WEC Energy Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. WEC serves approximately 1.7 million electric and 3.0 million natural gas customers and also owns transmission and renewable-energy investments.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $2,888.1 million | $2,908.1 million | Down 0.7% |
| Operating income | $669.3 million | $731.4 million | Down 8.5% |
| Net income attributable to common shareholders | $507.5 million | $565.9 million | Down 10.3% |
| Diluted EPS | $1.61 | $1.79 | Down $0.18 |
| Cash from operating activities | $796.1 million | $1,076.8 million | Down $280.7 million |
Operating expenses totaled $2,218.8 million, up from $2,176.7 million. Interest expense rose to $172.2 million from $117.6 million. The effective tax rate was 12.7%, versus 18.3%, primarily reflecting production tax credits and protected deferred-tax amortization. Management expects a 2023 annual effective tax rate of 13%–14%.
Operating cash flow declined mainly because of higher collateral paid and derivative losses, higher operating and interest payments, partly offset by higher customer collections. Capital expenditures were $499.4 million; investing cash outflow was $1,267.9 million, including acquisitions. Financing provided $417.6 million, including $1.1 billion of long-term debt issuance.
Liquidity, debt and capital
At March 31, cash and cash equivalents were $35.7 million; short-term debt was $1,261.2 million and long-term debt, including current maturities, was $16,635.5 million. Total debt was $17,896.7 million, with a reported debt-to-capitalization ratio of 60.5% (59.7% on management’s adjusted basis). Available revolving credit capacity was $1,839.6 million. Current liabilities exceeded current assets by $927.3 million; management said cash, operating cash generation, credit facilities and capital-market access should cover requirements. The company reported compliance with debt covenants.
WEC issued $1.1 billion of 4.75% senior notes in January 2023. Subsequent to quarter-end, it issued another $350 million of the same notes. The quarterly dividend was raised 7.2% to $0.78 per share; the annualized rate is $3.12.
Material changes and drivers
- Wisconsin segment earnings fell $30.9 million, principally from higher operating costs and lower utility sales volumes in warmer winter weather. New Wisconsin rate orders and higher margins partly offset the declines.
- Corporate and other shifted from $13.6 million of income to a $13.8 million loss, mainly due to higher interest expense and lower investment-fund earnings.
- Illinois earnings were nearly flat at $113.1 million; other-states earnings increased $1.7 million and transmission earnings increased $1.5 million.
- Non-utility energy infrastructure earnings declined $3.0 million. Q1 2022 included $15.2 million of previously deferred Upstream wind-market settlement revenue; 2023 benefited from additional renewable production tax credits.
- Acquisitions included the Whitewater gas-fired facility for $76.0 million and majority interests in Sapphire Sky wind for approximately $442.6 million and Samson I solar for approximately $249.4 million. Red Barn wind was acquired in April, after quarter-end, for WPS’s approximately $160 million share.
Outlook, risks and unusual items
- Management expects approximately $18.1 billion of utility and non-utility capital expenditures for 2023–2027, plus an estimated $2.0 billion share of ATC capital expenditures. Planned investment includes renewables, battery storage, gas generation, distribution reliability and LNG facilities. Project timing and costs remain subject to regulatory, supply-chain, inflation and other uncertainties.
- WEC’s ESG Progress Plan targets electric-generation CO2 reductions of 60% by 2025 and 80% by 2030, against a 2005 baseline, and net-zero generation emissions by 2050. It also targets net-zero methane emissions across gas distribution by 2030.
- Pending rate proceedings include PGL/NSG requests for increases of $194.7 million and $18.7 million, respectively; MERC’s proposed settlement would increase base rates by $28.8 million, subject to approval; and MGU requested a $19.1 million increase. Outcomes and recovery of costs are not assured.
- Environmental uncertainties include proposed tighter power-plant emissions and wastewater rules, evolving air and water standards, and remediation obligations. The company reported $491.7 million of environmental remediation liabilities and $590.6 million of related regulatory assets. It expects recovery of many regulated costs, subject to regulator approval.
- A March wind storm damaged portions of approximately 40% of the Samson I solar facility. WEC recorded a $21.4 million impairment and a $20.7 million insurance receivable; the net Q1 expense was $0.7 million. Damage assessment continued, but management did not expect a significant effect on future results or long-term cash flows.
- Minimum future purchase commitments were approximately $10.4 billion. WEC also disclosed ongoing legal and regulatory matters, including PGL QIP cost reconciliations whose recovery remains uncertain. On May 2, S&P affirmed WEC’s ratings but changed its outlook to negative, citing weakening financial measures; utility outlooks remained stable.
Key facts for investors to verify
- Whether earnings and margins recover as weather normalizes and newly approved rates take effect, and how operating-cost and interest-expense growth develops.
- Progress, budget and in-service timing for the large capital program, including renewable projects, solar-panel supply risks and planned generation retirements.
- Regulatory outcomes for rate cases, PGL’s QIP reconciliations and recovery of deferred costs and environmental expenditures.
- Debt, liquidity and credit-rating trends in light of elevated investment needs, current liabilities exceeding current assets and S&P’s negative outlook.
- Final Samson I storm-damage costs and insurance recovery, and the financial impact of proposed environmental rules and other contingencies.