Wisconsin Public Service (WSPBP) 10-Q 2021 Q1 Quarterly report

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 March 31, 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.
001-03016	WISCONSIN PUBLIC SERVICE CORPORATION	39-0715160

(A Wisconsin Corporation)

2830 South Ashland Avenue

P.O. Box 19001

Green Bay, WI 54307-9001

(800) 450-7260

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

None

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

    Yes ☒    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, $4 par value,

23,896,962 shares outstanding at

March 31, 2021

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

WISCONSIN PUBLIC SERVICE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended March 31, 2021

TABLE OF CONTENTS

				Page
	CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION			1
PART I.	FINANCIAL INFORMATION			3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)			3
	Condensed Income Statements			3
	Condensed Balance Sheets			4
	Condensed Statements of Cash Flows			5
	Condensed Statements of Equity			6
	Notes to Condensed Financial Statements			7
			Page
	Note 1	General Information	7
	Note 2	Operating Revenues	7
	Note 3	Credit Losses	8
	Note 4	Regulatory Assets and Liabilities	10
	Note 5	Common Equity	10
	Note 6	Short-Term Debt and Lines of Credit	11
	Note 7	Materials, Supplies, and Inventories	11
	Note 8	Income Taxes	11
	Note 9	Fair Value Measurements	12
	Note 10	Derivative Instruments	13
	Note 11	Guarantees	14
	Note 12	Employee Benefits	15
	Note 13	Goodwill	15
	Note 14	Segment Information	15
	Note 15	Commitments and Contingencies	16
	Note 16	Supplemental Cash Flow Information	19
	Note 17	Regulatory Environment	19
	Note 18	New Accounting Pronouncements	21
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34
ITEM 4.	CONTROLS AND PROCEDURES			34
PART II.	OTHER INFORMATION			35
ITEM 1.	LEGAL PROCEEDINGS			35
ITEM 1A.	RISK FACTORS			35
ITEM 6.	EXHIBITS			35
SIGNATURE				36

03/31/2021 Form 10-Q i Wisconsin Public Service Corporation

GLOSSARY OF TERMS AND ABBREVIATIONS

The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:

Affiliates
Integrys	Integrys Holding, Inc.
WE	Wisconsin Electric Power Company
WEC Energy Group	WEC Energy Group, Inc.
Federal and State Regulatory Agencies
EPA	United States Environmental Protection Agency
PSCW	Public Service Commission of Wisconsin
SEC	United States Securities and Exchange Commission
Accounting Terms
ASU	Accounting Standards Update
FASB	Financial Accounting Standards Board
GAAP	United States Generally Accepted Accounting Principles
OPEB	Other Postretirement Employee Benefits
Environmental Terms
ACE	Affordable Clean Energy
BATW	Bottom Ash Transport Water
CAA	Clean Air Act
CO2	Carbon Dioxide
CSAPR	Cross-State Air Pollution Rule
D.C. Circuit Court of Appeals	United States Court of Appeals for the District of Columbia Circuit
ELG	Steam Electric Effluent Limitation Guidelines
GHG	Greenhouse Gas
NAAQS	National Ambient Air Quality Standards
NOV	Notice of Violation
NOx	Nitrogen Oxide
Measurements
Dth	Dekatherm
MW	Megawatt
MWh	Megawatt-hour
Other Terms and Abbreviations
AMI	Advanced Metering Infrastructure
Badger Hollow I	Badger Hollow Solar Park I
CDC	Centers for Disease Control and Prevention
COVID-19	Coronavirus Disease – 2019
ESG Progress Plan	WEC Energy Group's Capital Investment Plan for Efficiency, Sustainability, and Growth for 2021-2025
Executive Order 13990	Executive Order 13990 of January 20, 2021 – Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis
Exchange Act	Securities Exchange Act of 1934, as amended
FTR	Financial Transmission Right
ITC	Investment Tax Credit
LIBOR	London Interbank Offered Rate
MISO	Midcontinent Independent System Operator, Inc.
PTC	Production Tax Credit
ROE	Return on Equity
SMRP	System Modernization and Reliability Project
Tax Legislation	Tax Cuts and Jobs Act of 2017
Two Creeks	Two Creeks Solar Park
WHO	World Health Organization

03/31/2021 Form 10-Q ii Wisconsin Public Service Corporation

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of capital projects, sales and customer growth, rate actions and related filings with regulatory authorities, environmental and other regulations, 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;

03/31/2021 Form 10-Q 1 Wisconsin Public Service Corporation

•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 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;

•The risk associated with the values of goodwill and other intangible assets and their possible impairment;

•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 SOX, 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.

03/31/2021 Form 10-Q 2 Wisconsin Public Service Corporation

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED INCOME STATEMENTS (Unaudited)	Three Months Ended
	March 31
(in millions)		2021		2020
Operating revenues		$	405.3	$	369.4
Operating expenses
Cost of sales		168.1		131.7
Other operation and maintenance		95.4		91.8
Depreciation and amortization		46.0		43.0
Property and revenue taxes		10.2		10.0
Total operating expenses		319.7		276.5
Operating income		85.6		92.9
Other income, net		8.6		8.3
Interest expense		16.2		16.3
Other expense		(7.6)		(8.0)
Income before income taxes		78.0		84.9
Income tax expense		8.7		16.7
Net income		$	69.3	$	68.2

