WEC Energy(WEC) - 2023 Q1 - Quarterly Report

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This section outlines forward-looking statements, identifying them by specific terms and listing risks that could cause actual results to differ materially - Forward-looking statements cover expectations on earnings, capital projects, sales growth, rate actions, environmental regulations, and financial resources[21] - Key risks include catastrophic weather, economic conditions, regulatory decisions, environmental laws, supply chain disruptions, inflation, and interest rate changes[22] PART I. FINANCIAL INFORMATION This part presents WEC Energy Group's unaudited condensed consolidated financial statements for Q1 2023, with detailed notes on accounts and transactions ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section provides unaudited condensed consolidated financial statements, including income statements, comprehensive income, balance sheets, cash flows, and equity, for Q1 2023 Condensed Consolidated Income Statements Net income attributed to common shareholders decreased to $507.5 million in Q1 2023 from $565.9 million in Q1 2022, primarily due to higher operating and interest expenses Condensed Consolidated Income Statements (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------- | :-------------------- | :-------------------- | :------------ | | Operating revenues | $2,888.1 | $2,908.1 | $(20.0) | | Total operating expenses | $2,218.8 | $2,176.7 | $42.1 | | Operating income | $669.3 | $731.4 | $(62.1) | | Interest expense | $172.2 | $117.6 | $54.6 | | Net income attributed to common shareholders | $507.5 | $565.9 | $(58.4) | | Diluted EPS | $1.61 | $1.79 | $(0.18) | Condensed Consolidated Statements of Comprehensive Income Comprehensive income attributed to common shareholders decreased to $507.4 million in Q1 2023 from $565.9 million in Q1 2022, mirroring the net income trend Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income | $507.6 | $568.0 | $(60.4) | | Comprehensive income attributed to common shareholders | $507.4 | $565.9 | $(58.5) | Condensed Consolidated Balance Sheets Total assets increased to $42,795.9 million at March 31, 2023, from $41,872.1 million at December 31, 2022, driven by property, plant, and equipment and regulatory assets Condensed Consolidated Balance Sheets (in millions) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total assets | $42,795.9 | $41,872.1 | $923.8 | | Property, plant, and equipment, net | $30,379.4 | $29,113.8 | $1,265.6 | | Regulatory assets | $3,313.1 | $3,264.6 | $48.5 | | Total liabilities | $30,808.2 | $30,255.5 | $552.7 | | Long-term debt | $15,827.3 | $14,766.2 | $1,061.1 | | Common shareholders' equity | $11,636.6 | $11,376.9 | $259.7 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $796.1 million in Q1 2023, while net cash used in investing activities increased substantially due to acquisitions and capital expenditures Condensed Consolidated Statements of Cash Flows (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------------- | :-------------------- | :-------------------- | :------------ | | Net cash provided by operating activities | $796.1 | $1,076.8 | $(280.7) | | Net cash used in investing activities | $(1,267.9) | $(338.2) | $(929.7) | | Net cash provided by (used in) financing activities | $417.6 | $(706.5) | $1,124.1 | | Net change in cash, cash equivalents, and restricted cash | $(54.2) | $32.1 | $(86.3) | - Significant investing activities in Q1 2023 included the acquisition of Sapphire Sky ($442.6 million), Samson I ($249.4 million), and Whitewater ($76.0 million), alongside increased capital expenditures[40] - Financing activities were boosted by $1,100.0 million in long-term debt issuances in Q1 2023, offsetting higher debt retirements and dividends paid[40] Condensed Consolidated Statements of Equity Total equity increased to $11,987.7 million at March 31, 2023, from $11,616.6 million at December 31, 2022, primarily due to net income attributed to common shareholders Condensed Consolidated Statements of Equity (in millions) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total Equity | $11,987.7 | $11,616.6 | $371.1 | | Net income attributed to common shareholders | $507.5 | N/A | N/A | | Common stock dividends | $(246.1) | N/A | N/A | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures for the condensed consolidated financial statements, covering general information, acquisitions, revenues, credit losses, regulatory items, and other financial notes Note 1 General Information WEC Energy Group is a diversified holding company serving 1.7 million electric and 3.0 million natural gas customers, with significant ownership in ATC and renewable generating facilities - WEC Energy Group serves approximately 1.7 million electric and 3.0 million natural gas customers[44] - The company owns ~60% of ATC and majority interests in multiple renewable generating facilities[44] - Majority-owned subsidiaries and VIEs are consolidated, while the equity method is used for investments like ATC due to limited voting rights[46][47] Note 2 Acquisitions The company completed several electric generation facility acquisitions in early 2023, including Whitewater, Samson I, and Sapphire Sky, expanding its non-utility energy infrastructure segment - In January 2023, WE and WPS acquired Whitewater, a 236.5 MW dual-fueled electric generation facility, for $76.0 million[53] - In February 2023, WECI acquired an 80% interest in Samson I, a 250 MW solar facility in Texas, for approximately $249.4 million[55] - In February 2023, WECI acquired a 90% interest in Sapphire Sky, a 250 MW wind facility in Illinois, for approximately $442.6 million[56] - WPS completed the acquisition of Red Barn (82 MW wind) in April 2023 for approximately $160 million[51] - WECI signed an agreement to acquire an 80% interest in Maple Flats (250 MW solar) for approximately $360 million, expected to close in early 2024[57] Note 3 Operating Revenues Total operating revenues for Q1 2023 were $2,888.1 