WEC Energy(US:WEC)2020-02-27 16:33Part I Business WEC Energy Group is a diversified holding company with regulated utility operations, a 60% interest in ATC, and non-utility energy infrastructure - WEC Energy Group operates as a diversified holding company with its primary business in regulated natural gas and electricity services, alongside a significant 60% equity interest in American Transmission Company (ATC)31 - The company is organized into six reportable segments: Wisconsin, Illinois, Other states, Electric transmission, Non-utility energy infrastructure, and Corporate and other31500 Introduction WEC Energy Group is a diversified holding company operating through subsidiaries in regulated and nonregulated energy sectors - WEC Energy Group, Inc. became a diversified holding company in 1986 and acquired 100% of Integrys's common shares on June 29, 201531 Utility Energy Operations The company's utility operations are segmented geographically, with seasonal demand patterns for electricity and natural gas - The Wisconsin segment includes electric and natural gas operations of WE, WPS, WG, and UMERC35 - The Illinois segment comprises the natural gas utility operations of PGL and NSG, serving Chicago and its northern suburbs90 - The Other States segment includes the natural gas utility operations of MERC in Minnesota and MGU in Michigan104 - Electric sales are highest in summer due to cooling demand, while natural gas sales peak in winter for heating; decoupling mechanisms in Illinois and Minnesota help mitigate earnings volatility115117 Electric Transmission Segment This segment consists of an approximately 60% ownership interest in ATC, a regional transmission company regulated by FERC - The company holds an approximately 60% ownership interest in ATC and a 75% interest in ATC Holdco as of December 31, 2019123 - ATC is a regional transmission company operating in Wisconsin, Michigan, Illinois, and Minnesota, regulated by the FERC and a member of MISO123 - In November 2019, FERC issued an order related to the methodology for calculating the base Return on Equity (ROE) for all MISO transmission owners, including ATC124 Non-Utility Operations Non-utility operations include energy infrastructure assets like generation and storage, as well as corporate support services - The Non-Utility Energy Infrastructure segment includes We Power (generation facilities), Bluewater (natural gas storage), and WECI (wind generation facilities)126 - We Power designed and built approximately 2,500 MW of generation, which is leased to WE under long-term agreements, with costs recovered through WE's rates127129 - WECI holds ownership interests in the Upstream (80%), Bishop Hill III (90%), and Coyote Ridge (80%) wind facilities, with plans to acquire interests in Thunderhead and Blooming Grove wind projects132134 - The Corporate and Other segment includes holding company operations and WBS, a centralized service company providing administrative support to regulated and nonregulated entities137138 Regulation The company and its utility subsidiaries are subject to federal and state regulations governing rates and cost recovery mechanisms - The company is subject to the Public Utility Holding Company Act of 2005 (PUHCA 2005) and Wisconsin's public utility holding company law, which limits non-utility affiliate assets to 25% of public utility affiliate assets141142 - Utility rates are regulated by state commissions including the PSCW, ICC, MPSC, and MPUC, while wholesale power and transmission are regulated by the FERC145146 - Electric utilities in Wisconsin can defer fuel and purchased power costs that deviate by more than 2% from amounts in rates, while natural gas utilities generally have dollar-for-dollar recovery147148 Utility Operating Revenues by Regulatory Jurisdiction (2019) | (in millions) | Amount | Percent | | :--- | :--- | :--- | | Electric | | | | Wisconsin | $3,807.4 | 88.2% | | Michigan | $142.6 | 3.3% | | FERC – Wholesale | $367.6 | 8.5% | | Total Electric | $4,317.6 | 100.0% | | Natural Gas | | | | Wisconsin | $1,325.3 | 42.6% | | Illinois | $1,357.1 | 43.6% | | Minnesota | $281.5 | 9.0% | | Michigan | $148.7 | 4.8% | | Total Natural Gas | $3,112.6 | 100.0% | Environmental Compliance The company's operations are subject to extensive environmental regulations that result in significant and potentially increasing compliance costs - Operations are subject to extensive environmental regulations from state and federal agencies, leading to significant compliance