Attached files
| file | filename |
|---|---|
| EX-32.2 - WISCONSIN ELECTRIC EXHIBIT 32.2 - WISCONSIN ELECTRIC POWER CO | a2018q3we10qexhibit322.htm |
| EX-32.1 - WISCONSIN ELECTRIC EXHIBIT 32.1 - WISCONSIN ELECTRIC POWER CO | a2018q3we10qexhibit321.htm |
| EX-31.2 - WISCONSIN ELECTRIC EXHIBIT 31.2 - WISCONSIN ELECTRIC POWER CO | a2018q3we10qexhibit312.htm |
| EX-31.1 - WISCONSIN ELECTRIC EXHIBIT 31.1 - WISCONSIN ELECTRIC POWER CO | a2018q3we10qexhibit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018
Commission | Registrant; State of Incorporation; | IRS Employer | ||
File Number | Address; and Telephone Number | Identification No. | ||
001-01245 | WISCONSIN ELECTRIC POWER COMPANY | 39-0476280 | ||
(A Wisconsin Corporation) | ||||
231 West Michigan Street | ||||
P.O. Box 2046 | ||||
Milwaukee, WI 53201 | ||||
(414) 221-2345 | ||||
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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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] (Do not check if a smaller reporting company) | 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, $10 Par Value,
33,289,327 shares outstanding at
September 30, 2018
All of the common stock of Wisconsin Electric Power Company is owned by WEC Energy Group, Inc.
WISCONSIN ELECTRIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2018
TABLE OF CONTENTS
Page | ||||
Page | ||||
09/30/2018 Form 10-Q | i | Wisconsin Electric Power Company |
GLOSSARY OF TERMS AND ABBREVIATIONS
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
Subsidiaries and Affiliates | ||
ATC | American Transmission Company LLC | |
Bluewater | Bluewater Natural Gas Holding, LLC | |
Bostco | Bostco LLC | |
UMERC | Upper Michigan Energy Resources Corporation | |
WBS | WEC Business Services LLC | |
We Power | W.E. Power, LLC | |
WEC Energy Group | WEC Energy Group, Inc. | |
WG | Wisconsin Gas LLC | |
WPS | Wisconsin Public Service Corporation | |
Federal and State Regulatory Agencies | ||
EPA | United States Environmental Protection Agency | |
FERC | Federal Energy Regulatory Commission | |
MDEQ | Michigan Department of Environmental Quality | |
MPSC | Michigan Public Service Commission | |
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 | ||
CO2 | Carbon Dioxide | |
CPP | Clean Power Plan | |
GHG | Greenhouse Gas | |
Measurements | ||
Dth | Dekatherm | |
MW | Megawatt | |
MWh | Megawatt-hour | |
Other Terms and Abbreviations | ||
D.C. Circuit Court of Appeals | United States Court of Appeals for the District of Columbia Circuit | |
ERGS | Elm Road Generating Station | |
Exchange Act | Securities Exchange Act of 1934, as amended | |
FTRs | Financial Transmission Rights | |
MISO | Midcontinent Independent System Operator, Inc. | |
MISO Energy Markets | MISO Energy and Operating Reserves Markets | |
OCPP | Oak Creek Power Plant | |
OC 5 | Oak Creek Power Plant Unit 5 | |
OC 6 | Oak Creek Power Plant Unit 6 | |
OC 7 | Oak Creek Power Plant Unit 7 | |
OC 8 | Oak Creek Power Plant Unit 8 | |
09/30/2018 Form 10-Q | ii | Wisconsin Electric Power Company |
PIPP | Presque Isle Power Plant | |
PWGS | Port Washington Generating Station | |
ROE | Return on Equity | |
Supreme Court | United States Supreme Court | |
Tax Legislation | Tax Cuts and Jobs Act of 2017 | |
09/30/2018 Form 10-Q | iii | Wisconsin Electric Power Company |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
In this report, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements may be identified by reference to a future period or periods or by the use of terms such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets," "will," or variations of these terms.
Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations and associated compliance costs, legal proceedings, effective tax rates, pension and OPEB plans, fuel costs, sources of electric energy supply, coal and natural gas deliveries, remediation costs, environmental matters, liquidity and capital resources, and other matters.
Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in the statements. These risks and uncertainties include those described in risk factors as set forth in this report and our 2017 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 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, and energy efficiency mandates; |
• | The uncertainty surrounding the recently enacted Tax Legislation, 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 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, 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; |
09/30/2018 Form 10-Q | 1 | Wisconsin Electric Power Company |
• | 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; |
• | 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 that result in competitive disadvantages and create the potential for impairment of existing assets; |
• | The timing, costs, and anticipated benefits associated with the remaining integration efforts relating to WEC Energy Group's acquisition of Integrys Energy Group, Inc.; |
• | Potential business strategies to acquire and dispose of assets or businesses, which cannot be assured to be completed timely or within budgets; |
• | The timing and outcome of any audits, disputes, and other proceedings related to taxes; |
• | The ability to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act, while both integrating and continuing to consolidate WEC Energy Group's enterprise systems with those of its other utilities; |
• | The effect of accounting pronouncements issued periodically by standard-setting bodies; and |
• | Other considerations disclosed elsewhere herein and in other reports we file with the SEC or in other publicly disseminated written documents. |
We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
09/30/2018 Form 10-Q | 2 | Wisconsin Electric Power Company |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) | Three Months Ended | Nine Months Ended | ||||||||||||||
September 30 | September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Operating revenues | $ | 924.0 | $ | 943.8 | $ | 2,721.7 | $ | 2,771.2 | ||||||||
Operating expenses | ||||||||||||||||
Cost of sales | 316.5 | 336.5 | 944.4 | 959.0 | ||||||||||||