million, a slight decrease from Q1 2022, with natural gas utility revenues decreasing and non-utility energy infrastructure revenues increasing Operating Revenues by Source (in millions) | Revenue Source | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------------- | :-------------------- | :-------------------- | :------------ | | Total operating revenues | $2,888.1 | $2,908.1 | $(20.0) | | Total regulated revenues | $2,811.1 | $2,852.9 | $(41.8) | | Non-utility energy infrastructure revenues | $166.2 | $159.5 | $6.7 | Electric Utility Operating Revenues by Customer Class (in millions) | Customer Class | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Residential | $486.5 | $463.1 | $23.4 | | Small commercial and industrial | $393.6 | $370.1 | $23.5 | | Large commercial and industrial | $229.8 | $229.2 | $0.6 | | Total electric utility operating revenues | $1,203.8 | $1,187.5 | $16.3 | Natural Gas Utility Operating Revenues by Customer Class (in millions) | Customer Class | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Residential | $1,088.2 | $1,129.3 | $(41.1) | | Commercial and industrial | $504.6 | $517.6 | $(13.0) | | Total natural gas utility operating revenues | $1,607.1 | $1,664.9 | $(57.8) | Note 4 Credit Losses The allowance for credit losses increased to $213.8 million at March 31, 2023, driven by higher past due accounts receivable in Wisconsin and Illinois during winter moratoriums Allowance for Credit Losses (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | | :------------------------------------------------- | :-------------------- | :-------------------- | | Balance at January 1 | $199.3 | $198.3 | | Provision for credit losses | $21.0 | $23.3 | | Write-offs charged against the allowance | $(53.5) | $(57.5) | | Recoveries of amounts previously written off | $11.4 | $15.6 | | Balance at March 31 | $213.8 | $200.6 | - The increase in allowance for credit losses was driven by higher past due accounts receivable in Wisconsin and Illinois, a common trend during winter moratoriums[77][78] - $1,119.8 million (62.9%) of net accounts receivable and unbilled revenues had regulatory protections in place to mitigate credit loss exposure as of March 31, 2023[77] Note 5 Regulatory Assets and Liabilities Total regulatory assets increased to $3,325.3 million and total regulatory liabilities increased to $3,834.8 million at March 31, 2023, primarily due to derivatives and energy costs Regulatory Assets (in millions) | Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :-------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total regulatory assets | $3,325.3 | $3,306.9 | $18.4 | | Derivatives | $196.5 | $133.8 | $62.7 | | Uncollectible expense | $95.9 | $69.3 | $26.6 | Regulatory Liabilities (in millions) | Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :-------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total regulatory liabilities | $3,834.8 | $3,791.9 | $42.9 | | Energy costs refundable through rate adjustments | $138.5 | $53.4 | $85.1 | | Derivatives | $21.6 | $76.7 | $(55.1) | - The increase in regulatory liabilities for energy costs was primarily due to lower natural gas costs in Q1 2023 compared to anticipated rates[80] Note 6 Property, Plant, and Equipment The company plans to retire several generating units by 2026, with their net book values classified as plant to be retired, and the Samson I solar facility incurred $21.4 million in storm damage - Oak Creek Power Plant Units 5-8 (net book value $812.9 million) are expected to be retired by May 2024 (units 5-6) and late 2025 (units 7-8)[81] - Columbia Units 1 and 2 (net book value $268.7 million) are expected to be retired by June 2026[82] - Samson I solar facility sustained $21.4 million in storm damage in March 2023, substantially offset by a $20.7 million insurance receivable[83] Note 7 Common Equity The Board of Directors awarded stock options, restricted shares, and performance units, and a quarterly cash dividend of $0.78 per share was declared in April 2023 - Stock-based compensation awarded in Q1 2023 included 257,780 stock options and 75,453 restricted shares[84] - Quarterly cash dividend of $0.78 per share declared on April 20, 2023, payable June 1, 2023[87] - Restrictions on fund transfers from utility subsidiaries are not expected to materially affect dividend payments[85][86] Note 8 Short-Term Debt and Lines of Credit Commercial paper outstanding decreased to $1,258.1 million at March 31, 2023, with a weighted-average interest rate of 5.16%, and the company maintains $3,100.0 million in revolving credit facilities Commercial Paper Outstanding (in millions) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Commercial paper outstanding | $1,258.1 | $1,643.5 | $(385.4) | | Weighted-average interest rate on commercial paper | 5.16% | 4.64% | 0.52% | Short-Term Credit Capacity (in millions) | Metric | March 31, 2023 (in millions) | | :--------------------------------------- | :----------------------------- | | Total short-term credit capacity | $3,100.0 | | Commercial paper outstanding | $1,258.1 | | Available capacity under existing agreements | $1,839.6 | Note 9 Long-Term Debt WEC Energy Group issued $1,100.0 million in Senior Notes in January 2023 and an additional $350.0 million in April 2023 to repay short-term debt and for corporate purposes - WEC Energy Group issued $650.0 million of 4.75% Senior Notes due 2026 and $450.0 million of 4.75% Senior Notes due 2028 in January 2023[90] - An additional $350.0 million of 4.75% Senior Notes due 2026 were issued in April 2023[90] - Integrys repurchased $18.9 million of its 6.00% 2013 Junior Notes, prior to maturity, for $18.6 million, resulting in an insignificant gain[91] Note 10 Materials, Supplies, and Inventories Total inventory decreased to $523.5 million at March 31, 2023, primarily due to a significant reduction in natural gas in storage, resulting in a temporary LIFO liquidation credit of $43.8 million Inventory (in millions) | Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :-------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total