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WISCONSIN ELECTRIC POWER CO - Quarter Report: 2021 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2021

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

For the transition period from ________________ to ___________________

Commission
File Number		Registrant; State of Incorporation;
Address; and Telephone Number		IRS Employer
Identification No.
001-01245WISCONSIN ELECTRIC POWER COMPANY39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345


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

None

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

    Yes ☒    No ☐

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

    Yes ☒    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☒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 ☒

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
June 30, 2021

All of the common stock of Wisconsin Electric Power Company is held by WEC Energy Group, Inc.

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WISCONSIN ELECTRIC POWER COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended June 30, 2021
TABLE OF CONTENTS
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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:
Affiliates
ATCAmerican Transmission Company LLC
We PowerW.E. Power, LLC
WEC Energy GroupWEC Energy Group, Inc.
WEPCo Environmental TrustWEPCo Environmental Trust Finance I, LLC
WPSWisconsin Public Service Corporation
Federal and State Regulatory Agencies
EPAUnited States Environmental Protection Agency
PSCWPublic Service Commission of Wisconsin
SECUnited States Securities and Exchange Commission
Accounting Terms
AFUDCAllowance for Funds Used During Construction
ASUAccounting Standards Update
FASBFinancial Accounting Standards Board
GAAPUnited States Generally Accepted Accounting Principles
OPEBOther Postretirement Employee Benefits
VIEVariable Interest Entity
Environmental Terms
ACEAffordable Clean Energy
BATWBottom Ash Transport Water
BTABest Technology Available
CO2
Carbon Dioxide
CSAPRCross-State Air Pollution Rule
ELGSteam Electric Effluent Limitation Guidelines
FGDFlue Gas Desulfurization
GHGGreenhouse Gas
NAAQSNational Ambient Air Quality Standards
NOxNitrogen Oxide
Measurements
DthDekatherm
MWMegawatt
MWhMegawatt-hour
Other Terms and Abbreviations
AMIAdvanced Metering Infrastructure
Badger Hollow IIBadger Hollow Solar Park II
CDCCenters for Disease Control and Prevention
COVID-19Coronavirus Disease – 2019
D.C. Circuit Court of AppealsUnited States Court of Appeals for the District of Columbia Circuit
ERGSElm Road Generating Station
ESG Progress PlanWEC Energy Group's Capital Investment Plan for Efficiency, Sustainability, and Growth for 2021-2025
ETBEnvironmental Trust Bond
Exchange ActSecurities Exchange Act of 1934, as amended
Executive Order 13990Executive Order 13990 of January 20, 2021 – Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis
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FTRFinancial Transmission Right
ITCInvestment Tax Credit
LIBORLondon Interbank Offered Rate
LNGLiquefied Natural Gas
MISOMidcontinent Independent System Operator, Inc.
OCPPOak Creek Power Plant
OC 5Oak Creek Power Plant Unit 5
OC 7Oak Creek Power Plant Unit 7
OC 8Oak Creek Power Plant Unit 8
PSBPublic Service Building
PTCProduction Tax Credit
ROEReturn on Equity
SSRSystem Support Resource
Tax LegislationTax Cuts and Jobs Act of 2017
WHOWorld Health Organization

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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, including 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, climate-related matters, the ESG Progress Plan, 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 our 2020 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 or regulatory developments, varying, adverse, or unusually severe weather conditions, 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 impact of health pandemics, including the COVID-19 pandemic, on our business functions, financial condition, liquidity, and results of operations;

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

•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;

•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 and the ability to recover the related costs through rates;

•Factors affecting the implementation of WEC Energy Group's CO2 emission and/or methane emission reduction goals, and opportunities and actions related to those goals, including related regulatory decisions, the cost of materials, supplies, and labor, technology advances, and the feasibility of competing generation projects;

•The financial and operational feasibility of taking more aggressive action to further reduce 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 natural gas and other fossil fuels, purchased power, materials needed to operate environmental controls at our electric
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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;

•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;

•Changes in the method of determining LIBOR or the replacement of LIBOR with an alternative reference rate;

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

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

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

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

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

•Potential business strategies to acquire and dispose of assets, 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 continuing to integrate and 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.

Except as may be required by law, 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.
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited)Three Months EndedSix Months Ended
June 30June 30
(in millions)2021202020212020
Operating revenues$827.5 $769.5 $1,832.7 $1,640.5 
Operating expenses
Cost of sales276.4 235.6 680.6 524.8 
Other operation and maintenance213.1 214.3 422.4 418.9 
Depreciation and amortization113.3 106.2 224.0 210.7 
Property and revenue taxes24.7 24.8 50.1 50.5 
Total operating expenses627.5 580.9 1,377.1 1,204.9 
Operating income200.0 188.6 455.6 435.6 
Other income, net7.3 4.9 14.7 10.2 
Interest expense116.0 116.6 232.2 235.2 
Other expense(108.7)(111.7)(217.5)(225.0)
Income before income taxes91.3 76.9 238.1 210.6 
Income tax expense12.2 6.0 31.7 20.7 
Net income79.1 70.9 206.4 189.9 
Preferred stock dividend requirements0.3 0.3 0.6 0.6 
Net income attributed to common shareholder$78.8 $70.6 $205.8 $189.3 

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

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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except share and per share amounts)
June 30, 2021December 31, 2020
Assets
Current assets
Cash and cash equivalents$4.7 $7.2 
Accounts receivable and unbilled revenues, net of reserves of $71.3 and $59.3, respectively
565.9 466.1 
Accounts receivable from related parties50.0 67.9 
Materials, supplies, and inventories209.1 219.5 
Prepaid taxes92.0 98.5 
Other46.1 36.4 
Current assets967.8 895.6 
Long-term assets
Property, plant, and equipment, net of accumulated depreciation and amortization of $4,989.1 and $4,849.2, respectively
9,885.0 9,789.9 
Regulatory assets (June 30, 2021 includes $106.0 related to WEPCo Environmental Trust)
2,790.6 2,803.3 
Other139.5 116.4 
Long-term assets12,815.1 12,709.6 
Total assets$13,782.9 $13,605.2 
Liabilities and Equity
Current liabilities
Short-term debt$202.0 $292.0 
Current portion of long-term debt (June 30, 2021 includes $4.1 related to WEPCo Environmental Trust)
4.1 300.0 
Current portion of finance lease obligations71.0 66.8 
Accounts payable306.6 261.2 
Accounts payable to related parties163.8 172.0 
Accrued payroll and benefits45.9 43.3 
Accrued taxes30.6 25.0 
Other115.8 97.1 
Current liabilities939.8 1,257.4 
Long-term liabilities
Long-term debt (June 30, 2021 includes $111.1 related to WEPCo Environmental Trust)
2,871.0 2,461.2 
Finance lease obligations2,747.0 2,774.4 
Deferred income taxes1,376.8 1,357.2 
Regulatory liabilities1,700.8 1,703.7 
Pension and OPEB obligations70.9 85.9 
Other267.6 272.8 
Long-term liabilities9,034.1 8,655.2 
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 capital1,090.7 1,060.1 
Retained earnings2,355.0 2,269.2 
Common shareholder's equity3,778.6 3,662.2 
Preferred stock30.4 30.4 
Total liabilities and equity$13,782.9 $13,605.2 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)Six Months Ended
June 30
(in millions)20212020
Operating activities
Net income$206.4 $189.9 
Reconciliation to cash provided by operating activities
Depreciation and amortization224.0 210.7 
Deferred income taxes and ITCs, net(14.3)(26.5)
Change in –
Accounts receivable and unbilled revenues, net(37.6)49.2 
Materials, supplies, and inventories10.4 9.8 
Prepaid taxes6.5 11.0 
Other current assets16.5 16.4 
Accounts payable30.3 (67.2)
Accrued taxes5.6 46.0 
Other current liabilities25.4 (8.6)
Other, net0.5 30.4 
Net cash provided by operating activities473.7 461.1 
Investing activities
Capital expenditures(387.6)(311.1)
Proceeds from assets transferred to affiliates10.7 0.3 
Other, net3.4 5.1 
Net cash used in investing activities(373.5)(305.7)
Financing activities
Change in short-term debt(90.0)(88.5)
Issuance of long-term debt418.8 — 
Retirement of long-term debt(300.0)— 
Payments for finance lease obligations(32.5)(28.2)
Equity contribution from parent30.0 65.0 
Payment of dividends to parent(120.0)(120.0)
Other, net(6.8)(0.8)
Net cash used in financing activities(100.5)(172.5)
Net change in cash, cash equivalents, and restricted cash(0.3)(17.1)
Cash, cash equivalents, and restricted cash at beginning of period7.2 19.1 
Cash, cash equivalents, and restricted cash at end of period$6.9 $2.0 

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

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WISCONSIN ELECTRIC POWER COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
Wisconsin Electric Power Company Common Shareholder's Equity
(in millions)Common StockAdditional Paid In CapitalRetained EarningsTotal Common Shareholder's EquityPreferred StockTotal Equity
Balance at December 31, 2020$332.9 $1,060.1 $2,269.2 $3,662.2 $30.4 $3,692.6 
Net income attributed to common shareholder— — 127.0 127.0 — 127.0 
Payment of dividends to parent— — (60.0)(60.0)— (60.0)
Equity contribution from parent— 30.0 — 30.0 — 30.0 
Stock-based compensation and other— 0.5 0.1 0.6 — 0.6 
Balance at March 31, 2021$332.9 $1,090.6 $2,336.3 $3,759.8 $30.4 $3,790.2 
Net income attributed to common shareholder— — 78.8 78.8 — 78.8 
Payment of dividends to parent— — (60.0)(60.0)— (60.0)
Stock-based compensation and other— 0.1 (0.1)— — — 
Balance at June 30, 2021$332.9 $1,090.7 $2,355.0 $3,778.6 $30.4 $3,809.0 

Wisconsin Electric Power Company Common Shareholder's Equity
(in millions)Common StockAdditional Paid In CapitalRetained EarningsTotal Common Shareholder's EquityPreferred StockTotal Equity
Balance at December 31, 2019$332.9 $929.5 $2,298.7 $3,561.1 $30.4 $3,591.5 
Net income attributed to common shareholder— — 118.7 118.7 — 118.7 
Payment of dividends to parent— — (60.0)(60.0)— (60.0)
Stock-based compensation and other— 0.5 — 0.5 — 0.5 
Balance at March 31, 2020$332.9 $930.0 $2,357.4 $3,620.3 $30.4 $3,650.7 
Net income attributed to common shareholder— — 70.6 70.6 — 70.6 
Payment of dividends to parent— — (60.0)(60.0)— (60.0)
Equity contribution from parent— 65.0 — 65.0 — 65.0 
Balance at June 30, 2020$332.9 $995.0 $2,368.0 $3,695.9 $30.4 $3,726.3 

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

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WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2021

NOTE 1—GENERAL INFORMATION

Wisconsin Electric Power Company serves approximately 1.1 million electric customers and 0.5 million natural gas customers.

