WEC ENERGY GROUP, INC. Annual Report - A Deep Dive for Investors

Unlock the insights into WEC Energy Group's performance over the past year. This summary cuts through the jargon, offering a clear picture of the company's operations, financial health, key achievements, challenges, and future prospects. Our goal is to equip you with the knowledge needed to make informed investment decisions.

1. Business Overview

WEC Energy Group stands as a prominent energy company, primarily delivering regulated electricity and natural gas. It serves approximately 4.7 million customers across Wisconsin, Illinois, Michigan, and Minnesota through its utility subsidiaries, including We Energies and North Shore Gas. Beyond these core utility operations, WEC Energy Group also owns and operates non-utility energy infrastructure, such as renewable energy projects and power plants, under its "We Power" segment. The company aims to provide safe, reliable, and affordable energy to its customers while actively transitioning to a cleaner energy portfolio.

2. Financial Performance

WEC Energy Group delivered robust financial results for the fiscal year ending December 31, 2023:

• Total Revenue: Reached approximately $9.2 billion, up 4.5% from the previous year. Rate adjustments in its regulated utilities and increased sales from its non-utility energy infrastructure primarily drove this growth.
• Net Income: Increased to $1.65 billion, a 7.8% rise year-over-year.
• Diluted Earnings Per Share (EPS): Grew to $5.20, up 7.2% compared to the prior year. This increase reflects efficient cost management and strategic investments.
• Capital Expenditures: The company invested approximately $2.5 billion in infrastructure upgrades and new energy projects, crucial for maintaining reliability and advancing its clean energy transition.

Notably, the "We Power" segment, which includes investments in renewable energy and other non-utility generation, contributed approximately 10% to total revenues, demonstrating the company's growing diversification beyond traditional regulated utilities.

3. Risk Factors

Investors should understand several key risks that could affect WEC Energy Group's operations and financial performance:

• Regulatory Risk: As a regulated utility, state regulatory commissions heavily influence WEC Energy Group's earnings. Unfavorable rate case outcomes, delays in recovering costs, or new environmental mandates could impact profitability and the company's ability to recoup investments.
• Interest Rate Risk: Sustained increases in interest rates could significantly raise the cost of financing the company's extensive capital expenditure program. This might impact earnings and dividend growth, as utilities require substantial capital.
• Customer Concentration Risk: While diversified, a portion of the company's revenue comes from large industrial customers. For instance, the top 10 industrial customers account for approximately 8% of total utility revenue. A significant reduction in energy consumption or the loss of one of these major customers could noticeably impact revenue.
• Operational and Infrastructure Risk: The company operates complex infrastructure vulnerable to outages, equipment failures, or cyberattacks. Such incidents could lead to service disruptions, significant repair costs, regulatory penalties, and reputational damage.
• Environmental and Climate Change Risk: More frequent and intense extreme weather events (e.g., storms, heatwaves) can damage infrastructure and increase operational costs. Evolving climate policies, including carbon reduction mandates, could also necessitate costly investments in new technologies or compliance measures, or result in stranded assets.
• Supply Chain Risk: Disruptions in global supply chains can cause delays and increase costs for critical components, especially for large-scale energy projects (e.g., renewable energy components, transmission equipment). This impacts project timelines and budgets.

4. Management Discussion & Analysis (MD&A) Highlights

WEC Energy Group demonstrated solid operational performance in 2023, effectively navigating a dynamic energy landscape. Approved rate adjustments in its regulated utilities and increased sales from its non-utility energy infrastructure primarily drove the increase in total revenue and net income, reflecting steady demand for its essential services. Efficient cost management and strategic investments also contributed to the growth in diluted earnings per share.

Major Wins: The company made significant strides in expanding its renewable energy portfolio, reinforcing its commitment to sustainability and future growth:

• Hardin Solar III Energy Center: This 150-megawatt (MW) solar project is on track to become operational in February 2025, adding substantial clean energy capacity.
• Delilah Solar Energy LLC: A 100 MW solar project, completed in December 2024, further diversifies the company's generation mix.
• Maple Flats: This 90 MW project was completed in November 2024, contributing additional renewable capacity.
• Sapphire Sky Wind Energy LLC (150 MW) and Samson I (250 MW): These significant wind projects came online in February 2023, already contributing to WEC Energy Group's clean energy goals.
• Existing facilities like Whitetail Wind Energy Generating Facility, West Riverside Energy Center, Red Barn Wind Park, and Whitewater Cogeneration Facility continued their strong performance, ensuring reliable power generation.

These investments underscore a clear strategic pivot towards cleaner energy sources, aligning with regulatory trends and customer preferences, and are central to the company's long-term strategy.

Challenges: The company faced several headwinds during the year:

• Rising Interest Rates: Increased borrowing costs impacted financing for new capital projects, though WEC Energy Group's strong credit profile helped mitigate some of this pressure.
• Supply Chain Disruptions: Delays and increased costs for critical components, particularly for renewable energy projects, led to some project timeline adjustments and cost overruns.
• Regulatory Scrutiny: Ongoing rate case proceedings and evolving environmental regulations required significant resources and careful navigation to ensure fair returns while meeting compliance standards.
• Extreme Weather Events: Several severe weather incidents led to increased operational expenses for infrastructure repair and restoration efforts.

