WEC Energy Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. WEC is a regulated electric and natural-gas utility holding company serving customers in Wisconsin, Illinois, Michigan, and Minnesota; it also owns approximately 60% of transmission affiliate ATC and operates non-utility energy infrastructure. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months 2017 | Three months 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenues | $1,657.5 | $1,712.5 | $5,593.5 | $5,509.3 |
| Operating income | $393.6 | $399.0 | $1,373.1 | $1,320.4 |
| Net income attributable to common shareholders | $215.4 | $217.0 | $771.1 | $744.6 |
| Diluted EPS | $0.68 | $0.68 | $2.43 | $2.35 |
| Dividends per common share | $0.520 | $0.495 | $1.560 | $1.485 |
- Third quarter: Revenue declined 3.2%, while common net income fell 0.7%; diluted EPS was unchanged. Operating income decreased $5.4, primarily from a $19.4 decline in Wisconsin, partly offset by gains in non-utility energy infrastructure and corporate and other.
- Nine months: Revenue increased 1.5%, operating income rose 4.0%, common net income rose 3.6%, and diluted EPS increased from $2.35 to $2.43.
- Cash flow, nine months: Operating cash flow was $1,746.7 (prior year $1,721.9); capital expenditures were $1,309.2 (prior year $1,000.1); cash used in investing was $1,552.0. Cash ended at $18.1, down from $37.5 at year-end 2016.
- Balance sheet and liquidity: Total assets were $31,013.0. Short-term debt was $993.5 and long-term debt, including current maturities, was $9,495.1; total debt was $10,488.6. The reported debt-to-total-capitalization ratio was 53.2% (51.9% on management’s adjusted basis). Current liabilities exceeded current assets by $1,202.8; management cited available credit facilities and capital-market access as liquidity support. Available capacity under credit agreements was $1,473.6 at quarter-end.
- Margins: Third-quarter Wisconsin electric and natural-gas margins together decreased $52.6. For the first nine months, they decreased $82.8. Management attributes the electric-margin pressure chiefly to lower sales volumes, unfavorable weather, and fuel-cost under-collections; lower operating expenses partly offset the declines.
Material changes and management commentary
- Bluewater natural-gas storage facilities were acquired on June 30 for $226.0, plus $4.9 of acquisition costs. Bluewater contributed $5.9 to third-quarter and nine-month operating income after acquisition.
- Nine-month earnings benefited from a $38.0 increase in Illinois operating income, $18.4 higher non-utility energy infrastructure income, and a $15.2 increase in ATC equity earnings. Offsetting factors included $27.4 lower other income and $10.3 higher interest expense.
- Quarterly results were affected by cooler summer weather: Wisconsin cooling degree days were materially lower than in Q3 2016, contributing to reduced electric sales. Wisconsin total electric sales volume fell by 707,300 MWh.
- Management expects a 2017 annual effective tax rate of 37%–38%. The filing provides no specific full-year earnings or EPS guidance.
- Current quarterly dividend is $0.52 per share, or $2.08 annualized. The board declared a $0.52 dividend in October 2017, payable December 1.
Outlook, investment plans, and risks
- Estimated capital expenditures and acquisitions are $2,207.1 for 2017, $2,465.2 for 2018, and $1,971.1 for 2019. Separately, management expects about $12 billion of regulated utility capital investment from 2017–2021 and approximately $350 of contributions to ATC and ATC Holdco over that period.
- UMERC’s proposed 180-MW natural-gas generation project was approved by the MPSC in October 2017. Estimated project cost is $265.7 ($277 including AFUDC); commercial operation is expected in 2019, supporting retirement of PIPP no later than 2020. The filing also describes plans to retire approximately 1,800 MW of coal generation by 2020, subject to final review.
- Wisconsin regulators approved a settlement freezing WE, WG, and WPS base rates through 2019. It also extends certain cost deferrals and earnings-sharing mechanisms. Various intervenors requested rehearing.
- Management estimates $80–$110 of potential capital cost for wastewater-treatment and bottom-ash compliance under environmental rules; compliance timing was postponed, and final requirements and costs remain uncertain. Manufactured-gas-plant remediation reserves were $617.5, with related regulatory assets of $683.3; future recovery and remediation costs remain subject to uncertainty.
- Key exposures include regulatory recovery of deferred costs, pending Illinois QIP reconciliations, ATC return-on-equity proceedings, environmental regulation, weather and utility demand, project execution and cost recovery, commodity and financing conditions, and litigation. The company reported $11,863.2 of minimum future purchase commitments.
- Moody’s downgraded certain utility subsidiaries in July 2017 and changed the outlook on several WEC-related entities to negative; management did not expect a material near-term impact on market access.
- After quarter-end, the CEO was hospitalized following a stroke. The filing states he was released and recovering; the chairman continued as interim CEO.
Important facts for investors to verify
- Whether lower Wisconsin electric sales and margins persist, and the extent to which weather or customer usage explains the trend.
- Regulatory decisions affecting deferred ReACT costs, Illinois QIP rider reconciliations, and Bluewater service agreements.
- Actual capital spending, financing needs, debt maturities, and liquidity relative to the large planned investment program.
- Final environmental compliance requirements and costs, as well as the timing and economics of planned generation retirements and replacement capacity.
- Developments in ATC ROE proceedings, credit ratings, and CEO succession or recovery arrangements.