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

On our financial statements, we consolidate VIEs of which we are the primary beneficiary.

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, 2020. 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 six months ended June 30, 2021 are not necessarily indicative of expected results for 2021 due to seasonal variations and other factors, including any continuing financial impacts from the COVID-19 pandemic.

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—OPERATING REVENUES

For more information about our operating revenues, see Note 1(d), Operating Revenues, in our 2020 Annual Report on Form 10-K.

Disaggregation of Operating Revenues

The following tables present our operating revenues disaggregated by revenue source for our utility segment. We do not have any revenues associated with our other segment. We disaggregate revenues into categories that depict how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors. 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 can be impacted differently by regulatory activities within their jurisdictions.
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Wisconsin Electric Power Company
Electric utility$758.9 $707.3 $1,542.4 $1,436.3 
Natural gas utility62.3 61.9 278.1 200.9 
Total revenues from contracts with customers821.2 769.2 1,820.5 1,637.2 
Other operating revenues6.3 0.3 12.2 3.3 
Total operating revenues$827.5 $769.5 $1,832.7 $1,640.5 

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Revenues from Contracts with Customers

Electric Utility Operating Revenues

The following table disaggregates electric utility operating revenues into customer class:
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Residential$307.6 $312.4 $619.8 $607.4 
Small commercial and industrial248.7 222.5 491.2 458.5 
Large commercial and industrial138.0 122.8 267.1 245.7 
Other4.6 4.6 10.2 9.7 
Total retail revenues698.9 662.3 1,388.3 1,321.3 
Wholesale17.9 18.0 38.7 37.7 
Resale36.1 22.0 92.6 61.2 
Steam4.2 4.1 19.0 12.5 
Other utility revenues1.8 0.9 3.8 3.6 
Total electric utility operating revenues$758.9 $707.3 $1,542.4 $1,436.3 

Natural Gas Utility Operating Revenues

The following table disaggregates natural gas utility operating revenues into customer class:
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Residential$70.3 $39.2 $183.0 $138.7 
Commercial and industrial31.6 13.0 84.2 57.3 
Total retail revenues101.9 52.2 267.2 196.0 
Transportation3.8 3.5 9.1 8.5 
Other utility revenues (1)
(43.4)6.2 1.8 (3.6)
Total natural gas utility operating revenues$62.3 $61.9 $278.1 $200.9 

(1)Includes the revenues subject to our purchased gas recovery mechanism. The negative amount for the three months ended June 30, 2021 primarily relates to the approval by the PSCW to recover from customers, over the second quarter of 2021, the higher natural gas costs that were incurred as a result of the extreme winter weather conditions in February 2021. As these amounts were billed to customers, they were reflected in retail revenues with an offsetting decrease in other utility revenues. See Note 19, Regulatory Environment, for more information.

Other Operating Revenues

Other operating revenues consist primarily of the following:
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Late payment charges (1)
$4.4 $— $8.1 $2.7 
Rental revenues1.6 1.6 2.4 2.3 
Alternative revenues (2)
0.3 (1.3)1.7 (1.7)
Total other operating revenues$6.3 $0.3 $12.2 $3.3 

(1)The increase in late payment charges during the three and six months ended June 30, 2021, compared with the same periods in 2020, was a result of the expiration of a regulatory order from the PSCW in response to the COVID-19 pandemic, which included the suspension of late payment charges during a designated time period. See Note 19, Regulatory Environment, for more information.

(2)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 wholesale customers subject to true-up, as discussed in Note 1(d), Operating Revenues, in our 2020 Annual Report on Form 10-K.

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NOTE 3—CREDIT LOSSES

Our exposure to credit losses is related to our accounts receivable and unbilled revenue balances, which are generated from the sale of electricity and natural gas by our regulated utility operations. Our regulated utility operations are included in our utility segment. No accounts receivable and unbilled revenue balances were reported in the other segment at June 30, 2021 and December 31, 2020.

We evaluate the collectability of our accounts receivable and unbilled revenue balances considering a combination of factors. For some of our larger customers and also in circumstances where we become aware of a specific customer's inability to meet its financial obligations to us, we record a specific allowance for credit losses against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we use the accounts receivable aging method to calculate an allowance for credit losses. Using this method, we classify accounts receivable into different aging buckets and calculate a reserve percentage for each aging bucket based upon historical loss rates. The calculated reserve percentages are updated on at least an annual basis, in order to ensure recent macroeconomic, political, and regulatory trends are captured in the calculation, to the extent possible. Risks identified that we do not believe are reflected in the calculated reserve percentages, are assessed on a quarterly basis to determine whether further adjustments are required.

We monitor our ongoing credit exposure through active review of counterparty accounts receivable balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution and payment confirmation. To the extent possible, we work with customers with past due balances to negotiate payment plans, but will disconnect customers for non-payment as allowed by the PSCW, if necessary, and employ collection agencies and legal counsel to pursue recovery of defaulted receivables. For our larger customers, detailed credit review procedures may be performed in advance of any sales being made. We sometimes require letters of credit, parental guarantees, prepayments or other forms of credit assurance from our larger customers to mitigate credit risk. See Note 19, Regulatory Environment, for information on certain regulatory actions that were and/or are being taken for the purpose of ensuring that essential utility services are available to our customers during the COVID-19 pandemic.

We have included a table below that shows our gross third-party receivable balances and related allowance for credit losses.
(in millions)June 30, 2021December 31, 2020
Accounts receivable and unbilled revenues $637.2 $525.4 
Allowance for credit losses71.3 59.3 
Accounts receivable and unbilled revenues, net (1)
$565.9 $466.1 
Total accounts receivable, net – past due greater than 90 days (1)
$39.6 $56.3 
Past due greater than 90 days – collection risk mitigated by regulatory mechanisms (1)
95.6 %98.2 %

(1)Our exposure to credit losses for certain regulated utility customers is mitigated by a regulatory mechanism we have in place. Specifically, our residential tariffs include a mechanism for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in rates. As a result, at June 30, 2021, $219.9 million, or 38.9%, of our net accounts receivable and unbilled revenues balance had regulatory protections in place to mitigate the exposure to credit losses. In addition, we have received specific orders related to the deferral of certain costs (including credit losses) incurred as a result of the COVID-19 pandemic. The additional protections related to our accounts receivable and unbilled revenue balances provided by these orders are subject to prudency reviews and are still being assessed. They are not reflected in the percentages in the above table or this note. See Note 19, Regulatory Environment, for more information on these orders.

A rollforward of the allowance for credit losses for the three and six months ended June 30, 2021 and 2020 is included below:
Three Months Ended
(in millions)June 30, 2021June 30, 2020
Balance at March 31$78.8 $39.8 
Provision for credit losses4.4 6.8 
Provision for credit losses deferred for future recovery or refund(3.5)3.7 
Write-offs charged against the allowance(10.7)(10.7)
Recoveries of amounts previously written off2.3 6.1 
Balance at June 30$71.3 $45.7 

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Six Months Ended
(in millions)June 30, 2021June 30, 2020
Balance at December 31$59.3 $38.1 
Provision for credit losses12.5 13.7 
Provision for credit losses deferred for future recovery or refund13.9 3.5 
Write-offs charged against the allowance(22.2)(21.6)
Recoveries of amounts previously written off7.8 12.0 
Balance at June 30$71.3 $45.7 

The increase in the allowance for credit losses at June 30, 2021, compared to December 31, 2020, was driven by higher past due accounts receivable balances, primarily related to residential customers. This increase in accounts receivable balances in arrears related to the continued economic disruptions caused by the COVID-19 pandemic, including continued high unemployment rates. However, as seen in the quarterly rollforward above, the allowance for credit losses began to decrease in the second quarter of 2021, which we believe is related to the start of normal collection practices. See Note 19, Regulatory Environment, for more information.

The increase in the allowance for credit losses from December 31, 2019 to June 30, 2020, was driven by an increase in past due accounts receivable balances. This is a trend we generally see over the winter moratorium months, when we are not allowed to disconnect customer service as a result of non-payment. In Wisconsin, the winter moratorium begins on November 1 and ends on April 15. However, as a result of the COVID-19 pandemic and related regulatory orders we received, we were also unable to disconnect any of our customers during the second quarter of 2020.

NOTE 4—REGULATORY ASSETS AND LIABILITIES

The following regulatory assets and liabilities were reflected on our balance sheets at June 30, 2021 and December 31, 2020. For more information on our regulatory assets and liabilities, see Note 5, Regulatory Assets and Liabilities, in our 2020 Annual Report on Form 10-K.
(in millions)June 30, 2021December 31, 2020
Regulatory assets
Finance leases$1,010.2 $985.5 
Plant retirements661.7 669.8 
Pension and OPEB costs457.4 477.0 
Income tax related items390.4 392.6 
SSR132.8 135.6 
Securitization (1)
106.0 105.2 
Asset retirement obligations27.9 28.6 
Other, net4.2 9.0 
Total regulatory assets$2,790.6 $2,803.3 
(1)See Note 16, Variable Interest Entities, for more information.

(in millions)June 30, 2021December 31, 2020
Regulatory liabilities
Income tax related items$768.7 $806.7 
Removal costs 689.3 677.2 
Pension and OPEB benefits129.1 132.1 
Electric transmission costs61.4 61.7 
Derivatives36.1 5.9 
Other, net19.1 24.3 
Total regulatory liabilities$1,703.7 $1,707.9 
Balance sheet presentation
Other current liabilities$2.9 $4.2 
Regulatory liabilities1,700.8 1,703.7 
Total regulatory liabilities$1,703.7 $1,707.9 
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NOTE 5—PROPERTY, PLANT, AND EQUIPMENT

During a significant rain event in May 2020, an underground steam tunnel in downtown Milwaukee flooded and steam vented into our PSB. The damage to the building from the flooding and steam was extensive and requires significant repairs and restorations. As of June 30, 2021, we have incurred $74.8 million of costs related to these repairs and restorations. We received $20.0 million of insurance proceeds in 2020 to cover a portion of these costs and $42.3 million was recorded in accounts receivable on our balance sheet as of June 30, 2021 for future insurance recoveries. The remaining $12.5 million of costs were included in other operation and maintenance expense in 2020 as we do not intend to seek recovery of these costs.