costs167 - Anticipated expenditures for environmental compliance and remediation are included in the company's estimated capital expenditures for the next three years168 Employees As of year-end 2019, the company employed over 7,500 people, with a significant portion represented by labor unions - As of December 31, 2019, the company had 7,509 total employees171 - A total of 4,380 employees are represented under various labor agreements, with expiration dates ranging from 2020 to 2024171 Risk Factors The company faces legislative, regulatory, operational, economic, and market risks that could impact its financial performance - Legislative and Regulatory Risks: The business is heavily impacted by governmental regulation, which affects rates, cost recovery, and compliance costs, with environmental laws posing significant financial risks174178186191 - Operational Risks: Financial performance depends on the successful operation of facilities, which are subject to risks like equipment failure, severe weather, and cyber attacks, while also being influenced by energy demand200203204208 - Economic and Market Risks: The company relies on access to capital markets, and a credit rating downgrade could increase borrowing costs, while fluctuating commodity prices and competition also pose risks222226228235 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None243 Properties The company owns a diverse portfolio of regulated and non-utility generation, distribution, and storage assets Regulated Electric Generation Capacity (as of Dec 31, 2019) | Fuel Type | Rated Capacity (MW) | | :--- | :--- | | Coal-fired | 3,158 | | Natural gas-fired | 3,753 | | Renewables | 207 | | Total System | 7,118 | - Natural gas facilities include approximately 49,500 miles of distribution mains, 1,200 miles of transmission mains, and 68.2 billion cubic feet of working gas capacity in underground storage fields254 WECI Wind Generating Facilities (as of Dec 31, 2019) | Name | Location | Nameplate Capacity (MW) | | :--- | :--- | :--- | | Upstream | Nebraska | 202.5 | | Bishop Hill III | Illinois | 132.1 | | Coyote Ridge | South Dakota | 96.7 | | Total | | 431.3 | Legal Proceedings The company is involved in ordinary course legal matters and a notable environmental issue at a gas storage field - In September 2017, the IDNR issued a Violation Notice to PGL regarding a natural gas leak from a well at the Manlove Gas Storage Field, which resulted in gas migration into the Mahomet Aquifer262263 - PGL is working with Illinois state agencies to investigate and remediate the impacts and believes any civil penalties will not have a material impact on its financial statements263265 Mine Safety Disclosures This section is not applicable to the company - Not applicable266 Information About Our Executive Officers This section provides professional background information for the company's executive officers as of year-end 2019 - The report lists the names, ages, positions, and recent business experience for all executive officers as of year-end 2019268 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock is listed on the NYSE, with approximately 45,000 registered shareholders as of January 2020 - As of January 31, 2020, the company had approximately 45,000 registered shareholders274 - Common stock is traded on the NYSE under the symbol "WEC"275 Selected Financial Data This section presents a five-year summary of key financial data, highlighting results for the 2019 fiscal year Comparative Financial Data (2018-2019) | (in millions, except per share) | 2019 | 2018 | | :--- | :--- | :--- | | Operating revenues | $7,523.1 | $7,679.5 | | Net income attributed to common shareholders | $1,134.0 | $1,059.3 | | Total assets | $34,951.8 | $33,475.8 | | Long-term debt (excluding current portion) | $11,211.0 | $9,994.0 | | Diluted earnings per share | $3.58 | $3.34 | | Dividends per share of common stock | $2.36 | $2.21 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A details corporate strategy, financial results, liquidity, capital resources, and critical accounting policies Corporate Developments The company's strategy focuses on reliability and financial discipline while transitioning its generation fleet to cleaner energy sources - The company's strategy focuses on reliability, operating efficiency, financial discipline, customer care, and safety283 - A major strategic goal is reshaping the generation fleet, which includes retiring over 1,800 MW of coal-fired generation since early 2018 and