inventory | $523.5 | $807.1 | $(283.6) | | Natural gas in storage | $137.0 | $446.3 | $(309.3) | | Materials and supplies | $276.6 | $257.0 | $19.6 | - A temporary LIFO liquidation credit of $43.8 million was recorded due to natural gas withdrawals from storage, expected to be replenished by year-end[92] Note 11 Income Taxes Total income tax expense decreased to $74.1 million in Q1 2023, with an effective tax rate of 12.7%, primarily due to Production Tax Credits (PTCs) and federal excess deferred tax amortization Income Tax Expense and Effective Tax Rate (in millions) | Category | Q1 2023 (in millions) | Effective Tax Rate | Q1 2022 (in millions) | Effective Tax Rate | | :--------------------------------------- | :-------------------- | :----------------- | :-------------------- | :----------------- | | Statutory federal income tax | $122.1 | 21.0% | $145.5 | 21.0% | | PTCs | $(66.2) | (11.4)% | $(44.8) | (6.5)% | | Federal excess deferred tax amortization | $(13.1) | (2.3)% | $(15.8) | (2.3)% | | Total income tax expense | $74.1 | 12.7% | $127.1 | 18.3% | - PTCs from renewable generation facilities significantly reduced the effective tax rate[94] Note 12 Fair Value Measurements Derivative assets decreased to $7.7 million and derivative liabilities increased to $169.8 million at March 31, 2023, primarily driven by natural gas contracts, while rabbi trust investments generated net unrealized gains Derivative Assets and Liabilities (in millions) | Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :-------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total derivative assets | $7.7 | $74.8 | $(67.1) | | Total derivative liabilities | $169.8 | $96.6 | $73.2 | - Investments held in rabbi trust recorded $2.8 million of net unrealized gains in Q1 2023, compared to $3.3 million net unrealized losses in Q1 2022[104] - Fair value of long-term debt (including current portion) was $15,349.3 million at March 31, 2023, compared to a carrying amount of $16,524.7 million[106] Note 13 Derivative Instruments The company uses derivatives to manage price volatility risks, with derivative assets decreasing and liabilities increasing at March 31, 2023, primarily due to natural gas contracts, which incurred $75.3 million in realized losses in Q1 2023 - Derivatives are used for risk management, not speculation, and regulated hedging programs are approved by state regulators[107] Derivative Assets and Liabilities (in millions) | Category | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :-------------------------- | :----------------------------- | :----------------------------- | :------------ | | Total derivative assets | $7.7 | $74.8 | $(67.1) | | Total derivative liabilities | $169.8 | $96.6 | $73.2 | Realized Gains (Losses) on Derivative Instruments (in millions) | Contract Type | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Natural gas contracts | $(75.3) | $31.6 | $(106.9) | | FTRs and TCRs | $0.4 | $1.0 | $(0.6) | | Total | $(74.9) | $32.6 | $(107.5) | Note 14 Guarantees The company has total outstanding guarantees of $159.8 million at March 31, 2023, primarily consisting of standby letters of credit and surety bonds for operational and environmental obligations Guarantees (in millions) | Type of Guarantee | Total Committed (in millions) | Less Than 1 Year (in millions) | 1 to 3 Years (in millions) | Over 3 Years (in millions) | | :------------------------ | :---------------------------- | :----------------------------- | :------------------------- | :------------------------- | | Standby letters of credit | $116.3 | $9.5 | $0.2 | $106.6 | | Surety bonds | $33.8 | $33.7 | $0.1 | $0.0 | | Other guarantees | $9.7 | $0.0 | $0.0 | $9.7 | | Total guarantees | $159.8 | $43.2 | $0.3 | $116.3 | Note 15 Employee Benefits Net periodic pension benefit cost shifted to a credit of $(2.5) million in Q1 2023, while OPEB benefits remained a credit, and escrow accounting for these costs was approved effective January 1, 2023 Net Periodic Pension Benefit Cost (Credit) (in millions) | Component | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Service cost | $6.6 | $12.4 | $(5.8) | | Expected return on plan assets | $(47.4) | $(52.7) | $5.3 | | Net periodic benefit cost (credit) | $(2.5) | $2.0 | $(4.5) | Net Periodic OPEB Benefit Credit (in millions) | Component | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Service cost | $2.5 | $3.8 | $(1.3) | | Expected return on plan assets | $(13.3) | $(17.2) | $3.9 | | Net periodic benefit credit | $(12.3) | $(19.5) | $7.2 | - Escrow accounting for pension and OPEB costs was approved by the PSCW, effective January 1, 2023, leading to regulatory assets for these costs[118] Note 16 Goodwill and Intangibles Goodwill remained unchanged at $3,052.8 million at March 31, 2023, while intangible liabilities, mainly related to Power Purchase Agreements (PPAs) from WECI acquisitions, significantly increased to $635.0 million Goodwill by Segment (in millions) | Segment | Goodwill (in millions) | | :-------------------------- | :--------------------- | | Wisconsin | $2,104.3 | | Illinois | $758.7 | | Other States | $183.2 | | Non-Utility Energy Infrastructure | $6.6 | | Total | $3,052.8 | Intangible Liabilities (in millions) | Category | March 31, 2023 (Net Carrying Amount, in millions) | December 31, 2022 (Net Carrying Amount, in millions) | Change (QoQ) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | :------------ | | PPAs | $626.8 | $327.0 | $299.8 | | Total intangible liabilities | $635.0 | $335.4 | $299.6 | - Amortization related to intangible liabilities for Q1 2023 was $10.4 million, significantly higher than $2.2 million in Q1 2022[125] Note 17 Investment in Transmission Affiliates The company's equity investment in ATC and ATC Holdco increased to $1,921.7 million at March 31, 2023, driven by equity earnings and capital contributions, with ATC's net income for Q1 2023 at $68.8 million Investment in Transmission Affiliates (in