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

03/31/2021 Form 10-Q 3 Wisconsin Public Service Corporation

WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED BALANCE SHEETS (Unaudited)	March 31,		December 31,
(in millions, except share and per share amounts)	2021		2020
Assets
Current assets
Cash and cash equivalents	$	2.5	$	2.7
Accounts receivable and unbilled revenues, net of reserves of $17.5 and $18.3, respectively	191.0		190.8
Accounts receivable from related parties	32.1		27.6
Materials, supplies, and inventories	76.4		92.7
Prepaid taxes	36.6		39.0
Other	24.4		12.2
Current assets	363.0		365.0
Long-term assets
Property, plant, and equipment, net of accumulated depreciation and amortization of $1,776.1 and $1,750.7, respectively	4,908.3		4,885.9
Regulatory assets	441.5		449.4
Goodwill	36.4		36.4
Pension and OPEB assets	166.5		159.2
Other	45.6		38.0
Long-term assets	5,598.3		5,568.9
Total assets	$	5,961.3	$	5,933.9
Liabilities and Equity
Current liabilities
Short-term debt	$	200.5	$	210.5
Current portion of long-term debt	400.0		400.0
Accounts payable	107.6		129.6
Accounts payable to related parties	55.8		48.8
Accrued payroll and benefits	19.0		22.0
Other	46.4		59.0
Current liabilities	829.3		869.9
Long-term liabilities
Long-term debt	1,247.1		1,244.8
Deferred income taxes	711.4		682.7
Deferred ITCs	51.5		41.3
Regulatory liabilities	760.9		772.6
Environmental remediation liabilities	88.3		88.3
Pension and OPEB obligations	19.0		19.3
Other	97.7		98.3
Long-term liabilities	2,975.9		2,947.3
Commitments and contingencies (Note 15)	0		0
Common shareholder's equity
Common stock – $4 par value; 32,000,000 shares authorized; 23,896,962 shares issued and outstanding	95.6		95.6
Additional paid in capital	1,436.5		1,436.4
Retained earnings	624.0		584.7
Common shareholder's equity	2,156.1		2,116.7
Total liabilities and equity	$	5,961.3	$	5,933.9

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

03/31/2021 Form 10-Q 4 Wisconsin Public Service Corporation

WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)	Three Months Ended
	March 31
(in millions)	2021		2020
Operating activities
Net income	$	69.3	$	68.2
Reconciliation to cash provided by operating activities
Depreciation and amortization	46.0		43.0
Deferred income taxes and ITCs, net	23.3		10.9
Change in –
Accounts receivable and unbilled revenues, net	(3.7)		26.5
Materials, supplies, and inventories	16.3		15.9
Prepaid taxes	2.4		14.9
Amounts recoverable from customers	(16.8)		0
Other current assets	4.2		2.2
Accounts payable	(2.9)		(65.0)
Other current liabilities	(14.3)		(2.3)
Other, net	(6.8)		(6.9)
Net cash provided by operating activities	117.0		107.4
Investing activities
Capital expenditures	(71.2)		(109.8)
Proceeds from cash surrender value of life insurance	0		7.1
Payments for assets transferred from affiliates	(5.1)		0
Other, net	(0.9)		(0.5)
Net cash used in investing activities	(77.2)		(103.2)
Financing activities
Change in short-term debt	(10.0)		(74.5)
Payment of dividends to parent	(30.0)		(30.0)
Equity contribution from parent	0		100.0
Net cash used in financing activities	(40.0)		(4.5)
Net change in cash and cash equivalents	(0.2)		(0.3)
Cash and cash equivalents at beginning of period	2.7		2.3
Cash and cash equivalents at end of period	$	2.5	$	2.0

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

03/31/2021 Form 10-Q 5 Wisconsin Public Service Corporation

WISCONSIN PUBLIC SERVICE CORPORATION

CONDENSED STATEMENTS OF EQUITY (Unaudited)
(in millions)	Common Stock		Additional Paid In Capital		Retained Earnings		Total Common Shareholder's Equity
Balance at December 31, 2020	$	95.6	$	1,436.4	$	584.7	$	2,116.7
Net income	0		0		69.3		69.3
Payment of dividends to parent	0		0		(30.0)		(30.0)
Stock-based compensation and other	0		0.1		0		0.1
Balance at March 31, 2021	$	95.6	$	1,436.5	$	624.0	$	2,156.1

(in millions)	Common Stock		Additional Paid In Capital		Retained Earnings		Total Common Shareholder's Equity
Balance at December 31, 2019	$	95.6	$	1,221.1	$	623.1	$	1,939.8
Net income	0		0		68.2		68.2
Equity contribution from parent	0		100.0		0		100.0
Payment of dividends to parent	0		0		(30.0)		(30.0)
Stock-based compensation and other	0		0.1		0		0.1
Balance at March 31, 2020	$	95.6	$	1,321.2	$	661.3	$	2,078.1

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

03/31/2021 Form 10-Q 6 Wisconsin Public Service Corporation

WISCONSIN PUBLIC SERVICE CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

March 31, 2021

NOTE 1—GENERAL INFORMATION

Wisconsin Public Service Corporation serves approximately 454,300 electric customers and 336,500 natural gas customers.

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

We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC and GAAP. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These financial statements should be read in conjunction with the 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 months ended March 31, 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.

