WEC ENERGY GROUP, INC. annual report, FY2017

WEC Energy Group, Inc. — 2017 Form 10-K

Business context and reporting period

Annual report for the year ended December 31, 2017; it is not a quarterly-only filing. WEC is a regulated electric and natural gas utility holding company serving Wisconsin, Illinois, Michigan, and Minnesota, with non-utility energy infrastructure operations and an approximately 60% equity interest in American Transmission Company (ATC).

Financial performance and liquidity

Metric	2017	2016
Operating revenues	$7,648.5 million	$7,472.3 million
Operating income	$1,785.2 million	$1,682.1 million
Net income attributable to common shareholders	$1,203.7 million	$939.0 million
Diluted EPS	$3.79	$2.96
Cash from operating activities	$2,079.6 million	$2,103.5 million
Capital expenditures	$1,959.5 million	$1,423.7 million

Revenue rose 2.4%, operating income 6.1%, and common net income 28.2%. Reported diluted EPS increased 28.0%. Derived operating and net margins were approximately 23.3% and 15.7%, respectively, versus 22.5% and 12.6% in 2016.
The effective tax rate fell to 24.1% from 37.6%; excluding the $206.7 million one-time tax-reform benefit, management reported a 2017 rate of 37.2%.
Operating cash flow declined $23.9 million. Cash and cash equivalents were $38.9 million at year-end. Cash from operations less capital expenditures was approximately $120 million.
Year-end short- and long-term debt, including the current portion of long-term debt, totaled $11,033.3 million. Debt was 53.8% of total capitalization on the company’s reported basis (52.5% on its adjusted basis).
Available capacity under bank backup credit facilities was $1,347.5 million. Current liabilities exceeded current assets by $1,655.8 million; management said it did not expect this to impair liquidity, citing credit facilities and capital-market access. The company reported compliance with debt covenants.
The annual common dividend was $2.08 per share. In January 2018, the board raised the quarterly dividend to $0.5525, or $2.21 annualized, and reaffirmed a 65–70% target payout ratio.

Material changes versus 2016

Higher earnings included the $206.7 million tax-reform benefit, improved Wisconsin and Illinois operating income, and $8.4 million of operating income from Bluewater, acquired in June 2017 for $226 million. Operating income also benefited from lower operating expenses; Wisconsin electric margins fell $63.0 million, mainly due to lower sales volumes and an SSR-related refund.
Wisconsin natural gas revenues rose to $1,270.2 million from $1,177.6 million, while electric utility revenues declined to $4,559.0 million from $4,628.1 million. The company attributed weaker electric sales principally to weather and lower use per customer.
Operating cash flow was nearly flat year over year, but investing cash outflow increased to $2,239.6 million, reflecting higher capital spending, the Bluewater acquisition, and greater ATC-related investment.
Interest expense increased to $415.7 million from $402.7 million, primarily due to higher debt levels and lower capitalized interest.
WEC classified $930.6 million of utility assets as plant to be retired. Planned coal-unit retirements include Pleasant Prairie by April 2018, Pulliam and Edgewater Unit 4 in 2018, and PIPP no later than 2020.

Outlook, commentary, risks, and unusual items

Management forecast normal-weather retail electric sales to remain flat or grow very slightly over five years; retail natural gas deliveries were forecast to range from flat to 0.5% growth annually.
Management expected the 2018 effective tax rate to be 15–16%, including an estimated 7-point benefit from tax repairs under a Wisconsin settlement; excluding that effect, the indicated range was 22–23%. Tax accounting remained provisional, and regulators were expected to determine how utility tax savings would be returned to customers.
Planned capital expenditures and acquisitions were $2,465 million for 2018, $1,971 million for 2019, and $2,690 million for 2020. The company expected almost $12 billion of capital expenditures for regulated utilities and non-utility energy infrastructure in 2018–2022, plus approximately $280 million of ATC and ATC Holdco contributions.
Generation strategy targets approximately 40% lower CO₂ emissions by 2030 compared with 2005, through coal retirements and investment in natural gas and renewables. A proposed 180 MW UMERC gas project was estimated at $266 million, or $277 million including AFUDC, with commercial operation expected in 2019.
Wisconsin electric, gas, and steam base rates were frozen through 2019 under a settlement; earnings-sharing mechanisms also apply. Recovery of deferred costs, including ReACT project costs and PGL infrastructure spending, remains subject to regulatory review.
Key risks include regulatory cost recovery and rate-case outcomes, tax-law implementation and customer refunds, weather and demand, commodity prices, major-project execution, environmental compliance, plant retirements, credit ratings and financing access, cyber and operational disruption, and pension/OPEB assumptions.
Environmental remediation reserves for manufactured-gas-plant sites were $617.2 million; related regulatory assets were $676.6 million. Asset retirement obligations were $573.7 million. The filing states that payment timing and future remediation costs are uncertain.
PGL faced state notices and a complaint concerning a 2016 natural-gas leak at its Manlove storage field and possible impact to the Mahomet Aquifer. The company said it believed any civil penalties would not be material. A Sheboygan River natural-resource-damages settlement was filed in December 2017 and was not expected to materially affect the financial statements.
Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.

Investor facts to verify

How much of 2017’s earnings and EPS increase is recurring versus the $206.7 million tax benefit, and how actual 2018 tax rates compare with management’s ranges.
Regulatory treatment and timing of the estimated $2.45 billion tax benefit assigned to utility ratepayers, and whether the rate freeze and earnings-sharing terms constrain returns.
Whether major capital projects remain on budget and schedule, particularly the Chicago gas-system modernization, UMERC generation, and coal-plant retirements; verify recovery of related costs in rates.
Developments in the Manlove Field matter, environmental remediation estimates, and the recoverability of associated regulatory assets.
Debt and liquidity trends, including commercial-paper use, refinancing needs, credit-rating changes, and the sustainability of the dividend under the planned investment program.