millions) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Balance at beginning of period | $1,909.2 | $1,789.4 (Dec 31, 2021) | N/A | | Equity in earnings of transmission affiliates | $43.8 | $41.7 | $2.1 | | Capital contributions | $6.1 | $21.1 | $(15.0) | | Distributions | $37.4 | $34.0 | $3.4 | | Balance at end of period | $1,921.7 | $1,818.2 (March 31, 2022) | N/A | ATC Financial Performance (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Operating revenues | $200.4 | $191.0 | $9.4 | | Net income | $68.8 | $67.5 | $1.3 | Note 18 Segment Information WEC Energy Group operates six segments, with total net income attributed to common shareholders for Q1 2023 at $507.5 million, primarily contributed by Wisconsin and Non-Utility Energy Infrastructure - The company's six segments are Wisconsin, Illinois, Other States, Electric Transmission, Non-Utility Energy Infrastructure, and Corporate and Other[130][131] Net Income Attributed to Common Shareholders by Segment (in millions) | Segment | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Wisconsin | $257.2 | $288.1 | $(30.9) | | Illinois | $113.1 | $113.4 | $(0.3) | | Other States | $33.2 | $31.5 | $1.7 | | Electric Transmission | $29.3 | $27.8 | $1.5 | | Non-Utility Energy Infrastructure | $88.5 | $91.5 | $(3.0) | | Corporate and Other | $(13.8) | $13.6 | $(27.4) | | Total | $507.5 | $565.9 | $(58.4) | Note 19 Variable Interest Entities WEPCo Environmental Trust is a consolidated VIE, while ATC and ATC Holdco are equity method investments due to limited voting rights, despite being VIEs - WEPCo Environmental Trust is a consolidated VIE, with $90.9 million in regulatory assets and $94.1 million in long-term debt at March 31, 2023[140] - ATC and ATC Holdco are VIEs but are accounted for as equity method investments due to limited voting rights, with equity investments of $1,896.2 million and $25.5 million, respectively, at March 31, 2023[141][143] Note 20 Commitments and Contingencies The company has significant unconditional purchase obligations totaling approximately $10.4 billion and faces ongoing environmental compliance and remediation obligations, with legal proceedings not expected to materially impact financial condition - Minimum future commitments for purchase obligations totaled approximately $10.4 billion as of March 31, 2023[151] - The company's ESG Progress Plan aims for 60% reduction in carbon emissions by 2025 and 80% by 2030 (from 2005 baseline), with a net-zero CO2 emissions target by 2050 for its generation fleet[166] - Net-zero methane emissions target by end of 2030 for natural gas distribution operations[166] - The EPA's proposed "supplemental ELG rule" could establish stricter limitations, including a Zero Liquid Discharge (ZLD) requirement for FGD wastewater by December 31, 2029[175] - Regulatory assets for manufactured gas plant sites were $590.6 million and reserves for future environmental remediation were $491.7 million at March 31, 2023[185] Note 21 Supplemental Cash Flow Information Cash paid for interest (net of capitalized amount) was $107.5 million in Q1 2023, up from $68.3 million in Q1 2022. Restricted cash, including funds in rabbi trusts and for debt agreements, totaled $128.0 million at March 31, 2023 Cash Paid for Interest and Income Taxes (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Cash paid for interest, net of capitalized amount | $107.5 | $68.3 | $39.2 | | Cash paid for income taxes, net | $1.0 | $0.7 | $0.3 | Cash, Cash Equivalents, and Restricted Cash (in millions) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | Change (QoQ) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :------------ | | Cash, cash equivalents, and restricted cash | $128.0 | $182.2 | $(54.2) | - Restricted cash includes funds in the Integrys rabbi trust, cash for debt agreements, and cash from renewable generation project acquisitions for construction costs[195] Note 22 Regulatory Environment PGL and NSG filed for natural gas rate increases in Illinois, MERC initiated a rate proceeding in Minnesota, and MGU filed for a rate increase in Michigan, with decisions anticipated in Q4 2023 - PGL and NSG requested natural gas rate increases of $194.7 million and $18.7 million, respectively, in Illinois, with an ICC decision expected in Q4 2023[196] - MERC's rate proceeding in Minnesota resulted in a $37.0 million interim rate increase effective January 1, 2023, and a pending settlement for a $28.8 million increase[200][201] - MGU filed for a $19.1 million natural gas rate increase in Michigan, with a MPSC decision anticipated in Q4 2023[202] - PGL's QIP rider, which recovers infrastructure upgrade costs, is in effect through 2023, with reconciliations from 2016-2022 still pending ICC approval[198][199] Note 23 New Accounting Pronouncements The FASB issued ASU No. 2022-06, extending the relief for applying GAAP to contracts affected by reference rate reform (LIBOR replacement) to December 31, 2024 - FASB extended relief for reference rate reform (LIBOR replacement) accounting to December 31, 2024[206] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition, operations, and corporate developments, including strategic goals, sustainability, and liquidity Corporate Developments WEC Energy Group focuses on long-term value through environmental stewardship, reliability, operating efficiency, financial discipline, customer care, and safety, guided by its ESG Progress Plan Introduction WEC Energy Group is a diversified holding company with natural gas and electric utility operations across four states, a 60% equity interest in ATC, and non-utility energy infrastructure operations - WEC Energy Group is a diversified holding company with utility operations in four states, a 60% equity interest in ATC, and non-utility energy infrastructure[209] Corporate Strategy The company's corporate strategy aims to build long-term value for shareholders and customers by focusing on environmental stewardship, reliability, operating efficiency, financial discipline, customer care, and safety - Corporate strategy focuses