		Wisconsin Public Service Corporation
	Three Months Ended March 31
(in millions)		2021		2020
Electric utility		$	271.4	$	271.3
Natural gas utility		132.3		96.9
Total revenues from contracts with customers		403.7		368.2
Other operating revenues		1.6		1.2
Total operating revenues		$	405.3	$	369.4

03/31/2021 Form 10-Q 7 Wisconsin Public Service Corporation

Revenues from Contracts with Customers

Electric Utility Operating Revenues

The following table disaggregates electric utility operating revenues into customer class:

		Electric Utility Operating Revenues
	Three Months Ended March 31
(in millions)		2021		2020
Residential		$	101.9	$	101.1
Small commercial and industrial		84.1		83.3
Large commercial and industrial		55.2		51.2
Other		2.1		2.1
Total retail revenues		243.3		237.7
Wholesale		18.9		22.4
Resale		5.9		5.3
Other utility revenues		3.3		5.9
Total electric utility operating revenues		$	271.4	$	271.3

Natural Gas Utility Operating Revenues

The following table disaggregates natural gas utility operating revenues into customer class:

		Natural Gas Utility Operating Revenues
	Three Months Ended March 31
(in millions)		2021		2020
Residential		$	67.3	$	58.4
Commercial and industrial		38.7		33.1
Total retail revenues		106.0		91.5
Transportation		5.8		6.0
Other utility revenues (1)		20.5		(0.6)
Total natural gas utility operating revenues		$	132.3	$	96.9

(1)Includes revenues subject to collection from (refund to) customers for purchased gas adjustment costs. The increase primarily relates to the high natural gas costs that were incurred as a result of the extreme winter weather conditions in February 2021. See Note 17, Regulatory Environment, for more information.

Other Operating Revenues

Other operating revenues consist primarily of the following:

	Three Months Ended March 31
(in millions)		2021		2020
Late payment charges		$	1.1	$	1.0
Alternative revenues		0.5		0.2
Total other operating revenues		$	1.6	$	1.2

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. NaN accounts receivable and unbilled revenue balances were reported in the other segment at March 31, 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

03/31/2021 Form 10-Q 8 Wisconsin Public Service Corporation

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 17, 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)	March 31, 2021			December 31, 2020
Accounts receivable and unbilled revenues	$	208.5		$	209.1
Allowance for credit losses	17.5			18.3
Accounts receivable and unbilled revenues, net (1)	$	191.0		$	190.8
Total accounts receivable, net – past due greater than 90 days (1)	$	10.8		$	12.6
Past due greater than 90 days – collection risk mitigated by regulatory mechanisms (1)	96.1		%	94.4		%

(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 March 31, 2021, $82.3 million, or 43.1%, 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 percentage in the above table or this note. See Note 17, Regulatory Environment, for more information.

A rollforward of the allowance for credit losses for the three months ended March 31, 2021 and 2020 is included below:

	Three Months Ended
(in millions)	March 31, 2021		March 31, 2020
Balance at December 31	$	18.3	$	4.2
Provision for credit losses	0.4		3.2
Provision for credit losses deferred for future recovery or refund	(0.1)		3.1
Write-offs charged against the allowance	(2.1)		(2.7)
Recoveries of amounts previously written off	1.0		1.0
Balance at March 31	$	17.5	$	8.8

03/31/2021 Form 10-Q 9 Wisconsin Public Service Corporation

NOTE 4—REGULATORY ASSETS AND LIABILITIES

The following regulatory assets and liabilities were reflected on our balance sheets at March 31, 2021 and December 31, 2020. For more information on our regulatory assets and liabilities, see Note 6, Regulatory Assets and Liabilities, in our 2020 Annual Report on Form 10-K.

(in millions)	March 31, 2021		December 31, 2020
Regulatory assets
Pension and OPEB costs	$	155.6	$	161.4
Environmental remediation costs	115.3		116.1
Plant retirements	56.8		58.5
Income tax related items	50.3		46.7
ReACT™	17.5		18.2
Energy costs recoverable through rate adjustments (1)	16.8		0
Asset retirement obligations	13.5		13.1
Uncollectible expense	12.4		12.5
Forward Wind Energy Center	8.4		10.3
Other, net	11.7		12.6
Total regulatory assets	$	458.3	$	449.4
Balance sheet presentation
Other current assets (1)	$	16.8	$	0
Regulatory assets	441.5		449.4
Total regulatory assets	$	458.3	$	449.4

(1)The increase in these regulatory assets primarily relates to the high natural gas costs that were incurred as a result of the extreme winter weather conditions in February 2021. See Note 17, Regulatory Environment, for more information.

(in millions)	March 31, 2021		December 31, 2020
Regulatory liabilities
Income tax related items	$	386.7	$	397.0
Removal costs	194.4		193.7
Pension and OPEB benefits	115.5		115.9
Earnings sharing mechanism	30.7		36.8
Electric transmission costs	16.6		16.8
Energy costs refundable through rate adjustments	10.6		9.7
Other, net	6.5		6.3
Total regulatory liabilities	$	761.0	$	776.2
Balance sheet presentation
Other current liabilities	$	0.1	$	3.6
Regulatory liabilities	760.9		772.6
Total regulatory liabilities	$	761.0	$	776.2

NOTE 5—COMMON EQUITY

Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to the sole holder of our common stock, Integrys, in the form of cash dividends, loans, or advances. In addition, Wisconsin law prohibits us from making loans to or guaranteeing obligations of WEC Energy Group, Integrys, or their subsidiaries. See Note 11, 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.

03/31/2021 Form 10-Q 10 Wisconsin Public Service Corporation

NOTE 6—SHORT-TERM DEBT AND LINES OF CREDIT

The following table shows our short-term borrowings and their corresponding weighted-average interest rates:

(in millions, except percentages)	March 31, 2021			December 31, 2020
Commercial paper
Amount outstanding	$	200.5		$	210.5
Weighted-average interest rate on amounts outstanding	0.16		%	0.18		%

Our average amount of commercial paper borrowings based on daily outstanding balances during the three months ended March 31, 2021 was $207.3 million with a weighted-average interest rate during the period of 0.16%.

