WEC ENERGY GROUP, INC. quarterly report, Q3 FY2018

WEC Energy Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2018. WEC is a regulated electric and natural gas utility group serving customers in Wisconsin, Illinois, Michigan, and Minnesota, with transmission and non-utility energy infrastructure businesses. Financial statements are unaudited.

Financial performance

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Operating revenue	$1,643.7 million	$1,657.5 million	$5,602.7 million	$5,593.5 million
Operating income	$302.7 million	$392.2 million	$1,178.6 million	$1,369.1 million
Net income attributable to common shareholders	$233.2 million	$215.4 million	$854.3 million	$771.1 million
Diluted EPS	$0.74	$0.68	$2.70	$2.43
Cash from operating activities	Not separately presented for the quarter	$2,008.2 million	$1,745.7 million

Third-quarter revenue declined about 0.8%; nine-month revenue was nearly flat, up about 0.2%. Operating income fell about 22.8% in the quarter and 13.9% year to date, while common net income and diluted EPS increased in both comparisons.
Management attributed much of the reported operating-income pressure to tax-related regulatory treatment, including transmission expenses associated with tax repairs and the Tax Cuts and Jobs Act. These items largely offset one another in net income. Q3 earnings also benefited from a prior-year tax true-up, higher pension and OPEB non-service credits, and stronger Wisconsin retail electric volumes.
Wisconsin electric margin was $819.7 million in Q3 versus $822.8 million; natural gas margin was $84.7 million versus $87.2 million. For the nine months, electric margin was $2,295.8 million versus $2,333.3 million and natural gas margin was $398.1 million versus $394.8 million. These are non-GAAP measures defined by the company.
Interest expense increased to $112.0 million in Q3 from $103.8 million and to $327.2 million for nine months from $310.4 million, primarily reflecting higher short-term borrowings and interest rates.

Cash flow, debt, and liquidity

Nine-month operating cash flow was $2,008.2 million; investing cash outflow was $1,720.0 million, including $1,490.5 million of capital expenditures and wind-facility acquisitions; financing cash outflow was $306.6 million.
At September 30, cash and cash equivalents were $14.5 million. Total debt was $11,276.7 million, including $1,788.3 million of short-term debt and $9,488.4 million of long-term debt, including current maturities. Debt was 53.5% of total capitalization (52.3% on the company’s adjusted presentation).
Current liabilities exceeded current assets by $1,762.8 million. WEC cited available revolving credit capacity of $1,008.7 million and access to capital markets, and said it expected adequate liquidity. The company’s $2.8 billion credit facilities mature in October 2022.
Moody’s downgraded WEC Energy Group’s senior unsecured rating to Baa1 from A3 in July 2018; the outlook was changed to stable. Management said it believed current ratings provided flexibility to obtain funding on competitive terms.
Common dividends paid during the first nine months were $523.0 million. The quarterly dividend was $0.5525 per share, declared for payment on December 1, 2018.

Material changes and outlook

WEC acquired an 80% interest in the 132 MW Bishop Hill III wind facility for $143.5 million net of restricted cash, and WPS acquired its 44.6% share of the 129 MW Forward Wind Energy Center for $77.1 million. A further 10% Bishop Hill III interest was under agreement, subject to FERC approval. An 80% interest in the 202.5 MW Upstream wind project was also under agreement, with closing expected after commercial operation in 2019.
WEC retired the 1,190 MW Pleasant Prairie plant in April 2018 and Edgewater Unit 4 in September; Pulliam Units 7 and 8 retired in October. PIPP was required to retire by May 31, 2019. Management’s generation plan targets about 1,800 MW of coal retirements by 2020, with CO₂ reductions of approximately 40% below 2005 levels by 2030 and 80% by 2050.
Management projected a 2018 annual effective tax rate of 14%–15%, including an estimated 10% benefit from the flow-through of tax repairs. Estimated capital expenditures and acquisitions were $2.314 billion for 2018, $2.620 billion for 2019, and $3.012 billion for 2020; management expected almost $12.7 billion of capital expenditures from 2019 through 2023.
Major planned investments include the approximately $266 million UMERC natural-gas generation project, expected online in Q2 2019; PGL’s Chicago pipeline modernization program, with projected average annual investment of $280–$300 million through 2020; and proposed Wisconsin solar projects with an estimated WPS share of $260 million. Recovery of some project costs remains subject to regulatory approval.
Environmental and regulatory exposures include estimated $70 million of wastewater-treatment and bottom-ash system upgrades under current effluent rules, $617.4 million of manufactured-gas-plant remediation reserves (with $680.0 million of related regulatory assets), and $12.034 billion of minimum future purchase commitments. Management said ordinary-course legal matters were not expected to materially affect financial condition or results, but outcomes remain uncertain.
Other risks include rate-case and cost-recovery outcomes, tax-law implementation and customer refunds, environmental requirements, project execution and financing costs, weather and energy demand, commodity supply and prices, and credit-rating or capital-market changes. The filing reported no material change to the prior annual report’s risk factors.

Most important facts for investors to verify

Whether the improvement in net income and EPS is sustainable apart from tax-related items, prior-year tax true-ups, and benefit-plan credits, given lower operating income.
How tax-law benefits and related refunds, bill credits, regulatory assets, and transmission expenses will affect future earnings, cash flows, and credit ratings.
Whether large planned capital projects stay on budget and schedule, and whether regulators approve recovery of deferred or proposed costs.
Liquidity and refinancing capacity as short-term debt and capital spending remain significant, particularly following the Moody’s downgrade.
Progress on plant retirements, replacement generation, renewables, and environmental compliance costs, including the stated wastewater-upgrade estimate.