Other operation and maintenance | 384.7 | 331.2 | 1,086.9 | 982.2 | ||||||||||||
Depreciation and amortization | 87.4 | 83.0 | 259.6 | 247.8 | ||||||||||||
Property and revenue taxes | 27.6 | 28.3 | 82.1 | 85.0 | ||||||||||||
Total operating expenses | 816.2 | 779.0 | 2,373.0 | 2,274.0 | ||||||||||||
Operating income | 107.8 | 164.8 | 348.7 | 497.2 | ||||||||||||
Other income, net | 5.1 | 4.1 | 16.2 | 8.4 | ||||||||||||
Interest expense | 29.9 | 29.3 | 88.8 | 88.0 | ||||||||||||
Other expense | (24.8 | ) | (25.2 | ) | (72.6 | ) | (79.6 | ) | ||||||||
Income before income taxes | 83.0 | 139.6 | 276.1 | 417.6 | ||||||||||||
Income tax (benefit) expense | (20.5 | ) | 49.9 | (26.6 | ) | 150.2 | ||||||||||
Net income | 103.5 | 89.7 | 302.7 | 267.4 | ||||||||||||
Preferred stock dividend requirements | 0.3 | 0.3 | 0.9 | 0.9 | ||||||||||||
Net income attributed to common shareholder | $ | 103.2 | $ | 89.4 | $ | 301.8 | $ | 266.5 | ||||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
09/30/2018 Form 10-Q | 3 | Wisconsin Electric Power Company |
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share and per share amounts) | September 30, 2018 | December 31, 2017 | ||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 4.1 | $ | 12.3 | ||||
Accounts receivable and unbilled revenues, net of reserves of $41.6 and $39.5, respectively | 453.4 | 513.8 | ||||||
Accounts receivable from related parties | 97.8 | 109.1 | ||||||
Materials, supplies, and inventories | 255.8 | 250.7 | ||||||
Prepayments | 93.7 | 144.3 | ||||||
Other | 10.4 | 9.4 | ||||||
Current assets | 915.2 | 1,039.6 | ||||||
Long-term assets | ||||||||
Property, plant, and equipment, net of accumulated depreciation of $3,424.2 and $3,741.8, respectively | 9,450.0 | 10,007.7 | ||||||
Regulatory assets | 2,892.1 | 1,984.9 | ||||||
Other | 97.7 | 89.4 | ||||||
Long-term assets | 12,439.8 | 12,082.0 | ||||||
Total assets | $ | 13,355.0 | $ | 13,121.6 | ||||
Liabilities and Equity | ||||||||
Current liabilities | ||||||||
Short-term debt | $ | 346.0 | $ | 210.9 | ||||
Current portion of long-term debt | — | 250.0 | ||||||
Current portion of capital lease obligations | 48.2 | 42.5 | ||||||
Accounts payable | 225.2 | 329.3 | ||||||
Accounts payable to related parties | 161.4 | 131.5 | ||||||
Accrued payroll and benefits | 42.4 | 53.4 | ||||||
Accrued taxes | 80.4 | 58.2 | ||||||
Other | 112.3 | 111.8 | ||||||
Current liabilities | 1,015.9 | 1,187.6 | ||||||
Long-term liabilities | ||||||||
Long-term debt | 2,413.9 | 2,412.3 | ||||||
Capital lease obligations | 2,819.5 | 2,823.8 | ||||||
Deferred income taxes | 1,216.6 | 1,155.5 | ||||||
Regulatory liabilities | 1,899.1 | 1,708.0 | ||||||
Pension and OPEB obligations | 153.5 | 143.2 | ||||||
Other | 291.8 | 276.9 | ||||||
Long-term liabilities | 8,794.4 | 8,519.7 | ||||||
Commitments and contingencies (Note 17) | ||||||||
Common shareholder's equity | ||||||||
Common stock – $10 par value; 65,000,000 shares authorized; 33,289,327 shares outstanding | 332.9 | 332.9 | ||||||
Additional paid in capital | 831.2 | 802.7 | ||||||
Retained earnings | 2,350.2 | 2,248.3 | ||||||
Common shareholder's equity | 3,514.3 | 3,383.9 | ||||||
Preferred stock | 30.4 | 30.4 | ||||||
Total liabilities and equity | $ | 13,355.0 | $ | 13,121.6 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
09/30/2018 Form 10-Q | 4 | Wisconsin Electric Power Company |
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | Nine Months Ended | |||||||
September 30 | ||||||||
(in millions) | 2018 | 2017 | ||||||
Operating Activities | ||||||||
Net income | $ | 302.7 | $ | 267.4 | ||||
Reconciliation to cash provided by operating activities | ||||||||
Depreciation and amortization | 259.6 | 247.8 | ||||||
Deferred income taxes and investment tax credits, net | (67.3 | ) | 105.2 | |||||
Contributions and payments related to pension and OPEB plans | (5.3 | ) | (5.9 | ) | ||||
Change in – | ||||||||
Accounts receivable and unbilled revenues | 74.4 | 49.0 | ||||||
Materials, supplies, and inventories | (5.1 | ) | (23.6 | ) | ||||
Prepaid taxes | 32.3 | 31.2 | ||||||
Other current assets | 22.4 | 5.3 | ||||||
Accounts payable | (65.0 | ) | (14.6 | ) | ||||
Accrued taxes | 25.7 | (15.2 | ) | |||||
Other current liabilities | (6.3 | ) | (15.6 | ) | ||||
Other, net | 198.1 | (36.7 | ) | |||||
Net cash provided by operating activities | 766.2 | 594.3 | ||||||
Investing Activities | ||||||||
Capital expenditures | (441.7 | ) | (405.7 | ) | ||||
Proceeds from the sale of assets | 0.7 | 22.9 | ||||||
Proceeds from assets transferred to affiliates | 6.1 | — | ||||||
Payments for assets transferred from affiliates | (59.8 | ) | — | |||||
Short-term notes receivable from related parties, net | — | (3.1 | ) | |||||
Other, net | 8.2 | 3.8 | ||||||
Net cash used in investing activities | (486.5 | ) | (382.1 | ) | ||||
Financing Activities | ||||||||
Change in short-term debt | 135.1 | (100.0 | ) | |||||
Repayment of subsidiary note to parent | — | (18.5 | ) | |||||
Retirement of long-term debt | (250.0 | ) | — | |||||
Equity contribution from parent | 28.0 | 75.0 | ||||||
Payment of dividends to parent | (200.0 | ) | (180.0 | ) | ||||
Payment of preferred stock dividends | (0.9 | ) | (0.9 | ) | ||||
Other | (0.1 | ) | 0.1 | |||||
Net cash used in financing activities | (287.9 | ) | (224.3 | ) | ||||
Net change in cash and cash equivalents | (8.2 | ) | (12.1 | ) | ||||
Cash and cash equivalents at beginning of period | 12.3 | 15.4 | ||||||
Cash and cash equivalents at end of period | $ | 4.1 | $ | 3.3 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
09/30/2018 Form 10-Q | 5 | Wisconsin Electric Power Company |
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2018
NOTE 1—GENERAL INFORMATION
As used in these notes, the term "financial statements" refers to the condensed consolidated financial statements. This includes the income statements, balance sheets, and statements of cash flows, unless otherwise noted. In this report, when we refer to "the Company," "us," "we," "our," or "ours," we are referring to Wisconsin Electric Power Company and its subsidiary, Bostco, which was dissolved in October 2018.