The information in the table below relates to our revolving credit facility used to support our commercial paper borrowing program, including available capacity under this facility:

(in millions)	Maturity	March 31, 2021
Revolving credit facility	October 2022	$	400.0
Less:
Letters of credit issued inside credit facility		$	1.3
Commercial paper outstanding		200.5
Available capacity under existing credit facility		$	198.2

NOTE 7—MATERIALS, SUPPLIES, AND INVENTORIES

Our inventory consisted of:

(in millions)	March 31, 2021		December 31, 2020
Materials and supplies	$	47.9	$	45.8
Fossil fuel	22.7		28.0
Natural gas in storage	5.8		18.9
Total	$	76.4	$	92.7

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

NOTE 8—INCOME TAXES

The provision for income taxes differs from the amount of income tax determined by applying the applicable United States statutory federal income tax rate to income before income taxes as a result of the following:

	Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
(in millions)	Amount		Effective Tax Rate		Amount		Effective Tax Rate
Statutory federal income tax	$	16.4	21.0	%	$	17.8	21.0	%
State income taxes net of federal tax benefit	4.9		6.3	%	5.2		6.1	%
Federal excess deferred tax amortization – Wisconsin unprotected	(10.5)		(13.4)	%	(4.0)		(4.7)	%
Federal excess deferred tax amortization	(1.6)		(2.1)	%	(1.6)		(1.9)	%
Other	(0.5)		(0.6)	%	(0.7)		(0.8)	%
Total income tax expense	$	8.7	11.2	%	$	16.7	19.7	%

The effective tax rates of 11.2% and 19.7% for the three months ended March 31, 2021 and 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 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, as discussed in more detail below, the impact of the protected benefits associated with the Tax Legislation drove a decrease in the effective tax rate. These items were partially offset by state income taxes.

03/31/2021 Form 10-Q 11 Wisconsin Public Service Corporation

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 17, Regulatory Environment, for more information on unprotected tax credits.

NOTE 9—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:

	March 31, 2021
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	1.6	$	0.6	$	0	$	2.2
FTRs	0		0		0.4		0.4
Coal contracts	0		0.5		0		0.5
Total derivative assets	$	1.6	$	1.1	$	0.4	$	3.1
Derivative liabilities
Natural gas contracts	$	0.6	$	0.1	$	0	$	0.7
Coal contracts	0		0.3		0		0.3
Total derivative liabilities	$	0.6	$	0.4	$	0	$	1.0

03/31/2021 Form 10-Q 12 Wisconsin Public Service Corporation

	December 31, 2020
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	1.6	$	0.1	$	0	$	1.7
FTRs	0		0		1.2		1.2
Coal contracts	0		0.4		0		0.4
Total derivative assets	$	1.6	$	0.5	$	1.2	$	3.3
Derivative liabilities
Natural gas contracts	$	1.6	$	0.3	$	0	$	1.9
Coal contracts	0		0.5		0		0.5
Total derivative liabilities	$	1.6	$	0.8	$	0	$	2.4

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

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:

	Three Months Ended March 31
(in millions)		2021		2020
Balance at the beginning of the period		$	1.2	$	1.3
Purchases		0.1		0
Settlements		(0.9)		(0.8)
Balance at the end of the period		$	0.4	$	0.5

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that were not recorded at fair value:

	March 31, 2021				December 31, 2020
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion (1)	$	1,613.9	$	1,779.9	$	1,613.5	$	1,935.9

(1)The carrying amount of long-term debt excludes finance lease obligations of $33.2 million and $31.3 million at March 31, 2021 and December 31, 2020, respectively.

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

NOTE 10—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.

03/31/2021 Form 10-Q 13 Wisconsin Public Service Corporation

The following table shows our derivative assets and derivative liabilities, along with their classification on our balance sheets. NaN of our derivatives are designated as hedging instruments.

	March 31, 2021				December 31, 2020
(in millions)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Other current
Natural gas contracts	$	2.2	$	0.6	$	1.7	$	1.7
FTRs	0.4		0		1.2		0
Coal contracts	0.2		0.2		0.2		0.3
Total other current (1)	2.8		0.8		3.1		2.0
Other long-term
Natural gas contracts	0		0.1		0		0.2
Coal contracts	0.3		0.1		0.2		0.2
Total other long-term (1)	0.3		0.2		0.2		0.4
Total	$	3.1	$	1.0	$	3.3	$	2.4

(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 March 31, 2021			Three Months Ended March 31, 2020
(in millions)	Volumes	Gains (Losses)		Volumes	Gains (Losses)
Natural gas contracts	13.6 Dth	$	(1.7)	12.7 Dth	$	(4.4)
FTRs	2.7 MWh	0.9		1.9 MWh	0.4
Total		$	(0.8)		$	(4.0)

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 March 31, 2021 and December 31, 2020, we had posted cash collateral of $1.3 million and $3.7 million, respectively, in our margin accounts. These amounts were recorded on our balance sheets in other current assets.

The following table shows derivative assets and derivative liabilities if derivative instruments by counterparty were presented net on our balance sheets:

	March 31, 2021				December 31, 2020
(in millions)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Gross amount recognized on the balance sheet	$	3.1	$	1.0	$	3.3	$	2.4
Gross amount not offset on the balance sheet	(0.6)		(0.6)		(1.6)		(1.6)
Net amount	$	2.5	$	0.4	$	1.7	$	0.8

NOTE 11—GUARANTEES

As of March 31, 2021, we had $20.6 million of standby letters of credit issued by financial institutions for the benefit of third parties that extended credit to us which automatically renew each year unless proper termination notice is given. These amounts are not reflected on our balance sheets.

03/31/2021 Form 10-Q 14 Wisconsin Public Service Corporation

NOTE 12—EMPLOYEE BENEFITS

The following tables show the components of net periodic benefit cost (credit) for our benefit plans.

