Business context and reporting period
WEC Energy Group, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2023. The company operates regulated electric and natural gas utilities, holds an approximately 60% interest in American Transmission Company, and owns non-utility energy infrastructure and renewable generation assets. It serves approximately 1.7 million electric customers and 3.0 million natural gas customers.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,957.4 million | $2,003.0 million | $6,675.5 million | $7,039.0 million |
| Operating income | $472.0 million | $404.2 million | $1,566.6 million | $1,543.8 million |
| Net income attributable to common shareholders | $316.0 million | $302.0 million | $1,113.2 million | $1,155.4 million |
| Diluted EPS | $1.00 | $0.96 | $3.52 | $3.65 |
| Interest expense | $182.5 million | $127.5 million | $533.4 million | $364.9 million |
- Q3 revenue declined 2.3%, while common-shareholder earnings rose 4.6%. Operating income increased 16.8%.
- For the first nine months, revenue fell 5.2%, common-shareholder earnings fell 3.7%, and diluted EPS declined 3.6%. Operating income increased 1.5%.
- Operating margin, calculated as operating income divided by revenue, was approximately 24.1% in Q3 2023 versus 20.2% in Q3 2022, and 23.5% for the first nine months versus 21.9%.
- Nine-month cash from operations was $2.538 billion, up $478.9 million year over year. Capital expenditures were $1.730 billion; net cash used in investing was $2.772 billion, including substantial renewable and generation-facility acquisitions.
- At September 30, cash and cash equivalents were $45.9 million. Current liabilities exceeded current assets by $1.630 billion. Management said liquidity was adequate, citing operating cash generation, capital-market access, and $1.552 billion of available capacity under revolving credit agreements.
- Short-term debt was $1.549 billion and long-term debt, including its current portion, was $16.669 billion; total debt was $18.219 billion. Debt was 60.7% of total capitalization on a GAAP basis, or 59.9% using management’s adjusted presentation. The company reported compliance with debt covenants.
- Nine-month effective tax rate was 14.1%, compared with 18.6% a year earlier. Management expected a 2023 annual effective tax rate of 13.0%–14.0%.
Material changes versus the prior comparable period
- Q3 Wisconsin earnings increased $48.2 million, principally from 2023 rate orders and improved fuel and purchased-power cost collections. Illinois earnings rose $9.8 million, while corporate and other losses widened by $25.7 million, primarily from higher interest costs. Transmission earnings were lower by $14.8 million, partly reflecting a favorable one-time 2022 ATC-related item.
- Nine-month Wisconsin earnings increased $54.5 million, but corporate and other losses widened $68.5 million; Illinois earnings declined $16.8 million and electric transmission earnings declined $13.2 million. These factors drove the overall earnings decrease.
- Interest expense rose materially following debt issuance and higher short-term borrowing costs. WEC issued $2.05 billion of long-term debt during the first nine months and repaid or retired $996 million of long-term debt.
- Lower natural gas prices reduced reported gas revenues and related costs; utility cost-recovery mechanisms generally pass prudently incurred fuel and gas costs through to customers. Warmer-than-comparable-period weather also reduced gas sales volumes.
Outlook, commentary, risks, and unusual items
- No full-year earnings or EPS guidance is stated in the supplied filing text; the company did provide the 13.0%–14.0% expected annual effective tax rate.
- The 2024–2028 investment plan totals approximately $23.4 billion: about $20 billion for regulated utilities, $3 billion as WEC’s share of projected ATC investment, and $0.4 billion for non-utility energy infrastructure. Management also cited approximately $6.8 billion of regulated Wisconsin renewable investment and $3.7 billion of reliability investment over that period.
- Planned generation transition includes retirement of approximately 1,500 MW of additional fossil-fueled capacity by the end of 2026, including Oak Creek Units 5–8 and Columbia Units 1–2. The company targets 60% and 80% reductions in electric-generation CO2 emissions by 2025 and 2030, respectively, from a 2005 baseline, and net-zero generation CO2 emissions by 2050.
- Management identified a $9.9 billion minimum commitment for future purchases, including fuel, power, and gas supply. It also cited inflation, supply-chain disruptions, interest rates, commodity prices, weather, regulatory outcomes, and environmental compliance as factors that could affect costs, projects, and results.
- Environmental exposures include proposed stricter wastewater and coal-combustion-residual rules. The proposed CCR rule could have a material adverse impact and require additional remediation. Potentially tighter air-emissions requirements and compliance costs remain under evaluation.
- Solar projects face timing and cost uncertainty from customs reviews and potential trade measures. Management reported some delays in the release of solar panels, though it did not expect the August 2023 Commerce Department ruling to materially affect results.
- Rate matters include pending Wisconsin 2024 rate re-openers and Illinois utility rate cases, plus open prudency reconciliations for PGL’s infrastructure rider. The filing states that recovery of all costs in the open rider years is not assured. A Minnesota rate-case settlement had verbal approval, with a written order expected later in 2023.
- Unusual items include a $22.2 million pre-tax gain on a 2023 land sale and a $54.5 million pre-tax gain on a Chicago property sale in 2022. Samson I storm damage produced a $1.6 million impairment offset by a $1.6 million insurance receivable.
- S&P affirmed WEC’s ratings but changed the parent-company outlook to negative in May 2023, citing weakening financial measures; utility outlooks remained stable. Management did not expect a material effect on capital-market access.
- The company declared a quarterly dividend of $0.78 per share in October 2023. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track whether higher utility margins and rate recovery offset rising operating costs, debt service, and capital spending, particularly given the nine-month earnings decline.
- Review the outcomes and timing of pending rate proceedings and open cost-recovery reconciliations, including any customer refunds or disallowed costs.
- Assess funding for the capital program, refinancing needs, interest-rate exposure, credit-rating outlook, and continued access to revolving facilities and capital markets.
- Monitor final environmental rules and potential compliance or remediation obligations, especially coal ash and wastewater requirements.
- Check progress, cost, and schedule for generation retirements, replacement capacity, solar projects, and supply-chain resolution; project estimates are subject to change.
- Confirm actual 2023 earnings and effective tax rate against management’s stated tax-rate expectation; the filing text does not provide a clear full-year earnings target.