REGULATORY ENVIRONMENT

9 Months Ended

Sep. 30, 2022

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. All of our utilities have regulatory mechanisms in place for recovering all prudently incurred gas costs.

In March 2021, WE and WG received approval from the PSCW to recover approximately $54 million and $24 million, respectively, of natural gas costs in excess of the benchmark set in their GCRMs over a period of three months, beginning in April 2021. In March 2021, WPS also filed its revised natural gas rate sheets with the PSCW reflecting approximately $28 million of natural gas costs in excess of the benchmark set in its GCRM. WPS also recovered these excess costs over a period of three months, beginning in April 2021.

PGL and NSG incurred approximately $131 million and $10 million, respectively, of natural gas costs in February 2021 in excess of the amounts included in their rates. These costs were recovered over a period of 12 months, which started on April 1, 2021. PGL's and NSG's natural gas costs are being reviewed for prudency by the ICC as part of their annual natural gas cost reconciliation. The ICC could order the refund of any costs determined to be imprudent as part of the reconciliation. A decision regarding this review is expected by the end of 2022.

In February 2021, MERC incurred approximately $75 million of natural gas costs in excess of the benchmark set in its GCRM. In August 2021, the MPUC issued a written order approving a joint proposal filed by MERC and four other Minnesota utilities to recover their respective excess natural gas costs. In accordance with the order, MERC recovered $10 million of these costs through its annual natural gas true-up process over a period of 12 months, and the remaining $65 million was to be recovered over a period of 27 months, both beginning in September 2021. Recovery of these costs and the issue of prudence was referred to a contested-case proceeding. In October 2022, the MPUC issued a written order approving a settlement agreement entered into by MERC and various parties related to the recovery of the extraordinary natural gas costs incurred in February 2021. Under the settlement agreement, MERC agreed to not seek recovery of $3 million of these costs. MERC will continue to recover the remaining $62 million of extraordinary natural gas costs over the previously approved 27-month recovery period.

Natural gas costs incurred at MGU and UMERC in excess of the amount included in their respective rates were not significant.

Wisconsin Electric Power Company, Wisconsin Public Service Corporation, and Wisconsin Gas LLC

2023 and 2024 Rates

In April 2022, WE, WPS, and WG filed requests with the PSCW to increase their retail electric, natural gas, and steam rates, as applicable, effective January 1, 2023. The requested increases in electric rates were driven by capital investments in new wind, solar, and battery storage; capital investments in natural gas generation; reliability investments, including grid hardening projects to bury power lines and strengthen WE's distribution system against severe weather; and changes in wholesale business with other utilities. Many of these investments have already been approved by the PSCW. The requested increases in natural gas rates primarily related to capital investments previously approved by the PSCW, including LNG storage for our natural gas distribution system.

In July 2022, WE, WPS, and WG updated their rate requests to reflect recent developments that impacted, as applicable, the respective utility's original proposal for rate increases in 2023. These recent developments included:

•Delays in the in-service dates of Darien and the battery portion of Paris due to supply chain disruptions.

•WE's decision to extend the operating life of the OCPP due to tight energy supply conditions in MISO and the delay in the renewable energy projects discussed above. The expected retirement of the OCPP units 5 and 6 was delayed one year, until May 2024, and the retirement of units 7 and 8 was delayed approximately 18 months, until late 2025.

•Wisconsin Power & Light Company's decision to delay the retirements of the jointly-owned Columbia units. The retirements of the Columbia units, which were originally planned for the end of 2023 and 2024, were delayed until 2026. WPS holds a 27.5% ownership interest in these units.

•Increases in the cost of Badger Hollow II.

•The effect of anticipated increases in interest rates on borrowing costs.

•An industry-wide update to S&P's methodology for assessing the impact of PPAs on utility's credit ratings.

On September 29, 2022, WE, WPS, and WG entered into settlement agreements with certain intervenors to resolve most of the outstanding issues in each utility's respective rate case. The settlement agreements, which are subject to PSCW review and approval, reflect the following:


	WE					WPS					WG
2023 base rate increase
Electric	$	257.9	million	/	8.3%	$	104.3	million	/	8.7%	N/A
Gas	$	53.3	million	/	11.2%	$	31.3	million	/	8.6%	$	57.1	million	/	7.9%
Steam	$	3.4	million	/	15.6%	N/A					N/A
Common equity component average on a financial basis	53.0%					53.0%					53.0%

In addition to the above, the settlement agreements include the following terms:

•The utilities will keep their current earnings sharing mechanisms, under which, if a utility earns above its authorized ROE: (i) the utility will retain 100.0% of earnings for the first 15 basis points above the authorized ROE; (ii) 50.0% of the next 60 basis points will be required to be refunded to ratepayers; and (iii) 100.0% of any remaining excess earnings will be required to be refunded to ratepayers.

•WE will seek a financing order from the PSCW to securitize $100.0 million of the remaining book value of environmental controls installed on the older units at the OCPP by 2024, plus the costs associated with the securitization.

•Upon retirement of the older units at the OCPP, WE will request PSCW approval to extend and levelize the recovery of the remaining un-securitized book value of those units over a 25-year period.

•WE and WPS will not propose any changes to their real-time pricing rates for large commercial and industrial electric customers through the end of 2024.

•WE and WPS will lower monthly residential and small commercial electric customer fixed charges by $1.00 and $2.00, respectively, from currently authorized rates.

•WE and WPS agreed to propose an additional voluntary renewable energy pilot for commercial and industrial customers.

•WE and WPS made commitments related to certain low income assistance programs and agreed to collectively contribute $4.0 million to the Keep Wisconsin Warm Fund.

Each utility's authorized ROE will be decided by the PSCW. WE and WPS requested an authorized ROE of 10.0%, and WG requested an authorized ROE of 10.2%.

WE and WPS are seeking a limited rate case re-opener for 2024 to address additional revenue requirements associated with generation projects that are expected to be placed into service in 2023 and 2024. In addition, WE and WG are seeking a limited rate case re-opener for 2024 to address additional revenue requirements associated with LNG projects that are expected to be placed into service in 2023 and 2024, respectively.

We expect a decision from the PSCW in the fourth quarter of 2022, with rate adjustments expected to be effective January 1, 2023.

The Peoples Gas Light and Coke Company

Qualifying Infrastructure Plant Rider

In July 2013, Illinois Public Act 98-0057, The Natural Gas Consumer, Safety & Reliability Act, became law. This law provides natural gas utilities with a cost recovery mechanism that allows collection, through a surcharge on customer bills, of prudently incurred costs to upgrade Illinois natural gas infrastructure. In January 2014, the ICC approved a QIP rider for PGL, which is in effect through 2023.

PGL's QIP rider is subject to an annual reconciliation whereby costs are reviewed for accuracy and prudency. In March 2022, PGL filed its 2021 reconciliation with the ICC, which, along with the 2020, 2019, 2018, 2017, and 2016 reconciliations, are still pending.

As of September 30, 2022, there can be no assurance that all costs incurred under PGL's QIP rider during the open reconciliation

years will be deemed recoverable by the ICC.

Minnesota Energy Resources Corporation

2023 Minnesota Rate Case

On November 1, 2022, MERC initiated a rate proceeding with the MPUC to increase its retail natural gas base rates by $40.3 million (9.9%). MERC's request reflects a 10.3% ROE and a common equity component average of 53.0%. The proposed retail natural gas rate increase is primarily driven by increased capital investments as well as inflationary pressure on operating costs. MERC is seeking interim rates totaling $37.0 million, subject to refund, to be effective January 1, 2023.