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, 2017. Financial results for an interim period may not give a true indication of results for the year. In particular, the results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of expected results for 2018 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—DISPOSITION
Other Segment–Sale of Bostco Real Estate Holdings
In March 2017, we sold the remaining real estate holdings of Bostco located in downtown Milwaukee, Wisconsin, which included retail, office, and residential space. During the first quarter of 2017, we recorded an insignificant gain on the sale, which was included in other income, net on our income statements. The assets included in the sale were not material and, therefore, were not presented as held for sale. The results of operations associated with these assets remained in continuing operations through the sale date as the sale did not represent a shift in our corporate strategy and did not have a major effect on our operations and financial results.
NOTE 3—OPERATING REVENUES
Adoption of ASU 2014-09, Revenues from Contracts with Customers
On January 1, 2018, we adopted ASU 2014-09, Revenues from Contracts with Customers, and the related amendments. In accordance with the guidance, we recognize revenues when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. These revenues include unbilled revenues, which are estimated using the amount of energy delivered to our customers but not billed until after the end of the period.
We adopted this standard using the modified retrospective method. Results for reporting periods beginning after January 1, 2018, are presented under the new standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Adoption of the standard did not result in an adjustment to our opening retained earnings balance as of January 1, 2018, and we do not expect the adoption of the standard to have a material impact on our net income in future periods.
We adopted the following practical expedients and optional exemptions for the implementation of this standard:
• | We elected to exclude from the transaction price any amounts collected from customers for all sales taxes and other similar taxes. |
• | When applicable, we elected to apply the standard to a portfolio of contracts with similar characteristics, primarily our tariff-based contracts, as we reasonably expect that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts. |
09/30/2018 Form 10-Q | 6 | Wisconsin Electric Power Company |
• | We elected to recognize revenue in the amount we have the right to invoice for performance obligations satisfied over time when the consideration received from a customer corresponds directly with the value provided to the customer during the same period. |
• | We elected to not disclose the remaining performance obligations of a contract that has an original expected duration of one year or less. |
• | We elected to apply this standard only to contracts that are not completed as of the date of initial application. |
Disaggregation of Operating Revenues
The following tables present 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 revenue 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.
Comparable amounts have not been presented for the three and nine months ended September 30, 2017, due to our adoption of this standard under the modified retrospective method.
Wisconsin Electric Power Company Consolidated | ||||||||
(in millions) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
Electric utility | $ | 877.0 | $ | 2,441.2 | ||||
Natural gas utility | 45.4 | 274.8 | ||||||
Total revenues from contracts with customers | 922.4 | 2,716.0 | ||||||
Other operating revenues | 1.6 | 5.7 | ||||||
Total operating revenues | $ | 924.0 | $ | 2,721.7 | ||||
Revenues from Contracts with Customers
Electric Utility Operating Revenues
The following table disaggregates electric utility operating revenues into customer class:
Electric Utility Operating Revenues | ||||||||
(in millions) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
Residential | $ | 352.7 | $ | 929.1 | ||||
Small commercial and industrial | 276.9 | 775.2 | ||||||
Large commercial and industrial | 177.9 | 499.2 | ||||||
Other | 5.2 | 15.5 | ||||||
Total retail revenues | 812.7 | 2,219.0 | ||||||
Wholesale | 28.3 | 85.7 | ||||||
Resale | 31.0 | 111.8 | ||||||
Steam | 2.6 | 16.9 | ||||||
Other utility revenues | 2.4 | 7.8 | ||||||
Total electric utility operating revenues | $ | 877.0 | $ | 2,441.2 | ||||
Electricity sales to residential and commercial and industrial customers are generally accomplished through requirements contracts, which provide for the delivery of as much electricity as the customer needs. These contracts represent discrete deliveries of electricity and consist of one distinct performance obligation satisfied over time, as the electricity is delivered and consumed by the customer simultaneously. For our residential and commercial and industrial customers, our performance obligation is bundled to consist of both the sale and the delivery of the electric commodity. The rates, charges, terms, and conditions of service for sales to these customers are included in tariffs that have been approved by state regulators. These rates often have a fixed component customer charge and a usage-based variable component charge. We recognize revenue for the fixed component customer charge
09/30/2018 Form 10-Q | 7 | Wisconsin Electric Power Company |
monthly using a time-based output method. We recognize revenue for the usage-based variable component charge using an output method based on the quantity of electricity delivered each month.
Wholesale customers who resell power can choose to either bundle capacity and electricity services together under one contract with a supplier or purchase capacity and electricity separately from multiple suppliers. Furthermore, wholesale customers can choose to have us provide generation to match the customer's load, similar to requirements contracts, or they can purchase specified quantities of electricity and capacity. The rates, charges, terms and conditions of service for sales to wholesale customers are included in tariffs that have been approved by the FERC. Contracts with wholesale customers that include capacity bundled with the delivery of electricity contain two performance obligations, as capacity and electricity are often transacted separately in the marketplace at the wholesale level. When recognizing revenue associated with these contracts, the transaction price is allocated to each performance obligation based on its relative standalone selling price. Revenue is recognized as control of each individual component is transferred to the customer. Electricity is the primary product sold by our electric operations and represents a single performance obligation satisfied over time through discrete deliveries to a customer. Revenue from electricity sales is generally recognized as units are produced and delivered to the customer within the production month. Capacity represents the reservation of an electric generating facility and conveys the ability to call on a plant to produce electricity when needed by the customer. The nature of our performance obligation as it relates to capacity is to stand ready to deliver power. This represents a single performance obligation transferred over time, which generally represents a monthly obligation. Accordingly, capacity revenue is recognized on a monthly basis.
We are an active participant in the MISO Energy Markets, where we bid our generation into the Day Ahead and Real Time markets and procure electricity for our retail and wholesale customers at prices determined by the MISO Energy Markets. Purchase and sale transactions are recorded using settlement information provided by MISO. These purchase and sale transactions are accounted for on a net hourly position. Net purchases in a single hour are recorded as purchased power in cost of sales and net sales in a single hour are recorded as resale revenues. For resale revenues, our performance obligation is created only when electricity is sold into the MISO Energy Markets.