In June 2021, we received approval from the PSCW to restore the PSB and to defer the project costs, net of insurance proceeds, to include in rate base. As such, we do not currently expect a significant impact to our future results of operations, and although we may experience differences between periods in the timing of cash flows, we also do not currently expect a significant impact to our long-term cash flows from this event.

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 2020 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)June 30, 2021December 31, 2020
Commercial paper
Amount outstanding$202.0 $292.0 
Weighted-average interest rate on amounts outstanding0.16 %0.21 %

Our average amount of commercial paper borrowings based on daily outstanding balances during the six months ended June 30, 2021 was $254.1 million with a weighted-average interest rate during the period of 0.17%.

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)MaturityJune 30, 2021
Revolving credit facilityOctober 2022$500.0 
Less: 
Letters of credit issued inside credit facility$1.0 
Commercial paper outstanding 202.0 
Available capacity under existing credit facility $297.0 

NOTE 8—LONG-TERM DEBT

Wisconsin Electric Power Company

In June 2021, we issued $300.0 million of 1.70% Debentures due June 15, 2028, and used the net proceeds to redeem all $300.0 million outstanding of our 2.95% Debentures due September 15, 2021 at par.

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WEPCo Environmental Trust Finance I, LLC

In May 2021, WEPCo Environmental Trust, a special purpose entity we formed, issued $118.8 million of 1.578% ETBs due December 15, 2035, and used the net proceeds to purchase environmental control property from us. Principal and interest will be paid semiannually, beginning December 15, 2021, and the ETBs are expected to be fully repaid by December 15, 2033. For additional information, see Note 16, Variable Interest Entities – WEPCo Environmental Trust Finance I, LLC.

NOTE 9—MATERIALS, SUPPLIES, AND INVENTORIES

Our inventory consisted of:
(in millions)June 30, 2021December 31, 2020
Materials and supplies$135.8 $136.5 
Fossil fuel45.8 57.1 
Natural gas in storage27.5 25.9 
Total$209.1 $219.5 

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

NOTE 10—INCOME TAXES

The provision for income taxes differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:
Three Months Ended June 30, 2021Three Months Ended June 30, 2020
(in millions)AmountEffective Tax RateAmountEffective Tax Rate
Statutory federal income tax$19.1 21.0 %$16.1 21.0 %
State income taxes net of federal tax benefit5.9 6.4 %4.9 6.4 %
Federal excess deferred tax amortization – Wisconsin unprotected(9.0)(9.9)%(9.4)(12.2)%
Federal excess deferred tax amortization(4.8)(5.3)%(5.1)(6.7)%
PTCs(1.4)(1.4)%(2.4)(3.1)%
Domestic production activities deferral1.3 1.4 %1.4 1.7 %
Other1.1 1.2 %0.5 0.7 %
Total income tax expense$12.2 13.4 %$6.0 7.8 %

Six Months Ended June 30, 2021Six Months Ended June 30, 2020
(in millions)AmountEffective Tax RateAmountEffective Tax Rate
Statutory federal income tax$49.9 21.0 %$44.1 21.0 %
State income taxes net of federal tax benefit15.2 6.4 %13.5 6.4 %
Federal excess deferred tax amortization – Wisconsin unprotected(23.3)(9.8)%(22.9)(10.9)%
Federal excess deferred tax amortization(12.6)(5.3)%(12.4)(5.9)%
PTCs(3.8)(1.6)%(5.7)(2.7)%
Domestic production activities deferral3.4 1.4 %3.4 1.6 %
Other2.9 1.2 %0.7 0.3 %
Total income tax expense$31.7 13.3 %$20.7 9.8 %

The effective tax rates of 13.4% and 13.3% for the three and six months ended June 30, 2021, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to the recognition of certain unprotected deferred tax benefits created as a result of the Tax Legislation. In accordance with the rate order received from the PSCW in December 2019, we are amortizing the unprotected deferred tax benefits over periods ranging from two years to four years, to reduce near-term rate impacts to our customers. In addition, the impact of the protected benefits associated with the Tax Legislation, as discussed in more detail below, and PTCs drove a decrease in the effective tax rate. These items were partially offset by state income taxes.

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The effective tax rates of 7.8% and 9.8% for the three and six months ended June 30, 2020, respectively, differ from the United States statutory federal income tax rate of 21%, primarily due to the recognition of certain unprotected deferred tax benefits created as a result of the Tax Legislation. In addition, the impact of the protected benefits associated with the Tax Legislation, as discussed in more detail below, and PTCs drove a decrease in the effective tax rate. These items were partially offset by state income taxes.

The Tax Legislation required us to remeasure the deferred income taxes at our utility segment and we began to amortize the resulting excess protected deferred income taxes beginning in 2018 in accordance with normalization requirements (see federal excess deferred tax amortization line above).

See Note 19, Regulatory Environment, for more information on unprotected tax benefits.

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 price 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.

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:
June 30, 2021
(in millions)Level 1Level 2Level 3Total
Derivative assets    
Natural gas contracts$23.2 $1.2 $— $24.4 
FTRs— — 2.6 2.6 
Coal contracts— 6.2 — 6.2 
Total derivative assets$23.2 $7.4 $2.6 $33.2 
Derivative liabilities
Natural gas contracts$— $0.4 $— $0.4 

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December 31, 2020
(in millions)Level 1Level 2Level 3Total
Derivative assets    
Natural gas contracts$3.0 $0.8 $— $3.8 
FTRs— — 1.1 1.1 
Coal contracts— 1.4 — 1.4 
Total derivative assets$3.0 $2.2 $1.1 $6.3 
Derivative liabilities
Natural gas contracts$2.9 $0.6 $— $3.5 
Coal contracts— 0.6 — 0.6 
Total derivative liabilities$2.9 $1.2 $— $4.1 

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

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Balance at the beginning of the period$0.4 $0.4 $1.1 $1.5 
Purchases3.0 3.1 3.0 3.1 
Settlements(0.8)(0.7)(1.5)(1.8)
Balance at the end of the period$2.6 $2.8 $2.6 $2.8 

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that were not recorded at fair value:
June 30, 2021December 31, 2020
(in millions)Carrying AmountFair ValueCarrying AmountFair Value
Preferred stock$30.4 $30.7 $30.4 $32.3 
Long-term debt, including current portion2,875.1 3,464.4 2,761.2 3,451.8 

The fair values of our 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.

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The following table shows our derivative assets and derivative liabilities, along with their classification on our balance sheets. None of our derivatives are designated as hedging instruments.
June 30, 2021December 31, 2020
(in millions)Derivative AssetsDerivative LiabilitiesDerivative AssetsDerivative Liabilities
Other current
Natural gas contracts$22.4 $0.4 $3.7 $3.2 
FTRs2.6 — 1.1 — 
Coal contracts5.7 — 1.4 0.5 
Total other current (1)
30.7 0.4 6.2 3.7 
Other long-term
Natural gas contracts2.0 — 0.1 0.3 
Coal contracts0.5 — — 0.1 
Total other long-term (1)
2.5 — 0.1 0.4 
Total$33.2 $0.4 $6.3 $4.1 

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

Realized gains (losses) on derivatives are primarily recorded in cost of sales on the income statements. Our estimated notional sales volumes and realized gains (losses) were as follows:
Three Months Ended June 30, 2021Three Months Ended June 30, 2020
(in millions)VolumesGainsVolumesGains (Losses)
Natural gas contracts
16.5 Dth
$1.1 
14.0 Dth
$(4.4)
FTRs
5.5 MWh
5.4 
5.1 MWh
0.5 
Total$6.5 $(3.9)
Six Months Ended June 30, 2021Six Months Ended June 30, 2020
(in millions)VolumesGains (Losses)VolumesGains (Losses)
Natural gas contracts
35.6 Dth
$(1.6)
33.1 Dth
$(11.3)
FTRs
11.1 MWh
6.5 
10.2 MWh
1.3 
Total $4.9  $(10.0)

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 June 30, 2021 and December 31, 2020, we had posted cash collateral of $4.0 million and $6.7 million, respectively, in our margin accounts. These amounts were recorded on our balance sheets in other current assets. At June 30, 2021, we had also received cash collateral of $16.7 million in our margin accounts. This amount was recorded on our balance sheet in other current liabilities.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:
June 30, 2021December 31, 2020
(in millions)Derivative AssetsDerivative LiabilitiesDerivative AssetsDerivative Liabilities
Gross amount recognized on the balance sheet$33.2 $0.4 $6.3 $4.1 
Gross amount not offset on the balance sheet(16.7)
(1)
— (2.9)(2.9)
Net amount$16.5 $0.4 $3.4 $1.2 

(1)    Includes cash collateral received of $16.7 million.

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NOTE 13—GUARANTEES

As of June 30, 2021, we had $26.0 million of standby letters of credit issued by financial institutions for the benefit of third parties that extended credit to us which automatically renew each year unless proper termination notice is given. These amounts are not reflected on our balance sheets.

NOTE 14—EMPLOYEE BENEFITS

The following tables show the components of net periodic benefit cost (credit) for our benefit plans.
Pension Benefits
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Service cost$3.9 $2.9 $7.2 $6.2 
Interest cost7.7 9.4 15.5 18.9 
Expected return on plan assets(17.4)(17.3)(35.1)(34.7)
Amortization of prior service credit(0.1)— (0.1)— 
Amortization of net actuarial loss11.0 9.8 21.0 18.9 
Net periodic benefit cost$5.1 $4.8 $8.5 $9.3 

OPEB Benefits
Three Months Ended June 30Six Months Ended June 30
(in millions)2021202020212020
Service cost$0.9 $1.0 $2.1 $2.1 
Interest cost1.4 1.7 2.7 3.4 
Expected return on plan assets(4.2)(3.9)(8.4)(7.8)
Amortization of prior service credit(0.3)(0.2)(0.6)(0.3)
Amortization of net actuarial gain(2.8)(2.9)(5.5)(5.3)
Net periodic benefit credit$(5.0)$(4.3)$(9.7)$(7.9)

During the six months ended June 30, 2021, we made contributions and payments of $2.6 million related to our pension plans and an insignificant amount related to our OPEB plans. We expect to make contributions and payments of $1.0 million related to our pension plans and $0.1 million related to our OPEB plans during the remainder of 2021, dependent upon various factors affecting us, including our liquidity position and possible tax law changes.

