WEC Energy : Fourth Quarter 2023 MERC

MINNESOTA ENERGY RESOURCES CORPORATION

FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2023

MINNESOTA ENERGY RESOURCES CORPORATION

FINANCIAL STATEMENTS

For the Year Ended December 31, 2023

TABLE OF CONTENTS

FINANCIAL STATEMENTS AND NOTES	Page
A.	Independent Auditor's Report	1
B.	Income Statements	3
C.	Balance Sheets	4
D.	Statements of Cash Flows	5
E.	Statements of Equity	6
F.	Notes to Financial Statements	7

Note 1	Summary of Significant Accounting Policies	Page
7
Note 2	Related Parties	12
Note 3	Operating Revenues	13
Note 4	Credit Losses	14
Note 5	Regulatory Assets and Liabilities	14
Note 6	Property, Plant, and Equipment	15
Note 7	Goodwill	16
Note 8	Short-Term Debt to Parent	16
Note 9	Long-Term Debt	16
Note 10	Income Taxes	17
Note 11	Fair Value Measurements	18
Note 12	Derivative Instruments	19
Note 13	Employee Benefits	19
Note 14	Commitments and Contingencies	23
Note 15	Supplemental Cash Flow Information	25
Note 16	Regulatory Environment	25
Note 17	New Accounting Pronouncements	27

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Minnesota Energy Resources Corporation

GLOSSARY OF TERMS AND ABBREVIATIONS

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

Subsidiaries and Affiliates
Integrys	Integrys Holding, Inc.
WBS	WEC Business Services LLC
WE	Wisconsin Electric Power Company
WEC Energy Group	WEC Energy Group, Inc.
WPS		Wisconsin Public Service Corporation
Federal and State Regulatory Agencies
Army Corps	United States Army Corps of Engineers
EPA	United States Environmental Protection Agency
FERC	Federal Energy Regulatory Commission
IRS	United States Internal Revenue Service
MPUC		Minnesota Public Utilities Commission
Accounting Terms
GAAP	Generally Accepted Accounting Principles
OPEB		Other Postretirement Employee Benefits
Environmental Terms
GHG	Greenhouse Gas
WOTUS		Waters of the United States
Measurements
Dth		Dekatherm
Other Terms and Abbreviations
AIA	Affiliated Interest Agreement
GCRM	Gas Cost Recovery Mechanism
GUIC	Gas Utility Infrastructure Costs
NGEP	Natural Gas Extension Project
Omnibus Stock Incentive Plan	WEC Energy Group Omnibus Stock Incentive Plan, Amended and Restated, Effective as of
		May 6, 2021
Supreme Court		United States Supreme Court

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Minnesota Energy Resources Corporation

FINANCIAL STATEMENTS AND NOTES

A. INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholder of Minnesota Energy Resources Corporation:

Opinion

We have audited the financial statements of Minnesota Energy Resources Corporation (the "Company"), which comprise the balance sheets as of December 31, 2023 and 2022, and the related statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the financial statements (collectively referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for one year after the date that the financial statements are available to be issued.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

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Minnesota Energy Resources Corporation

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

/s/ DELOITTE & TOUCHE LLP

Milwaukee, Wisconsin

March 22, 2024

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Minnesota Energy Resources Corporation

MINNESOTA ENERGY RESOURCES CORPORATION

B. INCOME STATEMENTS

Year Ended December 31
(in millions)			2023			2022			2021
Operating revenues		$	348.3		$	400.7		$	367.1
Operating expenses
Cost of sales			195.2			265.3			241.5
Other operation and maintenance			60.3			62.1			58.2
Depreciation and amortization			24.5			22.5			20.9
Property and revenue taxes			16.5			11.7			11.4
Total operating expenses			296.5			361.6			332.0
Operating income			51.8			39.1			35.1
Other income, net			0.3			0.9			0.3
Interest expense			7.7			7.3			6.2
Other expense			(7.4)			(6.4)			(5.9)
Income before income taxes			44.4			32.7			29.2
Income tax expense			12.1			8.9			7.8
Net income		$	32.3		$	23.8		$	21.4