		Pension Benefits
	Three Months Ended March 31
(in millions)		2021		2020
Service cost		$	3.0	$	2.6
Interest cost		5.5		6.2
Expected return on plan assets		(12.9)		(12.1)
Amortization of net actuarial loss		6.9		5.8
Net periodic benefit cost		$	2.5	$	2.5

		OPEB Benefits
	Three Months Ended March 31
(in millions)		2021		2020
Service cost		$	1.2	$	1.2
Interest cost		1.0		1.3
Expected return on plan assets		(5.0)		(4.6)
Amortization of prior service credit		(2.6)		(2.6)
Amortization of net actuarial (gain) loss		(0.5)		(0.3)
Net periodic benefit credit		$	(5.9)	$	(5.0)

During the three months ended March 31, 2021, we made contributions and payments of $0.2 million related to our pension plans and $0.3 million related to our OPEB plans. We expect to make contributions and payments of $0.5 million related to our pension plans and $0.6 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 13—GOODWILL

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired. We had 0 changes to the carrying amount of goodwill during the three months ended March 31, 2021. We had 0 accumulated impairment losses related to our goodwill as of March 31, 2021.

NOTE 14—SEGMENT INFORMATION

We use net income to measure segment profitability and to allocate resources to our businesses. At March 31, 2021, we reported 2 segments, which are described below.

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

Our other segment primarily consists of equity earnings from our investment in Wisconsin River Power Company.

03/31/2021 Form 10-Q 15 Wisconsin Public Service Corporation

The following tables show summarized financial information for the three months ended March 31, 2021 and 2020, related to our reportable segments:

(in millions)	Utility		Other		Wisconsin Public Service Corporation
Three Months Ended March 31, 2021
Operating revenues	$	405.3	$	0	$	405.3
Other operation and maintenance	95.4		0		95.4
Depreciation and amortization	46.0		0		46.0
Other income, net	8.2		0.4		8.6
Interest expense	16.2		0		16.2
Income tax expense	8.6		0.1		8.7
Net income	69.0		0.3		69.3

(in millions)	Utility		Other		Wisconsin Public Service Corporation
Three Months Ended March 31, 2020
Operating revenues	$	369.4	$	0	$	369.4
Other operation and maintenance	91.8		0		91.8
Depreciation and amortization	43.0		0		43.0
Other income, net	7.9		0.4		8.3
Interest expense	16.3		0		16.3
Income tax expense	16.6		0.1		16.7
Net income	67.9		0.3		68.2

NOTE 15—COMMITMENTS AND CONTINGENCIES

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

Unconditional Purchase Obligations

We have obligations to distribute and sell electricity and natural gas to our customers and expect to recover costs related to these obligations in future customer rates. In order to meet these obligations, we routinely enter into long-term purchase and sale commitments for various quantities and lengths of time. Our minimum future commitments related to these purchase obligations as of March 31, 2021, were approximately $0.8 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

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.

03/31/2021 Form 10-Q 16 Wisconsin Public Service Corporation

Consequently, the December 2020 decision to retain the 2015 ozone standards with 0 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: Door and Manitowoc. 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. Based on the 2017 to 2019 data, the EPA re-designated Door County as attainment/maintenance in June 2020.

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 comment period for the proposed rule revisions ended April 15, 2021. 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.

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 0 revisions were necessary to the current standard. All counties within our service territory are in attainment with the 2012 standards. This determination is also subject to review under Executive Order 13990.

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 0 existing rule regulates GHG emissions from electric generating units. The EPA is currently reviewing its options for such regulations.

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. 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 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 WEC Energy Group's generation fleet is net-zero carbon emissions by 2050. We have already retired approximately 300 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 the jointly-owned Columbia Units 1-2.

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.

We are required to report our CO2 equivalent emissions from the electric generating facilities we operate under the EPA Greenhouse Gases Reporting Program. We reported CO2 equivalent emissions of 5.4 million metric tonnes to the EPA for 2020. The level of CO2 and other GHG emissions varies from year to year and is dependent on the level of electric generation and mix of fuel sources, which is determined primarily by demand, the availability of the generating units, the unit cost of fuel consumed, and how our units are dispatched by MISO.

We are also required to report CO2 equivalent amounts related to the natural gas that our natural gas operations distribute and sell. We reported CO2 equivalent emissions of 3.5 million metric tonnes to the EPA for 2020.

03/31/2021 Form 10-Q 17 Wisconsin Public Service Corporation

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 9 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. NaN further NOx reductions would be needed within these 9 states. This rule becomes 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

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 at existing facilities. This rule created new requirements for several types of power plant wastewaters. The new requirement that affects us relates to discharge limits for BATW. Our Weston power plant facility already has 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 the water permit requirements for the BATW systems at Weston Unit 3. Based on engineering cost estimates, we expect that compliance with the ELG rule will require approximately $10 million in capital investment.

Land Quality

Manufactured Gas Plant Remediation

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

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

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

We have established the following regulatory assets and reserves for manufactured gas plant sites:

(in millions)	March 31, 2021		December 31, 2020
Regulatory assets	$	115.3	$	116.1
Reserves for future environmental remediation	88.3		88.3

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.

03/31/2021 Form 10-Q 18 Wisconsin Public Service Corporation

Consent Decrees

Weston and Pulliam Power Plants

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

Joint Ownership Power Plants – Columbia and Edgewater

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

NOTE 16—SUPPLEMENTAL CASH FLOW INFORMATION

	Three Months Ended March 31
(in millions)	2021		2020
Cash paid for interest, net of amount capitalized	$	4.3	$	4.9
Significant non-cash investing and financing transactions:
Accounts payable related to construction costs	11.6		17.6

NOTE 17—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 30, 2021, we filed our revised natural gas rate sheets with the PSCW reflecting approximately $28 million of natural gas costs in excess of the benchmark set in our gas cost recovery mechanism. We are authorized to recover these excess 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 2 orders requiring certain actions to ensure that essential utility services were, and continue to be, available to our customers. 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 has affirmed that this authorization for

03/31/2021 Form 10-Q 19 Wisconsin Public Service Corporation

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 March 31, 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.

