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Essential Energy Insights, April 2021


WEC Energy expands its map of wind assets in quest to reduce emissions

As utility holding company WEC Energy Group Inc. adds renewable energy to its portfolio through acquisitions from Invenergy LLC, among others, its geographic reach is growing as its sizable carbon footprint shrinks.

On June 26, Milwaukee-headquartered WEC filed an application with the Federal Energy Regulatory Commission to acquire a 90% stake in the 260.9-MW Blooming Grove Wind Energy Center in McLean County, Ill., from Invenergy, the latest in a string of similar transactions. With gas and coal accounting for 84% of WEC's total generation, the company has embarked on a five-year plan to invest $1.8 billion in renewables.

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Since 2018, WEC has agreed to acquire a raft of wind projects from Invenergy, a frequent development partner, with purchases from the Chicago-based company representing all of WEC's new renewable energy acquisitions since the beginning of 2019. The partnership stretches back to WEC subsidiary Wisconsin Public Service Corp.'s purchase of a 44.6% stake in the 129-MW Forward Energy Center wind project, which was agreed to in 2017 and closed the following year.

In 2018, WEC acquired a position in the 202.5-MW Upstream Wind Energy Project in Antelope County, Neb., and would ultimately bring its stake in that project to 100% in 2020. WEC also acquired the 119-MW Bishop Hill III Wind Farm in Henry County, Ill., in 2018, a purchase it undertook in three separate transactions over the course of the year. WEC acquired an 80% stake in the 106-MW Coyote Ridge Wind Project in Brookings County, S.D., from Avangrid Inc. that same year.

"Through our WEC Infrastructure LLC subsidiary we own a growing fleet of renewable generation facilities in the Midwest," WEC spokesperson Brendan Conway said, noting that each of the facilities WEC owns have long-term offtake agreements with credit-worthy counterparties for 100% of their output.

"We expect the return on these investments to be higher than our regulated returns," Conway said. "We only invest in projects that achieve our financial return metrics and do not change our risk profile."

Those comments echoed remarks made by WEC Executive Chairman Gale Klappa on the company's fourth-quarter 2019 conference call on Jan. 30.

"We're very encouraged about these investments in renewable energy, which will serve strong businesses for years to come," Klappa said of Blooming Grove and Coyote Ridge. "Of course, we're being very selective as we vet future projects."

"I think this is an incremental opportunity that they're uniquely positioned to do," Scotia Capital (USA) Inc. analyst Andrew Weisel said of WEC's sometimes-piecemeal strategy toward acquisitions of renewable energy assets.

In addition to the Blooming Grove acquisition, Invenergy's pending deals include the acquisition of a 10% stake in the 300-MW Thunderhead Wind Farm in Antelope County, Neb., which would bring its shareholding in that project up to 90%, and the acquisition of a two-thirds stake in a 150-MW portion of the Badger Hollow Solar Farm in Iowa County, Wis.

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"The strategy makes a lot of sense," Weisel said of the company's strong push into the renewable energy market. "Their regulated business is going to keep doing what it's doing and that's the vast majority of the company. As far as we understand, there's no change to any of the strategies at the regulated subsidiaries."

The move into neighboring Midwestern states can mean risk as well as opportunity, Weisel said. However, while it is "inherently riskier to venture outside of your service territory," partnerships with "qualified developers" allow WEC to take on what Weisel called "pretty modest risk" while doing so.

"Whenever you venture outside of your hometown, it's unfamiliar territory," Weisel said. "They're not the developer, they acquire [the projects], so it's not so much the development risk." However, less familiarity with local governments and regulators outside of a company's service territory is an important variable. "If something goes wrong, you're dependent on the local jurisdictions to fix the problem, whether that be some sort of permitting issue or some sort of local tax issue, who knows what it might be."

"As a general rule, our approach has been not to assume construction risk and close once the project is complete," Conway confirmed.

The focus on adding renewable energy mirrors the strategies of other large utilities, Weisel said, noting that WEC has a particular advantage. "Anyone familiar with the industry has seen some flavor of this from other large utilities [but] one differentiator for WEC is that they have a unique tax position."

"They have a lot of tax credits that they've accumulated over the years from various sources, so while most utilities need to partner with a tax equity investor, WEC is able to monetize the renewable tax credits themselves," Weisel said. "Because of the unique tax position, they're able to bid a more attractive price to the offtaker than their peers."