NOTE 15—SEGMENT INFORMATION

We use net income attributed to common shareholder to measure segment profitability and to allocate resources to our businesses. At June 30, 2021, we reported two segments, which are described below.

Our utility segment includes our electric utility operations, including steam operations, and our 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. In addition, our steam operations produce, distribute, and sell steam to customers in metropolitan Milwaukee.

•Our natural gas utility operations are engaged in the purchase, distribution, and sale of natural gas to retail customers as well as the transportation of customer-owned natural gas in southeastern, east central, and northern Wisconsin.

No significant items were reported in the other segment during the three and six months ended June 30, 2021 and 2020.

NOTE 16—VARIABLE INTEREST ENTITIES

The primary beneficiary of a VIE must consolidate the entity's assets and liabilities. In addition, certain disclosures are required for significant interest holders in VIEs.

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We assess our relationships with potential VIEs, such as our coal suppliers, natural gas suppliers, coal transporters, natural gas transporters, and other counterparties related to power purchase agreements and investments. 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.

WEPCo Environmental Trust Finance I, LLC

In November 2020, the PSCW issued a financing order approving the securitization of $100 million of undepreciated environmental control costs related to our retired Pleasant Prairie power plant, the carrying costs accrued on the $100 million during the securitization process, and the related financing fees. The financing order also authorized us to form WEPCo Environmental Trust, a bankruptcy-remote special purpose entity, for the sole purpose of issuing ETBs to recover the costs approved in the financing order. WEPCo Environmental Trust is our wholly-owned subsidiary.

In May 2021, WEPCo Environmental Trust issued ETBs and used the proceeds to acquire environmental control property from us. The environmental control property is recorded as a regulatory asset on our balance sheets and includes the right to impose, collect, and receive a non-bypassable environmental control charge from our retail electric distribution customers until the ETBs are paid in full and all financing costs have been recovered. The ETBs are secured by the environmental control property. Cash collections from the environmental control charge, and funds on deposit in trust accounts, are the sole source of funds to satisfy the debt obligation. The bondholders have no recourse to us or any of our affiliates. See Note 8, Long-Term Debt, for more information on the ETBs.

We act as the servicer of the environmental control property on behalf of WEPCo Environmental Trust and are responsible for metering, calculating, billing, and collecting the environmental control charge. As necessary, we are authorized to implement periodic adjustments of the environmental control charge designed to ensure the timely payment of principal, interest, and other ongoing financing costs. We remit all collections of the environmental control charge to an indenture trustee of WEPCo Environmental Trust.

WEPCo Environmental Trust is a VIE primarily because its equity capitalization is insufficient to support its operations. As described above, we have the power to direct the activities that most significantly impact WEPCo Environmental Trust's economic performance. Therefore, we are considered the primary beneficiary of WEPCo Environmental Trust, and consolidation is required.

The following table summarizes the impact of WEPCo Environmental Trust on our balance sheet.
(in millions)June 30, 2021
Assets
Other current assets (restricted cash)$1.6 
Regulatory assets106.0 
Other long-term assets (restricted cash)0.6 
Liabilities
Current portion of long-term debt4.1 
Other current liabilities (accrued interest)0.3 
Long-term debt111.1 

Power Purchase Agreement

We have a power purchase agreement that represents a variable interest. This agreement is for 236 MWs of firm capacity from a natural gas-fired cogeneration facility, and we account for it as a finance lease. The agreement includes no minimum energy requirements over the remaining term of approximately one year. 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 power purchase agreement.

We have $8.9 million of required capacity payments over the remaining term of this agreement. We believe that the required capacity payments under this contract will continue to be recoverable in rates, and our maximum exposure to loss is limited to these capacity payments.

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NOTE 17—COMMITMENTS AND CONTINGENCIES

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

Unconditional Purchase Obligations

We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. In order to meet these obligations, we routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. Our minimum future commitments related to these purchase obligations as of June 30, 2021, were approximately $9.0 billion.

Environmental Matters

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

Air Quality

National Ambient Air Quality Standards

Ozone

After completing its review of the 2008 ozone standard, the EPA released a final rule in October 2015, creating a more stringent standard than the 2008 NAAQS. The 2015 ozone standard lowered the 8-hour limit for ground-level ozone. In December 2020, the EPA completed its 5-year review of the ozone standard and issued a final decision to retain, without any changes, the existing 2015 standard. Under Executive Order 13990, the Biden Administration ordered that all agencies review existing regulations, orders, guidance documents, policies, and similar actions promulgated, issued, or adopted between January 20, 2017 and January 20, 2021. Consequently, the December 2020 decision to retain the 2015 ozone standards with no changes is currently under review by the EPA.

The EPA issued final nonattainment area designations for the 2015 ozone standard in April 2018. The following counties within our service territory were designated as partial nonattainment: Kenosha, Sheboygan, and Northern Milwaukee/Ozaukee. This re-designation was challenged in the D.C. Circuit Court of Appeals in Clean Wisconsin et al. v. U.S. Environmental Protection Agency. A decision was issued in July 2020 remanding the rule to the EPA for further evaluation. As a result of the July 2020 remand, in May 2021, the EPA announced it was taking final action to revise the boundaries for six nonattainment areas, including several in Wisconsin. Under the new designations, all of Milwaukee and Ozaukee counties will be listed as nonattainment and portions of Racine, Waukesha, and Washington counties will be added to the nonattainment area. As a result of these boundary changes, the Valley Power Plant is now in the nonattainment area. Additionally, the Chicago, Illinois, Indiana, and Wisconsin nonattainment area will now include an expanded portion of Kenosha county, and the partial nonattainment area of Sheboygan county is also being expanded.

In February 2021, the Wisconsin Department of Natural Resources proposed draft revisions to the Wisconsin Administrative Code to adopt the 2015 ozone standard and incorporate by reference the federal air pollution monitoring requirements related to the NAAQS. The Natural Resources Board adopted the rule as proposed during their June 2021 meeting. We believe that we are well positioned to meet the requirements associated with the 2015 ozone standard and do not expect to incur significant costs to comply with associated state or federal rules.

Particulate Matter

In addition to the 2015 ozone standard, in December 2020, the EPA completed its 5-year review of the 2012 standard for particulate matter, including fine particulate matter. The EPA determined that no revisions were necessary to the current standard. This determination was also subject to review under Executive Order 13990 and in June 2021, the EPA announced it would reconsider the
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December 2020 decision. Under the Biden Administration's policy review, the EPA concluded that the scientific evidence and information from the December 2020 determination supports revising the level of the annual standard for the particulate matter NAAQS to below the current level of 12 micrograms per cubic meter, while retaining the 24-hour standard. A proposed rule-making is expected in summer 2022, and a final rule is expected in spring 2023. All counties within our service territory are in attainment with the current 2012 standards.

Climate Change

The ACE rule, effective since September 2019, was vacated by the D.C. Circuit Court of Appeals in January 2021. The ACE rule replaced the Clean Power Plan and provided existing coal-fired generating units with standards for achieving GHG emission reductions. In a memorandum issued to the EPA regional administrators in February 2021, the EPA stated that the D.C. Circuit Court decision meant that no existing rule regulates GHG emissions from electric generating units. The EPA is currently reviewing its options for such regulations and has signaled that a draft rule will not be ready until 2022 at the earliest.

In January 2021, the EPA finalized a rule to revise the New Source Performance Standards for GHG emissions from new, modified, and reconstructed fossil-fueled power plants. The rule became effective March 14, 2021; however, on March 17, 2021 the EPA asked the D.C. Circuit Court of Appeals to vacate and remand the final rule, which was granted by the D.C. Circuit Court of Appeals on April 5, 2021. Despite this uncertainty, WEC Energy Group continues to move forward on the ESG Progress Plan, which is heavily focused on reducing GHG emissions.

The ESG Progress Plan includes the retirement of older, fossil-fueled generation, to be replaced with zero-carbon-emitting renewables and clean natural gas-fueled generation by 2025. By the end of 2020, WEC Energy Group was able to reduce CO2 emissions from its electric generation fleet by more than 50% below 2005 levels. As a result, WEC Energy Group announced new goals in May 2021. WEC Energy Group is committing to a 60% reduction in carbon emissions from its electric generation fleet by 2025 and an 80% reduction by the end of 2030, both from a 2005 baseline. WEC Energy Group expects to achieve these goals by the retirement of older, less efficient units, operating refinements, and the use of existing technology while executing its ESG Progress Plan. Over the longer term, the target for WEC Energy Group's generation fleet is net-zero carbon emissions by 2050. We have already retired approximately 1,500 MW of coal-fired generation since the beginning of 2018. As part of the ESG Progress Plan, WEC Energy Group expects to retire approximately 1,800 MW of additional fossil-fueled generation by 2025, which includes the planned retirements in 2023-2024 of OCPP Units 5-8.

WEC Energy Group continues to reduce methane emissions by improving its natural gas distribution system. WEC Energy Group's initial 2030 goal called for a 30% reduction in methane emissions from a 2011 baseline. Given advancements with renewable natural gas, WEC Energy Group is setting a new target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030.

Cross-State Air Pollution Rule Update Rule Revision

In 2015, the EPA determined that several upwind states had failed to submit state implementation plans that addressed their "Good Neighbor" obligations (i.e., the states projected NOx emissions significantly contribute to a continuing downwind nonattainment and/or maintenance problem); therefore, by statute, the EPA was required to issue a federal implementation plan. In March 2021, the EPA finalized a CSAPR update rule revision that keeps nine of the 21 CSAPR affected states (including Wisconsin) as a Group 2 NOx ozone season trading program source and found that the prior CSAPR update is sufficient to meet its "Good Neighbor" obligations. No further NOx reductions would be needed within these nine states. This rule became effective June 29, 2021. We do not expect that the final rule will have a material impact on our financial condition or results of operations.

Water Quality

Clean Water Act Cooling Water Intake Structure Rule

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

We have received BTA determinations for OC 5 through OC 8 and Valley power plant. Although we currently believe that existing technology at the Port Washington Generating Station satisfies the BTA requirements, a final determination will not be made until
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the discharge permit is renewed for this facility, which is expected to be in 2021. We anticipate that the permit renewal will include a final BTA determination to address all of the Section 316(b) rule requirements.