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

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Minnesota Energy Resources Corporation

MINNESOTA ENERGY RESOURCES CORPORATION

C. BALANCE SHEETS

At December 31
(in millions, except share amounts)			2023			2022
Assets
Current assets
Accounts receivable and unbilled revenues, net of reserves of $3.6 and $3.5, respectively			56.9			101.5
Accounts receivable from related parties			2.4			1.9
Materials, supplies, and inventories:
Natural gas in storage			18.8			35.1
Materials and supplies			0.3			0.3
Prepayments			3.2			3.5
Other			3.9			7.0
Current assets			85.5			149.3
Long-term assets
Property, plant, and equipment, net of accumulated depreciation and amortization of $215.9 and
$201.3, respectively			668.2			626.6
Regulatory assets			25.9			60.3
Goodwill			127.7			127.7
Other			19.3			18.8
Long-term assets			841.1			833.4
Total assets		$	926.6		$	982.7
Liabilities and Equity
Current liabilities
Short-term debt to parent	$	20.2	$	49.5
Accounts payable			33.2			55.6
Accounts payable to related parties			6.0			5.9
Accrued taxes			13.2			16.2
Customer credit balances			22.7			17.0
Amounts refundable to customers			12.7			26.2
Other			18.1			19.0
Current liabilities			126.1			189.4
Long-term liabilities
Long-term debt			209.2			209.0
Deferred income taxes			134.1			136.5
Regulatory liabilities			113.8			97.9
Other			4.7			4.5
Long-term liabilities			461.8			447.9
Commitments and contingencies (Note 14)
Common shareholder's equity
Common stock - without par value, 1,000 shares authorized; 100 shares issued and outstanding			209.1			209.1
Retained earnings			129.6			136.3
Common shareholder's equity			338.7			345.4
Total liabilities and equity		$	926.6		$	982.7

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

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Minnesota Energy Resources Corporation

MINNESOTA ENERGY RESOURCES CORPORATION

D. STATEMENTS OF CASH FLOWS

Year Ended December 31
(in millions)			2023			2022			2021
Operating activities
Net income	$	32.3	$	23.8	$	21.4
Reconciliation to cash provided by (used in) operating activities
Depreciation and amortization			24.5			22.5			20.9
Deferred income taxes, net			(3.6)			0.8			24.3
Change in -
Accounts receivable and unbilled revenues, net			44.1			(36.2)			(15.1)
Materials, supplies, and inventories			16.3			(12.8)			(13.3)
Prepaid taxes			0.3			(1.8)			9.5
Other current assets			2.2			(2.4)			(0.1)
Accounts payable			(25.8)			14.5			8.9
Amounts refundable to customers			(13.5)			23.2			(22.1)
Other current liabilities			1.7			5.8			6.5
Deferral of extraordinary natural gas costs			-			-			(65.0)
Recovery of extraordinary natural gas costs			34.3			24.6			5.3
Other, net			14.3			(3.1)			3.3
Net cash provided by (used in) operating activities			127.1			58.9			(15.5)
Investing activities
Capital expenditures			(58.8)			(53.4)			(59.2)
Other, net			-			5.7			(1.7)
Net cash used in investing activities			(58.8)			(47.7)			(60.9)
Financing activities
Short-term debt to parent, net			(29.3)			(2.0)			13.3
Issuance of long-term debt			-			-			40.0
Equity contribution from parent			-			-			24.0
Payment of dividends to parent			(39.0)			(10.0)			-
Other, net			-			-			(0.3)
Net cash provided by (used in) financing activities			(68.3)			(12.0)			77.0
Net change in cash and cash equivalents			-			(0.8)			0.6
Cash and cash equivalents at beginning of year			-			0.8			0.2
Cash and cash equivalents at end of year		$	-		$	-		$	0.8

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

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Minnesota Energy Resources Corporation