For all of our customers, consistent with the timing of when we recognize revenue, customer billings generally occur on a monthly basis, with payments typically due in full within 30 days. For the majority of our wholesale customers, the price billed for energy and capacity is a formula-based rate. Formula-based rates initially set a customer's current year rates based on the previous year’s expenses. This is a predetermined formula derived from the utility’s costs and a reasonable rate of return. Because these rates are eventually trued up to reflect actual current year costs, they represent a form of variable consideration in certain circumstances. The variable consideration is estimated and recognized over time as wholesale customers receive and consume the capacity and electricity services.
Natural Gas Utility Operating Revenues
The following table disaggregates natural gas utility operating revenues into customer class:
Natural Gas Utility Operating Revenues | ||||||||
(in millions) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
Residential | $ | 20.8 | $ | 176.2 | ||||
Commercial and industrial | 8.1 | 81.9 | ||||||
Total retail revenues | 28.9 | 258.1 | ||||||
Transport | 2.2 | 9.7 | ||||||
Other utility revenues * | 14.3 | 7.0 | ||||||
Total natural gas utility operating revenues | $ | 45.4 | $ | 274.8 | ||||
* | Includes amounts collected from customers for purchased gas adjustment costs. |
We recognize natural gas utility operating revenues under requirements contracts with residential, commercial and industrial, and transportation customers served under our tariffs. Tariffs provide our customers with the standard terms and conditions, including rates, related to the services offered. Requirements contracts provide for the delivery of as much natural gas as the customer needs. These requirements contracts represent discrete deliveries of natural gas and constitute a single performance obligation satisfied over time. Our performance obligation is both created and satisfied with the transfer of control of natural gas upon delivery to the customer. For most of our customers, natural gas is delivered and consumed by the customer simultaneously. A performance obligation can be bundled to consist of both the sale and the delivery of the natural gas commodity. In certain of our service
09/30/2018 Form 10-Q | 8 | Wisconsin Electric Power Company |
territories, customers can purchase the commodity from a third party. In this case, the performance obligation only includes the delivery of the natural gas to the customer.
The transaction price of the performance obligations is valued using rates in our tariffs, which have been approved by the PSCW. These rates often have a fixed component customer charge and a usage-based variable component charge. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component charge using an output method based on natural gas delivered each month.
Consistent with the timing of when we recognize revenue, customer billings generally occur on a monthly basis, with payments typically due in full within 30 days.
Other Operating Revenues
Other operating revenues consist primarily of the following:
(in millions) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
Late payment charges | $ | 1.6 | $ | 6.5 | ||||
Leases | 0.3 | 2.5 | ||||||
Alternative revenues * | (0.3 | ) | (3.3 | ) | ||||
Total other operating revenues | $ | 1.6 | $ | 5.7 | ||||
* | Negative amounts can result from alternative revenues being reversed to revenues from contracts with customers as the customer is billed for these alternative revenues. Negative amounts can also result from revenues to be refunded to customers subject to wholesale true-ups, as discussed below. |
Alternative Revenues
Alternative revenues are created from programs authorized by regulators that allow us to record additional revenues by adjusting rates in the future, usually as a surcharge applied to future billings, in response to past activities or completed events. We record alternative revenues when the regulator-specified conditions for recognition have been met. We reverse these alternative revenues as the customer is billed, at which time this revenue is presented as revenues from contracts with customers.
Our only alternative revenue program relates to the wholesale electric service that we provide to customers under market-based rates and FERC formula rates. The customer is charged a base rate each year based upon a formula using prior year actual costs and customer demand. A true-up is calculated based on the difference between the amount billed to customers for the demand component of their rates and what the actual cost of service was for the year. The true-up can result in an amount that we will recover from or refund to the customer. We consider the true-up portion of the wholesale electric revenues to be alternative revenues.
09/30/2018 Form 10-Q | 9 | Wisconsin Electric Power Company |
NOTE 4—REGULATORY ASSETS AND LIABILITIES
The following regulatory assets were reflected on our balance sheets at September 30, 2018 and December 31, 2017. For more information on our regulatory assets, see Note 5, Regulatory Assets and Liabilities, in our 2017 Annual Report on Form 10-K.
(in millions) | September 30, 2018 | December 31, 2017 | ||||||
Regulatory assets (1) | ||||||||
Capital leases | $ | 853.4 | $ | 801.3 | ||||
Plant retirements (2) | 760.9 | 6.6 | ||||||
Unrecognized pension and OPEB costs | 455.3 | 484.4 | ||||||
System support resource | 315.0 | 298.9 | ||||||
Income tax (3) | 256.5 | — | ||||||
Electric transmission costs (4) | 123.6 | 220.7 | ||||||
We Power generation | 48.7 | 71.3 | ||||||
Asset retirement obligations | 37.2 | 41.4 | ||||||
Environmental remediation costs | 29.7 | 30.4 | ||||||
Other, net | 11.8 | 29.9 | ||||||
Total regulatory assets | $ | 2,892.1 | $ | 1,984.9 | ||||
(1) | Based on prior and current rate treatment, we believe it is probable that we will continue to recover from customers the regulatory assets in this table. |
(2) | For information on the retirement of our older and less efficient fossil fuel generating units, see Note 5, Property, Plant, and Equipment. |
(3) | For information on the flow through of tax repairs and the regulatory treatment of the Tax Legislation, see Note 19, Regulatory Environment. |
(4) | In May 2018, the PSCW issued an order requiring us to use a portion of our tax benefits related to the Tax Legislation that was signed into law in December 2017 to reduce our transmission regulatory assets. See Note 19, Regulatory Environment, for more information. |
The following regulatory liabilities were reflected on our balance sheets at September 30, 2018 and December 31, 2017. For more information on our regulatory liabilities, see Note 5, Regulatory Assets and Liabilities, in our 2017 Annual Report on Form 10-K.
