WEC Energy Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 3, 2019. WEC is a regulated electric and natural gas utility holding company with transmission and non-utility energy infrastructure businesses. It serves approximately 1.6 million electric and 2.9 million natural gas customers.
Financial performance
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Operating revenue | $2,377.4 million | $2,286.5 million; up 4.0% |
| Operating income | $542.8 million | $545.1 million; down $2.3 million |
| Net income attributable to common shareholders | $420.1 million | $390.1 million; up $30.0 million |
| Diluted earnings per share | $1.33 | $1.23; up $0.10 |
| Effective income tax rate | 13.4% | 18.4% |
| Cash from operating activities | $735.7 million | $894.0 million |
| Capital expenditures | $358.8 million | $439.6 million |
Revenue growth primarily reflected higher natural gas revenues. Earnings rose despite slightly lower consolidated operating income, supported by a $23.4 million increase in other income, net—principally gains on investments held in the Integrys rabbi trust—and lower income tax expense. Wind production tax credits and stock-option tax benefits contributed to the lower tax rate. Higher interest expense partly offset these benefits.
Reported operating-income comparisons were affected by adoption of lease accounting standard Topic 842: certain We Power lease costs moved from operating expense to depreciation and interest expense. This presentation change did not affect consolidated net income. Wisconsin segment operating income increased $88.1 million, substantially reflecting lease reclassification; Illinois operating income fell $9.7 million, while other-states operating income increased $5.3 million.
Balance sheet, debt and liquidity
- At March 31, 2019, cash and cash equivalents were $30.6 million; current assets were $2,008.3 million and current liabilities were $2,889.9 million, leaving working capital negative by $881.6 million.
- Short-term debt was $1,145.2 million, down from $1,440.1 million at December 31, 2018. Long-term debt, including current maturities, was approximately $10.69 billion. Total debt was $11.84 billion; debt to total capitalization was 54.2% (53.0% on management’s adjusted basis).
- WEC issued $350 million of 3.10% senior notes due 2022 in March and used proceeds to repay short-term debt and for general corporate purposes. It reported $1.65 billion of available capacity under credit facilities totaling $2.8 billion.
- Operating cash flow declined year over year, primarily due to higher payments for operating expenses, lower customer collections associated with tax legislation, and remediation spending; timing of natural gas payments partly offset the decline. Investing cash use included the $268.2 million Upstream acquisition.
- Common dividends paid were $186.2 million, or $0.59 per share for the quarter. The board declared a further $0.59 quarterly dividend payable June 1, 2019.
Material developments, outlook and risks
- WEC acquired an 80% interest in the operating 202.5 MW Upstream wind facility in Nebraska for $268.2 million net of cash acquired. Its output revenue is substantially fixed under a 10-year agreement. The 97.5 MW Coyote Ridge project in South Dakota was under construction and expected to enter service by year-end 2019.
- The PIPP generating units were retired March 31, 2019, when UMERC’s new natural-gas generation began commercial operation. WEC reported approximately 1,800 MW of coal generation retired since the beginning of 2018. Management’s emissions goals are approximately 40% below 2005 levels by 2030 and 80% by 2050.
- Management expects a 2019 annual effective tax rate of 10.5%–11.5%, including an estimated 9.5 percentage-point benefit from Wisconsin tax-repair flow-through; excluding that benefit, the expected range is 20%–21%. The filing does not provide a clear consolidated 2019 earnings-per-share guidance figure.
- Estimated capital expenditures and acquisitions are $2.71 billion in 2019, $2.93 billion in 2020, and $2.51 billion in 2021. Management expects approximately $12.7 billion of capital expenditures for regulated utilities and non-utility energy infrastructure during 2019–2023, and believes liquidity is adequate through internal cash generation, borrowing arrangements, and capital-market access.
- Wisconsin utilities filed rate proposals for 2020 and, for some utilities, 2021. Requested increases and returns remain subject to PSCW review; final orders were expected by year-end 2019. Illinois QIP cost reconciliations for 2015–2018 remained pending, so recovery of all related costs was not assured.
- Environmental remediation reserves were $631.8 million, with related regulatory assets of $697.6 million. Estimated ELG compliance costs were approximately $70 million; an April 2019 court ruling struck down portions of the rule. WEC also disclosed the PGL Manlove gas-storage leak proceedings; management stated any civil penalties were not expected to be material.
- Key risks include regulatory recovery and rate-case outcomes, environmental requirements and remediation, construction cost and execution, weather-driven demand, commodity and interest-rate exposure, credit ratings and financing access, and cyber and operational disruptions. Management reported no material changes to risk factors or market-risk disclosures and stated disclosure controls were effective.
Important facts for investors to verify
- Whether requested Wisconsin rate increases and recovery of deferred costs are approved, and the timing and effect of final rates.
- Whether operating cash flow rebounds from the Q1 decline and how the planned capital program, acquisitions, dividends, and debt are funded.
- Whether the unusually low projected tax rate is achieved, especially given its dependence on tax-repair treatment and wind production tax credits.
- Whether wind projects meet their construction and operating milestones and deliver contracted revenues and tax benefits as expected.
- Whether environmental and regulatory matters—including manufactured-gas-plant remediation, Illinois QIP reconciliations, and transmission ROE proceedings—change recorded liabilities, recoverability, or future earnings.