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 and ended on April 15. 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 allows 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 and natural gas 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 second quarter of 2021.

03/31/2021 Form 10-Q 20 Wisconsin Public Service Corporation

2020 and 2021 Rates

In March 2019, we filed an application with the PSCW to increase our retail electric and natural gas rates, effective January 1, 2020. 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. The final order reflects the following:

2020 Effective rate increase
Electric (1) (2)	$	15.8	million	/	1.6%
Gas (3)	$	4.3	million	/	1.4%
ROE	10.0%
Common equity component average on a financial basis	52.5%

(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 over two years. Approximately $11 million of tax benefits were amortized in 2020 and approximately $39 million are being amortized in 2021. 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)The rate order is net of $21 million of refunds related to our 2018 earnings sharing mechanism. These refunds will be made to customers evenly over two years, with half returned in 2020 and the remainder being returned in 2021.

(3)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 all of the unprotected deferred tax benefits from the Tax Legislation being amortized evenly over four years, which results in approximately $5 million of previously deferred tax benefits being amortized each year. 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.

Our rate order allows us to collect the previously deferred revenue requirement for ReACT™ costs above the authorized $275.0 million level. The total cost of the ReACT™ project was $342 million. This regulatory asset will be collected from customers over eight years.

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 18—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.

03/31/2021 Form 10-Q 21 Wisconsin Public Service Corporation

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 an electric and natural gas utility and an indirect wholly owned subsidiary of WEC Energy Group. We derive revenues primarily from the distribution and sale of electricity and natural gas to retail customers. 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 14, 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 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 MWs of coal-fired generation since the beginning of 2018, which included the 2018 retirement of the Pulliam power plant as well as the jointly-owned Edgewater Unit 4 generating units. 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 the jointly-owned Columbia Units 1-2.

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 WE 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.

03/31/2021 Form 10-Q 23 Wisconsin Public Service Corporation

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 PSCW to invest in 200 MW of utility-scale solar. We have partnered with an unaffiliated utility to construct two solar projects in Wisconsin: Two Creeks, now in service, and Badger Hollow I, expected to enter commercial operation in the third quarter of 2021. We own 100 MW of Two Creeks and will own 100 MW of Badger Hollow I for a total of 200 MW.

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 electric and natural gas distribution systems to further improve reliability.

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

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 AMI program, replacing aging meter-reading equipment on both our network and customer property. An integrated system of smart meters, communication networks, and data management programs enables two-way communication between us and our customers. This program reduces the manual effort for disconnects and reconnects and enhances outage management capabilities.

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

Financial Discipline

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

We follow an asset management strategy that focuses on investing in and acquiring assets consistent with our strategic plans, as well as disposing of assets, including property, plants, and equipment, that are no longer strategic to operations, are not performing as intended, or have an unacceptable risk profile.

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.

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Safety

Across the organization, we monitor the integrity of our networks and conduct comprehensive incident response planning to enhance the safety of our operations.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2021

Earnings

Our earnings for the first quarter of 2021 were $69.3 million, compared to $68.2 million for the same quarter in 2020. See below for additional information on the $1.1 million increase in earnings.

Expected 2021 Annual Effective Tax Rate

We expect our 2021 annual effective tax rate to be between 10.0% and 11.0%, which includes an estimated 14.5% 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 24.5% and 25.5%.

Non-GAAP Financial Measures

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

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

Our electric margins and natural gas margins may not be comparable to similar measures presented by other companies. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance. Our utility segment operating income for the three months ended March 31, 2021 and 2020 was $85.6 million and $92.9 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

The following table compares our utility segment's contribution to net income during the first quarter of 2021, compared with the same quarter in 2020, including favorable or better, "B", and unfavorable or worse, "W", variances.

	Three Months Ended March 31
(in millions)	2021		2020		B (W)
Electric revenues	$	272.7	$	272.2	$	0.5
Fuel and purchased power	78.6		76.9		(1.7)
Total electric margins	194.1		195.3		(1.2)
Natural gas revenues	132.6		97.2		35.4
Cost of natural gas sold	89.5		54.8		(34.7)
Total natural gas margins	43.1		42.4		0.7
Total electric and natural gas margins	237.2		237.7		(0.5)
Other operation and maintenance	95.4		91.8		(3.6)
Depreciation and amortization	46.0		43.0		(3.0)
Property and revenue taxes	10.2		10.0		(0.2)
Operating income	85.6		92.9		(7.3)
Other income, net	8.2		7.9		0.3
Interest expense	16.2		16.3		0.1
Income before income taxes	77.6		84.5		(6.9)
Income tax expense	8.6		16.6		8.0
Net income	$	69.0	$	67.9	$	1.1

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

	Three Months Ended March 31
(in millions)	2021		2020		B (W)
Operation and maintenance not included in line items below	$	48.7	$	44.4	$	(4.3)
Transmission (1)	38.0		40.0		2.0
Regulatory amortizations and other pass through expenses (2)	8.7		7.4		(1.3)
Total other operation and maintenance	$	95.4	$	91.8	$	(3.6)

(1)Represents transmission expense that we are authorized to collect in rates, in accordance with the PSCW's approval of escrow accounting for American Transmission Company LLC and MISO network transmission expenses. As a result, we defer as a regulatory asset or liability, the difference between actual transmission costs and those included in rates until recovery or refund is authorized in a future rate proceeding. During the first quarter of 2021 and 2020, $38.4 million and $37.1 million, respectively, of costs were billed to us by transmission providers.

