WEC Energy Group (then Wisconsin Energy Corporation) — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015. The company operated utility and non-utility energy businesses, principally serving Wisconsin and Michigan. It had agreed to acquire Integrys Energy Group; the combined company was expected to be named WEC Energy Group. Interim results are seasonal and may not indicate full-year performance.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $1,387.9 million | $1,695.0 million | Down $307.1 million |
| Operating income | $358.8 million | $381.8 million | Down $23.0 million |
| Net income | $195.8 million | $207.6 million | Down $11.8 million |
| Diluted EPS | $0.86 | $0.91 | Down $0.05 |
| Operating cash flow | $329.7 million | $385.1 million | Down $55.4 million |
- Revenue fell primarily as natural gas costs and gas sales revenue declined; gas utility revenue decreased $287.8 million while gas cost of sales decreased $275.3 million. Gas gross margin declined $12.5 million to $174.0 million, mainly because Q1 2014 was substantially colder.
- Utility segment operating income was $276.5 million, down $16.2 million. Non-utility segment operating income increased $1.4 million to $91.6 million. Acquisition and proposed Michigan asset-sale costs reduced Q1 earnings by $0.04 per share.
- Cash used in investing was $156.3 million, including $149.5 million of capital expenditures. Cash used in financing was $170.1 million. The company contributed $100 million to its qualified pension plan, reducing operating cash flow.
- At March 31, cash was $65.2 million. Current liabilities exceeded current assets by approximately $233.9 million. Available undrawn backup credit facilities were approximately $1.2 billion; commercial paper outstanding was $563.0 million.
- Debt-to-total capitalization was 53.2% on a GAAP basis, or 50.6% using management’s adjusted presentation of its junior notes. Long-term debt, including current maturities, and short-term debt totaled approximately $5.16 billion.
- The quarterly dividend was raised 8.3% to $0.4225 per share. The 2015 effective tax rate was 38.5%; management expected a full-year rate of 37%–38%.
Material changes, outlook, and risks
- Electric utility revenue decreased $16.9 million. Retail revenue was affected by milder weather than in Q1 2014, while two Michigan mines returned as retail customers in February. Net revenues from the mines are deferred for customers and are not expected to significantly affect earnings.
- Management estimated approximately $830 million of 2015 capital expenditures for the existing business. The initial Western Gas Lateral project phase was estimated at $175 million–$185 million, excluding AFUDC, with completion targeted for late 2015.
- The Integrys transaction was expected to close by the end of summer 2015. The stated financing plan included approximately 91 million new Wisconsin Energy shares, $1.5 billion of new debt, and assumption of Integrys’ outstanding debt and preferred stock, estimated at $3.4 billion fair value. Subsequent to quarter-end, the company entered into $1.15 billion of forward-starting interest-rate swaps. Several regulatory approvals were reported after quarter-end; the PSCW had verbally approved the deal, with a written order expected by the end of May.
- Management targeted a 65%–70% dividend payout ratio in 2017 and anticipated a 7%–8% dividend increase upon completion of the acquisition. These are forward-looking expectations, not guarantees.
- Key risks include acquisition approval, financing, integration and credit-rating impacts; on May 4, Moody’s placed the company’s ratings under review for downgrade. Other risks include weather and energy prices, regulatory rate decisions, generation reliability, environmental compliance and litigation.
- Environmental matters include estimated manufactured-gas-plant investigation and remediation costs of $15 million–$47 million over ten years, with $32.6 million reserved. The company also identified potential future cooling-water compliance requirements and ongoing permit matters; it said known environmental contingencies were not expected to be material beyond accrued or disclosed amounts.
- The company reported ten acquisition-related shareholder lawsuits; the parties had reached a memorandum of understanding for settlement, subject to court approval. Management believed ordinary-course legal matters would not materially affect the financial statements.
Important facts for investors to verify
- Whether the Integrys transaction closed on the anticipated timetable and on the stated financing and regulatory terms, and the resulting combined-company debt and credit ratings.
- Whether reported earnings trends persist after separating commodity-price and weather effects, deferred mine revenues, and acquisition-related costs.
- Actual 2015 capital spending, project completion and funding needs, and liquidity as current maturities and acquisition financing come due.
- Regulatory outcomes for utility rates and Michigan generation reliability, plus any resulting costs or changes to customer recovery.
- Environmental remediation and compliance estimates, and final resolution of acquisition-related litigation.