WEC Energy Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. WEC is a regulated electric and natural gas utility holding company, with transmission affiliate and non-utility energy infrastructure businesses. It serves approximately 1.6 million electric and 2.9 million natural gas customers.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenues | $1,548.7 million | $1,590.2 million | $3,657.3 million | $3,967.6 million |
| Operating income | $338.8 million | $314.6 million | $965.4 million | $857.4 million |
| Net income attributable to common shareholders | $241.6 million | $235.7 million | $694.1 million | $655.8 million |
| Diluted EPS | $0.76 | $0.74 | $2.19 | $2.07 |
| Operating cash flow | Not separately presented | Not separately presented | $1,379.6 million | $1,291.2 million |
- For Q2, operating revenue fell 2.6%, while common-shareholder net income rose 2.5%. For the first half, revenue fell 7.8% and common-shareholder net income increased 5.8%.
- First-half capital expenditures were $1,037.2 million, up from $855.2 million. Operating cash flow less capital expenditures was approximately $342.4 million, versus $436.0 million in the prior-year period.
- At June 30, cash and cash equivalents were $13.3 million; cash, cash equivalents, and restricted cash totaled $62.4 million. Available capacity under credit agreements was $1,926.2 million.
- Total debt was $12,828.1 million, including short-term debt of $1,211.5 million. Debt was 55.2% of total capitalization (54.1% on management’s adjusted presentation). Current liabilities exceeded current assets by $1.8 billion; management said credit lines and capital-market access support liquidity.
- The quarterly dividend was $0.6325 per share, up 7.2% beginning with the March 2020 payment. A further $0.6325 dividend was declared for payment September 1, 2020.
Changes versus the prior comparable period
- Q2 operating income rose $24.2 million and common-shareholder earnings rose $5.9 million. Illinois operating income increased $16.9 million, largely from lower maintenance and customer-service costs and higher margins associated with PGL’s infrastructure program. Transmission affiliate earnings rose $16.0 million, primarily following a FERC-approved increase in ATC’s allowed return on equity.
- Wisconsin Q2 operating income increased $7.4 million, but underlying results included reduced electric and gas margins from lower commercial and industrial demand, COVID-19 disruptions, fuel-cost collection timing, and rate-order impacts. Favorable weather and lower operating costs partly offset these pressures.
- First-half earnings increased $38.3 million. Higher Illinois and Wisconsin operating income and transmission affiliate earnings more than offset lower other income, higher interest expense, and weaker results in the other-states segment.
- First-half revenue declines reflected lower natural gas revenues, including lower commodity costs passed through to customers, as well as reduced utility sales volumes. Commercial and industrial electric sales were affected by pandemic-related business interruptions; warmer winter weather reduced gas demand.
- Q2 and first-half effective tax rates were 18.2% and 17.1%, respectively, versus 6.1% and 10.9% in 2019. The comparison was affected by 2019 tax-repair benefits and deferred investment tax credits, partly offset in 2020 by tax-benefit amortization under Wisconsin rate orders.
Outlook, commentary, risks, and unusual items
- Management forecast a 2020 annual effective tax rate of 16%–17%, including an estimated 4-percentage-point benefit from amortizing unprotected excess deferred taxes; excluding that benefit, the expected range was 20%–21%. The supplied filing text does not provide a clear numerical full-year earnings guidance range.
- Planned 2020 capital expenditures and acquisitions totaled approximately $3.11 billion. Management expected approximately $13.7 billion of capital expenditures across regulated utilities and non-utility energy infrastructure over 2020–2024, plus approximately $150 million of ATC capital contributions over that period.
- COVID-19 reduced some commercial and industrial energy demand and collections, increased credit-loss exposure, and prompted temporary utility-service protections. WEC recorded a $3.4 million additional allowance for pandemic-related credit risk; $530.6 million of net receivables had existing regulatory protections. Recovery of deferred costs remains subject to regulatory review. Illinois utilities had deferred $8.5 million of COVID-related costs by June 30.
- WEC entered a $340 million, 364-day term loan in March to support liquidity. Management reported that commercial-paper and long-term debt market conditions had improved from the initial disruption and that overall liquidity remained strong.
- Project and acquisition execution risks include Badger Hollow I’s commercial-operation delay from December 2020 to April 2021; Thunderhead’s possible delay to summer 2021 following a permit ruling and a local utility’s suspension of substation construction; and pending approvals or construction for other wind and solar investments. A July 2020 agreement to acquire 85% of Tatanka Ridge contemplated an approximately $235 million investment, subject to FERC approval.
- Environmental and regulatory exposures include approximately $10.9 billion of minimum future purchase commitments, $589.4 million of environmental remediation liabilities, and an estimated $60 million of capital costs for certain wastewater-rule compliance, subject to EPA rule reconsideration. PGL’s QIP cost reconciliations remain pending before the ICC. WEC said ordinary-course legal matters were not expected to have a material impact, but outcomes remain uncertain.
- ATC’s allowed base ROE was revised by FERC in May 2020, retroactive for specified periods. WEC recorded a $39.1 million liability for possible refunds related to a second ROE complaint; further rehearing and court proceedings remained outstanding.
- WEC’s stated generation goals are to reduce electric-generation CO₂ emissions 70% below 2005 levels by 2030 and achieve net carbon neutrality by 2050. It reported that it had exceeded its prior 40% reduction goal in 2019.
Important facts for investors to verify
- Whether pandemic-related commercial and industrial demand weakness, customer arrears, credit losses, and service-protection measures persist, and how much deferred cost regulators ultimately allow WEC to recover.
- Delivery against the elevated capital plan, project budgets and schedules, and the timing, approvals, and financing of planned wind, solar, LNG, and utility-system projects.
- The eventual resolution of ATC’s ROE proceedings, including potential refunds and the effect on transmission affiliate earnings.
- Liquidity and leverage trends, including debt maturities, short-term borrowing, available credit capacity, and funding needs relative to capital expenditures and dividends.
- Whether reported earnings growth is sustained after considering weather, timing of maintenance and tax items, investment gains and losses, and regulatory rate effects.