Liquidity and Capital Resources: The company's financial health demonstrates strong cash flows from operations and access to capital markets, which supports its extensive capital expenditure program. Management actively monitors its debt maturity profile and maintains credit facilities to ensure adequate liquidity.

Critical Accounting Policies and Estimates: Management's discussion also highlights critical accounting policies and estimates, particularly those related to regulatory assets and liabilities, depreciation, asset retirement obligations, and environmental remediation costs. These areas involve significant judgment and assumptions that could materially impact the financial statements.

Leadership and Strategy: WEC Energy Group clearly defines its strategic direction through an aggressive pursuit of clean energy. The company aims to achieve a 60% reduction in carbon emissions from its electric generation fleet by 2025 (from 2005 levels) and net-zero carbon emissions by 2050. A robust capital plan focused on renewable energy and grid modernization supports this strategy. The company utilizes a comprehensive executive compensation program, including employee stock options, restricted stock units for management and directors, and performance shares, which aligns leadership interests with long-term shareholder value creation.

5. Financial Health

WEC Energy Group maintains a solid financial position, essential for a capital-intensive utility:

• Cash and Cash Equivalents: Approximately $350 million as of year-end, providing immediate liquidity.
• Total Debt: Totaled approximately $18.5 billion, primarily comprising long-term bonds and notes.
• Net Debt to EBITDA: Approximately 4.0x, a level within industry norms for a regulated utility, indicating a manageable debt load relative to its earnings.
• Credit Ratings: The company holds strong investment-grade credit ratings (e.g., A- from S&P, A3 from Moody's). These ratings reflect its stable cash flows and prudent financial management, which helps secure favorable borrowing terms and access to capital markets.

The company uses convertible debt as part of its financing strategy. This includes WEC 3.375% Convertible Notes due June 1, 2028 (approximately $750 million principal), WEC 4.375% Convertible Notes due June 1, 2027 (approximately $500 million principal), and WEC 4.375% Convertible Notes due June 1, 2029 (approximately $600 million principal). These notes offer lower interest rates than traditional debt but could dilute existing shares if converted into common stock, typically when the stock price reaches a certain threshold.

6. Future Outlook

WEC Energy Group is well-positioned for continued growth, driven by its strategic investments and the ongoing energy transition. The company projects annual capital expenditures of approximately $3.0 billion over the next five years, primarily directed towards:

• Renewable Energy: Further expanding its solar and wind generation capacity to meet clean energy goals.
• Grid Modernization: Enhancing the reliability, resilience, and efficiency of its transmission and distribution networks to support electrification and distributed generation.
• Natural Gas Infrastructure: Maintaining and upgrading its gas delivery systems to ensure safety and reliability.

Management anticipates annual earnings per share growth in the range of 5-7% over the next several years. Growth in its regulated assets and disciplined cost management will support this. The company also maintains a commitment to a growing dividend, targeting a payout ratio of 65-70% of earnings, which reflects confidence in future cash flows.

Several overarching trends significantly shape the company's future:

• Decarbonization and Clean Energy Transition: This dominant trend stems from state-level Renewable Portfolio Standards (RPS), federal incentives like the Inflation Reduction Act (IRA), and increasing corporate and consumer demand for clean energy. WEC Energy Group's substantial investments in renewables directly capitalize on this trend.
• Electrification: The push to electrify transportation and industrial processes will increase demand for electricity, providing a long-term growth driver for utilities.
• Grid Modernization: The need for a more resilient, intelligent, and secure grid to handle distributed energy resources and extreme weather events represents a continuous investment area.
• Cybersecurity: The increasing threat of cyberattacks on critical infrastructure necessitates ongoing investment in robust cybersecurity measures.
• Environmental Regulations: Evolving state and federal environmental regulations, particularly concerning emissions and water quality, will continue to influence operational costs and investment priorities.

WEC Energy Group's proactive approach to these trends, especially in renewable energy, positions it to adapt and thrive in an evolving energy landscape.

7. Competitive Position

As a regulated utility, WEC Energy Group operates largely as a geographic monopoly within its designated service territories for electricity and natural gas delivery. This regulatory framework provides stable, predictable revenue streams. Competition primarily arises in specific areas:

• Wholesale Energy Markets: For its "We Power" segment, the company competes to sell power to other utilities or large industrial customers in competitive wholesale markets.
• New Generation Projects: When developing new power generation facilities, particularly renewable projects, the company may compete with independent power producers or other utilities for project sites, permits, and power purchase agreements.
• Customer Choice Programs: In some limited areas or for certain customer segments, customers may have options for energy suppliers, though WEC's regulated utilities typically retain physical energy delivery.
• Energy Efficiency and Distributed Generation: The rise of energy efficiency technologies and customer-sited distributed generation (e.g., rooftop solar) can reduce demand for utility-provided energy, posing a form of indirect competition.

The company's competitive advantage stems from its efficient operations, strong regulatory relationships built on a history of reliable service, and strategic investments in modern, diversified infrastructure. These factors allow it to provide reliable service at competitive rates within its regulated footprint, while its growing renewable energy portfolio enhances its position in the broader energy transition.