on environmental stewardship, reliability, operating efficiency, financial discipline, customer care, and safety[210] - The ESG Progress Plan is a roadmap for cutting emissions, maintaining reliability, delivering customer savings, and growing energy investments[210] Creating a Sustainable Future The ESG Progress Plan involves retiring older fossil-fueled generation and investing approximately $5.4 billion in regulated renewable energy and clean natural gas, targeting significant carbon and methane emission reductions - ESG Progress Plan includes retiring older fossil-fueled generation and replacing it with zero-carbon renewables and clean natural gas[212] - Goals: 60% carbon emission reduction by end of 2025, 80% by end of 2030 (from 2005 baseline), and net-zero CO2 emissions by 2050 for electric generation fleet[212] - Target for natural gas distribution operations: net-zero methane emissions by end of 2030, achieved through operational improvements, equipment upgrades, and Renewable Natural Gas (RNG) use[219] - Expected investment of approximately $5.4 billion from 2023-2027 in regulated renewable energy in Wisconsin, including 1,900 MWs solar, 700 MWs battery storage, and 700 MWs wind[214][216] - Over 1,900 MWs of coal-fired generation retired since 2018; approximately 1,500 MWs of additional fossil-fueled generation expected to retire by end of 2026[213] Reliability The company plans to invest approximately $3.6 billion from 2023 to 2027 in reliability projects to strengthen its generation fleet and distribution networks, including new LNG facilities and pipeline upgrades - Approximately $3.6 billion expected to be spent from 2023-2027 on reliability projects[226] - WE and WG received approval to construct LNG facilities to meet peak demand, targeted for commercial operation by end of 2023 and 2024, respectively[223] - PGL continues its Safety Modernization Program to replace old iron pipes in Chicago's natural gas delivery system[234] Operating Efficiency The company continuously optimizes operating efficiency through initiatives like the Advanced Metering Infrastructure (AMI) program, enhancing customer communication and outage management - Advanced Metering Infrastructure (AMI) program is replacing aging meter-reading equipment to enable two-way communication, reduce manual effort, and enhance outage management[227] Financial Discipline Maintaining financial discipline is crucial for meeting earnings projections, a strong balance sheet, stable cash flows, growing dividends, and quality credit ratings, with projected capital expenditures and acquisitions of $18.1 billion for 2023-2027 - Investment focus remains on regulated utility, non-utility energy infrastructure, and ATC[231] - Non-utility energy infrastructure segment has acquired or agreed to acquire majority interests in eight wind parks and two solar parks, representing over $2.9 billion in committed investments[231] - Total capital expenditures for regulated utility and non-utility energy infrastructure businesses are expected to be approximately $18.1 billion from 2023-2027[232] - Forecasted share of ATC's capital expenditures over the next five years is approximately $2.0 billion[232] Exceptional Customer Care The company is committed to providing exceptional customer care by standardizing digital customer service across all companies to reduce costs, increase flexibility, and enhance consistent service delivery - A multiyear effort is standardizing digital customer service across all companies to improve efficiency and consistency[234] Safety Safety is a core value, with a "Target Zero" mission aiming for zero incidents, accidents, and injuries, reinforced by management and union leadership - "Target Zero" mission aims for zero incidents, accidents, and injuries, reinforced by management and union leadership[236] Results of Operations Consolidated net income attributed to common shareholders decreased by $58.4 million in Q1 2023, primarily due to lower earnings in the Wisconsin and Corporate and Other segments, influenced by increased expenses and lower sales volumes Consolidated Earnings Consolidated net income attributed to common shareholders decreased by $58.4 million to $507.5 million in Q1 2023, with diluted EPS of $1.61, mainly due to decreases in the Wisconsin and Corporate and Other segments Net Income Attributed to Common Shareholders by Segment (in millions) | Segment | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Wisconsin | $257.2 | $288.1 | $(30.9) | | Illinois | $113.1 | $113.4 | $(0.3) | | Other states | $33.2 | $31.5 | $1.7 | | Electric transmission | $29.3 | $27.8 | $1.5 | | Non-utility energy infrastructure | $88.5 | $91.5 | $(3.0) | | Corporate and other | $(13.8) | $13.6 | $(27.4) | | Net income attributed to common shareholders | $507.5 | $565.9 | $(58.4) | | Diluted earnings per share | $1.61 | $1.79 | $(0.18) | - Wisconsin segment earnings decreased $30.9 million due to higher operating expenses (transmission, depreciation, regulatory amortizations) and lower electric/natural gas sales volumes from warmer weather, partially offset by 2023 rate orders[239] - Corporate and other segment shifted from $13.6 million net income to a $13.8 million net loss, driven by higher interest expense and lower earnings from equity method investments, partially offset by gains from Integrys rabbi trust investments[239] - Expected 2023 annual effective tax rate is between 13.0% and 14.0%[240] Non-GAAP Financial Measures The company uses non-GAAP financial measures, electric margins and natural gas margins, to evaluate utility operations by excluding revenue fluctuations from fuel and natural gas costs passed through to customers - Electric margins (electric revenues less fuel and purchased power costs) and natural gas margins (natural gas revenues less cost of natural gas sold) are non-GAAP measures used to evaluate utility operations[241][242] - These non-GAAP measures exclude the majority of revenue fluctuations caused by changes in fuel and natural gas expenses, which