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

Steam Electric Effluent Limitation Guidelines

The EPA's final 2015 ELG rule took effect in January 2016 and was modified in 2020 to revise the treatment technology requirements related to BATW and wet FGD wastewaters at existing facilities. This rule created new requirements for several types of power plant wastewaters. The two new requirements that affect us relate to discharge limits for BATW and wet FGD wastewater. Our power plant facilities already have advanced wastewater treatment technologies installed that meet many of the discharge limits established by this rule. There will, however, need to be facility modifications to meet water permit requirements for the BATW systems at OC 7 and OC 8. Wastewater treatment system modifications also will be required for wet FGD discharges and site wastewater from the OCPP and ERGS units. Based on engineering cost estimates, we expect that compliance with the ELG rule will require approximately $100 million in capital investment.

In July 2021, the EPA announced that it intends to initiate rulemaking to revise the ELG Rule as modified in 2020. The EPA has stated that the ELG Rule will continue to be implemented and enforced while the agency pursues this rulemaking process. The EPA plans to propose a revised rule in the fall of 2022.

Land Quality

Manufactured Gas Plant Remediation

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

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

We have established the following regulatory assets and reserves for manufactured gas plant sites:
(in millions)June 30, 2021December 31, 2020
Regulatory assets$17.5 $18.5 
Reserves for future environmental remediation (1)
10.3 10.3 

(1)Recorded within other long-term liabilities on our balance sheets.

Enforcement and Litigation Matters

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

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NOTE 18—SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended June 30
(in millions)20212020
Cash paid for interest, net of amount capitalized$234.0 $233.8 
Cash paid for income taxes, net40.3 — 
Significant non-cash investing and financing transactions:
Accounts payable related to construction costs50.0 27.8 
Receivable related to insurance proceeds for property damage (1)
39.6 1.5 

(1)See Note 5, Property, Plant, and Equipment, for information about a steam incident at our PSB.

The statements of cash flows include our activity related to cash, cash equivalents, and restricted cash. Our restricted cash primarily consists of cash on deposit in financial institutions that is restricted to satisfy the requirements of certain debt agreements at WEPCo Environmental Trust. See Note 16, Variable Interest Entities, for more information.

The following table reconciles the cash, cash equivalents, and restricted cash amounts reported within the balance sheets to the total of these amounts shown on the statements of cash flows:

(in millions)June 30, 2021December 31, 2020
Cash and cash equivalents$4.7 $7.2 
Restricted cash included in other current assets1.6 — 
Restricted cash included in other long term assets0.6 — 
Cash, cash equivalents, and restricted cash$6.9 $7.2 

NOTE 19—REGULATORY ENVIRONMENT

Recovery of Natural Gas Costs

Due to the cold temperatures, wind, snow, and ice throughout the central part of the country during February 2021, the cost of gas purchased for our natural gas utility customers was temporarily driven significantly higher than our normal winter weather expectations. We have a regulatory mechanism in place for recovering all prudently incurred gas costs.

On March 23, 2021, we requested approval from the PSCW to recover approximately $54 million of natural gas costs in excess of the benchmark set in our gas cost recovery mechanism. On March 30, 2021, the PSCW approved our request to recover the costs over a period of three months, beginning in April 2021.

Coronavirus Disease – 2019

The global outbreak of COVID-19 was declared a pandemic by the WHO and the CDC. COVID-19 has spread globally, including throughout the United States and, in turn, our service territory. In response to the COVID-19 pandemic, Wisconsin declared a public health emergency and issued a shelter-in-place order, which has since been lifted. In March 2020, the PSCW issued two orders in response to the COVID-19 pandemic. The first order required all public utilities in the state of Wisconsin, including us, to temporarily suspend disconnections, the assessment of late fees, and deposit requirements for all customer classes. In addition, it required utilities to reconnect customers that were previously disconnected, offer deferred payment arrangements to all customers, and streamline the application process for customers applying for utility service.

In the second order issued in March 2020, the PSCW authorized Wisconsin utilities to defer expenditures and certain foregone revenues resulting from compliance with the first order, and expenditures as otherwise incurred to ensure safe, reliable, and affordable access to utility services during the declared public health emergency. The PSCW affirmed that this authorization for deferral includes the incremental increase in uncollectible expense above what is currently being recovered in rates. As we already have a cost recovery mechanism in place to recover uncollectible expense for residential customers, this new deferral only impacts the recovery of uncollectible expense for our commercial and industrial customers. See Note 3, Credit Losses, for information regarding changes to our allowance for credit losses. As of June 30, 2021, amounts deferred related to the COVID-19 pandemic were not significant. The PSCW will review the recoverability and examine the prudency of any deferred amounts in future rate proceedings.

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In June 2020, the PSCW issued a written order providing a timeline for the lifting of the temporary provisions required in the first March 2020 order. Utilities were allowed to disconnect commercial and industrial customers and require deposits for new service as of July 25, 2020 and July 31, 2020, respectively. After August 15, 2020, utilities were no longer required to offer deferred payment arrangements to all customers. Additionally, utilities were authorized to reinstate late fees except for the period between the first order and this supplemental order. We resumed charging late payment fees in late August 2020. Late payment fees were not charged on outstanding balances that were billed between the first order and late August 2020.

Subsequent to the June 2020 order, the PSCW extended the moratorium on disconnections of residential customers until November 1, 2020. In accordance with Wisconsin regulations, utilities are generally not allowed to disconnect residential customers for non-payment during the winter moratorium, which began on November 1, 2020 and ended on April 15, 2021. Utilities were allowed to continue assessing late payment fees during the winter moratorium. On April 5, 2021, the PSCW issued a written order indicating that it would not extend the moratorium on disconnections further; therefore, utilities could begin disconnecting residential customers for non-payment after April 15, 2021. Utilities are required to offer a deferred payment arrangement to low-income residential customers prior to disconnecting service. The order also allowed us to resume charging late payment fees on the full balance of all outstanding arrears, regardless of the associated dates the service was provided, after April 15, 2021.

2022 Rates

On March 30, 2021, we filed an application with the PSCW for the approval of certain accounting treatments which, if approved, would allow us to maintain our current electric, natural gas, and steam base rates through 2022 and forego filing a rate case for one year. In connection with the request, we also entered into an agreement, dated March 23, 2021, with various stakeholders. Pursuant to the terms of the agreement, the stakeholders fully support the application, and we expect to file our next rate case by no later than May 1, 2022.

The application filed with the PSCW includes the following key proposals:

•We would amortize, in 2022, certain previously deferred balances to offset approximately half of our forecasted revenue deficiency.
•We would be allowed to defer any increases in tax expense due to changes in tax law that occur in 2021 and/or 2022.
•We would maintain our earnings sharing mechanism for 2022, with modification. The earnings sharing mechanism would be modified to authorize us to retain 100% of the first 15 basis points of earnings above our currently authorized ROE. This modification would expire on December 31, 2022. The earnings sharing mechanism would otherwise remain as currently authorized.

We expect the PSCW to review and consider the application during the third quarter of 2021.

2020 and 2021 Rates

In March 2019, we filed an application with the PSCW to increase our retail electric, natural gas, and steam rates, effective January 1, 2020. In August 2019, we filed an application with the PSCW for approval of a settlement agreement entered into with certain intervenors to resolve several outstanding issues in our rate case. In December 2019, the PSCW issued a written order that approved the settlement agreement without material modification and addressed the remaining outstanding issues that were not included in the settlement agreement. The new rates became effective January 1, 2020.

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The final order reflects the following:
2020 Effective rate increase
Electric (1)
$15.3  million/0.5%
Gas (2)
$10.4  million/2.8%
Steam$1.9  million/8.6%
ROE10.0%
Common equity component average on a financial basis52.5%

(1)Amount is net of certain deferred tax benefits from the Tax Legislation that were utilized to reduce near-term rate impacts to our customers. The rate order reflects the majority of the unprotected deferred tax benefits from the Tax Legislation being amortized evenly over two years, which results in approximately $65 million of tax benefits being amortized in each of 2020 and 2021. The unprotected deferred tax benefits related to the unrecovered balances of certain of our retired plants and our SSR regulatory asset were used to reduce the related regulatory asset. Unprotected deferred tax benefits by their nature are eligible to be returned to customers in a manner and timeline determined to be appropriate by the PSCW.

(2)Amount includes certain deferred tax expense from the Tax Legislation. The rate order reflects all of the unprotected deferred tax expense from the Tax Legislation being amortized evenly over four years, which results in approximately $5 million of previously deferred tax expense being amortized each year. Unprotected deferred tax expense by its nature is eligible to be recovered from customers in a manner and timeline determined to be appropriate by the PSCW.

In accordance with our rate order, we filed an application with the PSCW in July 2020 requesting a financing order to securitize $100 million of Pleasant Prairie power plant's book value, plus the carrying costs accrued on the $100 million during the securitization process and related financing fees. In November 2020, the PSCW issued a written order approving the application. The financing order also authorized us to form a bankruptcy-remote special purpose entity, WEPCo Environmental Trust, for the sole purpose of issuing ETBs to recover the approved costs. In May 2021, WEPCo Environmental Trust issued $118.8 million of 1.578% ETBs due December 15, 2035. See Note 8, Long-Term Debt, for more information on the issuance of the ETBs. See Note 16, Variable Interest Entities, for more information on WEPCo Environmental Trust.

We will continue having an earnings sharing mechanism through 2021. The earnings sharing mechanism was modified from its previous structure to one that is consistent with other Wisconsin investor-owned utilities. Under this earnings sharing mechanism, if we earn above our authorized ROE: (i) we retain 100.0% of earnings for the first 25 basis points above the authorized ROE; (ii) 50.0% of the next 50 basis points is refunded to customers; and (iii) 100.0% of any remaining excess earnings is refunded to customers. In addition, the rate order also requires us to maintain residential and small commercial electric and natural gas customer fixed charges at previously authorized rates and to maintain the status quo for our electric market-based rate programs for large industrial customers through 2021.

NOTE 20—NEW ACCOUNTING PRONOUNCEMENTS

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The new standard removes certain exceptions for performing intraperiod allocation and calculating income taxes in interim periods and also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The guidance was effective for annual and interim periods beginning after December 15, 2020. The adoption of ASU 2019-12, effective January 1, 2021, did not have a significant impact on our financial statements and related disclosures.

Reference Rate Reform

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impact this guidance may have on our financial statements and related disclosures.

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

CORPORATE DEVELOPMENTS

The following discussion should be read in conjunction with the accompanying financial statements and related notes and our 2020 Annual Report on Form 10-K.

Introduction

We are a wholly owned subsidiary of WEC Energy Group, and derive revenues 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 15, Segment Information, for more information on our reportable business segments.

