WEC Energy Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company is a regulated electric and natural gas utility group operating principally in Wisconsin, Illinois, Michigan, and Minnesota, with an approximately 60% interest in American Transmission Company (ATC) and non-utility energy infrastructure investments. The filing also reports unaudited fourth-quarter results.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $7.242 billion | $7.523 billion | Down 3.7% |
| Operating income | $1.706 billion | $1.531 billion | Up 11.4% |
| Net income attributable to common shareholders | $1.200 billion | $1.134 billion | Up 5.8% |
| Diluted EPS | $3.79 | $3.58 | Up $0.21 |
| Cash from operating activities | $2.196 billion | $2.346 billion | Down $149.5 million |
| Capital expenditures | $2.239 billion | $2.261 billion | Down $22.0 million |
| Total assets | $37.028 billion | $34.952 billion | Up $2.076 billion |
| Total debt, including short-term debt | $14.291 billion | $12.735 billion | Up $1.556 billion |
| Debt / total capitalization | 57.6% | 55.7% | Up 1.9 percentage points |
| Common dividends per share | $2.53 | $2.36 | Up 7.2% |
Operating margin, calculated as operating income divided by revenue, was approximately 23.6% versus 20.4% in 2019. Net margin attributable to common shareholders was approximately 16.6% versus 15.1%. Cash from operations less capital expenditures was approximately negative $42.8 million; this simple calculation is not a company-reported free-cash-flow measure.
Fourth quarter: Revenue was $1.933 billion versus $1.948 billion in Q4 2019; net income attributable to common shareholders was $239.0 million versus $243.9 million. Diluted EPS was $0.76 versus $0.77.
Liquidity: Cash and cash equivalents were $24.8 million at year-end. Current liabilities exceeded current assets by $2.065 billion. WEC reported $1.361 billion of available capacity under its credit agreements and said it expected to meet foreseeable funding needs through operating cash, borrowing arrangements, and capital-market access. The company was in compliance with debt covenants at year-end.
Material changes versus 2019
- Revenue declined, with lower electric and natural gas sales volumes amid COVID-19 business disruptions and warmer-than-normal winter weather; lower fuel and gas costs also reduced reported revenue and cost of sales.
- Net income increased, led by higher Wisconsin and Illinois utility earnings, stronger ATC equity earnings following FERC ROE decisions and continued investment, and wind production tax credits. These gains were partly offset by a higher corporate and other loss.
- Operating income improved while operating expenses fell, in part because of lower operating and maintenance costs and changes in regulatory and pass-through expense timing. Depreciation and amortization increased to $975.9 million from $926.3 million.
- Operating cash flow fell as customer collections weakened and pension/OPEB contributions rose. The decline was partly offset by lower fuel payments and collateral requirements.
- Debt increased amid capital spending, renewable acquisitions, and refinancing activity. The company issued new debt and retired debt early, recording a $38.4 million loss on extinguishment, including make-whole premiums.
Outlook, management commentary, risks, and unusual items
- Capital and strategy: The 2021–2025 ESG Progress Plan forecasts approximately $15.0 billion of capital expenditures for regulated utility and non-utility energy infrastructure businesses, plus an estimated $1.1 billion WEC share of ATC capital expenditures. The company targets a 70% reduction in electric-generation CO₂ emissions from 2005 levels by 2030, a 55% reduction by 2025, and net carbon neutrality by 2050. It expects to retire approximately 1,800 MW of additional fossil-fueled generation by 2025.
- Demand outlook: Assuming normal weather, management forecasts retail electric sales and retail natural gas delivery volumes to grow 1.0%–1.3% over the five years following 2020. COVID-19 reduced 2020 weather-normalized sales.
- Taxes and dividends: Management expects a 2021 effective tax rate of 13%–14%, including an estimated 6% benefit from amortization of unprotected excess deferred taxes; excluding that benefit, the expected range is 19%–20%. The 2021 annualized dividend was raised to $2.71 per share, with a target payout ratio of 65%–70% of earnings.
- COVID-19 and collections: Disconnection moratoria, reduced late-fee activity, and weaker customer demand contributed to higher past-due balances. Receivables more than 90 days past due were $122.8 million, up $38.6 million year over year. The allowance for credit losses rose to $220.1 million from $140.0 million; some exposures are subject to regulatory recovery mechanisms, including prudency reviews.
- Subsequent cold-weather event: The company estimated that severe February 2021 weather increased natural gas procurement costs by $300 million–$350 million as of February 25, 2021. It stated that prudently incurred costs are recoverable under utility mechanisms, but timing creates working-capital needs.
- Regulatory and environmental exposure: Recovery of regulatory assets depends on regulator approval; year-end regulatory assets were $3.544 billion and regulatory liabilities $3.979 billion. Environmental remediation liabilities were $532.9 million, primarily associated with manufactured gas plant sites. Estimated capital investment to comply with steam-electric effluent rules was approximately $110 million.
- Contingencies and unusual items: A $39.1 million liability remains for possible ATC refunds related to a second FERC ROE complaint; the outcome remains subject to petitions and court review. PGL faces proceedings related to a 2016 gas leak at Manlove Field that affected residential wells; management believed any civil penalties would not be material. A May 2020 rain event caused $35.2 million of Public Service Building repair costs, of which $12.5 million was expensed after insurance proceeds and a receivable; management did not expect a significant future earnings impact.
- Audit: Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The auditor identified regulatory assets and liabilities as a critical audit matter because their recognition depends on judgments about future regulatory decisions.
Most important facts for investors to verify
- Whether utility regulators permit timely recovery of COVID-related costs, bad debts, infrastructure spending, and deferred balances, including open PGL QIP rider reconciliations.
- Whether operating cash flow and customer collections recover as pandemic-related restrictions and arrears evolve, and whether the $340 million term loan due in March 2021 is repaid as planned.
- Execution, costs, approvals, and timing of the substantial 2021–2025 capital program, including renewable projects, LNG facilities, and planned fossil-fuel retirements.
- The ultimate FERC and court resolution of ATC ROE proceedings and any associated refunds beyond the recorded $39.1 million liability.
- Whether the forecast tax rate, dividend growth, and 65%–70% payout target remain supportable alongside higher debt and capital requirements.
- The recoverability and timing of environmental remediation costs and the potential financial effects of changing climate and emissions regulation.