WEC Energy Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. WEC is a regulated electric and natural gas utility group, with transmission and non-utility energy infrastructure businesses. The company serves approximately 1.6 million electric and 3.0 million natural gas customers. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $2,691.4 million | $2,108.6 million | +27.6% |
| Operating income | $629.3 million | $626.6 million | +$2.7 million |
| Net income attributable to common shareholders | $510.1 million | $452.5 million | +$57.6 million |
| Diluted EPS | $1.61 | $1.43 | +$0.18 |
| Net cash from operating activities | $395.2 million | $690.5 million | -$295.3 million |
| Capital expenditures | $470.6 million | $496.1 million | -$25.5 million |
Reported operating margin was approximately 23.4%, compared with 29.7% a year earlier, as revenue growth was outweighed by a sharp increase in cost of sales. WEC said much of the gas and fuel cost increase is passed through to customers, so revenue and cost-of-sales movements do not translate directly into earnings. Net income growth was supported by higher utility margins, wind production tax credits, transmission affiliate earnings, lower interest expense, and a year-over-year improvement in corporate and other results. The latter included investment gains in the Integrys rabbi trust versus losses in Q1 2020.
Cash and cash equivalents were $26.1 million at quarter-end; cash, cash equivalents, and restricted cash totaled $89.6 million. Total debt was $14.7 billion, and the reported debt-to-total-capitalization ratio was 57.6% (56.6% on management’s adjusted basis). Current liabilities exceeded current assets by approximately $1.4 billion. WEC reported $1.217 billion of available capacity under revolving credit facilities. The quarterly common dividend was $0.6775 per share; the board declared the same rate for payment in June 2021.
Material changes and key developments
- Operating revenue rose substantially, largely reflecting higher natural gas revenues and costs. Q1 included unusually high gas costs following February’s extreme winter weather; WEC recorded $301.6 million of regulatory assets for energy costs recoverable through rate adjustments, versus $1.1 million at year-end 2020.
- Operating cash flow fell, primarily because natural gas payments increased $348.1 million year over year and receivables and amounts recoverable from customers increased. Management expected to recover most of the higher gas costs through existing mechanisms by year-end, subject to applicable regulatory review.
- The allowance for credit losses increased to $259.1 million from $220.1 million at December 31, 2020. Management attributed the increase to higher past-due utility receivables amid pandemic-related economic disruption and restrictions on residential disconnections. Regulatory mechanisms protect a substantial portion of receivables, but some recovery remains subject to prudency review.
- WEC acquired a 90% interest in the 190 MW Jayhawk wind project for $119.4 million in February and incurred additional project capital expenditures. Commercial operation was expected by year-end 2021; WEC’s total investment was expected to be approximately $302 million.
- In March, WEC issued $600 million of 0.80% senior notes due 2024, using net proceeds to repay a $340 million term loan and for general corporate purposes.
- The Wisconsin utilities applied for approval to keep base rates in place through 2022 and defer specified items; the PSCW was expected to consider the application in Q2 2021. Rate increase requests were also pending for North Shore Gas and Michigan Gas Utilities.
Outlook, commentary, risks, and contingencies
- Management expected a 2021 annual effective tax rate of 13%–14%, including an estimated 6 percentage-point benefit from amortizing unprotected excess deferred taxes. Excluding that benefit, the expected range was 19%–20%. The filing does not provide a clear annual EPS guidance figure.
- WEC forecast capital expenditures and acquisitions of approximately $3.19 billion in 2021, $3.02 billion in 2022, and $3.24 billion in 2023. Its 2021–2025 plan contemplated approximately $15 billion for regulated utility and non-utility infrastructure investment, plus an estimated $1.1 billion share of ATC capital expenditures.
- Management cited a goal to reduce electric-generation carbon emissions 60% by 2025 and 80% by 2030, from a 2005 baseline, with a longer-term net-zero generation target for 2050. It also set a net-zero methane-emissions goal for natural gas distribution operations by 2030. Achieving these goals depends on project execution, technology, costs, and regulatory outcomes.
- Environmental compliance is a material area of uncertainty. WEC estimated approximately $110 million of capital investment to comply with steam-electric wastewater requirements. Federal climate rules were under review, and WEC noted uncertainty about future emissions regulation and compliance costs.
- Regulatory recovery is a key risk: deferred costs and gas-cost recoveries remain subject to regulator review, and open reconciliations for PGL’s infrastructure rider could affect recoverability. ATC return-on-equity proceedings and a proposed FERC change to its transmission-organization incentive also present uncertainty; the proposed incentive change could reduce WEC’s after-tax ATC equity earnings by approximately $7 million annually if adopted.
- COVID-19-related risks include customer payment difficulties, higher working-capital needs, reduced commercial and industrial demand, possible project or supply-chain delays, and additional operating costs. The filing reports no material change in disclosed risk factors from the 2020 Form 10-K.
- Other contingencies include environmental remediation liabilities of $532.9 million and approximately $11.1 billion of minimum future purchase commitments. Management said ordinary-course litigation reserves were adequate and did not expect the matters discussed to have a material impact, while acknowledging that outcomes are uncertain.
Important facts for investors to verify
- Whether the exceptional February 2021 gas costs are recovered on schedule and in full, and how regulatory prudency reviews affect recovery.
- Trends in past-due receivables, credit-loss provisions, and customer collections as disconnection moratoria and pandemic-related protections change.
- Execution, costs, and regulatory approvals for the substantial capital plan, including renewable projects and planned generation retirements.
- Resolution of rate cases, PGL infrastructure rider reconciliations, and ATC return-on-equity matters, including the potential FERC incentive change.
- Whether cash generation and borrowing capacity remain adequate alongside planned investment, debt obligations, and dividend payments.
- Progress toward emissions goals and the eventual cost and regulatory treatment of environmental compliance.