WEC Energy Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. WEC is a regulated electric and natural gas utility group, with transmission investments and non-utility energy infrastructure, serving approximately 1.6 million electric and 3.0 million natural gas customers.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $2,003.0 million | $1,746.5 million | $7,039.0 million | $6,114.1 million |
| Operating income | $404.2 million | $390.0 million | $1,543.8 million | $1,388.1 million |
| Net income attributable to common shareholders | $302.0 million | $290.0 million | $1,155.4 million | $1,076.1 million |
| Diluted EPS | $0.96 | $0.92 | $3.65 | $3.40 |
| Cash provided by operating activities | — | $2,059.5 million | $2,006.7 million |
- Revenue increased 14.7% in Q3 and 15.1% for the first nine months year over year; common-shareholder earnings rose 4.1% and 7.4%, respectively.
- GAAP operating margin, calculated as operating income divided by revenue, was approximately 20.2% in Q3 2022 versus 22.3% in Q3 2021, and 21.9% versus 22.7% for the nine-month periods.
- Nine-month investing cash outflow was $1,985.9 million, including $1,700.7 million of capital expenditures and $362.9 million paid for the Thunderhead acquisition. Financing cash outflow was $45.1 million. Common dividends paid totaled $688.5 million.
- At September 30, cash and cash equivalents were $28.5 million; short-term debt was $1,259.5 million and long-term debt, including current portion, was approximately $15,077.9 million. Reported debt to total capitalization was 58.9% (58.0% on management’s adjusted basis).
- Current liabilities exceeded current assets by $598.7 million. WEC reported $1,841.8 million of available capacity under revolving credit facilities and said operating cash generation and capital-market access should meet its requirements. Debt covenants were in compliance.
Material changes and notable items
- Q3 earnings growth was led by the electric transmission segment, whose common-shareholder contribution increased $16.7 million, mainly reflecting an August 2022 court decision on ATC’s allowed return on equity, and by non-utility energy infrastructure, up $6.6 million.
- For the nine months, the non-utility energy infrastructure segment increased earnings by $38.2 million, supported by production tax credits, higher wind generation, a customer sharing arrangement, and $15.2 million of previously disputed SPP settlements recognized after a FERC order. Wisconsin earnings rose $31.1 million, partly due to regulatory-liability amortization.
- WEC recorded a $54.5 million pretax gain from the May sale of Chicago real estate. Corporate and other results were adversely affected by investment losses in the Integrys rabbi trust and lower investment-fund earnings.
- Thunderhead, a 300 MW Nebraska wind facility, was acquired in September for a purchase price of $381.9 million, including a $19.0 million milestone payable. WEC issued $900 million of parent-company senior notes in September and WE issued $500 million of 4.75% debentures due 2032.
- Natural gas prices and related pass-through revenues rose substantially. Management noted that gas costs are generally recovered through utility mechanisms; timing differences can affect reported revenues and cash flows.
Outlook, risks, and contingencies
- Management expects a 2022 annual effective tax rate of 18.5%–19.5%. The filing does not provide a clear consolidated 2022 EPS guidance range.
- WEC expects approximately $18.1 billion of regulated utility and non-utility capital expenditures for 2023–2027, plus an estimated $2.0 billion share of ATC capital expenditures. Planned investments include renewables, storage, natural gas generation, system reliability, and gas infrastructure.
- Wisconsin utilities reached settlements with intervenors for proposed 2023 base-rate increases, subject to PSCW approval. Management expected a decision in Q4 2022 and rates effective January 1, 2023. The settlements include earnings-sharing provisions and other customer terms. Separately, MERC filed in November 2022 for a $40.3 million, or 9.9%, Minnesota gas-rate increase.
- Key execution risks include inflation, supply-chain disruption, solar-panel availability and potential tariffs, higher interest rates, project delays, fuel-price volatility, weather, regulatory decisions, and environmental requirements. Supply-chain issues had already delayed certain solar and battery project dates.
- Environmental and regulatory matters include approximately $497.7 million of environmental remediation reserves, against $616.3 million of related regulatory assets; recovery depends on regulatory approval. Minimum future purchase commitments were approximately $10.6 billion.
- ATC’s return-on-equity complaints remain subject to further FERC proceedings. The court decision generated both a new potential-refund liability and a release of liability for another complaint period; WEC said the resulting effects increased Q3 transmission-segment earnings, but outcomes remain subject to further proceedings.
- WEC reported no material change in risk factors from its 2021 Form 10-K. Management stated that legal proceedings were not expected to have a material impact, while noting it could not estimate the potential loss in a newly filed employee-benefit-plan lawsuit.
Important facts for investors to verify
- PSCW decisions and final authorized returns in the Wisconsin rate cases, and the status and outcome of MERC’s Minnesota rate proceeding.
- FERC’s next actions on ATC’s ROE and potential refunds, including effects on future equity-method earnings and customer transmission costs.
- Whether large planned capital projects remain on schedule and within budget amid supply-chain, inflation, and solar tariff risks.
- Actual year-end fuel recovery, customer arrears and credit losses, and the timing of recovery or refund of gas costs through regulatory mechanisms.
- Funding needs and leverage as WEC executes its capital plan; confirm liquidity availability, debt costs, and dividend capacity.
- Regulatory recovery of environmental and infrastructure costs, including open PGL QIP rider reconciliations and remediation obligations.