WEC Energy Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The unaudited filing covers an electric and natural gas utility group serving Wisconsin, Illinois, Michigan, and Minnesota, an approximately 60% interest in American Transmission Company (ATC), and non-utility generation. WEC acquired Integrys on June 29, 2015; therefore, 2016 results include its operations for the full periods, while 2015 comparisons largely do not. Year-over-year increases are not directly comparable as organic growth.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenues | $1,602.0 million | $991.2 million | $3,796.8 million | $2,379.1 million |
| Operating income | $332.1 million | $165.8 million | $921.4 million | $524.6 million |
| Net income attributable to common shareholders | $181.4 million | $80.9 million | $527.6 million | $276.7 million |
| Diluted EPS | $0.57 | $0.35 | $1.66 | $1.21 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1,224.1 million | $716.5 million |
| Capital expenditures | Not separately stated for quarter | Not separately stated for quarter | $618.7 million | $368.0 million |
Margins and drivers: Q2 operating income rose $166.3 million; management cited $96.4 million of higher earnings from including Integrys and the absence of 2015 acquisition costs. Wisconsin electric and gas margins also benefited from WPS being included and higher electric sales, partly driven by warmer weather. The filing does not provide a single consolidated margin measure. Six-month operating income increased $396.8 million, with comparable-period interpretation similarly affected by the acquisition.
Cash flow and liquidity: Six-month investing cash outflow was $449.1 million, including $618.7 million in capital spending and $161.0 million in asset-sale proceeds; financing cash outflow was $792.7 million. Cash ended at $32.1 million, down from $49.8 million at year-end 2015. At June 30, short-term debt was $927.8 million and long-term debt, including current maturities, was $8,997.9 million; total debt was $9,925.7 million. Debt-to-total capitalization was 52.8% as reported, or 50.1% on management’s rating-agency-adjusted basis. The company had $1,546.2 million of available revolving credit capacity. Current liabilities exceeded current assets by $371.2 million; management said it did not expect this to affect liquidity.
Other metrics: Total assets were $29.2 billion; goodwill was $3.0 billion. WEC’s quarterly dividend rate was $0.495 per share ($1.98 annualized). The six-month effective tax rate was 38.2%; management expected a 2016 full-year rate of 37.5%–38.5%.
Material changes and notable items
- Integrys’s full-period inclusion drove much of the reported revenue and earnings increase. Management attributed $96.4 million of Q2 and $262.9 million of first-half earnings improvement to Integrys inclusion and acquisition costs incurred in 2015.
- Interest expense increased $38.3 million in Q2 and $79.8 million in the first half, mainly from Integrys and acquisition-financing debt issued in 2015.
- WEC repurchased $154.9 million principal amount of Integrys 6.11% Junior Notes for $128.6 million plus accrued interest, recognizing a $23.6 million gain in first-half other income.
- In April, the company sold Milwaukee County Power Plant assets, recording a $10.9 million pretax gain, and Wisvest chilled-water assets, recording a $19.6 million pretax gain. ITF’s sale was completed in the first quarter with no material gain or loss.
- ATC equity earnings were $30.9 million in Q2 and $69.4 million in the first half. The year-over-year increase primarily reflects WEC’s higher ownership interest after the Integrys acquisition; ALJ recommendations in rate-of-return complaints reduced recognized earnings relative to what they otherwise would have been.
Outlook, risks, and contingencies
- Investment plans: Estimated capital expenditures are $1.56 billion in 2016, $1.91 billion in 2017, and $1.55 billion in 2018; planned ATC capital contributions total approximately $317 million for 2016–2018. Major projects include PGL’s gas-system modernization program, WPS’s ReACT emissions controls and distribution upgrades, and other utility infrastructure work.
- Environmental compliance: The company estimated $95 million–$130 million for wastewater-treatment and bottom-ash system improvements under steam-electric effluent rules. The Clean Power Plan was stayed pending litigation, but could entail significant compliance costs if implemented. Other air- and water-quality requirements may require additional spending.
- Regulatory recovery and proceedings: Recovery of deferred project costs depends on regulator approval. PGL’s gas modernization program remains subject to ICC review; a proceeding initiated in July 2016 was expected to produce an order in the first quarter of 2017, and the long-term effect was unclear. MERC’s interim $9.7 million rate increase is subject to refund pending a final order expected by year-end 2016.
- ATC returns: FERC complaints seek lower transmission returns. ALJ recommendations are not binding; decisions were expected in Q4 2016 and Q2 2017. Lower authorized returns could reduce ATC earnings and distributions.
- Environmental reserves and commitments: At June 30, environmental remediation liabilities were $617.9 million, with $686.6 million of related regulatory assets. Minimum future energy-related purchase commitments were $12.35 billion. Outstanding guarantees totaled $233.2 million. Management stated that reserves were established for ordinary-course legal and administrative matters and did not expect their resolution to materially affect results or financial condition.
- Other risks: Management highlighted weather and demand variability, commodity supply and price exposure, capital-project execution and cost recovery, regulatory decisions, credit and capital-market access, litigation, environmental rules, and cybersecurity. Moody’s affirmed specified utility ratings but changed their outlook from stable to negative, citing the absence of certain automatic recovery mechanisms in Wisconsin; WEC did not expect a material effect on market access.
- Controls and goodwill: Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. The annual goodwill impairment test was in process; the company reported no known impairment indicators at the filing date.
Investor facts to verify
- Separate acquisition-driven growth from underlying performance; compare 2015 with the filing’s pro forma information and later full-year results.
- Track final regulatory decisions on PGL’s modernization program, MERC rates, WPS cost deferrals, and recovery of major capital investments.
- Monitor FERC decisions on ATC allowed returns and any resulting effects on WEC earnings and distributions.
- Assess whether environmental compliance estimates and the large purchase commitments lead to additional spending, rate recovery, or changes in operations.
- Review debt, commercial-paper usage, credit availability, and rating outlooks alongside the substantial planned capital program and dividend commitments.
- Confirm the status and outcome of the pending legal, environmental, and regulatory matters, including the ICC proceedings and remediation obligations.