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

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The following tables provide information on delivered sales volumes by customer class and weather statistics:

	Three Months Ended March 31
	MWh (in thousands)
Electric Sales Volumes	2021	2020	B (W)
Customer class
Residential	758.6	732.8	25.8
Small commercial and industrial	968.0	960.3	7.7
Large commercial and industrial	957.5	926.6	30.9
Other	7.6	7.6	—
Total retail	2,691.7	2,627.3	64.4
Wholesale	413.2	477.3	(64.1)
Resale	90.1	199.1	(109.0)
Total sales in MWh	3,195.0	3,303.7	(108.7)

	Three Months Ended March 31
	Therms (in millions)
Natural Gas Sales Volumes	2021	2020	B (W)
Customer class
Residential	115.8	111.0	4.8
Commercial and industrial	75.1	74.7	0.4
Total retail	190.9	185.7	5.2
Transportation	143.8	132.1	11.7
Total sales in therms	334.7	317.8	16.9

	Three Months Ended March 31
	Degree Days
Weather (1)	2021	2020	B (W)
Heating (3,659 Normal)	3,482	3,368	3.4	%

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

Electric Utility Margins

Electric utility margins decreased $1.2 million during the first quarter of 2021, compared with the same quarter in 2020. The significant factors impacting the lower electric utility margins were:

•A $2.9 million net decrease in margins related to the impact of our rate order approved by the PSCW, effective January 1, 2020. This decrease in margins includes a $9.4 million negative 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 17, Regulatory Environment, for more information.

•Lower margins of $2.9 million driven by a decrease in wholesale customers related to the expiration of certain wholesale contracts.

These decreases were offset by a $5.8 million increase in margins related to higher retail sales volumes, including the impact of colder winter weather. As measured by heating degree days, the first quarter of 2021 was 3.4% colder than the same quarter in 2020. Weather-normalized retail sales volumes also improved during the first quarter of 2021, compared with the same quarter in 2020, a sign of economic recovery in Wisconsin from the COVID-19 pandemic.

Natural Gas Utility Margins

Natural gas utility margins increased $0.7 million during the first quarter of 2021, compared with the same quarter in 2020. The most significant factor impacting the higher natural gas utility margins was higher sales volumes, primarily driven by colder winter weather.

03/31/2021 Form 10-Q 27 Wisconsin Public Service Corporation

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

Other operating expenses at the utility segment increased $6.8 million during the first quarter of 2021, compared with the same quarter in 2020. The significant factors impacting the increase in operating expenses were:

•A $3.0 million increase in depreciation and amortization, driven by assets being placed into service as we continue to execute on our capital plan.

•A $1.3 million increase in regulatory amortizations and other pass through expenses, as discussed in the notes under the other operation and maintenance table above.

•A $1.1 million increase in property and liability insurance premiums.

•A $0.8 million increase in benefit costs, primarily due to higher deferred compensation costs, partially offset by lower stock-based compensation and medical costs.

Income tax expense

Income tax expense decreased $8.0 million during the first quarter of 2021, compared with the same quarter in 2020. This decrease was primarily due to higher 2021 amortization of the unprotected excess deferred tax benefits from the Tax Legislation in connection with our Wisconsin rate order approved by the PSCW, effective January 1, 2020. This item did not impact earnings as it was offset in operating income. See Note 8, Income Taxes, and Note 17, Regulatory Environment, for more information.

Other Segment Contribution to Net Income

	Three Months Ended March 31
(in millions)	2021		2020		B (W)
Net income	$	0.3	$	0.3	$	—

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

The following table summarizes our cash flows during the three months ended March 31:

(in millions)	2021		2020		Change in 2021 Over 2020
Cash provided by (used in):
Operating activities	$	117.0	$	107.4	$	9.6
Investing activities	(77.2)		(103.2)		26.0
Financing activities	(40.0)		(4.5)		(35.5)

Operating Activities

Net cash provided by operating activities increased $9.6 million during the first quarter of 2021, compared with the same quarter in 2020, driven by:

•A $5.2 million increase in cash due to lower collateral requirements, driven by a decrease in the fair value of our natural gas derivative liabilities during the first quarter of 2021, compared with the same quarter in 2020.

•A $2.5 million increase in cash from lower payments for other operation and maintenance expenses due to the timing of payments for accounts payable during the first quarter of 2021, compared with the same quarter in 2020.

•A $1.8 million increase in cash related to lower payments for environmental remediation from work completed on former manufactured gas plant sites during the first quarter of 2021, compared with the same quarter in 2020.

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Investing Activities

Net cash used in investing activities decreased $26.0 million during the first quarter of 2021, compared with the same quarter in 2020, driven by a $38.6 million decrease in cash paid for capital expenditures, which is discussed in more detail below.

This decrease in net cash used in investing activities was partially offset by:

•Proceeds of $7.1 million received in the first quarter of 2020 for the cash surrender of life insurance.

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

Capital Expenditures

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

(in millions)	2021		2020		Change in 2021 Over 2020
Capital expenditures	$	71.2	$	109.8	$	(38.6)

The decrease in cash paid for capital expenditures during the first quarter of 2021, compared with the same quarter in 2020, was driven by lower payments for capital expenditures related to Badger Hollow I and upgrades of automated meter reading devices.

