WEC Energy Group said declining demand for natural gas amid mild winter weather weighed on its first quarter top line, and fallout from the coronavirus may curb sales overall in the current quarter and beyond, necessitating cost-cutting to protect profits.
“The first quarter happened to be one of the warmest on record in the past century,” Executive Chairman Gale Klappa said on an earnings call.
For the quarter, natural gas deliveries in Wisconsin, excluding gas used for power generation, fell by 10.6% from a year earlier, with declines across residential, commercial and industrial (C&I) and retail customers. The company breaks out data for Wisconsin because, in terms of rate base, the state represents roughly 70% of its business, by far the largest segment.
New headwinds imposed by shelter-in-place orders intended to curb spread of the coronavirus likely will curb C&I and retail demand in the current quarter, with lighter demand lingering into the second half of the year as the Midwest economy gradually recovers, executives said.
The effects should be greater on electricity than natural gas, given that the latter’s strongest quarters are the first and fourth in any given year because of colder weather.
[Want to see more earnings? See the full list of NGI’s 1Q2020 earnings season coverage.]
The Milwaukee-based company, which serves 4.5 million customers in Illinois, Michigan, Minnesota and Wisconsin, said first quarter revenue declined nearly $269 million from a year earlier to $2.1 billion.
The decline developed despite a larger customer base. At the close of the first quarter, WEC utilities were serving about 12,000 more natural gas customers compared with the same time a year earlier.
“Obviously,” Klappa said, “we’re keeping a close eye on local economic trends and customer demand for energy.”
Despite the challenges, the company drove 1Q2020 earnings higher and expects to forge ahead with a $15 billion, five-year capital plan that includes substantial investments in infrastructure and renewable energy projects across the Midwest. More than one-third — $5.7 billion — is earmarked for natural gas distribution projects.
“In short, our overall capital plan is low-risk and highly executable,” Klappa said. “We have ample liquidity; no need to issue new equity.”
Lower operational costs to offset sales curbed by the pandemic, however, will be key for the company to drive profitability and continue investing in its multi-year plan without interruption. Klappa said the company reduced day-to-day operation and maintenance costs by 7% in 2019 and planned another 2-3% this year. Amid the economic freeze imposed by the virus, WEC plans to be even more aggressive in its cost-cutting this year.
“We’re learning of additional possibilities for long-term, sustainable cost reduction through what we’ve been forced to operate through,” Klappa said. “We’re confident in our levers and in the dozens and dozens of initiatives that we have across the enterprise to become even more efficient.
“We’re learning things here as 80% of our workforce is operating remotely, if you will, about our ability to [make] reductions throughout the business.”
For the quarter, WEC reported net income of $452.5 million ($1.43/share), up from $420.1 million ($1.33) a year earlier. The company reaffirmed its earnings per share guidance for 2020 of $3.71-3.75.
Klappa said that he expects the company can maintain its long-term annual earnings growth rate of 5-7%.
Asked about acquisitions, he said any target would have to be accretive to earnings and have an organic growth rate that matched or exceeded WEC’s. Such sellers may be difficult to identify in the current environment, he said.
“We’re not going to trash the balance sheet to do it,” he said.
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