solar manufacturers filed a petition (AD/CVD) with the DOC seeking to impose new tariffs on solar panels and cells imported from several countries, including Malaysia, Vietnam, and Thailand. The petitioners claimed that Chinese solar manufacturers are shifting products to these countries to avoid the tariffs required on products imported from China. In September 2021, the DOC asked that the anonymous group amend its petition to provide more detail and asked the group to identify its members. In its response to the DOC, the anonymous group refused and argued that identifying its members could expose them to retribution from the Chinese solar industry, which dominates the global solar supply chain for critical solar panel components. In November 2021, the DOC rejected the petition filed by the anonymous group and cited the group's anonymity as a driving factor in the denial. 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 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. This decision alone is having an adverse impact on the United States solar industry. 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. 

      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 

      03/31/2022 Form 10-Q 33 Wisconsin Public Service Corporation

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       Table of Contents 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. 

      Environmental Matters

      See Note 17, Commitments and Contingencies, for a discussion of certain environmental matters affecting us, including rules and regulations relating to air quality, water quality, land quality, and climate change.

      Market Risks and Other Significant Risks

       We are exposed to market and other significant risks as a result of the nature of our business and the environment in which we operate. These risks include, but are not limited to, the inflation and supply chain disruptions described below. In addition, there is continuing uncertainty over the impact that the ongoing conflict 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 WEC Energy Group's capital plan. For additional information concerning risks related to inflation and supply chain disruptions, see the two risk factors below that are disclosed in Part I of our 2021 Annual Report on Form 10-K. 

      •Item 1A. Risk Factors - Risks Related to the Operation of Our Business - Our operations and corporate strategy may be adversely affected by supply chain disruptions and inflation.

       •Item 1A. Risk Factors - Risks Related to Economic and Market Volatility - Fluctuating commodity prices could negatively impact our electric and natural gas utility operations. For additional information concerning risk factors, including market risks, see the Cautionary Statement Regarding Forward-Looking Information at the beginning of this report. 

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