Energy Group Inc. (NYSE: WEC). Management recently laid out plans to boost its five-year capex plan to $16.1 billion from $15.0 billion. The plan includes investments in renewable assets that will improve the company’s generation mix. Based on our projections, the generation mix will improve to roughly 30% coal, 45% natural gas, and 25% renewables by 2026. The compares to 2019, when owned generation assets consisted of roughly 49% coal, 45% natural gas/oil, and 6% renewables.
WEC ranks among the largest generators of electricity, and is the largest in the Midwest. Over 99% of the company’s earnings come from regulated operations, which we view as more reliable than nonregulated operations. Additionally, the Federal Reserve has lowered interest rates, which has driven utility valuations higher.
The beta on WEC shares is 0.95.
Wisconsin Energy recently reported third-quarter results that exceeded Street expectations. GAAP net income came to $267 million or $0.84 per share, up 14% year-over-year, driven by favorable weather, strong residential demand, and lower operational and maintenance expense.
The company is targeting 5%-7% EPS growth over the long term. WEC management also increased its guidance for capital spending during the next five years to $16.1 billion from a prior estimate of $15.0 billion. The spending plan was also rebranded as an ‘ESG Progress Plan’ that will include coal plant retirements and new investments in renewable assets.
EARNINGS & GROWTH ANALYSIS
In 3Q20, retail deliveries of electricity – excluding the iron ore mines in Michigan’s Upper Peninsula – declined by 0.3%. Residential electricity use jumped by 7.1%, as increased work from home and favorable weather boosted consumer usage. Meanwhile, small commercial and industrial sales declined 2.5% and large commercial and industrial sales decreased by 4.5%, though these declines were more modest than in the second quarter.
The 3Q operating margin improved to 22.4%. The improvement reflected operating and maintenance expense that declined 5.8% year-over-year to $499 million, depreciation and amortization that increased 4.8% to $245 million, and a cost of sales that remained roughly flat at $483 million.
On growth, management has outlined its five-year $16.1 billion ESG Progress Plan. The plan features asset retirements for 1,800 MW of coal and less efficient gas generation capacity; the building of 800 MW of new solar capacity, 600 MW of battery storage, and 100 MW of wind and 100 MW of RICE generation; and investments in 200 MW of combined cycle gas generation. We view these developments positively, as they should help the firm achieve a more favorable generation mix that favors renewables.
Because of the pandemic, educational and work places are expected to use hybrid models in which facilities such as schools, factories and offices are only partly staffed and occupied. At the same time, home working and learning will be maintained, keeping residential usage elevated. We therefore expect kWh demand for commercial and industrial customers to recover while remaining above-average for residential customers.
We are also maintaining our 2021 estimate of $4.01 per share.
FINANCIAL STRENGTH & DIVIDEND
The company is targeting dividend growth in line with earnings growth, and a payout ratio in the 65%-70% range.
MANAGEMENT & RISKS
Kevin Fletcher, has served as CEO since February 2019. He was previously the company president from October 2018. He replaced Gale Klappa, who remains chairman of the company. Messrs. Fletcher and Klappa were previously executives at Southern Co.
Risks to WEC’s regulated utilities include cooler-than-normal summers, while the gas distribution business faces the risk of warmer-than-normal winter temperatures, which decrease demand for air conditioning and heating, respectively. With rates low, nationwide ROE for utilities may drop. However, we view the regulatory climate in Wisconsin as favorable to utilities, as demonstrated by interim rate awards, relatively prompt rate orders, and full consideration of updated test periods.
WEC Energy Group, based in Milwaukee, is an energy company serving 4.5 million electric customers in Wisconsin, Illinois, Michigan and Minnesota. The company’s other major subsidiary, We Power, designs, builds, and owns electric generating plants.
On November 19 at midday, BUY-rated WEC traded at $94.97, down $1.78.