Corporate Strategy

Our goal is to continue to build and sustain long-term value for our customers 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 2021-2025 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 commodity prices, 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 by 2025 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 carbon dioxide (CO2) emissions from electric generation.

By the end of 2020, WEC Energy Group was able to reduce CO2 emissions from its electric generation fleet by more than 50% below 2005 levels. As a result, WEC Energy Group announced new goals in May 2021. WEC Energy Group is committing to a 60% reduction in carbon emissions from its electric generation fleet by 2025 and an 80% reduction 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.

WEC Energy Group has already retired more than 1,800 megawatts (MW) of coal-fired generation since the beginning of 2018, which included the 2019 retirement of the Presque Isle power plant as well as the 2018 retirement of the Pleasant Prairie power plant. As part of the ESG Progress Plan, WEC Energy Group expects to retire approximately 1,800 MW of additional fossil-fueled generation by 2025, which includes the planned retirement in 2023-2024 of Oak Creek Power Plant Units 5-8.

In addition to retiring these older, fossil-fueled plants, WEC Energy Group expects to invest approximately $2 billion from 2021-2025 in renewable energy in Wisconsin. WEC Energy Group's plan is to replace a portion of the retired capacity by building and owning a combination of clean, natural gas-fired generation and zero-carbon-emitting renewable generation facilities that are anticipated to include the following new investments made by either us or Wisconsin Public Service Corporation based on specific customer needs:

•800 MW of utility-scale solar;
•600 MW of battery storage;
•100 MW of wind;
•100 MW of reciprocating internal combustion engine (RICE) natural gas-fueled generation; and
•the planned purchase of 200 MW of capacity in the West Riverside Energy Center — a new, combined-cycle natural gas plant recently completed by Alliant Energy in Wisconsin.
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For more details, see Liquidity and Capital Resources – Capital Resources and Requirements – Capital Requirements – Significant Capital Projects.

In addition, we previously received approval from the Public Service Commission of Wisconsin (PSCW) to invest in 100 MW of utility-scale solar. We have partnered with an unaffiliated utility to construct Badger Hollow Solar Park II that is expected to enter commercial operation in December 2022. Once constructed, we will own 100 MW of the project.

In December 2018, we received approval from the PSCW for two renewable energy pilot programs. The Solar Now pilot is expected to add 35 MW of solar generation to our portfolio, allowing non-profit and government entities, as well as commercial and industrial customers to site utility owned solar arrays on their property. Under this program, we have energized 18 Solar Now projects and currently have another four under construction, together totaling more than 24 MW. The second program, the Dedicated Renewable Energy Resource pilot, would allow large commercial and industrial customers to access renewable resources that we would operate, adding up to 150 MW of renewables to our portfolio, and allowing these larger customers to meet their sustainability and renewable energy goals.

WEC Energy Group also continues to reduce methane emissions by improving its natural gas distribution system. WEC Energy Group's initial 2030 goal called for a 30% reduction in methane emissions from a 2011 baseline. Given advancements with renewable natural gas, WEC Energy Group is setting a new target across its natural gas distribution operations to achieve net-zero methane emissions by the end of 2030.

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 and distribution networks to further improve reliability.

Below are a few examples of reliability projects that are proposed or currently underway.

•We are constructing approximately 46 miles of natural gas transmission main to increase the quantity and reliability of natural gas service in southeastern Wisconsin. This project, called the Lakeshore Lateral Project, is expected to be completed by the end of 2021.

•We plan to construct a liquefied natural gas (LNG) facility to meet anticipated peak demand. Subject to PSCW approval, commercial operation for the LNG facility is targeted for the end of 2023.

For more details, see Liquidity and Capital Resources – Capital Resources and Requirements – Capital 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 Advanced Metering Infrastructure program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities.

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.

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.

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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.

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 JUNE 30, 2021

Earnings

Our earnings for the second quarter of 2021 were $78.8 million, compared to $70.6 million for the same quarter in 2020. See below for additional information on the $8.2 million increase in earnings.

Non-GAAP Financial Measures

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

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

Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator
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of operating performance. Our utility segment operating income for the three months ended June 30, 2021 and 2020 was $200.0 million and $188.6 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 Attributed to Common Shareholder

The following table compares our utility segment's contribution to net income during the second quarter of 2021, compared with the same quarter in 2020, including favorable or better, "B", and unfavorable or worse, "W", variances.
Three Months Ended June 30
(in millions)20212020B (W)
Electric revenues$764.7 $707.7 $57.0 
Fuel and purchased power243.3 206.6 (36.7)
Total electric margins521.4 501.1 20.3 
Natural gas revenues62.8 61.8 1.0 
Cost of natural gas sold33.1 29.0 (4.1)
Total natural gas margins29.7 32.8 (3.1)
Total electric and natural gas margins551.1 533.9 17.2 
Other operation and maintenance213.1 214.3 1.2 
Depreciation and amortization113.3 106.2 (7.1)
Property and revenue taxes24.7 24.8 0.1 
Operating income200.0 188.6 11.4 
Other income, net7.3 4.9 2.4 
Interest expense116.0 116.6 0.6 
Income before income taxes91.3 76.9 14.4 
Income tax expense12.2 6.0 (6.2)
Preferred stock dividends of subsidiary0.3 0.3 — 
Net income attributed to common shareholder$78.8 $70.6 $8.2 

The following table shows a breakdown of other operation and maintenance:
Three Months Ended June 30
(in millions)20212020B (W)
Operation and maintenance not included in line items below$84.5 $82.1 $(2.4)
Transmission (1)
84.5 84.5 — 
We Power (2)
29.4 29.9 0.5 
Regulatory amortizations and other pass through expenses (3)
14.7 17.8 3.1 
Total other operation and maintenance$213.1 $214.3 $1.2 

(1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting for ATC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the three months ended June 30, 2021 and 2020, $82.3 million and $74.3 million, respectively, of costs were billed to us by transmission providers.

(2)Represents costs associated with the We Power generation units, including operating and maintenance costs we recognized. During the three months ended June 30, 2021 and 2020, $25.7 million and $25.5 million, respectively, of costs were billed to or incurred by us related to the We Power generation units, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset.

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

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The following tables provide information on delivered sales volumes by customer class and weather statistics:
Three Months Ended June 30
MWh (in thousands)
Electric Sales Volumes20212020B (W)
Customer Class
Residential1,903.9 1,981.0 (77.1)
Small commercial and industrial2,068.7 1,861.3 207.4 
Large commercial and industrial1,691.3 1,463.6 227.7 
Other23.9 30.3 (6.4)
Total retail5,687.8 5,336.2 351.6 
Wholesale 275.5 225.5 50.0 
Resale1,301.7 1,147.2 154.5 
Total sales in MWh7,265.0 6,708.9 556.1 

Three Months Ended June 30
Therms (in millions)
Natural Gas Sales Volumes20212020B (W)
Customer Class
Residential45.7 59.9 (14.2)
Commercial and industrial23.6 29.4 (5.8)
Total retail69.3 89.3 (20.0)
Transportation66.0 65.0 1.0 
Total sales in therms135.3 154.3 (19.0)

Three Months Ended June 30
Degree Days
Weather (1)
20212020B (W)
Heating (928 Normal)738 995 (25.8)%
Cooling (164 Normal)303 223 35.9 %

(1)Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.

Electric Utility Margins

Electric utility margins increased $20.3 million during the second quarter of 2021, compared with the same quarter in 2020. The significant factors impacting the higher electric utility margins were:

•A $9.8 million increase in margins related to higher retail sales volumes, including the impact of weather. As measured by cooling degree days, the second quarter of 2021 was 35.9% warmer than the same quarter in 2020. Commercial and industrial retail sales volumes also improved during the second quarter of 2021, compared with the same quarter in 2020, due to the continued economic recovery in Wisconsin from the COVID-19 pandemic.

•A $4.6 million increase in margins from other revenues, primarily related to higher late payment charges driven by an increase in past due accounts receivable balances during the second quarter of 2021. Late payment charges were suspended by the PSCW for a period of time beginning March 24, 2020 as a result of the COVID-19 pandemic. See Note 19, Regulatory Environment, for more information.

•A $3.6 million net increase in margins related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This increase in margins includes a $3.5 million positive impact related to unprotected excess deferred taxes, which we agreed to return to customers over two years and is offset in income taxes. See Note 19, Regulatory Environment, for more information.

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Natural Gas Utility Margins

Natural gas utility margins decreased $3.1 million during the second quarter of 2021, compared with the same quarter in 2020. The most significant factor impacting the lower natural gas utility margins was lower retail sales volumes, driven by warmer spring weather during the second quarter of 2021. As measured by heating degree days, the second quarter of 2021 was 25.8% warmer than the same quarter in 2020.

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

Other operating expenses at the utility segment increased $5.8 million during the second quarter of 2021, compared with the same quarter in 2020. The significant factors impacting the increase in operating expenses were:

•A $7.1 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan as well as an increase related to the We Power leases.

•A $1.6 million increase in customer service expenses, primarily related to additional costs from an information technology project created to improve the billing, call center, and credit collection functions, as well as higher call volumes and metering costs.

•A $1.4 million increase in other operation and maintenance expense at our plants, driven by the timing of planned outages.

These increases in operating expenses were partially offset by:

•A $3.4 million decrease in benefit costs, primarily due to lower deferred compensation costs and pension costs, partially offset by higher medical costs.

•A $3.1 million decrease in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above.

•Costs incurred of $2.5 million during the second quarter of 2020, related to facility damage resulting from a significant rain event in May 2020. See Note 5, Property, Plant, and Equipment, for more information.

Other Income, Net

Other income, net increased $2.4 million during the second quarter of 2021, compared with the same quarter in 2020, 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. Higher AFUDC–Equity due to continued capital investment also contributed to the increase in other income, net.

Income Tax Expense

Income tax expense increased $6.2 million during the second quarter of 2021, compared with the same quarter in 2020. The increase was primarily due to an increase in pretax income and a decrease in PTCs. See Note 10, Income Taxes, for more information.

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SIX MONTHS ENDED JUNE 30, 2021

Earnings

Our earnings for the six months ended June 30, 2021 were $205.8 million, compared to $189.3 million for the same period in 2020. See below for additional information on the $16.5 million increase in earnings.