(in millions) | September 30, 2018 | December 31, 2017 | ||||||
Regulatory liabilities | ||||||||
Income tax * | $ | 983.7 | $ | 849.1 | ||||
Removal costs | 743.1 | 730.0 | ||||||
Mines deferral | 115.4 | 95.1 | ||||||
Energy efficiency programs | 12.9 | 11.1 | ||||||
Uncollectible expense | 11.7 | 6.4 | ||||||
Other, net | 38.4 | 29.4 | ||||||
Total regulatory liabilities | $ | 1,905.2 | $ | 1,721.1 | ||||
Balance Sheet Presentation | ||||||||
Current liabilities | $ | 6.1 | $ | 13.1 | ||||
Regulatory liabilities | 1,899.1 | 1,708.0 | ||||||
Total regulatory liabilities | $ | 1,905.2 | $ | 1,721.1 | ||||
* | For information on the regulatory treatment of the Tax Legislation, see Note 19, Regulatory Environment. |
09/30/2018 Form 10-Q | 10 | Wisconsin Electric Power Company |
NOTE 5—PROPERTY, PLANT, AND EQUIPMENT
Utility Segment Plant to be Retired
We have evaluated future plans for our older and less efficient fossil fuel generating units and have either retired or announced the retirement of the plants identified below. In addition, a severance liability was recorded in other current liabilities on our balance sheets related to these plant retirements.
(in millions) | ||||
Severance liability at December 31, 2017 | $ | 25.8 | ||
Severance payments | (9.5 | ) | ||
Other | (3.0 | ) | ||
Total severance liability at September 30, 2018 | $ | 13.3 | ||
Pleasant Prairie Power Plant
The Pleasant Prairie power plant was retired effective April 10, 2018. The carrying value of this plant was $653.3 million at September 30, 2018. This amount included the net book value of $755.8 million, which was classified as a regulatory asset on our balance sheet. In addition, a $102.5 million cost of removal reserve related to the Pleasant Prairie power plant was classified as a regulatory liability at September 30, 2018. We continue to amortize this regulatory asset on a straight-line basis using the composite depreciation rates approved by the PSCW before this plant was retired. Amortization is included in depreciation and amortization in the income statement. The physical dismantlement of the plant will not occur immediately. It may take several years to finalize long-term plans for the site. See Note 17, Commitments and Contingencies, for more information.
Presque Isle Power Plant
In October 2017, the MPSC approved UMERC’s application to construct and operate approximately 180 MW of natural gas-fired generation in the Upper Peninsula of Michigan. The new units are expected to begin commercial operation during the second quarter of 2019. Upon receiving the MPSC's approval, retirement of the PIPP generating units became probable. In connection with MISO's April 2018 approval of the retirement of the plant, the PIPP units will be retired on or before May 31, 2019. The carrying value of the PIPP units was $186.9 million at September 30, 2018. This amount included the net book value of $197.4 million, which was classified as plant to be retired within property, plant, and equipment on our balance sheet. In addition, a $10.5 million cost of removal reserve related to the PIPP units was classified as a regulatory liability at September 30, 2018. These units are included in rate base, and we continue to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW. See Note 17, Commitments and Contingencies, for more information.
NOTE 6—COMMON EQUITY
Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to WEC Energy Group in the form of cash dividends, loans, or advances. In addition, Wisconsin law prohibits us from making loans to or guaranteeing obligations of WEC Energy Group or its subsidiaries. See Note 8, Common Equity, in our 2017 Annual Report on Form 10-K for additional information on these and other restrictions.
We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.
NOTE 7—SHORT-TERM DEBT AND LINES OF CREDIT
The following table shows our short-term borrowings and their corresponding weighted-average interest rates:
(in millions, except percentages) | September 30, 2018 | December 31, 2017 | ||||||
Commercial paper | ||||||||
Amount outstanding | $ | 346.0 | $ | 210.9 | ||||
Weighted-average interest rate on amounts outstanding | 2.30 | % | 1.81 | % | ||||
09/30/2018 Form 10-Q | 11 | Wisconsin Electric Power Company |
Our average amount of commercial paper borrowings based on daily outstanding balances during the nine months ended September 30, 2018, was $162.1 million with a weighted-average interest rate during the period of 2.23%.
The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including available capacity under this facility:
(in millions) | Maturity | September 30, 2018 | |||||
Revolving credit facility | October 2022 | $ | 500.0 | ||||
Less: | |||||||
Letters of credit issued inside credit facility | $ | 1.2 | |||||
Commercial paper outstanding | 346.0 | * | |||||
Available capacity under existing agreement | $ | 152.8 | |||||
* | See Note 8, Long-Term Debt, for more information about the use of proceeds from our issuance of long-term debt in October 2018. |
NOTE 8—LONG-TERM DEBT
In October 2018, we issued $300.0 million of 4.30% Debentures due October 15, 2048, and used the net proceeds to repay short-term debt and for working capital and other corporate purposes.
In July 2018, we redeemed all $80.0 million of our series of tax-exempt pollution control refunding bonds. From August 2009 until they were called, the bonds were not reported in our long-term debt because they were previously repurchased by us.
In June 2018, our $250.0 million of 1.70% Debentures matured, and the outstanding principal was paid with proceeds received from issuing commercial paper.
NOTE 9—MATERIALS, SUPPLIES, AND INVENTORIES
Our inventory consisted of:
(in millions) | September 30, 2018 | December 31, 2017 | ||||||
Materials and supplies | $ | 142.4 | $ | 140.7 | ||||
Fossil fuel | 70.9 | 74.8 | ||||||
Natural gas in storage | 42.5 | 35.2 | ||||||
Total | $ | 255.8 | $ | 250.7 | ||||
Substantially all materials and supplies, fossil fuel, and natural gas in storage inventories are recorded using the weighted-average cost method of accounting.
NOTE 10—INCOME TAXES
The effective tax rates of (24.7)% and (9.6)% for the three and nine months ended September 30, 2018, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to the flow through of tax repairs in connection with the Wisconsin rate settlement and the impact of the Tax Legislation, partially offset by state income taxes. The Tax Legislation, signed into law in December 2017, required us to remeasure our deferred income taxes and begin to amortize the resulting excess deferred income taxes beginning in 2018 in accordance with normalization requirements. See Note 19, Regulatory Environment, for more information on the Tax Legislation and the Wisconsin rate settlement.
On December 22, 2017, the SEC staff issued guidance in Staff Accounting Bulletin 118 (SAB 118), Income Tax Accounting Implications of the Tax Legislation, which provides for a measurement period of up to one year from the enactment date to complete accounting under GAAP for the tax effects of the legislation. Due to the complex and comprehensive nature of the enacted tax law changes, and their application under GAAP, certain amounts related to bonus depreciation and future tax benefit utilization recorded in the financial statements as a result of the Tax Legislation are to be considered "provisional" as discussed in SAB 118 and subject to revision. We are awaiting additional guidance from industry and income tax authorities in order to finalize our accounting.
