WEC ENERGY GROUP, INC. quarterly report, Q2 FY2018

WEC Energy Group, Inc. — Q2 2018 Form 10-Q

Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2018, compared with the same 2017 periods. WEC operates regulated electric and natural gas utilities, owns about 60% of American Transmission Company (ATC), and has non-utility energy infrastructure businesses. It serves approximately 1.6 million electric and 2.9 million natural gas customers.

Financial results and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Operating revenues	$1,672.5 million	$1,631.5 million	$3,959.0 million	$3,936.0 million
Operating income	$330.8 million	$362.2 million	$875.9 million	$976.9 million
Net income attributable to common shareholders	$231.0 million	$199.1 million	$621.1 million	$555.7 million
Diluted EPS	$0.73	$0.63	$1.96	$1.75
Effective tax rate	18.1%	36.7%	18.3%	37.2%

Q2 revenue rose about 2.5%, while operating income fell about 8.7%; common earnings increased about 16.0%. For the first half, revenue increased about 0.6%, operating income decreased about 10.3%, and common earnings increased about 11.8%.
Management attributed improved earnings primarily to higher utility margins from weather-related sales volumes and higher weather-normalized usage, higher other income in Q2, and Bluewater’s contribution. Higher operating costs, lower ATC equity earnings, and increased interest expense partly offset these factors. Tax legislation and Wisconsin tax-repair flow-through accounting affected reported line items but management said these effects did not significantly affect common net income.
Operating cash flow for the first half was $1,513.4 million, up from $1,266.9 million. Capital expenditures were $915.5 million. Investing cash outflow was $996.8 million and financing cash outflow was $523.2 million. Cash, cash equivalents, and restricted cash totaled $52.0 million at period-end.
At June 30, total assets were $31.94 billion; common shareholders’ equity was $9.73 billion. Short-term debt was $1.37 billion and long-term debt, including current maturities, was approximately $9.50 billion. Reported debt was 52.7% of total capitalization (51.5% using management’s rating-agency-adjusted presentation).
Current liabilities exceeded current assets by $1,242.8 million. WEC reported $1,427.5 million of available capacity under its revolving credit facilities after commercial paper and letters of credit. Management stated it believed liquidity and capital-market access were adequate for the foreseeable future.
Common dividends were $0.5525 per share quarterly; the board declared the same amount in July for payment September 1, 2018.

Material changes and developments

Q2 operating income declined despite stronger utility margins. Wisconsin segment operating income fell $27.5 million, reflecting higher operating expenses and tax-related regulatory accounting; Illinois operating income fell $2.2 million. Other States improved $3.4 million. ATC and other transmission affiliate earnings fell $13.1 million in Q2 and $22.2 million in the first half.
Higher short-term borrowing balances and interest rates increased interest expense by $6.6 million in Q2 and $8.6 million in the first half. WEC issued $600 million of 3.375% senior notes due 2021 in June and used proceeds for debt repayment and general corporate purposes.
First-half operating cash flow improved, while capital spending rose $125.5 million year over year to $915.5 million. Common dividends paid were $348.7 million, versus $328.3 million in the first half of 2017.
WEC acquired its 44.6% share of Forward Wind Energy Center for $77.1 million in April. It also signed agreements to acquire 80% interests in Bishop Hill III wind facility for $148 million, expected to close in Q3 2018 subject to FERC approval, and Upstream Wind Energy Center for $276 million, expected to close in Q1 2019 after commercial operation and subject to FERC approval.
Pleasant Prairie Power Plant was retired in April 2018. WEC expects to retire approximately 1,800 MW of coal generation by 2020; additional retirements include Pulliam units by October 2018, Edgewater Unit 4 by September 2018, and PIPP by May 2019.

Outlook, risks, and contingencies

Management expected a 2018 annual effective tax rate of 15%–16%, including an estimated 7% benefit from flow-through tax repairs. The filing does not provide a clear consolidated earnings or EPS guidance range.
WEC forecast nearly $12 billion of capital expenditures for regulated utility and non-utility energy infrastructure businesses from 2018 through 2022. Estimated capital expenditures and acquisitions were $2.378 billion in 2018, $2.247 billion in 2019, and $2.690 billion in 2020. Major projects include distribution-system upgrades, Chicago gas-system modernization, new Michigan gas-fired generation, and proposed Wisconsin solar projects.
WEC’s emissions goals are to reduce CO₂ emissions approximately 40% below 2005 levels by 2030 and 80% by 2050. The company noted uncertainty around future federal climate rules and stakeholder pressure for further emissions reductions.
Rate recovery and regulatory decisions remain important risks. Wisconsin electric and gas base rates are frozen through 2019 under a settlement; Minnesota interim rates are subject to refund pending a final order expected in the first half of 2019. Some Illinois QIP reconciliations remain pending, and WEC cautioned that recovery of all costs is not assured.
Environmental remediation liabilities were $617.2 million, with related manufactured-gas-plant regulatory assets of $669.9 million. WEC estimated approximately $70 million for certain wastewater-treatment and bottom-ash compliance work, subject to final rules and requirements. Minimum future purchase obligations totaled $11.216 billion.
Legal and environmental matters include the Manlove gas-storage-field leak and related Illinois proceedings, a PIPP mercury-emissions finding, and ongoing environmental and regulatory proceedings. Management did not expect the cited matters to have a material financial impact, but outcomes remain uncertain.
Moody’s downgraded certain WEC and subsidiary senior unsecured ratings in July 2018, after quarter-end, citing reduced cash flow associated with tax legislation. Moody’s affirmed commercial paper ratings and set stable outlooks. Further ratings changes could raise financing costs or affect access to capital.
Other key risks cited include weather, outages, fuel and commodity costs, capital-project execution and cost recovery, tax-law interpretation, environmental regulation, litigation, credit-market conditions, cyber incidents, and ATC performance.

Important facts for investors to verify

Whether the increase in net income is sustainable given lower operating income, lower transmission-affiliate earnings, and Q2 support from other income and favorable weather.
Progress and regulatory recovery of major capital programs, including Chicago gas modernization, Michigan generation, solar and wind investments, and planned coal retirements.
Final customer-refund treatment and earnings/cash-flow effects of tax legislation across utility jurisdictions, including Minnesota and FERC formula-rate proceedings.
Debt levels, refinancing needs, credit ratings, borrowing costs, and the continuing availability of revolving credit facilities.
Resolution and cost exposure from environmental remediation, wastewater rules, QIP reconciliations, the Manlove matter, and other regulatory or legal proceedings.