WEC ENERGY GROUP, INC. quarterly report, Q2 FY2019

WEC Energy Group, Inc. — Q2 2019 Form 10-Q

Business context and period: Unaudited results for the three and six months ended June 30, 2019, compared with 2018. WEC is a regulated electric and natural gas utility holding company, with transmission affiliate investments and non-utility energy infrastructure. It serves approximately 1.6 million electric and 2.9 million natural gas customers.

Key financial metrics

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Operating revenue	$1,590.2 million	$1,672.5 million	$3,967.6 million	$3,959.0 million
Operating income	$314.6 million	$330.8 million	$857.4 million	$875.9 million
Net income attributable to common shareholders	$235.7 million	$231.0 million	$655.8 million	$621.1 million
Diluted EPS	$0.74	$0.73	$2.07	$1.96
Cash provided by operating activities	Not stated for quarter	Not stated for quarter	$1,291.2 million	$1,513.4 million

Margins and earnings drivers: Operating income fell in both comparison periods despite higher common net income and EPS. The effective tax rate was 6.1% for Q2 and 10.9% for the first half, versus 18.1% and 18.3%, respectively, in 2018. Lower taxes, transmission-affiliate earnings and other income supported earnings; higher interest expense weighed on results.
Cash flow and investment: First-half capital expenditures were $855.2 million, and the Upstream wind acquisition used $268.2 million. Investing cash outflow was $1,066.4 million; financing cash outflow was $280.2 million. Common dividends paid were $372.3 million.
Debt and liquidity at June 30: Short-term debt was $1,262.7 million; long-term debt, including current maturities, was $10,687.5 million. Total debt was $11,950.2 million, with a reported debt-to-capitalization ratio of 54.3% (53.2% on management’s adjusted basis). Cash and cash equivalents were $37.9 million. WEC had $1,534.8 million available under its credit facilities.
Balance sheet: Total assets were $33,934.3 million; common shareholders’ equity was $10,016.2 million. Current liabilities exceeded current assets by $1,523.3 million; management said it expected no liquidity impact given available credit lines and capital-market access.

Material changes versus the prior comparable period

Q2 revenue declined $82.3 million, while first-half revenue was nearly unchanged. Q2 common net income increased $4.7 million; first-half common net income increased $34.7 million.
Wisconsin electric margins weakened amid lower sales volumes, especially as Q2 cooling-degree days were about 64%–65% below the prior-year quarter. First-half electric sales volumes also declined. Colder winter weather supported natural gas volumes and margins in several territories.
Equity earnings from transmission affiliates rose $8.2 million in Q2 and $11.5 million in the first half, primarily reflecting ATC investment and the absence of a prior-year customer refund effect.
Interest expense increased $15.6 million in Q2 and $33.3 million for the first half, attributed mainly to higher debt balances and short-term borrowing rates.
First-half operating cash flow declined $222.2 million, primarily due to higher operating payments, collateral requirements and interest paid.

Outlook, management commentary, risks and unusual items

Tax outlook: Management expects a 2019 effective tax rate of 10.5%–11.5%, including an estimated 9.5% benefit from flow-through of tax repairs; excluding that benefit, the expected range is 20%–21%.
Investment plans: Estimated capital expenditures and acquisitions are $2.705 billion in 2019, $2.927 billion in 2020 and $2.511 billion in 2021. WEC forecasts nearly $12.7 billion of utility and non-utility energy infrastructure capital expenditures for 2019–2023. Plans include grid modernization, natural gas system replacement, wind and solar investments, and transmission investment.
Rates and regulation: Wisconsin utilities filed for rate increases effective in 2020, with additional proposed electric increases for 2021; final orders were expected by year-end 2019. Proposed amounts and outcomes remain subject to regulatory approval. Recovery of certain deferred costs and QIP rider costs is also subject to regulatory review.
Generation and climate: The PIPP retired March 31, 2019, following the retirement of other coal units since 2018. Management targets CO₂ emissions reductions of approximately 40% by 2030 and 80% by 2050, relative to 2005. The EPA’s ACE rule was being litigated. Estimated compliance costs under the steam-electric effluent guidelines were approximately $70 million.
Contingencies: Environmental remediation reserves were $631.8 million, with corresponding regulatory assets of $707.6 million. Minimum future purchase commitments were approximately $11.9 billion. PGL’s open QIP reconciliations could result in some costs being disallowed. WEC also disclosed ongoing FERC proceedings regarding ATC’s allowed return on equity; timing and final outcomes were uncertain.
Unusual items/accounting: Sale of three PDL solar facilities generated a $4.9 million after-tax gain, primarily from recognizing deferred investment tax credits. Adoption of lease accounting changed classification of certain expenses but, according to management, did not change consolidated earnings. WEC acquired an 80% interest in the 202.5 MW Upstream wind facility for $268.2 million.
Principal risks: Weather and demand variability, regulatory decisions and cost recovery, capital-project execution, environmental rules, interest rates and credit access, commodity and supplier risks, and cybersecurity. Management reported no material changes to the risk factors in its 2018 Form 10-K and no material change in market-risk disclosures.

Important facts for investors to verify

Whether the proposed Wisconsin rate increases are approved, and their final timing and amounts.
Whether projected capital spending, renewable projects and system-modernization work remain on schedule and within budget, and whether costs are recoverable in rates.
How operating cash flow and debt evolve as investment continues, including refinancing needs and available liquidity.
Whether the low reported tax rate and stated 2019 tax-rate outlook persist, including the effects of tax benefits and regulatory treatment.
Developments in environmental remediation, PGL QIP reconciliations, and ATC return-on-equity proceedings.