09/30/2018 Form 10-Q | 12 | Wisconsin Electric Power Company |
NOTE 11—FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methods.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methods that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. We use a mid-market pricing convention (the mid-point 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:
September 30, 2018 | ||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Derivative assets | ||||||||||||||||
Natural gas contracts | $ | 1.9 | $ | 0.1 | $ | — | $ | 2.0 | ||||||||
FTRs | — | — | 6.4 | 6.4 | ||||||||||||
Coal contracts | — | 0.2 | — | 0.2 | ||||||||||||
Total derivative assets | $ | 1.9 | $ | 0.3 | $ | 6.4 | $ | 8.6 | ||||||||
Derivative liabilities | ||||||||||||||||
Natural gas contracts | $ | 0.1 | $ | — | $ | — | $ | 0.1 | ||||||||
09/30/2018 Form 10-Q | 13 | Wisconsin Electric Power Company |
December 31, 2017 | ||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Derivative assets | ||||||||||||||||
Natural gas contracts | $ | 0.5 | $ | 0.1 | $ | — | $ | 0.6 | ||||||||
Petroleum products contracts | 0.9 | — | — | 0.9 | ||||||||||||
FTRs | — | — | 2.4 | 2.4 | ||||||||||||
Coal contracts | — | 0.7 | — | 0.7 | ||||||||||||
Total derivative assets | $ | 1.4 | $ | 0.8 | $ | 2.4 | $ | 4.6 | ||||||||
Derivative liabilities | ||||||||||||||||
Natural gas contracts | $ | 2.0 | $ | 0.1 | $ | — | $ | 2.1 | ||||||||
Coal contracts | — | 0.3 | — | 0.3 | ||||||||||||
Total derivative liabilities | $ | 2.0 | $ | 0.4 | $ | — | $ | 2.4 | ||||||||
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 Markets.
The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Balance at the beginning of the period | $ | 8.7 | $ | 6.0 | $ | 2.4 | $ | 3.1 | ||||||||
Purchases | — | — | 9.4 | 6.9 | ||||||||||||
Settlements | (2.3 | ) | (2.3 | ) | (5.4 | ) | (6.3 | ) | ||||||||
Balance at the end of the period | $ | 6.4 | $ | 3.7 | $ | 6.4 | $ | 3.7 | ||||||||
Fair Value of Financial Instruments
The following table shows the financial instruments included on our balance sheets that are not recorded at fair value:
September 30, 2018 | December 31, 2017 | |||||||||||||||
(in millions) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
Preferred stock | $ | 30.4 | $ | 28.3 | $ | 30.4 | $ | 30.5 | ||||||||
Long-term debt, including current portion | 2,413.9 | 2,570.5 | 2,662.3 | 2,976.3 | ||||||||||||
The fair values of long-term debt and preferred stock are categorized within Level 2 of the fair value hierarchy.
NOTE 12—DERIVATIVE INSTRUMENTS
We use derivatives as part of our risk management program to manage the risks associated with the price volatility of purchased power, generation, and natural gas costs for the benefit of our customers. Our approach is non-speculative and designed to mitigate risk. Our regulated hedging programs are approved by the PSCW.
We record derivative instruments on our balance sheets as an asset or liability measured at fair value unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy-related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of fair value accounting to be offset to regulatory assets and liabilities.
09/30/2018 Form 10-Q | 14 | Wisconsin Electric Power Company |
The following table shows our derivative assets and derivative liabilities:
September 30, 2018 | December 31, 2017 | |||||||||||||||
(in millions) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
Other current | ||||||||||||||||
Natural gas contracts | $ | 2.0 | $ | — | $ | 0.6 | $ | 1.9 | ||||||||
Petroleum products contracts | — | — | 0.9 | — | ||||||||||||
FTRs | 6.4 | — | 2.4 | — | ||||||||||||
Coal contracts | 0.2 | — | 0.6 | 0.1 | ||||||||||||
Total other current * | $ | 8.6 | $ | — | $ | 4.5 | $ | 2.0 | ||||||||
Other long-term | ||||||||||||||||
Natural gas contracts | $ | — | $ | 0.1 | $ | — | $ | 0.2 | ||||||||
Coal contracts | — | — | 0.1 | 0.2 | ||||||||||||
Total other long-term * | — | 0.1 | 0.1 | 0.4 | ||||||||||||
Total | $ | 8.6 | $ | 0.1 | $ | 4.6 | $ | 2.4 | ||||||||
* | On our balance sheets, we classify derivative assets and liabilities as other current or other long-term based on the maturities of the underlying contracts. |
Realized gains (losses) on derivative instruments are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:
Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | |||||||||||
(in millions) | Volumes | Gains | Volumes | Gains (Losses) | ||||||||
Natural gas contracts | 12.2 Dth | $ | 0.3 | 4.6 Dth | $ | (0.5 | ) | |||||
Petroleum products contracts | 0.9 gallons | 0.3 | 4.1 gallons | (0.5 | ) | |||||||
FTRs | 5.4 MWh | 1.4 | 6.9 MWh | 2.4 | ||||||||
Total | $ | 2.0 | $ | 1.4 | ||||||||
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||
(in millions) | Volumes | Gains (Losses) | Volumes | Gains (Losses) | ||||||||
Natural gas contracts | 35.9 Dth | $ | (2.1 | ) | 17.8 Dth | $ | 0.2 | |||||
Petroleum products contracts | 3.4 gallons | 0.9 | 13.9 gallons | (1.4 | ) | |||||||
FTRs | 16.0 MWh | 3.1 | 21.2 MWh | 6.9 | ||||||||
Total | $ | 1.9 | $ | 5.7 | ||||||||
On our balance sheets, the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against the fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. At September 30, 2018 and December 31, 2017, we had posted cash collateral of $1.7 million and $4.9 million, respectively, 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:
September 30, 2018 | December 31, 2017 | ||||||||||||||||
(in millions) | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||
Gross amount recognized on the balance sheet | $ | 8.6 | $ | 0.1 | $ | 4.6 | $ | 2.4 | |||||||||
Gross amount not offset on the balance sheet | (0.1 | ) | (0.1 | ) | (1.3 | ) | (2.0 | ) | * | ||||||||
Net amount | $ | 8.5 | $ | — | $ | 3.3 | $ | 0.4 | |||||||||
* | Includes cash collateral posted of $0.7 million. |
09/30/2018 Form 10-Q | 15 | Wisconsin Electric Power Company |
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 September 30 | Nine Months Ended September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | 3.3 | $ | 3.0 | $ | 9.9 | $ | 9.1 | ||||||||
Interest cost | 10.6 | 11.8 | 31.7 | 35.3 | ||||||||||||
Expected return on plan assets | (18.8 | ) | (19.2 | ) | (56.4 | ) | (57.5 | ) | ||||||||
Loss on plan settlement | — | 0.7 | — | 3.5 | ||||||||||||
Amortization of prior service cost | 0.2 | 0.3 | 0.6 | 0.9 | ||||||||||||
Amortization of net actuarial loss | 9.5 | 8.8 | 28.5 | 26.5 | ||||||||||||
Net periodic benefit cost | $ | 4.8 | $ | 5.4 | $ | 14.3 | $ | 17.8 | ||||||||
OPEB Costs | ||||||||||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Service cost | $ | 1.7 | $ | 1.8 | $ | 5.2 | $ | 5.2 | ||||||||
