WEC ENERGY GROUP, INC. annual report, FY2021

WEC Energy Group, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter earnings report. The company operates regulated electric and natural gas utilities across the Midwest, has an approximately 60% interest in American Transmission Company, and owns non-utility energy infrastructure and renewable-generation investments.

Financial performance and position

Metric	2021	2020	Change
Operating revenue	$8,316.0 million	$7,241.7 million	+$1,074.3 million
Operating income	$1,714.9 million	$1,706.1 million	+$8.8 million
Net income attributable to common shareholders	$1,300.3 million	$1,199.9 million	+$100.4 million
Diluted earnings per share	$4.11	$3.79	+$0.32
Cash provided by operating activities	$2,032.7 million	$2,196.0 million	−$163.3 million
Capital expenditures	$2,252.8 million	$2,238.8 million	+$14.0 million
Cash used in investing activities	$2,311.8 million	$2,806.8 million	$495.0 million less cash used
Cash provided by financing activities	$294.0 million	$601.1 million	−$307.1 million

Revenue growth largely reflected higher natural gas prices and related customer billings; prudently incurred gas costs are generally passed through to customers. Utility operating revenue rose to $8,228.8 million from $7,179.5 million.
Earnings improved 8.4%. The largest reported contributions included lower corporate and other losses, growth in Illinois utility earnings, and increased renewable-energy production tax credits. ATC earnings and other-states utility earnings declined.
Operating cash flow fell despite higher earnings, principally because of higher fuel and purchased-power payments, operating and maintenance spending, and working-capital needs associated with increased natural gas prices.
At year-end, total debt was $15,590.1 million, including $1,897.0 million of short-term debt. Debt was 58.8% of total capitalization on the reported basis; management’s adjusted ratio, which treats half of the junior notes as equity, was 57.8%.
Cash and cash equivalents were $16.3 million. Current liabilities exceeded current assets by $1,096.3 million; management cited $1,201.6 million of available revolving-credit capacity, operating cash generation, and capital-market access as supporting liquidity.
The filing does not provide a single consolidated gross-margin measure as a principal performance metric. Wisconsin electric and natural gas margins were $3,050.4 million and $591.9 million, respectively; Illinois natural gas margins were $1,044.4 million.

Material changes and business developments

Retail electric sales volumes in the Wisconsin segment increased 3.4% to 36.8 million MWh, while total sales including wholesale and resale declined slightly. Commercial and industrial demand improved with the economic recovery; gas utility deliveries were mixed and weather-sensitive.
Fuel mix shifted in 2021: coal supplied 35.5% of electric sales versus 31.1% in 2020, while natural gas combined-cycle generation supplied 24.6% versus 27.8%. Management attributed greater coal use partly to higher natural gas prices.
Badger Hollow I, a 150 MW solar facility, entered commercial operation in November 2021. Jayhawk, a 190 MW wind project, entered commercial operation in December; WECI acquired a 90% interest in it during 2021.
Depreciation and amortization increased to $1,074.3 million from $975.9 million, reflecting assets placed in service and continued capital investment. Long-term debt, including its current portion, increased year over year.
The company issued new debt and refinanced or repaid other obligations. It recorded losses on early debt extinguishments, including $23.1 million at the parent and $13.2 million at Integrys.

Outlook, management commentary, risks and contingencies

Investment and transition plan: Management expects approximately $16.4 billion of capital expenditures and acquisitions for regulated utility and non-utility energy infrastructure businesses from 2022–2026, plus an estimated $1.3 billion share of ATC capital expenditures. The plan includes grid and gas-system upgrades, renewables, battery storage, and natural-gas generation. Estimated total capital expenditures and acquisitions are $3.72 billion in 2022.
Climate goals: The company targets electric-generation CO₂ reductions of 60% by 2025 and 80% by 2030, from a 2005 baseline, and net-zero generation CO₂ emissions by 2050. It expects coal to represent less than 5% of supplied power by 2030 and believes it could eliminate coal by 2035. It also targets net-zero methane emissions across gas distribution operations by 2030. Delivery depends on regulatory approvals, project execution, technology, costs, and supply availability.
Near-term outlook: Management forecast five-year annual growth of 0.5%–1.0% for weather-normalized retail electric sales and 0.7%–1.0% for natural-gas deliveries. It expected a 2022 effective tax rate of 18.5%–19.5%. The filing text does not provide a clear consolidated 2022 earnings-per-share guidance figure.
Dividend: The board raised the quarterly dividend to $0.7275 per share in January 2022, or $2.91 annualized, and reaffirmed a target payout ratio of 65%–70% of earnings.
February 2021 cold-weather costs: The company reported approximately $322 million of extraordinary natural-gas costs above established benchmarks across service territories and sought recovery through regulatory mechanisms. Most identified amounts were approved for recovery, but MERC’s recovery and prudence remain subject to a contested proceeding, with a decision expected in August 2022; other cost reconciliations also remain subject to review.
Regulatory and environmental exposure: PGL’s QIP infrastructure-cost rider is scheduled to sunset after December 2023 absent legislative or regulatory action; several annual cost reconciliations remained pending. Environmental compliance and remediation costs may rise, and recovery through rates is not assured. Regulatory assets were $3,367.1 million and liabilities were $3,960.3 million at year-end.
Project and market risks: Management identified inflation, supply-chain constraints, solar-panel import delays, construction execution, weather, fuel and power prices, interest rates, credit access, cyber threats, and renewable-project transmission congestion as risks. Congestion and transmission outages contributed to operating losses at Coyote Ridge and Tatanka Ridge.
Other contingencies: WEC recorded a $39.1 million liability related to potential ATC transmission-ROE refunds while appeals remained unresolved. PGL’s Manlove gas-storage leak remediation and related proceedings continue; management said any civil penalties were not expected to materially affect the financial statements.
Reporting and controls: Deloitte issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. The auditor identified regulatory-asset and liability judgments as a critical audit matter.

Important facts for investors to verify

Whether regulators permit recovery of the February 2021 extraordinary gas costs, particularly MERC’s contested amount, and the timing of collections.
Progress and approved costs for the multiyear capital plan, including solar, storage, wind, gas-generation, LNG, and grid projects; assess supply-chain and financing effects.
Whether PGL’s QIP rider is extended or replaced after 2023, and the outcome of pending rider reconciliations.
Debt maturities, refinancing costs, credit metrics, and continued access to revolving facilities and capital markets as interest rates change.
Whether ATC ROE proceedings result in refunds or changes to future earnings, including the status of the recorded $39.1 million liability.
Execution of emissions targets and the potential effect of environmental rules, plant retirements, and regulatory cost recovery on earnings and customer rates.
Wind-project generation, transmission congestion, offtake-contract performance, and production tax credits supporting non-utility returns.
Dividend coverage and payout relative to earnings, capital requirements, and cash available from subsidiaries.