WEC Energy Group (WEC) Risk Analysis

We are subject to significant state, local, and federal governmental regulations, including regulations by the various utility commissions in the states where we serve customers. These regulations significantly influence our operating environment, may affect our ability to recover costs from utility customers, affect our ability to implement our corporate strategy, and cause us to incur substantial compliance and other costs. Changes in regulations, interpretations of regulations, or the imposition of new regulations could also significantly impact us, including requiring us to change our business operations. Many aspects of our operations are regulated and impacted by government regulation, including, but not limited to: the rates we charge our retail electric, natural gas, and steam customers; the authorized rates of return of our utilities; construction and operation of electric generating facilities and electric and natural gas distribution systems, including the ability to recover such costs; decommissioning generating facilities, the ability to recover the related costs, and continuing to recover the return on the net book value of these facilities; wholesale power service practices; electric reliability requirements and accounting; participation in the interstate natural gas pipeline capacity market; standards of service; issuance of securities; short-term debt obligations; transactions with affiliates; and billing practices. Failure to comply with any applicable rules or regulations may lead to customer refunds, penalties, and other payments, which could materially and adversely affect our results of operations and financial condition. The rates, including adjustments determined under riders, we are allowed to charge our customers for retail and wholesale services have the most significant impact on our financial condition, results of operations, and liquidity. Rate regulation provides us an opportunity to recover prudently incurred costs and earn a reasonable rate of return on invested capital. However, our ability to obtain rate adjustments in the future is dependent upon regulatory action, the outcome of which can be influenced by the level of opposition by intervening parties; potential rate impacts; increasing levels of regulatory review; and changes in the political, regulatory, or legislative environments. There is no assurance that our regulators will consider all of our costs to have been prudently incurred. In addition, our rate proceedings may not always result in rates that fully recover our costs or provide for a reasonable ROE. We defer certain costs and revenues as regulatory assets and liabilities for future recovery from or refund to customers, as authorized by our regulators. Future recovery of regulatory assets is not assured and is subject to review and approval by our regulators. If recovery of regulatory assets is not approved or is no longer deemed probable, these costs would be recognized in current period expense and could have a material adverse impact on our results of operations, cash flows, and financial condition. Changes in the local and national political, regulatory, and economic environment have had, and may in the future have, an adverse effect on regulatory decisions, which could impair the ability of our utility subsidiaries to recover costs historically collected from customers. These decisions, which may come from any level of government, may cause us to cancel or delay current or planned projects, to reduce or delay other planned capital expenditures, or to pay for investments or otherwise incur costs that our utilities may not be able to recover through rates or otherwise. In November 2023, the ICC issued final rate orders for PGL and NSG, with PGL rates effective December 1, 2023. In the rate order, the ICC disallowed certain previously incurred capital costs in Illinois, which resulted in PGL and NSG recording an impairment loss in the fourth quarter of 2023. In addition, the ICC paused spending on PGL's SMP for at least one year, causing uncertainty of recovery of costs for existing and future projects. Due to the expiration of the QIP rider in December 2023, PGL had included the costs of necessary infrastructure improvements related to the SMP in its rate case. In January 2024, the ICC granted a rehearing to PGL and NSG with a limited scope. Disallowance of PGL's and NSG's capital costs will not be part of the rehearing. Subsequent to the rehearing, we anticipate appealing the ICC's disallowance of these capital costs to the Illinois Circuit Court, which may result in extended uncertainty related to the recovery of existing and future investments in capital expenditures and our natural gas infrastructure in Illinois, and may impact future capital plans. Prior to its expiration, the QIP rider provided PGL with recovery of, and a return on, qualifying natural gas infrastructure investments that are placed in service between regulatory rate reviews. This rider continues to be subject to an annual reconciliation whereby costs are reviewed for accuracy and prudency. There can be no assurance that all costs incurred under the QIP rider during the open reconciliation years, which include 2016 through 2023, will be deemed recoverable by the ICC. Regulatory lag, as well as the risk of costs being deemed unrecoverable during the review of the outstanding reconciliations, could have a material adverse impact on PGL's, and correspondingly our, results of operations, financial position, and liquidity. We believe we have obtained the necessary permits, approvals, authorizations, certificates, and licenses for our existing operations, have complied in all material respects with all of their associated terms, and that our businesses are conducted in accordance with applicable laws. These permits, approvals, authorizations, certificates, and licenses may be revoked or modified by the agencies that granted them if facts develop that differ significantly from the facts assumed when they were issued. In addition, permits and other approvals and licenses are often granted for a term that is less than the expected life of the associated facility. Licenses and permits may require periodic renewal, which may result in additional requirements being imposed by the granting agency. In addition, existing regulations may be revised or reinterpreted by federal, state, and local agencies, or these agencies may adopt new laws and regulations that apply to us. We cannot predict the impact on our business and operating results of any such actions by these agencies. If we are unable to recover costs of complying with regulations or other associated costs in customer rates in a timely manner, or if we are unable to obtain, renew, or comply with these governmental permits, approvals, authorizations, certificates, or licenses, our results of operations and financial condition could be materially and adversely affected.