Expected 2021 Annual Effective Tax Rate

We expect our 2021 annual effective tax rate to be between 12.5% and 13.5%, which includes an estimated 10.5% effective tax rate benefit due to the amortization of unprotected excess deferred taxes in connection with our 2019 Wisconsin rate order. Excluding this estimated effective tax rate benefit, the expected 2021 range would be between 23% and 24%.

Non-GAAP Financial Measures

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

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

Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the six months ended June 30, 2021 and 2020 was $455.6 million and $435.6 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.

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Utility Segment Contribution to Net Income Attributed to Common Shareholder
Six Months Ended June 30
(in millions)20212020B (W)
Electric revenues$1,553.5 $1,439.3 $114.2 
Fuel and purchased power499.0 421.0 (78.0)
Total electric margins1,054.5 1,018.3 36.2 
Natural gas revenues279.2 201.2 78.0 
Cost of natural gas sold181.6 103.8 (77.8)
Total natural gas margins97.6 97.4 0.2 
Total electric and natural gas margins1,152.1 1,115.7 36.4 
Other operation and maintenance422.4 418.9 (3.5)
Depreciation and amortization224.0 210.7 (13.3)
Property and revenue taxes50.1 50.5 0.4 
Operating income455.6 435.6 20.0 
Other income, net14.7 10.2 4.5 
Interest expense232.2 235.2 3.0 
Income before income taxes238.1 210.6 27.5 
Income tax expense31.7 20.7 (11.0)
Preferred stock dividends of subsidiary0.6 0.6 — 
Net income attributed to common shareholder$205.8 $189.3 $16.5 

The following table shows a breakdown of other operation and maintenance:
Six Months Ended June 30
(in millions)20212020B (W)
Operation and maintenance not included in line items below$161.6 $155.9 $(5.7)
Transmission (1)
168.9 168.9 — 
We Power (2)
58.8 60.2 1.4 
Regulatory amortizations and other pass through expenses (3)
33.1 33.9 0.8 
Total other operation and maintenance$422.4 $418.9 $(3.5)

(1)Represents transmission expense that we are authorized to collect in rates. The PSCW has approved escrow accounting for ATC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the six months ended June 30, 2021 and 2020, $169.2 million and $152.9 million, respectively, of costs were billed to us by transmission providers.

(2)Represents costs associated with the We Power generation units, including operating and maintenance costs we recognized. During the six months ended June 30, 2021 and 2020, $51.6 million and $60.6 million, respectively, of costs were billed to or incurred by us related to the We Power generation units, with the difference in costs billed or incurred and expenses recognized, either deferred or deducted from the regulatory asset.

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

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The following tables provide information on delivered sales volumes by customer class and weather statistics:
Six Months Ended June 30
MWh (in thousands)
Electric Sales Volumes20212020B (W)
Customer Class
Residential3,887.8 3,867.2 20.6 
Small commercial and industrial4,146.2 3,953.0 193.2 
Large commercial and industrial3,266.4 3,095.1 171.3 
Other59.5 64.4 (4.9)
Total retail11,359.9 10,979.7 380.2 
Wholesale 592.6 490.8 101.8 
Resale3,149.1 2,944.5 204.6 
Total sales in MWh15,101.6 14,415.0 686.6 

Six Months Ended June 30
Therms (in millions)
Natural Gas Sales Volumes20212020B (W)
Customer Class
Residential223.0 226.7 (3.7)
Commercial and industrial119.0 120.3 (1.3)
Total retail342.0 347.0 (5.0)
Transportation161.9 169.7 (7.8)
Total sales in therms503.9 516.7 (12.8)

Six Months Ended June 30
Degree Days
Weather (1)
20212020B (W)
Heating (4,209 Normal)3,858 3,920 (1.6)%
Cooling (164 Normal)303 223 35.9 %

(1)Normal degree days are based on a 20-year moving average of monthly temperatures from Mitchell International Airport in Milwaukee, Wisconsin.

Electric Utility Margins

Electric utility margins increased $36.2 million during the six months ended June 30, 2021, compared with the same period in 2020. The significant factors impacting the higher electric utility margins were:

•A $26.0 million net increase in margins related to higher sales volumes, including the impact of weather. As measured by cooling degree days, the six months ended June 30, 2021 were 35.9% warmer than the same period in 2020. Commercial and industrial retail sales volumes also improved during the six months ended June 30, 2021, compared with the same period in 2020, due to the continued economic recovery in Wisconsin from the COVID-19 pandemic.

•A $4.7 million increase in margins from other revenues, primarily related to higher late payment charges driven by an increase in past due accounts receivable balances during the six months ended June 30, 2021. Late payment charges were suspended by the PSCW for a period of time beginning March 24, 2020 as a result of the COVID-19 pandemic. See Note 19, Regulatory Environment, for more information.

•A $4.4 million increase in margins driven by lower purchased capacity costs as a result of an expiration of a contract in 2020, as well as lower ash handling costs.

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

Other operating expenses at the utility segment increased $16.4 million during the six months ended June 30, 2021, compared with the same period in 2020. The significant factors impacting the increase in operating expenses were:

•A $13.3 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan as well as an increase related to the We Power leases.

•A $3.1 million increase in customer service expenses, primarily related to additional costs from an information technology project created to improve the billing, call center, and credit collection functions, as well as higher call volumes and metering costs.

•A $1.7 million increase in property and liability insurance premiums.

These increases in operating expenses were partially offset by:

•Costs incurred of $2.5 million during the second quarter of 2020, related to facility damage resulting from a significant rain event in May 2020. See Note 5, Property, Plant, and Equipment, for more information.

•A $1.7 million decrease in benefit costs, primarily due to lower stock-based compensation and pension costs, partially offset by higher deferred compensation costs.

Other Income, Net

Other income, net increased $4.5 million during the six months ended June 30, 2021, compared with the same period in 2020, driven by higher net credits from the non-service components of our net periodic pension and OPEB costs.

Interest Expense

Interest expense decreased $3.0 million during the six months ended June 30, 2021, compared with the same period in 2020, primarily due to lower interest expense on finance lease liabilities.

Income Tax Expense

Income tax expense increased $11.0 million during the six months ended June 30, 2021, compared with the same period in 2020. The increase was primarily due to an increase in pretax income and a decrease in PTCs.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table summarizes our cash flows during the six months ended June 30:
(in millions)20212020Change in 2021 Over 2020
Cash provided by (used in):
Operating activities$473.7 $461.1 $12.6 
Investing activities(373.5)(305.7)(67.8)
Financing activities(100.5)(172.5)72.0 

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Operating Activities

Net cash provided by operating activities increased $12.6 million during the six months ended June 30, 2021, compared with the same period in 2020, driven by:

•A $47.2 million increase in cash related to higher overall collections from customers related to an increase in sales volumes during the six months ended June 30, 2021, compared with the same period in 2020. This increase was driven by warmer spring weather and the continued economic recovery in Wisconsin from the COVID-19 pandemic. In addition, during the second quarter of 2021, we began recovering natural gas costs in excess of the benchmark set in our gas cost recovery mechanism as approved by the PSCW. See Note 19, Regulatory Environment, for more information.

•A $36.5 million increase in cash due to lower collateral requirements, driven by an increase in the fair value of our natural gas derivative assets during the six months ended June 30, 2021, compared with the same period in 2020.

•A $29.0 million increase in cash from lower payments for other operation and maintenance expenses. During the six months ended June 30, 2021, our payments were lower for costs associated with the We Power generation units, as well as timing of payments for accounts payable.

These increases in net cash provided by operating activities were partially offset by:

•A $64.6 million decrease in cash related to higher payments for natural gas during the six months ended June 30, 2021, compared with the same period in 2020. Natural gas costs increased significantly throughout the central part of the country in February 2021 related to extreme weather conditions. This increase in natural gas costs drove higher payments for fuel used at our plants. See Note 19, Regulatory Environment, for more information on the recovery of these natural gas costs.

•A $40.3 million decrease in cash related to the payment of income taxes during the six months ended June 30, 2021. There were no payments of incomes taxes during the same period in 2020 as a result of the extension of the estimated payment due date to July 15, 2020 due to the COVID-19 pandemic.

Investing Activities

Net cash used in investing activities increased $67.8 million during the six months ended June 30, 2021, compared with the same period in 2020, driven by a $76.5 million increase in cash paid for capital expenditures, which is discussed in more detail below. This increase in net cash used in investing activities was partially offset by $10.4 million of proceeds received from affiliates during the six months ended June 30, 2021 related to transfers of a customer billing system.

Capital Expenditures

Capital expenditures for the six months ended June 30 were as follows:
(in millions)20212020Change in 2021 Over 2020
Capital expenditures$387.6 $311.1 $76.5 

The increase in cash paid for capital expenditures during the six months ended June 30, 2021, compared with the same period in 2020, was primarily driven by an increase in capital expenditures related to upgrades to our natural gas distribution system, partially offset by a decrease in capital expenditures related to upgrades to our electric distribution system and an information technology project created to improve our billing, call center, and credit collection functions during the six months ended June 30, 2021.

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

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Financing Activities

Net cash used in financing activities decreased $72.0 million during the six months ended June 30, 2021, compared with the same period in 2020, driven by a $418.8 million increase in cash due to the issuance of long-term debt during the six months ended June 30, 2021. A portion of these proceeds were used to redeem $300.0 million of long-term debt with higher interest rates. There were no issuances or repayments of long-term debt during the six months ended June 30, 2020.

This decrease in net cash used in financing activities was partially offset by a $35.0 million decrease in equity contributions received from our parent during the six months ended June 30, 2021, compared with the same period in 2020, to balance our capital structure.

Significant Financing Activities

For more information on our financing activities, see Note 7, Short-Term Debt and Lines of Credit and Note 8, Long-Term Debt.

Capital Resources and Requirements

Capital Resources

Liquidity

We anticipate meeting our capital requirements for our existing operations through internally generated funds and short-term borrowings, supplemented by the issuance of intermediate or long-term debt securities, depending on market conditions and other factors, and equity contributions from our parent.

We currently have access to the capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We currently believe that we have adequate capacity to fund our operations for the foreseeable future through our existing borrowing arrangements, access to capital markets, and internally generated cash. See Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019, for additional information on the impacts of the COVID-19 pandemic.

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. See Note 7, Short-Term Debt and Lines of Credit, for more information on our credit facility.

Working Capital

Although not the case as of June 30, 2021, our current liabilities sometimes exceeded our current assets. If this were to occur, we would not expect this to have any impact on our liquidity since we believe we have adequate back-up lines of credit in place for our ongoing operations. We also believe that we can access the capital markets to finance our construction programs and to refinance current maturities of long-term debt, if necessary.

