WEC Energ Group Inc

WEC Energy Group reported second-quarter operating earnings per share of $0.91, up from $0.76 in the same year-ago period.

Why it matters: Second-quarter earnings benefited from continued regulated investments. Management reaffirmed its 2026 EPS guidance of $5.51 to $5.61, in line with our estimates.

The bottom line: We are maintaining our $116 fair value estimate per share and narrow moat rating. WEC Energy trades at a slight discount to our fair value as of July 29, compared with our view that the US utilities sector is 5% overvalued making WEC among the cheapest US utilities we cover. Management maintained its 7%-8% long-term annual earnings growth target beginning in 2028. We expect WEC to reach the high end of that range.

Long view: WEC Energy maintained its $37.5 billion capital investment plan, which is the main driver of our earnings growth estimate. WEC Energy's rate case for new rates in Wisconsin remains ongoing. WEC proposed a modest 10-basis-point increase in allowed return on equity to 9.9%. We expect continued constructive treatment with a decision by year-end. Construction at the Microsoft data center campus remains on schedule.

Coming up: Investors remain concerned about the company's Port Washington data center campus. The Very Large Customer Tariff, which was approved by regulators earlier this year, provides a framework for attracting new data centers. However, Oracle, the main customer, is working to meet the stricter collateral requirements mandated under the tariff. WEC Energy management reaffirmed its confidence that Oracle can meet the new requirements and the project remains on track. We think other data center customers would be interested in the site if Oracle were to fail to meet the conditions. An upcoming gubernatorial election in Wisconsin could create uncertainty around stakeholder relations in the state, however, WEC Energy has consistently worked successfully with both political parties in the past.

Our fair value estimate is $116 after incorporating year-to-date financial and regulatory updates.

We forecast annual earnings growth through our five-year forecast at the high end of management's 7%-8% guidance range. We forecast stable allowed returns on equity and assume consistent regulatory treatment at its Midwest utilities.

We forecast $37.5 billion of capital expenditures through 2030 at the company's regulated operations, in line with management's plan. We forecast WEC will complete investments in natural gas power generation, Illinois pipe replacement, and renewable energy.

In our discounted cash flow valuation, we use a 5.9% cost of capital based on a 7.5% cost of equity. This is lower than the 9% rate of return we expect investors will demand for a diversified equity portfolio, reflecting WEC Energy Group's lower sensitivity to the economic cycle and lower degree of operating leverage.

We recently lowered our cost of capital assumption to reflect modest adjustments to our risk-free rate assumptions. Our assessment of the company's business risk is unchanged.

We assign WEC Energy Group a narrow moat.

Service territory monopolies and efficient scale advantages are the primary sources of economic moat for regulated utilities. State and federal regulators typically grant regulated utilities exclusive rights to charge customers rates that allow the utilities to earn a fair return on and return of the capital they invest to build, operate, and maintain their distribution networks.

In exchange for regulated utilities’ service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

This implicit contract between regulators and capital providers should, on balance, allow regulated utilities to outearn their costs of capital, though observable returns might vary in the short run based on demand trends, investment cycles, operating costs, and access to financing. Intuitively, utilities should have an economic moat based on efficient scale, but in some cases regulation offsets this advantage, preventing excess returns on capital. The risk of adverse regulatory decisions precludes regulated utilities from earning wide economic moat ratings.

However, the threat of material value destruction is low, and normalized returns exceed costs of capital in most cases, leaving us comfortable assigning narrow moat ratings to many regulated utilities.

Wisconsin, representing nearly two thirds of WEC Energy's business, is a favorable regulatory environment with a forward-looking test year and allowed returns above the national average.

The company's capital investment plan supports our forecast for annual earnings growth to be in the upper end of management's 7%-8% guidance range.

WEC has numerous growth opportunities across its operating subsidiaries, particularly in the southeastern Wisconsin economic development area.

WEC Energy's large investment plan increases regulatory risk.

Regional economic opportunities might not pan out, lowering long-term growth opportunities.

As with all regulated utilities, rising interest rates will raise financing costs and could make the dividend less attractive for income investors.