Interest cost | 2.8 | 3.0 | 8.3 | 9.2 | ||||||||||||
Expected return on plan assets | (3.8 | ) | (3.6 | ) | (11.6 | ) | (10.8 | ) | ||||||||
Amortization of prior service credit | (0.6 | ) | (0.2 | ) | (1.7 | ) | (0.8 | ) | ||||||||
Net periodic benefit cost | $ | 0.1 | $ | 1.0 | $ | 0.2 | $ | 2.8 | ||||||||
During the nine months ended September 30, 2018, we made contributions and payments of $3.8 million related to our pension plans and $1.5 million related to our OPEB plans. We expect to make contributions and payments of $0.3 million related to our pension plans and $3.0 million related to our OPEB plans during the remainder of 2018, dependent upon various factors affecting us, including our liquidity position and the effects of the new Tax Legislation.
Effective January 1, 2018, we adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which modifies certain aspects of the accounting for employee benefit costs. Under the new guidance, only the service cost component can be included in total operating expenses. The remaining components of net periodic benefit cost (credit) are required to be presented in the income statement separately from the service cost component, outside of operating income. As required, this change was applied retrospectively to all prior periods presented. Accordingly, for the three and nine months ended September 30, 2018 and 2017, we have presented the service cost component of our retirement benefit plans in other operation and maintenance on the income statements, while presenting the non-service components in other income, net.
The following table shows the non-service (credit) cost components of net benefit costs:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Non-service (credit) cost components | $ | (1.6 | ) | $ | 1.4 | $ | (4.5 | ) | $ | 5.9 | ||||||
For the three and nine months ended September 30, 2017, the non-service components of net benefit cost (credit) were reclassified from other operation and maintenance to other income, net, on our income statements.
Under ASU 2017-07, only the service cost component of net periodic benefit cost is eligible for capitalization to property, plant, and equipment. In prior periods, a portion of all net benefit cost components was capitalized to property, plant, and equipment. As required, this amendment was applied prospectively, beginning January 1, 2018. As a result of the application of accounting principles for rate regulated entities, the non-service cost (credit) components of the net benefit cost (credit) that are no longer eligible for capitalization under this standard, but are capitalized under the regulatory framework, are presented as regulatory assets or liabilities rather than property, plant, and equipment.
09/30/2018 Form 10-Q | 16 | Wisconsin Electric Power Company |
NOTE 14—SEGMENT INFORMATION
We use operating income to measure segment profitability and to allocate resources to our businesses. At September 30, 2018, we reported two segments, which are described below.
Our utility segment includes both our electric and natural gas utility operations. Our electric utility operations are engaged in the generation, distribution, and sale of electricity to customers in southeastern Wisconsin (including metropolitan Milwaukee), east central Wisconsin, and northern Wisconsin, and to one customer in the Upper Peninsula of Michigan. Our electric utility operations also include our steam operations, which produce, distribute, and sell steam to customers in metropolitan Milwaukee, Wisconsin. Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers and the transportation of customer-owned natural gas in our three service areas within southeastern, east central, and northern Wisconsin.
Our other segment included Bostco, our non-utility subsidiary that was originally formed to develop and invest in real estate. In March 2017, we sold substantially all of the remaining assets of Bostco, and, in October 2018, Bostco was dissolved. See Note 2, Disposition, for more information.
The following tables show summarized financial information for the three and nine months ended September 30, 2018 and 2017, related to our reportable segments:
(in millions) | Utility | Other | Wisconsin Electric Power Company Consolidated | |||||||||
Three Months Ended September 30, 2018 | ||||||||||||
Operating revenues | $ | 924.0 | $ | — | $ | 924.0 | ||||||
Other operation and maintenance | 384.7 | — | 384.7 | |||||||||
Depreciation and amortization | 87.4 | — | 87.4 | |||||||||
Operating income | 107.8 | — | 107.8 | |||||||||
Interest expense | 29.9 | — | 29.9 | |||||||||
(in millions) | Utility | Other | Wisconsin Electric Power Company Consolidated | |||||||||
Three Months Ended September 30, 2017 | ||||||||||||
Operating revenues | $ | 943.8 | $ | — | $ | 943.8 | ||||||
Other operation and maintenance * | 331.2 | — | 331.2 | |||||||||
Depreciation and amortization | 83.0 | — | 83.0 | |||||||||
Operating income * | 164.8 | — | 164.8 | |||||||||
Interest expense | 29.3 | — | 29.3 | |||||||||
* | Includes the retroactive restatement impacts of the implementation of ASU 2017-07. See Note 13, Employee Benefits, for more information on this new standard. |
(in millions) | Utility | Other | Wisconsin Electric Power Company Consolidated | |||||||||
Nine Months Ended September 30, 2018 | ||||||||||||
Operating revenues | $ | 2,721.7 | $ | — | $ | 2,721.7 | ||||||
Other operation and maintenance | 1,086.9 | — | 1,086.9 | |||||||||
Depreciation and amortization | 259.6 | — | 259.6 | |||||||||
Operating income | 348.7 | — | 348.7 | |||||||||
Interest expense | 88.8 | — | 88.8 | |||||||||
09/30/2018 Form 10-Q | 17 | Wisconsin Electric Power Company |
(in millions) | Utility | Other | Wisconsin Electric Power Company Consolidated | |||||||||
Nine Months Ended September 30, 2017 | ||||||||||||
Operating revenues | $ | 2,771.2 | $ | — | $ | 2,771.2 | ||||||
Other operation and maintenance * | 982.2 | — | 982.2 | |||||||||
Depreciation and amortization | 247.8 | — | 247.8 | |||||||||
Operating income * | 497.2 | — | 497.2 | |||||||||
Interest expense | 87.7 | 0.3 | 88.0 | |||||||||
* | Includes the retroactive restatement impacts of the implementation of ASU 2017-07. See Note 13, Employee Benefits, for more information on this new standard. |
NOTE 15—VARIABLE INTEREST ENTITIES
The primary beneficiary of a variable interest entity must consolidate the entity's assets and liabilities. In addition, certain disclosures are required for significant interest holders in variable interest entities.
