WEC Energy Group, Inc. — Q1 2018 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2018. WEC operates regulated electric and natural gas utilities in Wisconsin, Illinois, Michigan, and Minnesota; owns approximately 60% of American Transmission Company (ATC); and has non-utility energy infrastructure businesses. Management cautions that results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $2,286.5 million | $2,304.5 million | Down $18.0 million |
| Operating income | $545.1 million | $614.7 million | Down $69.6 million |
| Income before tax | $478.7 million | $570.2 million | Down $91.5 million |
| Income tax expense / effective rate | $88.3 million / 18.4% | $213.3 million / 37.4% | Expense down $125.0 million |
| Net income attributable to common shareholders | $390.1 million | $356.6 million | Up $33.5 million |
| Diluted EPS | $1.23 | $1.12 | Up $0.11 |
| Common dividend per share | $0.5525 | $0.5200 | Up $0.0325 |
| Net cash from operating activities | $894.0 million | $714.6 million | Up $179.4 million |
| Capital expenditures | $439.6 million | $329.7 million | Up $109.9 million |
Margins: Calculated operating margin was approximately 23.8%, compared with 26.7% in Q1 2017. Revenue declined about 0.8%; operating income declined about 11.3%, while common net income increased about 9.4%, primarily reflecting lower income tax expense.
Cash and debt at March 31, 2018: Cash and cash equivalents were $48.1 million; cash, cash equivalents, and restricted cash totaled $71.7 million. Short-term debt was $1.20 billion and long-term debt, including current maturities, was $9.58 billion. Total debt was $10.78 billion, or 52.6% of total capitalization (51.4% on management’s adjusted basis). Available capacity under credit facilities was $1.60 billion. Current liabilities exceeded current assets by $1.63 billion; management said it expected no liquidity impact, citing credit facilities and capital-market access.
Material changes and drivers
- Common earnings rose despite lower operating income, as the effective tax rate fell to 18.4% from 37.4%, mainly due to the 2017 Tax Cuts and Jobs Act and the flow-through of tax-repair benefits.
- Management said tax-related changes did not significantly affect net income overall: regulated utilities deferred estimated tax benefits for return to customers, and certain segment revenue or margin reductions were offset by lower tax expense.
- Colder winter weather increased utility sales volumes and supported margins in Wisconsin and other states. Wisconsin electric and gas sales volumes were higher, but Wisconsin operating income fell $55.8 million, reflecting lower margins associated with tax-related customer benefits and higher expenses.
- Operating income also benefited from Bluewater, acquired in 2017, which contributed $7.8 million in Q1 2018. ATC affiliate earnings fell $9.1 million, primarily because of tax legislation, with the tax impact offset by lower income tax expense.
- Operating cash flow increased with higher customer collections and lower pension and OPEB payments. Higher capital spending and commercial paper repayments contributed to cash outflows from investing and financing activities, respectively.
Outlook, commitments, and risks
- Management expects a 2018 annual effective tax rate of 13%–14%, including an estimated 8% benefit from the flow-through of tax repairs. The filing does not provide a clear full-year earnings or EPS guidance figure.
- Estimated capital expenditures and acquisitions are $2.47 billion in 2018, $1.97 billion in 2019, and $2.69 billion in 2020; the company expects nearly $12 billion of capital expenditures from 2018–2022. Major projects include utility modernization, Chicago gas pipeline replacement, approximately 180 MW of Michigan gas-fired generation, and up to 350 MW of Wisconsin solar.
- WEC’s generation reshaping plan targets approximately 40% lower CO2 emissions by 2030 versus 2005 and retirement of about 1,800 MW of coal generation by 2020. The 1,190 MW Pleasant Prairie plant retired in April 2018; other planned retirements include Presque Isle, Pulliam units 7 and 8, and Edgewater Unit 4.
- Regulatory treatment of Tax Act benefits remained in progress in several jurisdictions. The Wisconsin PSCW had issued a preliminary determination, subject to a final order; Illinois approved a tax adjustment rider after quarter-end. Management warned that regulator-ordered customer refunds or application of tax benefits could differ from expectations.
- Environmental and regulatory matters include an estimated $70 million for wastewater-treatment and bottom-ash system work under the steam-electric effluent guidelines, subject to evolving rules and plant retirement plans. Manufactured-gas-plant remediation reserves were $617.2 million, with $668.2 million of related regulatory assets.
- Minimum future purchase commitments were $11.47 billion. PGL’s 2015–2017 QIP rider reconciliations remained pending; the company stated that recovery of all costs in open years was not assured. A 2014 reconciliation settlement included a $4.7 million customer refund and a $5.4 million rate-base reduction.
- Management identified weather, utility outages and system constraints, regulatory recovery and rate decisions, tax-law implementation, environmental compliance, commodity and financing costs, credit ratings, litigation, and cybersecurity among relevant risks. Moody’s placed WG’s outlook on negative in January 2018; management did not expect a material effect on capital-market access.
Important facts for investors to verify
- How final regulatory orders allocate and return Tax Act benefits, and whether the projected 13%–14% full-year effective tax rate is achieved.
- Whether colder-weather sales gains persist and how earnings perform absent the quarter’s weather and tax-related effects.
- Progress, cost, timing, and rate recovery for major capital projects and planned plant retirements, including replacement generation and environmental work.
- Outcomes of open rate and QIP reconciliation proceedings, environmental matters, and related potential customer refunds or cost disallowances.
- Funding needs and liquidity as capital spending continues, including debt maturities, borrowing costs, and access to credit and capital markets.