exceeding its 2030 CO2 reduction goal in 2019284 - Projected capital expenditures for regulated utility and non-utility energy infrastructure are approximately $13.7 billion from 2020 to 2024294 Results of Operations Consolidated net income increased by $74.7 million in 2019, driven by improved operating income in the Wisconsin and Illinois segments Consolidated Earnings Summary (2019 vs. 2018) | (in millions) | 2019 | 2018 | Change B(W) | | :--- | :--- | :--- | :--- | | Total operating income | $1,531.4 | $1,468.4 | $63.0 | | Income before income taxes | $1,259.7 | $1,230.3 | $29.4 | | Net income attributed to common shareholders | $1,134.0 | $1,059.3 | $74.7 | | Diluted earnings per share | $3.58 | $3.34 | $0.24 | - The $74.7 million increase in earnings was primarily driven by a $41.6 million increase in operating income at the Wisconsin segment and a $36.1 million increase at the Illinois segment303 - Earnings from the electric transmission segment (ATC investment) decreased by $9.1 million, driven by a FERC order addressing ATC's allowed ROE310341 Liquidity and Capital Resources Operating cash flow decreased in 2019, while investing activities increased due to acquisitions and capital expenditures Summary of Cash Flows (2019 vs. 2018) | (in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | $2,345.5 | $2,445.5 | | Cash used in investing activities | $(2,494.9) | $(2,384.4) | | Cash provided by financing activities | $85.6 | $26.4 | - Total capital expenditures increased by $145.1 million to $2.26 billion in 2019, with notable increases in the Illinois and non-utility energy infrastructure segments354 Estimated Capital Expenditures (2020-2022) | (in millions) | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Wisconsin | $1,482.0 | $1,881.1 | $1,630.5 | | Illinois | $779.0 | $619.4 | $586.7 | | Other states | $117.4 | $111.6 | $87.4 | | Non-utility energy infrastructure | $852.5 | $159.7 | $393.0 | | Corporate and other | $24.6 | $22.7 | $2.7 | | Total | $3,255.5 | $2,794.5 | $2,700.3 | Factors Affecting Results, Liquidity, and Capital Resources Financial performance is influenced by regulatory cost recovery, commodity price fluctuations, weather, and economic conditions - The company's rates and cost recovery are determined by various regulatory commissions; as of December 31, 2019, the company had $3.5 billion in regulatory assets and $4.1 billion in regulatory liabilities390391 - The business is exposed to market fluctuations in the costs of coal, natural gas, and purchased power, which are managed through contracts and hedging programs395 - In November 2019, FERC issued an order that reduced the base ROE for MISO transmission owners, including ATC, to 9.88% effective September 28, 2016425426 Critical Accounting Policies and Estimates Management identifies regulatory accounting, goodwill, asset impairment, and pension benefits as areas requiring significant judgment - Regulatory Accounting: Financial statements reflect rate-making principles, allowing deferral of costs as regulatory assets ($3.5 billion at year-end 2019) if future recovery is probable432434 - Goodwill: The company performs annual goodwill impairment tests; as of July 1, 2019, no impairments were recorded for the $3.1 billion goodwill balance435439 - Long-Lived Assets: The company assesses asset recoverability when impairment indicators are present and has received regulatory approval to recover the net book value of retired power plants440443 - Pension and OPEB: Costs are dependent on actuarial assumptions; a 0.5% decrease in the discount rate would increase the projected pension benefit obligation by $206.6 million444447 Quantitative and Qualitative Disclosures About Market Risk This section refers to other parts of the report for information regarding the company's exposure to market risks - Information concerning potential market risks is provided in Item 7 (MD&A) and Notes 1(p), 1(q), and 18 to the financial statements458 Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's report for fiscal year 2019 Reports of Independent Registered Public Accounting Firm The independent auditor issued unqualified opinions on the financial statements and the effectiveness of internal controls - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2019461 - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2019462474 - The audit identified the impact of rate regulation and the accounting for regulatory assets and liabilities as a critical audit matter due to the significant