WEC Energy Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. WEC operates regulated electric and natural gas utilities, holds an approximately 60% interest in American Transmission Company, and has non-utility energy infrastructure businesses. It serves approximately 1.6 million electric and 2.9 million natural gas customers.
Financial performance and position
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $2,108.6 | $2,377.4 |
| Operating income | $626.6 | $542.8 |
| Net income attributable to common shareholders | $452.5 | $420.1 |
| Diluted EPS | $1.43 | $1.33 |
| Operating cash flow | $690.5 | $735.7 |
| Capital expenditures | $496.1 | $358.8 |
- Revenue fell about 11%, while operating income rose about 15% and common earnings rose about 8%. Operating margin was approximately 29.7%, compared with 22.8% a year earlier.
- Operating cash flow declined $45.2 million. Investing cash use was $463.0 million, primarily reflecting $496.1 million of capital expenditures; financing cash use was $244.1 million. Cash, cash equivalents, and restricted cash totaled $65.7 million at quarter-end, including $15.4 million of unrestricted cash.
- Quarter-end total debt was $12,716.2 million; debt was 55.1% of total capitalization, or 54.0% on the company’s rating-agency-adjusted basis. Interest expense increased to $129.4 million from $124.4 million.
- Current liabilities exceeded current assets by approximately $1.0 billion. WEC reported $2,310.5 million of available capacity under credit agreements at March 31, 2020.
- The effective tax rate was 16.6%, versus 13.4%. The company expects a 2020 annual effective tax rate of 16%–17%, including an estimated four-percentage-point benefit from amortizing unprotected excess deferred taxes; excluding that benefit, it expects 20%–21%.
Material changes and drivers
- Warmer winter weather reduced heating demand and utility sales volumes. Wisconsin and Illinois heating degree days were respectively 16.0% and 17.5% below the prior-year quarter; natural gas utility revenues also declined.
- Earnings improved mainly through higher Wisconsin and Illinois operating income. Wisconsin benefited from new rates effective January 1, 2020, lower operating costs, and fuel and purchased-power collection effects. Illinois benefited from lower gas maintenance costs and continued investment recovered through its infrastructure rider.
- Other income fell $25.3 million, primarily because of losses on investments held in the Integrys rabbi trust, compared with gains in Q1 2019. Higher debt balances also increased interest expense.
- Capital expenditures increased $137.3 million year over year. WEC expects approximately $13.7 billion of capital expenditures for 2020–2024 and lists estimated expenditures and acquisitions of $3.26 billion in 2020, $2.79 billion in 2021, and $2.70 billion in 2022.
Outlook, risks, and notable items
- COVID-19: Management said the pandemic’s effects on demand, collections, liquidity, operations, and results could not yet be determined. WEC recorded a $2.7 million increase in its credit-loss allowance specifically for COVID-19 economic risks. Utility disconnection and late-fee restrictions, and customer payment protections, may increase uncollectible expense and reduce revenues; certain regulators authorized deferral of specified costs for potential future recovery.
- WEC entered a $340 million, 364-day term loan in March 2020 to enhance liquidity and pay down commercial paper. Management stated liquidity remained strong. Commercial and industrial demand had begun to weaken; the Tilden mine, WEC’s largest customer, temporarily idled production at the end of April and planned to restart in July. Management did not expect a significant earnings impact because Tilden remains responsible for specified generation costs.
- WEC identified no significant supply-chain disruption at filing, but warned extended disruption could delay maintenance and capital projects. Badger Hollow I’s expected commercial operation was tentatively delayed from December 2020 to April 2021; timing of other projects remained subject to monitoring.
- WEC declared a quarterly dividend of $0.6325 per share, equivalent to $2.53 annually. It reported approximately $11.2 billion of minimum future purchase obligations and $589.4 million of environmental remediation liabilities, with related regulatory assets of $686.4 million. Recovery of regulatory deferrals remains subject to regulator review.
- WEC is pursuing wind investments in Thunderhead and Blooming Grove, both under construction and expected to enter commercial operation by year-end 2020, subject to approvals and completion conditions. It also reports a $41.9 million liability related to a contested transmission return-on-equity proceeding; management said any eventual additional refund was not expected to be material.
- Management stated that ordinary-course legal matters were appropriately reserved and not expected to materially affect results. The filing highlights risks including COVID-19, customer credit losses, regulatory recovery, capital-project execution, environmental compliance, market access, and pension asset performance.
Important facts for investors to verify
- Whether COVID-19-related lower commercial and industrial demand, customer payment restrictions, and bad-debt expense materially affect subsequent-quarter earnings and cash collections.
- Whether regulators approve recovery of deferred pandemic costs and outstanding infrastructure-rider costs, including PGL’s open QIP reconciliations.
- Whether capital spending, renewable project schedules, and the planned 2020–2024 investment program remain on budget and recoverable in rates.
- Whether pension and OPEB asset declines lead to higher expense or funding needs; WEC reported an approximate $397 million decrease in plan investment values during Q1.
- Whether the stated 2020 tax-rate outlook and quarterly dividend remain supportable as conditions and regulatory decisions evolve.