MINNESOTA ENERGY RESOURCES CORPORATION

E. STATEMENTS OF EQUITY

									Total Common
									Shareholder's
(in millions)			Common Stock		Retained Earnings			Equity
Balance at December 31, 2020		$	184.9		$	101.1		$	286.0
Net income			-			21.4			21.4
Equity contribution from parent			24.0			-			24.0
Stock-based compensation and other			0.1			-			0.1
Balance at December 31, 2021		$	209.0		$	122.5		$	331.5
Net income			-			23.8			23.8
Payment of dividends to parent			-			(10.0)			(10.0)
Stock-based compensation and other			0.1			-			0.1
Balance at December 31, 2022		$	209.1		$	136.3		$	345.4
Net income			-			32.3			32.3
Payment of dividends to parent			-			(39.0)			(39.0)
Balance at December 31, 2023		$	209.1		$	129.6		$	338.7

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

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Minnesota Energy Resources Corporation

MINNESOTA ENERGY RESOURCES CORPORATION

F. NOTES TO FINANCIAL STATEMENTS

December 31, 2023

NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations-As used in these notes, the term "financial statements" includes the income statements, balance sheets, statements of cash flows, and statements of equity, unless otherwise noted. In this report, when we refer to "us," "we," "our," or "ours," we are referring to Minnesota Energy Resources Corporation.

We are primarily a natural gas utility company that distributes, sells, and transports natural gas to customers in Minnesota. We also have non-utility operations related to servicing appliances for customers. We are subject to the jurisdiction of, and regulation by, the MPUC, which has general supervisory and regulatory powers over public utilities in Minnesota. In addition, we are subject to the standards of conduct and affiliate rules of the FERC. We are a wholly owned subsidiary of Integrys, which is wholly owned by WEC Energy Group.

1. Basis of Presentation-We prepare our financial statements in conformity with GAAP. We make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.
2. Cash and Cash Equivalents-Cash and cash equivalents include marketable debt securities with an original maturity of three months or less.
3. Operating Revenues-The following discussion includes our significant accounting policies related to operating revenues. For additional required disclosures on disaggregation of operating revenues, see Note 3, Operating Revenues.

Revenues from Contracts with Customers

Natural Gas Utility Operating Revenues

We recognize natural gas utility operating revenues under requirements contracts with residential, commercial and industrial, and transportation customers served under our tariffs. Tariffs provide our customers with the standard terms and conditions, including rates, related to the services offered. Requirements contracts provide for the delivery of as much natural gas as the customer needs. These requirements contracts represent discrete deliveries of natural gas and constitute a single performance obligation satisfied over time. Our performance obligation is both created and satisfied with the transfer of control of natural gas upon delivery to the customer. For most of our customers, natural gas is delivered and consumed by the customer simultaneously. A performance obligation can be bundled to consist of both the sale and the delivery of the natural gas commodity. Our customers can purchase the commodity from a third party. In this case, the performance obligation only includes the delivery of the natural gas to the customer.

The transaction price of the performance obligations for our natural gas customers is valued using the rates, charges, terms, and conditions of service included in our tariffs, which have been approved by the MPUC. These rates often have a fixed component customer charge and a usage-based variable component charge. We recognize revenue for the fixed component customer charge monthly using a time-based output method. We recognize revenue for the usage-based variable component charge using an output method based on natural gas delivered each month.

Our tariffs include various rate mechanisms that allow us to recover or refund changes in prudently incurred costs from rate case- approved amounts. Our rates include a one-for-one recovery mechanism for natural gas commodity costs. Under normal circumstances, we defer any difference between actual natural gas costs incurred and costs recovered through rates as a current asset or liability. The deferred balance is returned to or recovered from customers at intervals throughout the year. However, as a result of the extreme weather in the Midwest in February 2021, the cost of gas purchased for our natural gas customers was temporarily driven significantly higher than our normal winter weather expectations, and we were not allowed to recover all of the additional costs. See Note 16, Regulatory Environment, for more information on the recovery of these high natural gas costs.

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Minnesota Energy Resources Corporation