The production of energy from wind and solar sites depends heavily on suitable weather conditions, which are variable. Wind conditions or solar irradiance that is unfavorable or below our estimates can cause electricity production, and therefore revenues and PTCs earned from non-utility renewable energy facilities, to be substantially below our expectations. We base our decisions about which sites to acquire and operate in part on the findings of studies of long-term meteorological data in the proposed area, which includes wind speed and prevailing direction or solar irradiance and seasonal variations of each. Actual conditions at these sites, however, may not conform to the results of these studies. An increase in frequency and severity of weather conditions could cause disruptions to our sites to become more frequent and severe. Wind and solar equipment can be damaged by natural events such as lightning strikes that damage blades or in-ground electrical systems used to collect electricity from turbines or panels. Sites also may experience production shutdowns or delayed restoration of production during extreme weather conditions resulting in, among other things, damage to solar panels, icing on wind turbine blades, or restricted access to sites. The costs of repairing damage to these facilities may exceed the insurance limits on our insurance policies or may be outside the coverage afforded by our insurance policies. In addition, significant repair costs and/or continuous damage events could cause our insurance premiums to increase or lead to insurance coverage not being available at all. Damage to renewable facilities could also reduce operating capacity and cause the declaration of force majeure events. Customers may raise objections to force majeure declarations for these or similar operating issues. The failure to satisfy minimum operational or availability requirements under the PPAs, including PPAs related to projects under construction, could result in payment of damages or termination of the PPAs. Lower wholesale market prices for electricity may adversely affect the financial results for certain of our renewable projects, depending on the structure of the related PPA. In addition, lower prices for other energy sources may reduce the demand for wind and solar energy development, which could adversely affect our growth prospects and financial condition. Wind and solar energy demand is affected by the price and availability of other fuels, including nuclear, coal, natural gas and oil, as well as other sources of renewable energy. Reduced government incentives for wind and solar energy, increases in operating and maintenance costs, new regulations, or incentives that favor other forms of energy could reduce the demand for renewable energy and may adversely affect our results of operations. We do not own all the property and other sites on which our projects are located, and our rights may be subordinate to the rights of lienholders and leaseholders, which could have an adverse effect on our business and financial condition. Existing and future projects may be located on property on other sites occupied under long-term easements, leases, and rights of way. The ownership interests on these properties may be subject to mortgages securing loans or other liens and other easements, lease rights and rights of way of third parties that were created previously. As a result, some of our real property rights may be subordinate to the rights of these third parties, and the rights of our operating subsidiaries to use the property could be lost or curtailed. We have entered into long-term PPAs for the majority of our non-utility renewable energy operations with a small number of customers where their payment is based on the energy produced, and in some cases the REC value created, by our facilities. Although initial agreements are often ten years or more, in the future we may not be able to replace expiring PPAs related to our non-utility renewable energy facilities with contracts on acceptable terms, including at prices that support operation of the facility on a profitable basis. Decreases in the retail prices of electricity supplied by traditional utilities or the pricing of other clean energy sources in the regions where our non-utility renewable energy facilities are located could harm our ability to offer competitive pricing and to sign PPAs with customers. If we are unable to replace an expiring PPA with an acceptable new revenue contract, we may be required to sell the power produced by the facility at wholesale prices and be exposed to market fluctuations and risks, or the affected site may temporarily or permanently cease operations. If we are unable to replace an expired distributed generation PPA with an acceptable new contract, we may be required to remove the renewable energy facility from the site or, alternatively, we may have to sell the assets, but the sale price may not be sufficient to replace the revenue previously generated by the renewable energy facility. For some of our PPAs, the net amount paid by our PPA counterparties is impacted by wholesale prices at a market hub location different from the location of our renewable site. Systemic shortfalls and disruptions in transmission capacity can cause congestion between the two locations, which along with other factors, can cause price disparity between the market hub and site. This price disparity, known as basis risk, can be significant at times. We attempt to mitigate basis risk where possible, but hedging instruments are often not economically feasible or available in the quantities that we require. Basis risk cannot be entirely eliminated and can adversely affect our financial condition and results of operations. Our non-utility renewable energy facilities are exposed to risks through participation in various regional power markets. Our ability to acquire new non-utility renewable energy facilities or generate revenue from existing facilities depends on having interconnection arrangements with transmission providers and power markets along with a reliable grid. We cannot predict whether transmission facilities will be expanded in specific markets to accommodate or increase competitive access to those markets. If a transmission network to which one or more of our facilities is connected experiences down time for system emergencies, force majeure, safety, reliability, maintenance or other operational reasons, we may lose revenues and PTCs and be exposed to non-performance penalties and claims from our customers. This risk of curtailment of our non-utility renewable energy facilities may result in a reduced return on our investments, and we may not be compensated for lost energy and ancillary services. As members of these RTOs, we are also subject to certain additional risks, including the allocation of losses among existing members caused by unreimbursed defaults of other participants in these markets and resolution of complaint cases seeking refunds of revenues previously earned by members of these markets. Existing, new, or changed rules of these RTOs could result in significant additional fees and increased costs for participation, including the cost of transmission facilities built by others due to changes in transmission rate design. In addition, these RTOs may assess costs resulting from improved transmission reliability, reduced transmission congestion, and firm transmission rights.

