WEC Energy Group, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
WEC Energy Group is a regulated electric and natural gas utility holding company, with operations in Wisconsin, Illinois, Michigan, and Minnesota, an approximately 60% equity interest in American Transmission Company (ATC), and non-utility energy infrastructure operations. It served approximately 1.6 million electric and 2.9 million natural gas customers. This unaudited filing covers the quarter and nine months ended September 30, 2020; interim results are seasonal and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenues | $1,651.0 million | $1,608.0 million | $5,308.3 million | $5,575.6 million |
| Operating income | $370.2 million | $310.9 million | $1,335.6 million | $1,168.3 million |
| Net income attributable to common shareholders | $266.8 million | $234.3 million | $960.9 million | $890.1 million |
| Diluted EPS | $0.84 | $0.74 | $3.04 | $2.81 |
| Cash from operating activities | Not separately presented for the quarter | $1,949.7 million | $1,840.7 million |
For the first nine months, capital expenditures were $1,618.7 million, versus $1,511.5 million a year earlier. Cash used in investing activities was $1,563.1 million; cash used in financing activities was $407.7 million. Cash, cash equivalents, and restricted cash at period-end totaled $61.2 million, including $48.1 million of restricted cash.
At September 30, 2020, total debt was $13,019.7 million, including $771.0 million of short-term debt. The reported debt-to-total-capitalization ratio was 55.4% (54.3% on management’s adjusted basis, which treats half of the $500 million junior notes as equity). Current liabilities exceeded current assets by approximately $1.1 billion. WEC reported $2,366.7 million of available capacity under its credit agreements and said it expected to have adequate liquidity.
Material changes versus prior comparable periods
- Q3 common earnings increased $32.5 million and diluted EPS rose $0.10. Management cited stronger Wisconsin operating income, lower interest expense, higher ATC earnings, and lower taxes, partly offset by other items.
- Nine-month common earnings increased $70.8 million. Operating income rose $167.3 million, while equity earnings from transmission affiliates increased $21.1 million, primarily following a FERC decision that raised ATC’s allowed base return on equity and continued ATC investment.
- Nine-month revenue declined $267.3 million, reflecting lower natural gas revenues and reduced utility sales volumes, among other factors. Management attributed weaker commercial and industrial demand in part to COVID-19 disruptions and cited warmer winter weather.
- The nine-month effective tax rate was 16.5%, compared with 9.3% in 2019. The prior-year rate benefited from tax-repair flow-through; 2020 benefited from deferred-tax amortization and wind production tax credits. The tax-repair and related rate effects described by management were offset across income-statement lines and did not change common net income.
Outlook, commentary, risks, and unusual items
- Tax outlook: Management expected a 2020 effective tax rate of 16%–17%, including an estimated 4% benefit from amortization of unprotected excess deferred taxes; excluding that benefit, the expected range was 20%–21%.
- Capital and growth: Estimated capital expenditures and acquisitions were $2,973.5 million for 2020, $3,092.8 million for 2021, and $3,048.2 million for 2022. The company expected approximately $15 billion of regulated utility and non-utility energy infrastructure capital expenditures from 2021–2025. Plans include grid upgrades, renewable generation, gas infrastructure, and wind project investments.
- Energy transition goals: WEC said it had surpassed its prior 2030 emissions-reduction goal and set goals to reduce electric-generation CO2 emissions 55% below 2005 levels by 2025 and 70% by 2030, and to achieve net carbon neutrality by 2050. It also planned to retire approximately 1,800 MW of additional fossil-fueled generation by 2025.
- COVID-19 and credit risk: Customer disconnection restrictions, lower commercial and industrial usage, delayed collections, and reduced late-fee revenue affected the business. The allowance for credit losses was $173.3 million at September 30, including a $2.9 million incremental COVID-related reserve; $498.3 million of net receivables had regulatory protections. Recovery of some deferred costs remains subject to regulatory prudency review. Management said the pandemic’s ultimate impact could not be determined.
- Regulatory and environmental contingencies: PGL’s prior-year QIP reconciliations remained pending before the Illinois commission, and recovery of all costs was not assured. A potential second ATC ROE complaint refund remained under review; WEC retained a $39.1 million liability and did not expect any eventual refund to materially affect future results. Environmental remediation reserves were $589.4 million, supported by $696.6 million of related regulatory assets. Estimated capital compliance costs under existing wastewater rules were $60 million, subject to evaluation of a revised EPA rule.
- Projects and financing after quarter-end: The May 2020 Milwaukee steam-tunnel flooding had incurred $16.8 million of repair costs, with insurance proceeds received sufficient to cover costs incurred; the company did not expect a significant earnings or long-term cash-flow impact. In October 2020, WEC issued $950 million of notes and redeemed higher-coupon debt, recognizing a $27.9 million loss on early extinguishment. The board declared a $0.6325-per-share quarterly dividend payable December 1, 2020.
Important facts for investors to verify
- Whether commercial and industrial demand, customer collections, and credit losses continue to recover, and whether regulators permit recovery of COVID-related deferrals.
- Execution, cost, and regulatory recovery of the substantial capital program, including planned renewable, gas, and grid projects and the timing of wind-facility acquisitions.
- Final outcomes of the ATC ROE proceedings and the pending Illinois QIP rider reconciliations.
- Whether the $60 million wastewater compliance estimate changes under the revised EPA rule, and whether environmental remediation costs remain recoverable through rates.
- Liquidity and leverage trends, including debt maturities, interest costs, and WEC’s ability to fund capital spending and dividends while maintaining credit quality.