We assess our relationships with potential variable interest entities, such as our coal suppliers, natural gas suppliers, coal transporters, natural gas transporters, and other counterparties related to power purchase agreements, investments, and joint ventures. In making this assessment, we consider, along with other factors, the potential that our contracts or other arrangements provide subordinated financial support, the obligation to absorb the entity's losses, the right to receive residual returns of the entity, and the power to direct the activities that most significantly impact the entity's economic performance.
Purchased Power Agreement
We have a purchased power agreement that represents a variable interest. This agreement is for 236 MW of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a capital lease. The agreement includes no minimum energy requirements over the remaining term of approximately four years. We have examined the risks of the entity, including operations, maintenance, dispatch, financing, fuel costs, and other factors, and have determined that we are not the primary beneficiary of the entity. We do not hold an equity or debt interest in the entity, and there is no residual guarantee associated with the purchased power agreement.
We have approximately $60.4 million of required payments over the remaining term of this agreement. We believe that the required lease payments under this contract will continue to be recoverable in rates. Total capacity and lease payments under this contract for the nine months ended September 30, 2018 and 2017 were $14.1 million and $13.5 million, respectively. Our maximum exposure to loss is limited to the capacity payments under the contract.
NOTE 16—RELATED PARTIES
We routinely enter into transactions with related parties, including WEC Energy Group, its other subsidiaries, ATC (a for-profit electric transmission company regulated by the FERC and certain state regulatory commissions), and other affiliated entities.
We provide and receive services, property, and other items of value to and from our parent, WEC Energy Group, and other subsidiaries of WEC Energy Group.
On January 1, 2017, based upon input we received from the PSCW, we transferred our $415.4 million investment in ATC, and the related receivable for distributions approved and recorded in December 2016 to another subsidiary of WEC Energy Group. In addition, during 2017 we transferred $186.8 million of related deferred income tax liabilities. These transactions were non-cash equity transfers recorded to additional paid in capital between entities under common control, and therefore, did not result in the recognition of a gain or loss.
We pay ATC for transmission and other related services it provides. In addition, we provide a variety of operational, maintenance, and project management work for ATC, which is reimbursed by ATC. Services are billed to and from ATC under agreements approved by the PSCW, at each of our fully allocated costs.
09/30/2018 Form 10-Q | 18 | Wisconsin Electric Power Company |
Our balance sheets included the following receivables and payables related to transactions entered into with ATC:
(in millions) | September 30, 2018 | December 31, 2017 | ||||||
Accounts receivable | ||||||||
Services provided to ATC | $ | 2.4 | $ | 0.8 | ||||
Accounts payable | ||||||||
Services received from ATC | 19.3 | 22.2 | ||||||
The following table shows activity associated with our related party transactions:
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
(in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Lease agreements | ||||||||||||||||
Lease payments to We Power (1) | $ | 92.7 | $ | 104.3 | $ | 280.0 | $ | 315.4 | ||||||||
Construction work in progress billed to We Power | 4.4 | 5.9 | 13.2 | 31.1 | ||||||||||||
Transactions with WBS (2) | ||||||||||||||||
Billings to WBS | 4.1 | 60.2 | 12.8 | 177.2 | ||||||||||||
Billings from WBS | 64.2 | (3) | 49.4 | 240.9 | (3) | 152.1 | ||||||||||
Transactions with WPS | ||||||||||||||||
Natural gas purchases from WPS | 0.6 | 0.8 | 1.6 | 1.3 | ||||||||||||
Billings to WPS (2) | 3.9 | 6.4 | 11.2 | 14.1 | ||||||||||||
Billings from WPS (2) | 1.5 | 1.4 | 6.6 | 3.6 | ||||||||||||
Transactions with WG | ||||||||||||||||
Natural gas purchases from WG | 1.4 | 1.4 | 4.0 | 4.0 | ||||||||||||
Billings to WG (2) | 10.5 | (4) | 16.3 | 37.6 | (4) | 48.2 | ||||||||||
Billings from WG (2) | 4.8 | 6.0 | 14.5 | 17.3 | ||||||||||||
Transactions with UMERC | ||||||||||||||||
Electric sales to UMERC | 7.4 | 9.0 | 22.4 | 23.1 | ||||||||||||
Billings to UMERC (2) | 5.2 | 18.7 | 12.3 | 52.6 | ||||||||||||
Transactions with Bluewater (5) | ||||||||||||||||
Storage service fees | 4.5 | 1.4 | 10.4 | 1.4 | ||||||||||||
Transactions with ATC | ||||||||||||||||
Charges to ATC for services and construction | 3.7 | 2.9 | 9.4 | 8.1 | ||||||||||||
Charges from ATC for network transmission services | 57.9 | 60.4 | 174.0 | 181.1 | ||||||||||||
Refund from ATC related to a FERC audit | — | — | 15.4 | — | ||||||||||||
Refund from ATC per FERC ROE order | — | — | — | 19.4 | ||||||||||||
(1) | We make lease payments to We Power, another subsidiary of WEC Energy Group, for PWGS Units 1 and 2 and ERGS Units 1 and 2. Lease payments were reduced in 2018 as a result of tax savings related to Tax Legislation. |
(2) | Includes amounts billed for services, pass through costs, and other items in accordance with approved affiliated interest agreements. |
(3) | Includes $2.2 million and $59.8 million for the transfer of certain software assets from WBS during the three and |