WEC ENERGY GROUP, INC. quarterly report, Q2 FY2014

WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. The filing issuer was Wisconsin Energy Corporation; it stated that the combined company following the proposed Integrys acquisition would be named WEC Energy Group, Inc. Figures below are unaudited and in U.S. dollars.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Operating revenue	$1,043.7 million	$1,012.3 million	$2,738.7 million	$2,287.5 million
Operating income	$240.7 million	$229.5 million	$622.5 million	$550.5 million
Net income	$133.0 million	$119.0 million	$340.6 million	$295.6 million
Diluted EPS	$0.58	$0.52	$1.50	$1.28
Dividends per share	$0.39	$0.34	$0.78	$0.68

• Q2 revenue increased 3.1%, net income 11.8%, and diluted EPS 11.5% year over year. Six-month revenue rose 19.7%, net income 15.2%, and diluted EPS 17.2%.
• Q2 utility segment operating income rose $16.3 million to $155.2 million; non-utility segment operating income was nearly unchanged at $91.7 million. Acquisition-related costs contributed about $5.1 million to the higher corporate and other operating loss.
• Q2 electric utility revenue increased $20.5 million, including higher MISO resale sales, SSR revenue, and Wisconsin pricing; cooler-than-prior-year weather reduced retail demand. Six-month electric revenue gains also reflected colder winter weather and MISO sales, partly offset by the loss of two Michigan iron ore mines as retail customers.
• Six-month gas revenue rose sharply with colder weather and higher gas commodity costs, which largely flow through under gas cost recovery mechanisms. Gas gross margin increased $22.7 million to $268.4 million for the six months; Q2 gross margin was essentially flat at $81.9 million.
• Other operation and maintenance expense fell $14.0 million in Q2 and $27.0 million in the first half, primarily from lower benefit costs. Net interest expense also declined, mainly due to lower debt levels and average interest rates.

Cash flow, debt, and liquidity

• First-half cash from operations was $721.3 million, versus $681.5 million a year earlier; management attributed the increase mainly to $76.2 million of Treasury Grant proceeds and higher net income, partly offset by working-capital needs.
• Cash used in investing activities was $312.9 million, including $305.5 million of capital expenditures. Cash used in financing was $401.0 million. Cash ended the period at $33.4 million.
• At June 30, total debt was $5,042.7 million, including $4,632.6 million of long-term debt and current maturities and $410.1 million of short-term debt. Debt to total capitalization was 53.4% on the company’s reported basis, or 50.8% using its rating-agency-adjusted treatment of junior notes.
• Current assets were $1,285.5 million and current liabilities $980.8 million. The company reported approximately $1.2 billion of available, undrawn bank credit facilities; commercial paper outstanding was $410.1 million.
• Wisconsin Electric issued $250 million of 4.25% debentures due 2044 in May. Proceeds were used to repay short-term debt and for general corporate purposes.

Material changes, outlook, and notable items

• Proposed Integrys acquisition: Announced June 22, 2014, for consideration valued at approximately $5.8 billion: 1.128 Wisconsin Energy shares plus $18.58 cash per Integrys share. The company expected to finance the cash portion with about $1.5 billion of holding-company debt and issue approximately 91 million shares. Closing was anticipated in the second half of 2015, subject to shareholder, antitrust, and regulatory approvals.
• The company expected 2014 capital expenditures of approximately $711 million and an annual effective tax rate of 37.5%–38.5%. It said it expected adequate funding from internally generated cash, borrowing arrangements, and capital markets.
• Management planned to continue its existing dividend policy before the acquisition closes, including targeted annual increases of 7%–8%; the filing described a 65%–70% earnings payout target for the combined company after closing. The share repurchase program was terminated in connection with the acquisition.
• Wisconsin Electric and Wisconsin Gas reported a settlement with customer groups on requested 2015–2016 Wisconsin rates, including electric, gas, and steam rate proposals. The proposals and agreed return-on-equity terms remained subject to PSCW action.
• The $76.2 million Treasury Grant for the biomass facility was received in June. Grant income was recognized to match customer bill credits, and proceeds exceeding amounts originally included in rates were to be returned to customers in future rate proceedings.
• Environmental exposure includes a $19 million–$56 million estimate for manufactured-gas-plant investigation and remediation over the next ten years, with $36.9 million reserved. Proposed greenhouse-gas requirements could add significant costs; the company was still evaluating their impact. PIPP was expected to remain under an MISO System Support Resource arrangement, with a new agreement planned from October 2014.
• Rating agencies revised or placed Wisconsin Energy and its financing subsidiary on negative outlook/watch following the acquisition announcement; utility subsidiary ratings and outlooks were largely affirmed. Six purported shareholder class actions sought to block or unwind the acquisition; the company said it considered them without merit.
• Other operational and regulatory matters include temporary outages of Paris Generating Station Units 1 and 4 pending resolution of air-permit issues, and uncertainty over future cooling-water intake requirements. The company reported no material change in market-risk disclosures.

Important facts for investors to verify

1. Progress, financing terms, approvals, conditions, and timing of the Integrys acquisition, including the reported $175 million potential termination fee under specified circumstances.
2. PSCW outcomes for the 2015–2016 rate proposals and the treatment of Treasury Grant proceeds and customer bill credits.
3. Whether MISO and FERC approve continuing SSR cost recovery for PIPP, including expected MATS compliance costs, and whether the units remain necessary for system reliability.
4. Actual costs and rate recovery for environmental compliance, remediation, the Western Gas Lateral, and other planned capital projects.
5. Debt, liquidity, and credit-rating developments as acquisition financing proceeds; the reported capital expenditure and tax-rate outlooks are management expectations, not guarantees.