WEC Energy Group, Inc. — 2018 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2018 (not a standalone fourth-quarter filing). WEC is a regulated electric and natural gas utility holding company serving Wisconsin, Illinois, Michigan, and Minnesota; it also holds an approximately 60% interest in transmission company ATC and operates non-utility energy infrastructure and renewable generation businesses.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $7,679.5 million | $7,648.5 million |
| Operating income | $1,468.4 million | $1,776.1 million |
| Net income attributable to common shareholders | $1,059.3 million | $1,203.7 million |
| Diluted EPS | $3.34 | $3.79 |
| Cash from operating activities | $2,445.5 million | $2,078.6 million |
| Capital expenditures | $2,115.7 million | $1,959.5 million |
| Interest expense | $445.1 million | $415.7 million |
Operating margin was approximately 19.1% of revenue, down from 23.2% in 2017; net margin was approximately 13.8%, versus 15.7%. Operating cash flow exceeded capital expenditures by $329.8 million, before acquisitions and other investing activity.
Balance sheet and liquidity: Total assets were $33.5 billion; long-term debt was $10.0 billion excluding current maturities, and total debt including short-term debt and current maturities was $11.8 billion. Debt was 54.6% of total capitalization (53.8% in 2017). Current liabilities exceeded current assets by $1.084 billion. WEC reported $1.357 billion of available capacity under its credit facilities and said it expected adequate liquidity and capital-market access. Cash and cash equivalents were $84.5 million.
At year-end, regulatory assets totaled $3.856 billion and regulatory liabilities $4.288 billion. The company reported $616.4 million of estimated future manufactured-gas-plant remediation costs. Common dividends were $2.21 per share for 2018; the board raised the quarterly dividend to $0.59, or $2.36 annualized, for 2019.
Material changes and period comparison
- Full-year revenue increased only 0.4%, while operating income fell 17.3%, common net income fell 12.0%, and diluted EPS declined 11.9%.
- Management said earnings excluding the Tax Legislation’s effects increased $78.8 million year over year. The reported decline primarily reflects the absence of a $206.7 million one-time tax benefit recorded in 2017, along with higher operating expenses and interest costs. The 2018 effective tax rate was 13.8%, versus 24.1% in 2017.
- Wisconsin segment operating income declined $255.0 million, including higher expenses tied to tax-related regulatory treatment and earnings-sharing mechanisms. Colder winter and warmer summer weather supported higher retail volumes. Illinois operating income declined $24.1 million, while Other States operating income rose $14.4 million.
- Fourth-quarter 2018 revenue was $2,076.8 million, operating income $289.8 million, common net income $205.0 million, and diluted EPS $0.65. Fourth-quarter 2017 amounts were $2,055.0 million, $407.0 million, $432.6 million, and $1.36, respectively; the 2017 quarter included the tax-remeasurement benefit.
- Cash from operations increased $366.9 million, principally on higher customer collections and lower operating-maintenance payments. Investing cash outflow rose to $2.384 billion, including $2.116 billion of capital expenditures and acquisitions of wind assets. Long-term debt issuance was $1.740 billion, compared with $435 million in 2017.
Outlook, commentary, and risks
- Management forecasts five-year weather-normalized retail electric sales growth of flat to 0.5% and natural gas delivery growth of 0.5% to 1.0%. It did not provide a 2019 EPS guidance range in the supplied filing text.
- Estimated capital expenditures and acquisitions are $2.705 billion in 2019, $2.927 billion in 2020, and $2.511 billion in 2021; planned capital expenditures for regulated utilities and non-utility energy infrastructure total nearly $12.7 billion over 2019–2023. ATC and ATC Holdco contributions are forecast at approximately $250 million over 2019–2023.
- Management expects a 2019 effective tax rate of 10.5%–11.5%, including an estimated 9.5 percentage-point benefit from flow-through tax repairs; excluding that effect, the expected range is 20%–21%.
- Generation reshaping includes retirement of approximately 1,800 MW of coal capacity by 2020. About 1,500 MW was retired in 2018; PIPP is required to retire by May 31, 2019. A roughly 180 MW Upper Peninsula natural-gas facility was expected to enter service in the second quarter of 2019. The company targets CO₂ emissions reductions of approximately 40% below 2005 levels by 2030 and 80% by 2050.
- Key exposures include regulatory decisions and cost recovery, environmental compliance and remediation, weather and energy demand, fuel and power prices, construction cost and schedule risks, interest rates and credit ratings, counterparties, cyber and physical security, and pension/OPEB investment performance. Moody’s downgraded certain WEC and subsidiary ratings in July 2018, citing reduced cash flow following tax reform; the outlook was stable after the downgrade.
- Notable contingencies include the Manlove natural-gas storage leak and related Illinois proceedings, and an EPA finding alleging mercury-emission violations at PIPP. Management did not expect either matter to have a material financial-statement impact. Regulatory recovery of retired-plant carrying values and PGL’s infrastructure-rider costs remains subject to review or future proceedings.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Investor verification priorities
- Reconcile 2018 earnings and fourth-quarter comparisons for the 2017 one-time tax benefit, tax-repair flow-through, and customer refunds or credits.
- Track regulatory outcomes for retired generating-plant balances, Wisconsin rate proceedings, PGL’s open QIP reconciliations, and the remaining tax-reform filings.
- Monitor capital spending, financing needs, debt maturities, credit ratings, and the ability to maintain the targeted 65%–70% dividend payout ratio.
- Verify construction progress, cost recovery, and timing for the UMERC gas facility, solar projects, and other generation and infrastructure investments.
- Follow the Manlove Field remediation and enforcement matters, PIPP allegations, and environmental rulemaking for any change in expected costs or materiality.