are typically passed through to customers[242] Wisconsin Segment Contribution to Net Income Attributed to Common Shareholders The Wisconsin segment's net income decreased by $30.9 million (10.7%) to $257.2 million in Q1 2023, primarily due to a $93.3 million increase in other operating expenses and lower sales volumes, partially offset by increased margins from 2023 rate orders Wisconsin Segment Net Income and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income attributed to common shareholders | $257.2 | $288.1 | $(30.9) | | Total electric and natural gas margins | $1,076.0 | $1,038.6 | $37.4 | | Other operation and maintenance | $380.8 | $312.6 | $(68.2) | | Depreciation and amortization | $207.3 | $187.1 | $(20.2) | | Property and revenue taxes | $46.1 | $41.2 | $(4.9) | | Interest expense | $150.6 | $136.3 | $(14.3) | | Income tax expense | $65.9 | $95.4 | $29.5 | - Electric utility margins increased $11.1 million, driven by $81.5 million from 2023 rate orders, but offset by $31.0 million negative impact from fuel/purchased power cost collections and $26.6 million from lower sales volumes due to warmer weather[254][257] - Natural gas utility margins increased $26.3 million, driven by $55.7 million from 2023 rate orders, but offset by $27.7 million from lower sales volumes due to warmer weather[256] - Other operating expenses increased $93.3 million, including $30.2 million in transmission expense, $20.2 million in depreciation, $17.3 million in regulatory amortizations, and $7.9 million in We Power lease expenses[257][258] - Q1 2023 weather was significantly warmer than Q1 2022, with heating degree days down 14.8% in Milwaukee and 12.7% in Green Bay[249] Illinois Segment Contribution to Net Income Attributed to Common Shareholders The Illinois segment's net income slightly decreased by $0.3 million (0.3%) to $113.1 million in Q1 2023, as higher natural gas margins were offset by increased interest expense and operating expenses Illinois Segment Net Income and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income attributed to common shareholders | $113.1 | $113.4 | $(0.3) | | Total natural gas margins | $360.5 | $351.1 | $9.4 | | Interest expense | $21.6 | $17.7 | $(3.9) | - Natural gas utility margins increased $9.7 million, primarily due to a $6.2 million increase in revenues from PGL's SMP project and increases in late payment charges and fixed customer charges[268] - Other operating expenses increased $2.5 million, driven by a $1.7 million increase in depreciation and amortization from SMP investment, partially offset by a $2.7 million decrease in natural gas distribution and maintenance costs[272] - Natural gas sales volumes decreased by 130.3 million therms (13.5%) due to warmer winter weather (heating degree days down 15.3%)[265] Other States Segment Contribution to Net Income Attributed to Common Shareholders The Other States segment's net income increased by $1.7 million (5.4%) to $33.2 million in Q1 2023, driven by a $6.8 million increase in natural gas margins from an interim rate increase, partially offset by lower sales volumes and higher operating expenses Other States Segment Net Income and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income attributed to common shareholders | $33.2 | $31.5 | $1.7 | | Total natural gas margins | $90.8 | $84.0 | $6.8 | | Property and revenue taxes | $7.4 | $4.8 | $(2.6) | - Natural gas utility margins increased $6.8 million, primarily due to a $9.0 million interim rate increase at MERC, partially offset by a $3.8 million decrease from lower sales volumes due to warmer weather[276] - Other operating expenses increased $3.1 million, driven by a $2.6 million increase in property and revenue taxes and a $1.1 million increase in bad debt expense[277][280] - Natural gas sales volumes decreased by 78.0 million therms (14.6%) due to warmer winter weather (heating degree days down 10.0% for MERC, 15.3% for MGU)[274] Electric Transmission Segment Contribution to Net Income Attributed to Common Shareholders The Electric Transmission segment's net income increased by $1.5 million (5.4%) to $29.3 million in Q1 2023, primarily due to a $2.1 million increase in equity in earnings of transmission affiliates from continued capital investment by ATC Electric Transmission Segment Net Income and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income attributed to common shareholders | $29.3 | $27.8 | $1.5 | | Equity in earnings of transmission affiliates | $43.8 | $41.7 | $2.1 | - Increase in equity in earnings of transmission affiliates was primarily due to continued capital investment by ATC[281] Non-Utility Energy Infrastructure Segment Contribution to Net Income Attributed to Common Shareholders The Non-Utility Energy Infrastructure segment's net income decreased by $3.0 million (3.3%) to $88.5 million in Q1 2023, mainly due to a $15.2 million decrease in operating income, partially offset by a $12.9 million increase in income tax benefit from PTCs Non-Utility Energy Infrastructure Segment Net Income and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income attributed to common shareholders | $88.5 | $91.5 | $(3.0) | | Operating income | $90.4 | $105.6 | $(15.2) | | Interest expense | $19.9 | $17.2 | $(2.7) | | Income tax benefit | $(17.8) | $(4.9) | $12.9 | - Operating income decreased $15.2 million due to a one-time revenue recognition in Q1 2022 from SPP market settlements[284] - Income tax benefit increased $12.9 million, primarily due to an $8.6 million increase in PTCs from the acquisition of three additional renewable generation facilities[286] Corporate and Other Segment Contribution to Net Income Attributed to Common Shareholders The Corporate and Other segment shifted from a net income of $13.6 million in Q1 2022 to a net loss of $13.8 million in Q1 2023, a $27.4 million decrease, driven by higher interest expense and lower other income Corporate and Other Segment Net Income (Loss) and Key Metrics (in