WEC Energy Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. WEC is a regulated electric and natural gas utility group operating across Wisconsin, Illinois, Michigan, and Minnesota, with an approximately 60% investment in American Transmission Company (ATC) and nonregulated generation through We Power. The quarter’s results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $2,304.5 million | $2,194.8 million |
| Operating income | $617.3 million | $589.3 million |
| Net income attributable to common shareholders | $356.6 million | $346.2 million |
| Diluted EPS | $1.12 | $1.09 |
| Cash from operating activities | $714.6 million | $695.9 million |
| Capital expenditures | $329.7 million | $312.0 million |
- Revenue rose 5.0%; operating income increased $28.0 million and common-shareholder earnings increased $10.4 million. Calculated operating margin was approximately 26.8%, versus 26.9% in Q1 2016; calculated net margin was approximately 15.5%, versus 15.8%.
- Common dividends were $0.52 per share, up from $0.495. The board declared another $0.52 quarterly dividend, payable June 1, 2017.
- At March 31, cash was $45.7 million. Current assets were $1,855.3 million and current liabilities were $2,054.6 million, a $199.3 million working-capital deficit. Management said it expects no liquidity impact, citing available credit and capital-market access.
- Short-term debt was $670.4 million and long-term debt, including current maturities, was $9,301.6 million; total debt was approximately $9,972 million. Debt was 52.1% of total capitalization, or 50.8% using management’s adjusted presentation. Revolving facilities totaled $2.5 billion, with $1,800.5 million available after commercial paper and letters of credit.
Changes and operating drivers
- Wisconsin operating income increased $4.8 million, despite a $16.1 million decline in electric margins. Lower retail electric volumes—attributed partly to warmer weather and the extra leap-year sales day in 2016—were a key headwind. Lower operating and maintenance costs partly offset the margin decline.
- Illinois operating income increased $18.4 million, reflecting higher natural gas margins from continued investment under PGL’s infrastructure rider and lower benefit costs. Other-states operating income rose $1.6 million; We Power operating income rose $4.1 million; ATC equity earnings increased $3.4 million.
- Other income fell $17.0 million, principally because Q1 2016 included a $23.6 million gain on repurchase of Integrys junior notes. Interest expense rose $3.8 million, including from higher rates, debt levels, and lower capitalized interest.
- Operating cash flow increased $18.7 million. Higher customer collections and lower operating-cost payments were partly offset by higher fuel and gas payments and a $90.9 million increase in pension and OPEB contributions and payments. Investing cash use increased to $325.6 million, while financing cash use was $380.8 million.
Outlook, developments, and risks
- Management expects a 2017 effective tax rate of 37.0%–38.0%. The filing provides no specific full-year earnings guidance in the text provided.
- Estimated capital expenditures are $2.18 billion in 2017, $1.96 billion in 2018, and $1.90 billion in 2019. Over five years, planned regulated-utility capital expenditures excluding ATC are $9.5–$10.0 billion. Planned projects include PGL’s gas-system modernization program and utility reliability investments.
- WEC agreed to acquire a Michigan natural-gas storage facility for $225 million, plus approximately $5 million in acquisition costs. Regulatory approval and closing were expected by Q3 2017; the filing does not report completion.
- UMERC’s proposed approximately 180 MW natural-gas generation project is estimated at $265 million, or $275 million including AFUDC. Subject to approvals, it was expected to enter service in 2019 and could enable retirement of PIPP by 2020.
- Wisconsin utilities filed a proposed settlement to freeze electric and gas base rates through 2019, subject to PSCW approval. The settlement also includes an earnings-sharing mechanism and other provisions.
- Key uncertainties include regulatory recovery of deferred and infrastructure costs, rate-case and settlement outcomes, environmental compliance, weather and demand, commodity and financing costs, litigation, and the impact of FERC return-on-equity proceedings on ATC earnings and distributions. WEC estimated $80–$110 million for certain wastewater-treatment and bottom-ash-system compliance work; timing and final requirements remain uncertain.
- Environmental remediation reserves for manufactured-gas-plant sites were $630.5 million, with related regulatory assets of $685.4 million. Minimum future purchase-obligation commitments were $11,774.4 million. Management stated that ordinary-course legal matters were not expected to have a material effect, while noting that outcomes cannot be predicted with certainty.
Most important facts to verify
- Whether the Michigan storage acquisition received regulatory approval and closed, and how its costs will be recovered.
- PSCW decisions on the proposed 2018–2019 rate settlement and deferred ReACT costs; ICC outcomes affecting PGL’s modernization program and QIP cost recovery.
- Approval, cost, and schedule for UMERC’s proposed generation project and the related PIPP retirement plan.
- Actual 2017 earnings and cash generation against the stated tax-rate outlook, capital plan, and dividend commitments.
- Developments in ATC FERC return-on-equity proceedings and environmental compliance requirements that could affect earnings, cash flows, or capital needs.