As a holding company with no operations of our own, our ability to meet our financial obligations including, but not limited to, debt service, taxes, and other expenses, as well as pay dividends on our common stock, is dependent upon the ability of our subsidiaries to pay amounts to us, whether through dividends or other payments. Our subsidiaries are separate legal entities that are not required to pay any of our obligations or to make any funds available for that purpose or for the payment of dividends on our common stock. The ability of our subsidiaries to pay amounts to us depends on their earnings, cash flows, capital requirements, and general financial condition, as well as regulatory limitations. Prior to distributing cash to us, our subsidiaries have financial obligations that must be satisfied, including, among others, debt service and preferred stock dividends. In addition, each subsidiary's ability to pay amounts to us depends on any statutory, regulatory, and/or contractual restrictions and limitations applicable to such subsidiary, which may include requirements to maintain specified levels of debt or equity ratios, working capital, or other assets. Our utility subsidiaries are regulated by various state utility commissions, which generally possess broad powers to ensure that the needs of the utility customers are being met.

There are a number of factors that impact our credit ratings, including, but not limited to, capital structure, regulatory environment, the ability to cover liquidity requirements, and other requirements for capital. We could experience a downgrade in ratings if the rating agencies determine that our level of business or financial risk, or that of any of our utilities or the utility industry, has deteriorated. Changes in rating methodologies by the rating agencies could also have a negative impact on credit ratings. Any downgrade by the rating agencies could: - Increase borrowing costs under certain existing credit facilities;- Require the payment of higher interest rates in future financings and possibly reduce the pool of creditors;- Decrease funding sources by limiting our access to the commercial paper market;- Limit the availability of adequate credit support for our operations; and - Trigger collateral requirements in various contracts.

Public health crises, including epidemics and pandemics, and any related government responses may adversely impact the economy and financial markets and could have a variety of adverse impacts on us, including a decrease in revenues; increased bad debt expense; increases in past due accounts receivable balances; and access to the capital markets at unreasonable terms or rates. Public health crises, including epidemics and pandemics, and any related government responses could also impair our ability to develop, construct, and operate facilities. Risks include extended disruptions to supply chains and inflation, resulting in increased costs for labor, materials, and services, which could adversely impact our ability to implement our corporate strategy. We may also be adversely impacted by labor disruptions and productivity as a result of infections, employee attrition, and a reduced ability to replace departing employees as a result of employees who leave or forego employment to avoid any required precautionary measures. Despite our efforts to manage the impacts of public health crises, including epidemics and pandemics, that may occur in the future, the extent to which they may affect us depends on factors beyond our knowledge or control. As a result, we are unable to determine the potential impact any such public health crises, including epidemics and pandemics, may have on our business plans and operations, liquidity, financial condition, and results of operations.

Our ability to execute our strategy and achieve anticipated financial outcomes are influenced by the expectations of our customers, regulators, investors, and other stakeholders. Those expectations are based in part on the core fundamentals of affordability and reliability but are also increasingly focused on our ability to meet rapidly changing demands for new and varied products, services, and offerings. Additionally, the risks of global climate change continues to shape our customers' sustainability goals and energy needs, as well as the investment and financing criteria of investors. Failure to meet these increasing expectations or to adequately address the risks and external pressures from regulators, customers, investors, and other stakeholders may impact our reputation and affect our ability to achieve favorable outcomes in future rate cases or our results of operations. Furthermore, the increasing use of social media may accelerate and increase the potential scope of negative publicity we might receive and could increase the negative impact on our reputation, business, results of operations, and financial condition. As it relates to electric generation, a diversified fleet with increasingly clean generation resources may facilitate more efficient financing and lower costs. Conversely, jurisdictions utilizing more carbon-intensive generation such as coal may experience difficulty attracting certain investors and obtaining the most economical financing terms available. Furthermore, with this heightened emphasis on environmental, social, and governance concerns, and climate change in particular, there is an increased risk of litigation.