millions) | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :--------------------------------------- | :-------------------- | :-------------------- | :------------ | | Net income (loss) attributed to common shareholders | $(13.8) | $13.6 | $(27.4) | | Operating loss | $(3.6) | $(0.5) | $(3.1) | | Other income, net | $8.5 | $11.9 | $(3.4) | | Interest expense | $55.6 | $22.6 | $(33.0) | | Income tax benefit | $(36.9) | $(24.8) | $12.1 | - Interest expense increased $33.0 million due to long-term debt issuances in September 2022 and January 2023, and higher short-term debt interest rates[291] - Other income, net decreased $3.4 million, driven by a $3.1 million net loss from equity method investments in Q1 2023, compared to $11.3 million net earnings in Q1 2022[290] Liquidity and Capital Resources The company expects to maintain adequate liquidity through internal cash generation and capital market access, despite decreased operating cash flows and increased investing activities in Q1 2023 Overview The company plans to meet its short-term and long-term cash requirements through internally generated cash from operations and access to capital markets - Liquidity will be maintained through internal cash generation and access to capital markets (commercial paper, term loans, debt securities)[318] Cash Flows Net cash provided by operating activities decreased by $280.7 million in Q1 2023, while net cash used in investing activities increased by $929.7 million, and net cash from financing activities increased by $1,124.1 million Cash Flow Activities (in millions) | Activity | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (YoY) | | :-------------------------- | :-------------------- | :-------------------- | :------------ | | Operating activities | $796.1 | $1,076.8 | $(280.7) | | Investing activities | $(1,267.9) | $(338.2) | $(929.7) | | Financing activities | $417.6 | $(706.5) | $1,124.1 | - Operating cash flow decreased due to higher collateral paid ($363.8 million), higher O&M payments ($74.2 million), and higher interest payments ($39.2 million), partially offset by higher customer collections ($203.2 million)[295] - Investing cash flow increased due to acquisitions of Sapphire Sky ($442.6 million), Samson I ($249.4 million), Whitewater ($76.0 million), and a $115.9 million increase in capital expenditures[297] - Financing cash flow increased due to $1,100.0 million in long-term debt issuances, lower net repayments of commercial paper ($62.5 million), and lower common stock purchases ($16.5 million), partially offset by higher debt retirements ($19.8 million) and dividends paid ($16.5 million)[301] Cash Requirements Significant cash requirements include capital and investment expenditures, debt retirement, interest payments, common stock dividends, and ongoing operations, with projected capital expenditures and acquisitions for 2023-2025 totaling $11.27 billion Projected Capital Expenditures and Acquisitions (2023-2025, in millions) | Segment | 2023 (in millions) | 2024 (in millions) | 2025 (in millions) | Total (2023-2025) | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :------------------ | | Wisconsin | $2,530.7 | $2,432.8 | $2,445.5 | $7,409.0 | | Illinois | $557.1 | $659.5 | $614.0 | $1,830.6 | | Other states | $111.8 | $115.0 | $104.7 | $331.5 | | Non-utility energy infrastructure | $747.0 | $683.8 | $217.2 | $1,648.0 | | Corporate and other | $28.1 | $17.0 | $2.7 | $47.8 | | Total | $3,974.7 | $3,908.1 | $3,384.1 | $11,266.9 | - Key capital projects include utility system upgrades (aging infrastructure, AMI), solar, wind, battery storage, clean natural gas-fired generation, and LNG facilities[307][311][315] - PGL is continuing its Safety Modernization Program with projected average annual investment of $280-$300 million through 2025[312] - Expected capital contributions to ATC are approximately $244 million from 2023-2025[313] - Current quarterly dividend rate is $0.78 per share, or $3.12 annually[315] Sources of Cash The company relies on internal cash generation and capital market access, maintaining $3,100.0 million in revolving credit facilities, and deems its liquidity adequate despite current liabilities exceeding current assets - Cash from operations and capital markets access are primary liquidity sources[318] - WEC Energy Group and its key utility subsidiaries maintain bank back-up credit facilities totaling $3,100.0 million, with $1,839.6 million available capacity at March 31, 2023[319][89] - Current liabilities exceeded current assets by $927.3 million at March 31, 2023, but liquidity is deemed adequate[322] Capitalization Structure The company's actual debt to total capitalization ratio was 60.5% at March 31, 2023, with an adjusted ratio of 59.7% reflecting rating agency treatment of certain junior notes as equity Capitalization Structure (in millions) | Metric | Actual (in millions) | Adjusted (in millions) | | :--------------------------------------- | :------------------- | :------------------- | | Common shareholders' equity | $11,636.6 | $11,886.6 | | Long-term debt (including current portion) | $16,635.5 | $16,385.5 | | Short-term debt | $1,261.2 | $1,261.2 | | Total capitalization | $29,563.7 | $29,563.7 | | Ratio of debt to total capitalization | 60.5% | 59.7% | - The adjusted capitalization reflects rating agency treatment of $250.0 million of 2007 Junior Notes as equity[327][328] Credit Rating Risk The company is in compliance with all debt covenants, and while a credit rating downgrade could impact capital market access, S&P Global Inc. affirmed ratings in May 2023, revising its outlook to negative from stable - Company is in compliance with all debt covenants[329] - S&P Global Inc. affirmed WEC Energy Group's ratings on May 2, 2023, but revised its outlook to negative from stable, citing weakening financial measures[332] - A sub-investment grade rating for WE could require $100 million in additional collateral for a PPA[330] Factors Affecting Results, Liquidity, and Capital Resources This section discusses various regulatory, legislative, legal, environmental, and market risks