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

Financing Activities

Net cash used in financing activities increased $35.5 million during the first quarter of 2021, compared with the same quarter in 2020, driven by a $100.0 million equity contribution received from our parent during the first quarter of 2020, to balance our capital structure. We did not receive any equity contributions during the first quarter of 2021. This increase in cash used was offset by a $64.5 million increase in cash related to lower net repayments of commercial paper during the first quarter of 2021, compared with the same quarter in 2020.

For more information on our financing activities, see Note 6, Short-Term Debt and Lines of Credit.

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

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Working Capital

As of March 31, 2021, our current liabilities exceeded our current assets by $466.3 million. We do 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 that, in the event of a credit rating downgrade, could result in a reduction of our unsecured credit granted by counterparties.

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

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

If we are unable to successfully take actions to continue to manage any impact 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	$	578.8
2022	537.6
2023	443.8
Total	$	1,560.2

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. We are also continuing work on the SMRP. This project involves modernizing parts of our electric distribution system, including burying or upgrading lines. The project focuses on constructing facilities to improve the reliability of electric service that we provide to our customers. In 2021, we expect to invest approximately $50 million on this project at which time it will be substantially complete.

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 solar project, Badger Hollow I, that will be located in Iowa County, Wisconsin. Once constructed, we will own 100 MW of this project. Our share of the cost of this project is estimated to be approximately $130 million. Commercial operation is expected in the third quarter of 2021.

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•In February 2021, we, along with WE 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 30 MW of solar generation and 16 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $64 million with construction expected to begin in 2022 and completed by the end of 2023.

•In February 2021, we, along with WE, filed an application with the PSCW for approval to accelerate capital investments in two wind parks. Our share of the investment is expected to be approximately $69 million to repower major components of Crane Creek Wind Park, which is expected to be completed by the end of 2022.

•In March 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire and construct the Darien Solar-Battery Park, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Kenosha County, Wisconsin and once constructed, we will own 38 MW of solar generation and 12 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $67 million with construction expected to begin in late 2021 and completed by the end of 2023.

•In March 2021, we, along with an unaffiliated utility, filed an application with the PSCW for approval to acquire the Red Barn Wind Park, a utility-scale wind-powered electric generating facility. The project will be located in Grant County, Wisconsin and once constructed, we will own 82 MW of this project. If approved, our share of the cost of this project is estimated to be approximately $146 million, with construction expected to begin in early 2022 and completed by the end of 2022.

•In April 2021, we, along with WE and an unaffiliated utility, filed an application with the PSCW for approval to acquire the Koshkonong Solar-Battery Park, a utility-scale solar-powered electric generating facility with a battery energy storage system. The project will be located in Dane County, Wisconsin and once constructed, we will own 45 MW of solar generation and 25 MW of battery storage of this project. If approved, our share of the cost of this project is estimated to be approximately $97 million, with construction expected to begin in late 2022 and completed by the second quarter of 2024.

•In April 2021, we, along with WE, filed an application with the PSCW for approval to construct a natural gas-fired generation facility at our existing Weston Power Plant site in northern Wisconsin. The new facility will consist of seven 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 $85 million, with construction expected to begin in 2022 and completed in 2023.

See Factors Affecting Results, Liquidity, and Capital Resources – Coronavirus Disease – 2019, for information on the impacts to our capital projects as a result of the COVID-19 pandemic.

Off-Balance Sheet Arrangements

We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit that support construction projects, commodity contracts, and other payment obligations. We believe that these agreements do not have, and are not reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. See Note 6, Short-Term Debt and Lines of Credit, and Note 11, Guarantees, for more information.

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 three months ended March 31, 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. The following 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.

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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. Although the shelter-in-place order that was in effect for Wisconsin has expired, other orders limiting the capacity of various businesses have been adopted at the state and local levels. In addition, similar or more restrictive 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.

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.

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.

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 17, Regulatory Environment, for more information.

Loss of Business

We have seen a decrease in the consumption of electricity and natural gas by some of our commercial and industrial customers as they continue to experience lower demand for their products and services as a result of the COVID-19 pandemic. Many businesses in our service territory still are not operating at full capacity. The extent to which this decrease in consumption will 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.

The timing of Badger Hollow I has been impacted by the COVID-19 pandemic. The parties agreed to delay the expected commercial operation date from December 2020 so that initial staffing increases could be minimized in light of state mandated COVID-19 orders. We now expect Badger Hollow I to be placed into commercial operation during the third quarter of 2021. We are not currently aware of any other 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.

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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 activated 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.

With vaccinations now available in our service area, we continue to provide educational information to employees to encourage them to obtain a vaccine. As the number of administered vaccinations increases, we are developing a return-to-the-workplace strategy for those employees currently working remotely.

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 have taken actions to ensure that essential utility services are available to our customers during the COVID-19 pandemic. In addition, the PSCW has issued written orders requiring certain actions by all public utilities in the state of Wisconsin. See Note 17, Regulatory Environment, for more information on these orders and the potential recovery of expenditures incurred as a result of the measures being 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 15, 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.

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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 9, Fair Value Measurements, Note 10, Derivative Instruments, and Note 11, 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 first 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 15, Commitments and Contingencies, and Note 17, 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 15, Commitments and Contingencies, and Note 17, 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.

ITEM 6. EXHIBITS

Number	Exhibit
31	Rule 13a-14(a) / 15d-14(a) Certifications
	31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Section 1350 Certifications
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive Data Files
	101.INS	Inline 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.SCH	Inline XBRL Taxonomy Extension Schema
	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase
	101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase
	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase
	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase
104	Cover 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 PUBLIC SERVICE CORPORATION
		(Registrant)
		/s/ WILLIAM J. GUC
Date:	May 6, 2021	William J. Guc
		Vice President, Controller, and Assistant Corporate Secretary
		(Duly Authorized Officer and Chief Accounting Officer)

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