Credit Rating Risk

We do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. However, we have certain agreements in the form of commodity contracts and employee benefit plans 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
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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.

If we are unable to successfully take actions to manage any additional impacts from the COVID-19 pandemic, the credit rating agencies could place our credit ratings on negative outlook or downgrade our credit ratings. Any such actions by credit rating agencies may make it more difficult and costly for us to issue future debt securities and certain other types of financing and could increase borrowing costs under our credit facility.

Capital Requirements

Significant Capital Projects

We have several capital projects that will require significant capital expenditures over the next three years and beyond. All projected capital requirements are subject to periodic review and may vary significantly from estimates, depending on a number of factors. These factors include environmental requirements, regulatory restraints and requirements, changes in tax laws and regulations, acquisition and development opportunities, market volatility, economic trends, and the COVID-19 pandemic. Our estimated capital expenditures for the next three years are as follows:
(in millions)
2021$933.5 
20221,032.0 
20231,375.3 
Total$3,340.8 

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 have partnered with an unaffiliated utility to construct a utility-scale solar project, Badger Hollow II, that will be located in Iowa County, Wisconsin. Once constructed, we will own 100 MW of the project. Our share of the cost of this project is estimated to be approximately $130 million. Commercial operation of Badger Hollow II is targeted for December 2022.

•In February 2021, we, along with WPS and an unaffiliated utility, filed an application with the PSCW for 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 150 MW of solar generation and 82 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $320 million, with construction expected to begin in 2022 and completed by the end of 2023.

•In February 2021, we, along with WPS, filed an application with the PSCW for approval to accelerate capital investments in two wind parks. If appoved, our share of the investment is expected to be approximately $85 million to repower major components of Blue Sky Green Field Wind Park, which is expected to be completed by the end of 2022.

•In March 2021, we, along with WPS 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 Kenosha County, Wisconsin and once constructed, we will own 188 MW of solar generation and 56 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $335 million, with construction expected to begin in late 2021 and completed by the end of 2023.

•In April 2021, we, along with WPS 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 225 MW of solar generation and 124 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $488 million, with construction expected to begin in late 2022 and completed by the second quarter of 2024.

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•In April 2021, we, along with WPS, filed an application with the PSCW for approval to construct a natural gas-fired generation facility at WPS's existing Weston Power Plant site in northern Wisconsin. The new facility will consist of seven reciprocating internal combustion engines. Once constructed, we will own 64 MW of this project. If approved, our share of the cost of this project is estimated to be approximately $86 million, with construction expected to begin in 2022 and completed in 2023.

We are constructing approximately 46 miles of natural gas transmission main to increase the quantity and reliability of natural gas service in southeastern Wisconsin. This project, which was approved by the PSCW in June 2020, has been designated as the Lakeshore Lateral Project. The cost of the project is estimated to be between $174 and $180 million. Construction for the project began in December 2020, and the project is expected to be completed by the end of 2021.

We plan to construct a LNG facility. Subject to PSCW approval, the facility would provide us with approximately one billion cubic foot of natural gas supply to meet anticipated peak demand without requiring the construction of additional interstate pipeline capacity. The facility is expected to reduce the likelihood of constraints on our natural gas system during the highest demand days of winter. The project is estimated to cost approximately $185 million. Commercial operation for the LNG facility is targeted for the end of 2023.

Off-Balance Sheet Arrangements

We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including letters of credit that primarily support our commodity contracts. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. For additional information, see Note 7, Short-Term Debt and Lines of Credit, Note 13, Guarantees, and Note 16, Variable Interest Entities.

Contractual Obligations

For information about our commitments, see Contractual Obligations in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Requirements in our 2020 Annual Report on Form 10-K. There were no material changes to our commitments outside the ordinary course of business during the six months ended June 30, 2021.

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 2020 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, competitive markets, environmental matters, critical accounting policies and estimates, and other matters.

Coronavirus Disease – 2019

The global outbreak of COVID-19 was declared a pandemic by the WHO and the CDC and has spread globally, including throughout the United States. There are still questions regarding the extent and duration of the COVID-19 pandemic itself, as well as the measures currently in place to try to contain the virus. Shelter-in-place and other orders limiting the capacity of various businesses that were in effect for our service territory have now expired. Similar orders could be adopted in the future depending on how the virus continues to mutate and spread. The effects of the COVID-19 pandemic and related government responses significantly disrupted economic activity in our service territory in 2020 and continues to impact our results in 2021.

Liquidity and Financial Markets

Upon the initial enactment of certain COVID-19 related shelter-in-place orders in early to mid-March 2020, commercial paper markets became more expensive and related terms became less flexible. In response to these signs of market instability, the Federal Reserve implemented certain measures, including a reduction in its benchmark Federal Funds rate and the establishment of various programs to restore liquidity and stability into the short-term funding markets. These measures continue to have a mitigating effect on commercial paper rates and availability. In addition, the initial disruption in the long-term debt markets as a result of the COVID-19 pandemic has subsided.

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Allowance for Credit Losses

We evaluate the collectability of our accounts receivable and unbilled revenue balances considering a combination of factors. Risks identified that we do not believe are reflected in historical reserve percentages are assessed on a quarterly basis to determine whether further adjustments are required. Economic disruptions caused by the COVID-19 pandemic, including higher unemployment rates and the inability of some businesses to recover from the pandemic, have caused a higher percentage of accounts receivable to become uncollectible. Although impacts on our results of operations related to uncollectible receivable balances are mitigated by a regulatory mechanism and certain COVID-19 specific regulatory orders we have received, the increase in past due receivables we have experienced has resulted in higher working capital requirements. However, with normal collection practices underway, our working capital position has improved in the second quarter of 2021 from where we were at the end of the first quarter of 2021, and we expect working capital to continue to improve throughout the remainder of the year.

Our exposure to credit losses for certain regulated utility customers is mitigated by a regulatory mechanism we have in place. Specifically, our residential tariffs include a mechanism for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in rates. In addition, we have received specific orders related to the deferral of certain costs (including credit losses) and foregone revenues related to the COVID-19 pandemic. The additional protections provided by these COVID-19 specific regulatory orders are still being assessed and will be subject to prudency reviews. See Note 19, Regulatory Environment, for more information.

Loss of Business

We saw a decrease in the consumption of electricity and natural gas by some of our commercial and industrial customers as a result of the COVID-19 pandemic. Although many of these customers have started to recover, the extent to which this decreased consumption continues to impact our results of operations and liquidity is dependent upon the duration of the COVID-19 pandemic and the ability of our customers to resume and continue normal operations.

Supply Chain and Capital Projects

We have not yet experienced a significant disruption in our supply chain as a result of the COVID-19 pandemic. However, if the pandemic significantly impacts our key suppliers’ ability to manufacture or deliver critical equipment and supplies or provide services, we could experience delays in our ability to perform certain maintenance and capital project activities.

We are not currently aware of any major delays or changes related to our capital plan as a result of the COVID-19 pandemic, although we are continuing to monitor potential impacts on an ongoing basis.

Employee Safety

The health and safety of our employees during the COVID-19 pandemic is paramount and enables us to continue to provide critical services to our customers.

We are following CDC guidelines and have taken precautions with regard to employee hygiene and facility cleanliness, imposed travel limitations on our employees, provided additional employee benefits, and implemented remote-work policies where appropriate. We have an incident management team and updated our pandemic continuity plan, which includes identifying critical work groups and ensuring safe-harbor plans are in place. We have minimized the unnecessary risk of exposure to COVID-19 by implementing self-quarantine measures and have adopted additional precautionary measures for our critical work groups.

Additional protocols have been implemented for our field employees who travel to customer premises in order to protect them, our customers, and the public. We have modified our work protocols to ensure compliance with social distancing and face covering recommendations.

We continue to provide educational information to employees to encourage them to obtain the COVID-19 vaccine. We are developing return-to-the workplace strategies for those employees currently working remotely, taking into consideration factors such as any updated CDC guidelines, the delta variant, any increases in COVID-19 cases in our service territories, and the overall level of risk to our employees and customers.

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All of these safety measures have caused us to incur additional costs that, depending upon the duration of the COVID-19 pandemic, could have a material impact on our results of operations and liquidity.

Regulatory Environment

We took actions to ensure that essential utility services were available to our customers during the COVID-19 pandemic. In addition, the PSCW issued written orders requiring certain actions by all public utilities in the state of Wisconsin. See Note 19, Regulatory Environment, for more information on these orders and the potential recovery of expenditures incurred as a result of the measures taken.

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. 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 2020 Annual Report on Form 10-K for a discussion of significant risks applicable to us.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes related to market risk from the disclosures presented in our 2020 Annual Report on Form 10-K. In addition to the Form 10-K disclosures, see Management's Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019 and Market Risks and Other Significant Risks in Item 2 of Part I of this report, as well as Note 11, Fair Value Measurements, Note 12, Derivative Instruments, and Note 13, Guarantees, in this report for information concerning our market risk exposures.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective: (i) in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act; and (ii) to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the second quarter of 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The following should be read in conjunction with Item 3. Legal Proceedings in Part I of our 2020 Annual Report on Form 10-K. See Note 17, Commitments and Contingencies, and Note 19, Regulatory Environment, in this report for additional information on material legal proceedings and matters related to us.

In addition to those legal proceedings discussed in Note 17, Commitments and Contingencies, and Note 19, Regulatory Environment, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these additional legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material effect on our financial statements.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors disclosed in Item 1A. Risk Factors in Part I of our 2020 Annual Report on Form 10-K.

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ITEM 6. EXHIBITS
The following exhibits are filed or furnished with or incorporated by reference in the report with respect to Wisconsin Electric Power Company (File No. 001-01245). An asterisk (*) indicates that the exhibit has previously been filed with the SEC and is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified below by two asterisks (**) following the description of the exhibit.
NumberExhibit
4Instruments Defining the Rights of Security Holders, Including Indentures
10Material Contracts
31Rule 13a-14(a) / 15d-14(a) Certifications
32Section 1350 Certifications
101Interactive Data Files
101.INSInline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation Linkbase
101.DEFInline XBRL Taxonomy Extension Definition Linkbase
101.LABInline XBRL Taxonomy Extension Label Linkbase
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



WISCONSIN ELECTRIC POWER COMPANY
(Registrant)
/s/ WILLIAM J. GUC
Date:August 5, 2021William J. Guc
Vice President, Controller, and Assistant Corporate Secretary
(Duly Authorized Officer and Chief Accounting Officer)

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