WEC ENERGY GROUP, INC. quarterly report, Q3 FY2019

WEC Energy Group, Inc. — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. WEC serves approximately 1.6 million electric and 2.9 million natural gas customers and owns about 60% of transmission affiliate ATC.

Financial performance

Metric	Q3 2019	Q3 2018	Nine months 2019	Nine months 2018
Operating revenue	$1,608.0 million	$1,643.7 million	$5,575.6 million	$5,602.7 million
Operating income	$310.9 million	$302.7 million	$1,168.3 million	$1,178.6 million
Net income attributable to common shareholders	$234.3 million	$233.2 million	$890.1 million	$854.3 million
Diluted EPS	$0.74	$0.74	$2.81	$2.70
Interest expense	$125.8 million	$112.0 million	$374.3 million	$327.2 million

• Q3 revenue declined $35.7 million year over year; common-shareholder earnings rose $1.1 million, with diluted EPS unchanged. Management cited lower Wisconsin electric sales from cooler summer weather, partly offset by lower expenses, stronger Illinois gas margins and higher ATC earnings.
• For the first nine months, revenue decreased $27.1 million, while common-shareholder earnings increased $35.8 million. Lower income tax expense and higher transmission-affiliate earnings were key offsets to higher interest expense and lower Wisconsin electric margins.
• Operating income was nearly flat year over year for the nine-month period. The large reported reduction in Wisconsin operating expenses was partly due to lease-expense reclassification under Topic 842; the company says this change did not affect consolidated net income.
• Wisconsin electric and natural gas margins, management’s non-GAAP measures, totaled $2,654.1 million for the nine months, down $39.8 million. The electric-margin decline reflected lower sales volumes, including cooler summer weather.

Cash flow, debt and liquidity

• Nine-month operating cash flow was $1,840.7 million, down $167.5 million year over year. Capital expenditures were $1,511.5 million; cash used in investing was $1,734.5 million and cash used in financing was $185.7 million. Common dividends paid were $558.4 million.
• At September 30, cash and cash equivalents were $20.0 million; cash, cash equivalents and restricted cash totaled $66.6 million. Current liabilities exceeded current assets by $1,045.4 million. Management said available credit facilities and capital-market access should support liquidity.
• Total debt was $12,276.3 million, including $686.4 million short-term debt. Debt was 54.9% of total capitalization, or 53.8% on management’s adjusted basis for junior notes. Long-term debt, including current maturities, was $11,589.9 million.
• Revolving credit capacity totaled $2.8 billion, with $2,111.1 million available after commercial paper and letters of credit. Commercial paper outstanding was $686.4 million at a weighted-average rate of 2.23%.

Business developments and outlook

• WEC completed its acquisition of an 80% interest in the 202.5 MW Upstream wind facility in January for $268.2 million, net of acquired cash. In August it agreed to acquire an 80% interest in the 300 MW Thunderhead project for an estimated $338 million; closing is expected when the facility enters service, anticipated at the end of 2020, subject to FERC approval.
• The company’s generation transition includes retiring older coal units and investing in gas and renewable generation. It targets CO₂ reductions of approximately 40% from 2005 levels by 2030 and 80% by 2050. Wisconsin solar projects Badger Hollow I and Two Creeks target end-2020 operation; Badger Hollow II is subject to approval and targets end-2021.
• Management forecast 2019 effective tax rate of 10.5%–11.5%, including an estimated 9.5% benefit from flow-through tax repairs; excluding that impact, the expected rate was 20%–21%. The filing does not provide full-year earnings guidance in the supplied text.
• Estimated capital expenditures and acquisitions were $2.691 billion for 2019, $2.794 billion for 2020 and $3.070 billion for 2021; planned regulated utility and non-utility infrastructure capital spending for 2020–2024 was almost $13.7 billion. The quarterly dividend was $0.59 per share; the board declared the same amount for payment in December 2019.
• PSCW approved Wisconsin utility rate-case settlement agreements on October 31, 2019, subject to final written orders. The settlements generally set 2020 rate increases below the initial requests, with differing outcomes by utility and service. New rates were expected January 1, 2020.

Risks, contingencies and unusual items

• Regulatory recovery is important: regulatory assets totaled $4.036 billion, including $719.6 million for environmental remediation; environmental remediation reserves were $631.8 million. Recovery depends on regulatory approval. WEC cited an estimated $70 million to comply with current steam-electric wastewater requirements, while EPA reconsideration could change requirements or costs.
• Minimum future purchase commitments were approximately $12 billion. Other uncertainties include environmental rules and remediation, rate proceedings, the pending ATC return-on-equity complaints, and commodity, interest-rate, credit and weather risks.
• PGL’s Manlove gas-storage-field leak affected residential water wells. Investigation and remediation are ongoing; the company said any civil penalties were not expected to have a material financial impact. Management stated that reserves were established for ordinary-course legal matters and did not expect their resolution to materially affect results.
• Effective January 1, 2019, lease-accounting adoption recognized operating-lease right-of-use assets of $49.0 million and liabilities of $48.8 million at adoption and changed some expense classifications. The filing reports no material impact on net income from the We Power lease reclassification.

Important facts for investors to verify

• Final PSCW written orders, implementation of 2020 rates and the treatment of retired-plant balances and tax benefits.
• Whether WEC sustains earnings and cash generation as interest expense and capital investment rise, and how much of planned spending is recovered through rates.
• Thunderhead’s FERC approval, construction progress, total investment and expected in-service timing; progress and costs for solar, LNG and other major projects.
• Regulatory recovery of environmental, infrastructure and deferred costs, including open PGL QIP reconciliations and the ReACT costs.
• Developments in the Manlove matter, environmental compliance estimates, and ATC ROE proceedings and their potential impact.