WEC Energy Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. WEC is a regulated electric and natural gas utility holding company operating principally in Wisconsin, Illinois, Minnesota, and Michigan, with an approximately 60% interest in American Transmission Company (ATC) and non-utility energy infrastructure investments.
Financial performance and position
- Revenue: $7.523 billion, down 2.0% from $7.680 billion in 2018. Operating income was $1.531 billion, up 4.3% from $1.468 billion.
- Profit: Net income attributable to common shareholders was $1.134 billion, up 7.1%; diluted EPS was $3.58 versus $3.34. The effective tax rate declined to 9.9% from 13.8%.
- Margins: Operating margin was approximately 20.4% of revenue, compared with 19.1% in 2018. Wisconsin electric margin fell $45.1 million, partly reflecting weaker sales; Wisconsin natural gas margin rose $17.8 million, and Illinois natural gas margin rose $36.2 million.
- Cash flow and investment: Operating cash flow was $2.346 billion, down $100 million. Capital expenditures were $2.261 billion, up $145 million; operating cash flow less capital expenditures was approximately $85 million. Investing cash outflow was $2.495 billion.
- Debt and liquidity: Total debt was $12.735 billion at year-end, up from $11.799 billion; debt was 55.7% of total capitalization versus 54.6%. Current liabilities exceeded current assets by $1.089 billion. The company reported $1.967 billion of available capacity under revolving credit facilities and said liquidity was adequate.
- Other: Total assets were $34.952 billion. The annual common dividend was $2.36 per share; the board set the 2020 annualized dividend at $2.53 and reaffirmed a 65%–70% earnings payout target.
Material changes and notable items
- Common-shareholder earnings rose $74.7 million. Key contributors included lower income tax expense, improved Wisconsin and Illinois operating results, and higher other income. Offsets included $53.1 million of higher interest expense and $9.1 million lower earnings from transmission affiliates.
- Revenue declined with lower electric and natural gas utility revenues. Wisconsin retail electric sales volumes fell 2.5%, with cooler summer weather cited as a factor; natural gas volumes increased in Wisconsin and other states, supported by colder weather and customer growth.
- Adoption of lease accounting Topic 842 changed the classification of We Power lease costs between operating expense, depreciation, and interest. The filing states the change did not affect consolidated net income; it materially affects interpretation of certain segment comparisons.
- WEC acquired an 80% interest in the Upstream wind facility for $268.2 million. Coyote Ridge entered commercial operation in December 2019. Four distributed solar facilities were sold, producing a $6.5 million after-tax gain.
- WEC retired the Presque Isle power plant in March 2019 and reported retiring more than 1,800 MW of coal generation since the start of 2018. It exceeded its 2030 goal of reducing CO₂ emissions 40% below 2005 levels and is reassessing longer-term goals.
Outlook, risks, and contingencies
- Management forecast 2020–2024 retail electric sales growth of 1%–1.5% and electric peak-demand growth of 0%–0.5%; natural gas delivery growth was forecast at 0.5%–1.0%, assuming normal weather.
- Expected capital expenditures for regulated utility and non-utility energy infrastructure businesses total approximately $13.7 billion for 2020–2024. Planned projects include distribution modernization, solar and wind generation, and proposed LNG facilities. The filing gives a 2020 effective tax-rate estimate of 16%–17%, including an estimated 4-point benefit from amortization of excess deferred taxes.
- Principal risks include regulatory decisions and cost recovery, environmental compliance and remediation, weather and demand, project execution and cost overruns, commodity and interest-rate changes, access to capital, cyber incidents, and counterparty performance.
- Estimated future cash expenditures for manufactured-gas-plant remediation were $589.2 million at year-end. PGL’s Manlove Field gas leak affected the Mahomet Aquifer; proceedings and remediation continued, while management said any civil penalties were not expected to be material.
- FERC’s November 2019 ATC return-on-equity order reduced the allowed base ROE and remains subject to rehearing requests. WEC recorded a $41.9 million liability related to a potential refund from a separate complaint period.
- Auditors issued unqualified opinions on the financial statements and internal controls. Rate-regulation accounting was identified as a critical audit matter because recovery of regulatory assets depends on future regulatory decisions.
Most important facts for investors to verify
- Whether earnings growth is sustainable after separating tax-credit benefits, regulatory effects, investment gains, and the noncash lease-accounting reclassification.
- Debt growth, refinancing needs, interest expense, and the company’s ability to fund its sizable capital plan while maintaining its dividend target.
- Regulatory recovery and timing for plant-retirement balances, environmental costs, infrastructure riders, and tax benefits returned to customers.
- Outcomes and financial exposure from the Manlove Field matter and ATC ROE proceedings, including any required refunds.
- Execution, approval, cost, and commercial-operation timelines for planned renewable, LNG, and distribution-system projects.