WEC Energy Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Unaudited interim results may be seasonal and are not necessarily indicative of full-year results.
Business context
WEC Energy Group is a regulated electric and natural gas utility holding company serving approximately 1.6 million electric and 3.0 million natural gas customers. It also owns about 60% of American Transmission Company and operates non-utility energy infrastructure, including wind generation and natural gas storage.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,746.5 million | $1,651.0 million | $6,114.1 million | $5,308.3 million |
| Operating income | $390.0 million | $370.2 million | $1,388.1 million | $1,335.6 million |
| Net income attributable to common shareholders | $290.0 million | $266.8 million | $1,076.1 million | $960.9 million |
| Diluted EPS | $0.92 | $0.84 | $3.40 | $3.04 |
| Operating cash flow | Not separately reported for the quarter | $2,006.7 million | $1,949.7 million | |
| Capital expenditures | Not separately reported for the quarter | $1,627.9 million | $1,618.7 million |
Q3 operating margin was approximately 22.3% of revenue, versus 22.4% in Q3 2020; nine-month operating margin was approximately 22.7%, versus 25.2%. These are calculated from reported operating income and revenue. The 2021 nine-month revenue increase partly reflects higher natural gas costs, which are largely recovered through regulatory mechanisms.
- Cash and liquidity: Cash and cash equivalents were $26.0 million at September 30, 2021. Current liabilities exceeded current assets by approximately $1.3 billion. Management said available credit lines and capital-market access were adequate; $1,589.3 million of revolving credit capacity remained available.
- Debt: Short-term debt was $1,508.9 million; long-term debt including current maturities was $13,174.8 million. Total debt was $14,683.7 million and debt was 57.3% of capitalization (56.3% on management’s adjusted basis for junior notes).
- Dividends: Common dividends paid in the first nine months were $641.2 million. The quarterly rate was $0.6775 per share; a dividend at that rate was declared October 21, 2021.
Material changes versus the prior comparable periods
- Common-shareholder earnings increased $23.2 million in Q3 and $115.2 million for the first nine months. Q3 gains were led by Wisconsin and Illinois utilities; year-to-date gains also reflected lower corporate interest expense, investment-fund earnings, and stronger wind production tax credits.
- Higher retail electric volumes, weather, continued economic recovery, rate effects, and lower benefit costs supported results. Increased depreciation and distribution expenses partly offset those benefits. Illinois earnings benefited from PGL’s pipeline modernization investment and the resumption of late-payment charges.
- Operating cash flow rose $57.0 million year over year for the nine-month period. Investing cash use increased $125.6 million, including the $119.8 million Jayhawk wind acquisition. Financing cash use decreased $126.3 million.
- Property, plant and equipment increased to $26.6 billion from $25.7 billion at December 31, 2020; total assets rose to $38.4 billion from $37.0 billion. Long-term debt including current maturities increased from $12.45 billion to $13.17 billion.
Outlook, commentary, risks and unusual items
- Tax outlook: Management expected a 2021 annual effective tax rate of 13%–14%, including an estimated six-percentage-point benefit from amortizing unprotected excess deferred taxes; excluding that benefit, the expected range was 19%–20%.
- Capital and transition plans: Estimated capital expenditures and acquisitions were $2.45 billion for 2021, $3.72 billion for 2022, and $3.18 billion for 2023. The company cited approximately $16.4 billion of planned regulated utility and non-utility energy infrastructure investment for 2022–2026, plus an estimated $1.3 billion share of ATC capital spending. Plans include renewable generation, storage, gas infrastructure and reliability upgrades.
- Emissions goals: WEC reported that fleet CO2 emissions were already more than 50% below 2005 levels at year-end 2020, and set targets for 60% reduction by 2025, 80% by 2030, and net-zero generation emissions by 2050. It also set a net-zero methane emissions goal for gas distribution operations by 2030.
- Gas-cost event: February 2021 extreme winter weather caused unusually high natural gas costs. The company described recovery plans across its jurisdictions; MERC’s approximately $75 million excess-cost recovery remains subject to a prudency proceeding, with a decision expected in August 2022 and potential disallowance or refund risk.
- Environmental and regulatory exposure: Estimated capital investment for steam-electric wastewater compliance was approximately $110 million. Environmental remediation reserves were $510.3 million, with corresponding regulatory assets of $601.9 million. Approximately $10.8 billion of minimum future purchase commitments were disclosed.
- Other notable items: Retirement of WPS’s Columbia Units 1 and 2 became probable following a MISO ruling; expected retirement dates were end-2023 and end-2024. The company reported $279.3 million net book value for its ownership share. The Public Service Building restoration had $93.5 million of incurred costs, including $61.0 million recorded as an insurance receivable; regulators approved deferral of net costs into rate base.
- Project and legal risks: A U.S. Commerce Department petition seeking solar import tariffs could affect cost and timing of solar projects. ATC ROE proceedings could reduce WEC’s after-tax equity earnings by about $7 million annually if a proposed FERC incentive rule is adopted. The Manlove gas storage field matter and other proceedings remain; management did not expect a material financial impact from currently described litigation, but outcomes are uncertain.
- Credit and operational risks: Risks include weather, commodity prices, customer collections, regulatory cost recovery, capital-project execution, supply-chain disruption, environmental rules, transmission outages, and access to financing. Moody’s changed WG’s outlook to negative in September 2021 but affirmed its ratings.
Important facts for investors to verify
- Whether the 2021 earnings improvement is sustainable after separating weather, rate effects, tax benefits, gas-cost pass-throughs, and non-recurring corporate items.
- Actual recovery and prudency outcomes for February 2021 gas costs, particularly MERC’s contested recovery, and for deferred COVID-19-related costs and uncollectible accounts.
- Progress, final cost, regulatory approval, and schedule for major renewable, storage, gas, and reliability projects, including potential solar tariff impacts.
- Debt and liquidity trends against the large planned investment program, dividend commitments, and current-liability deficit.
- Developments in ATC ROE proceedings, environmental compliance spending, Columbia unit retirements, and the Manlove field matter.