management judgments required466469 Consolidated Financial Statements The financial statements show increased operating and net income in 2019 despite a slight decrease in operating revenues Key Financial Metrics (2019 vs. 2018) | (in millions) | 2019 | 2018 | | :--- | :--- | :--- | | Income Statement | | | | Operating Revenues | $7,523.1 | $7,679.5 | | Operating Income | $1,531.4 | $1,468.4 | | Net Income Attributed to Common Shareholders | $1,134.0 | $1,059.3 | | Balance Sheet | | | | Total Assets | $34,951.8 | $33,475.8 | | Total Long-Term Debt | $11,211.0 | $9,994.0 | | Total Common Shareholders' Equity | $10,113.4 | $9,788.9 | Notes to Consolidated Financial Statements The notes provide detailed supplemental information on accounting policies, acquisitions, debt, and commitments - Note 2 (Acquisitions): Details recent acquisitions, including an 80% interest in the Upstream wind facility for $268.2 million in January 2019584587 - Note 5 (Regulatory Assets and Liabilities): As of Dec 31, 2019, the company had $3.53 billion in regulatory assets and $4.08 billion in regulatory liabilities611615 - Note 13 (Long-Term Debt): Total long-term debt outstanding was $11.9 billion as of Dec 31, 2019, an increase from $10.4 billion in 2018664 - Note 23 (Commitments and Contingencies): The company has significant unconditional purchase obligations totaling $11.6 billion and reserves of $589.2 million for manufactured gas plant remediation770790 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None843 Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report844 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019845 Other Information The company reports no other information for this item - None849 Part III Directors, Executive Officers, and Corporate Governance Information regarding governance is incorporated by reference from the 2020 Proxy Statement and a Code of Conduct is available online - Required information is incorporated by reference from the company's Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders852 - The company has adopted a Code of Business Conduct, which is posted on its website853 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Annual Meeting Proxy Statement856 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with details provided on equity compensation plans - Security ownership information is incorporated by reference from the 2020 Annual Meeting Proxy Statement857 Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Type | Securities to be Issued Upon Exercise | Securities Remaining for Future Issuance | | :--- | :--- | :--- | | Approved by Security Holders | 3,249,918 | 26,456,888 | Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Annual Meeting Proxy Statement859 Principal Accounting Fees and Services Information regarding auditor fees and services is incorporated by reference from the company's 2020 Proxy Statement - Required information is incorporated by reference from the 2020 Annual Meeting Proxy Statement860 Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K - This item lists all financial statements, schedules, and exhibits included in the filing863 - Financial statement schedules included are Schedule I (Condensed Parent Company Financial Statements) and Schedule II (Valuation and Qualifying Accounts)863 Form 10-K Summary The company reports no information for this item - None875 Schedule I — Condensed Parent Company Financial Statements This schedule presents the condensed financial statements for the parent company, WEC Energy Group, Inc Parent Company Income Statement (2019) | (in millions) | 2019 | | :--- | :--- | | Equity in earnings of subsidiaries | $1,210.5 | | Interest expense | $122.3 | | Income before income taxes | $1,089.8 | | Net income attributed to common shareholders | $1,134.0 | Parent Company Balance Sheet (Dec 31, 2019) | (in millions) | 2019 | | :--- | :--- | | Assets | | | Investments in subsidiaries | $13,433.1 | | Total assets | $13,526.3 | | Liabilities and Equity | | | Long-term debt | $2,141.6 | | Common shareholders' equity | $10,113.4 | | Total liabilities and equity | $13,526.3 | Schedule II — Valuation and Qualifying Accounts This schedule details the activity in the allowance for doubtful accounts, which decreased during 2019 Allowance for Doubtful Accounts Activity (2019) | (in millions) | Amount | | :--- | :--- | | Balance at Beginning of Period | $149.2 | | Expense | $85.8 | | Deferral | $11.4 | | Net Write-offs | $(106.4) | | Balance at End of Period | $140.0 |