that could impact the company's financial performance, liquidity, and capital resources Regulatory, Legislative, and Legal Matters Regulatory approvals, legislative changes like Illinois' CEJA, federal actions on solar panels, and FERC proposals regarding ROE incentives for transmission organizations could impact the company's costs and earnings - PGL's QIP rider reconciliations for 2016-2022 are pending ICC approval, with no assurance of full cost recovery[336] - Illinois' CEJA, effective January 1, 2023, prohibits natural gas utilities from charging late payment fees to certain low-income residential customers[342] - UFLPA and DOC investigations on solar panels could cause delays and impact costs for solar projects, despite a 24-month tariff moratorium[343][344][345] - The IRA provides significant energy-related provisions, including extended tax benefits for renewables, higher PTC rates, and transferability of tax credits, which are expected to reduce investment costs[347] - FERC's proposed rule to limit the 50 basis point ROE incentive for transmission organization membership could reduce future after-tax equity earnings from ATC by approximately $7 million annually[348] - The D.C. Circuit Court of Appeals remanded FERC's ROE orders for MISO transmission owners, including ATC, for additional proceedings, potentially leading to further refunds[356] Environmental Matters The company faces significant environmental compliance and remediation obligations related to air, water, and land quality, requiring ongoing investments and potentially leading to stricter limitations - EPA's final Good Neighbor Plan (March 2023) requires significant NOx emission reductions, which the company believes it is well-positioned to meet[154] - EPA's proposed MATS revisions (April 2023) could lower PM limits, potentially impacting operations[156] - EPA's proposed revision to the annual PM2.5 standard (January 2023) to 9-10 µg/m3 could affect permitting for smaller ancillary equipment if lowered below 10 µg/m3[161][162] - The proposed "supplemental ELG rule" (March 2023) would establish stricter limitations, including a ZLD requirement for FGD wastewater by December 31, 2029[175] - The Supreme Court's decision on the WOTUS definition (expected Q2 2023) will provide clarity on federal jurisdiction over wetlands[179] - EPA is drafting regulations for CCR storage at inactive "legacy units" and considering corrective action requirements for all CCR contamination, with a proposed rule expected in summer 2023[186] Market Risks and Other Significant Risks The company is exposed to market and other significant risks, including inflation and supply chain disruptions, which it manages through various strategies, while the Russia-Ukraine conflict presents ongoing global economic uncertainty - Inflation and supply chain disruptions are ongoing risks, managed through pricing strategies, productivity improvements, and cost reductions[356] - The Russia-Ukraine conflict creates uncertainty for the global economy, supply chains, and fuel prices[355] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to market risk disclosures from the 2022 Annual Report on Form 10-K, with additional information provided in Management's Discussion and Analysis and financial notes - No material changes to market risk disclosures from the 2022 Annual Report on Form 10-K[360] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting during Q1 2023 Disclosure Controls and Procedures Management, including principal executive and financial officers, evaluated and concluded that the company's disclosure controls and procedures were effective as of March 31, 2023 - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023[361] Changes in Internal Control Over Financial Reporting There were no material changes in the company's internal control over financial reporting during the first quarter of 2023 - No material changes in internal control over financial reporting during Q1 2023[362] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, unregistered sales of equity securities, and exhibits, providing additional context to the financial information ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal and administrative proceedings, including a class action lawsuit, but management believes their ultimate resolution will not materially impact financial condition - A putative class action lawsuit, Munt, et al. v. WEC Energy Group, Inc., et al., was filed in May 2022, alleging breaches of fiduciary duties related to the Employee Retirement Saving Plan[368] - Management believes the ultimate resolution of legal proceedings will not materially impact financial condition or results of operations[367] ITEM 1A. RISK FACTORS There were no material changes to the risk factors disclosed in the 2022 Annual Report on Form 10-K - No material changes to risk factors from the 2022 Annual Report on Form 10-K[369] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During Q1 2023, the company purchased 17,270 shares of its equity securities at an average price of $93.88 per share, primarily from employees to satisfy tax withholding obligations Equity Securities Purchased (Q1 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------- | :----------------------------- | :--------------------------- | | January 1 – January 31 | 17,270 | $93.88 | | Total (Q1 2023) | 17,270 | $93.88 | - Shares were surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock[371] ITEM 6. EXHIBITS This section lists the exhibits filed or furnished with the report, including instruments defining security holders' rights, certifications, and Interactive Data Files (XBRL) - Exhibits include Securities Resolution No. 14, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and Interactive Data Files (XBRL)[373] SIGNATURE The report is signed by William J. Guc, Vice President and Controller, as the Duly Authorized Officer and Chief Accounting Officer of WEC Energy Group, Inc. - Report signed by William J. Guc, Vice President and Controller, on May 4, 2023[376]