Business context and reporting period
WEC Energy Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. The company operates regulated electric and natural gas utilities in Wisconsin, Illinois, Michigan, and Minnesota; owns approximately 60% of electric transmission affiliate ATC; and leases generation assets through We Power. Results include a full year of Integrys operations in 2016 versus six months in 2015, limiting year-over-year comparability.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenues | $7.472 billion | $5.926 billion |
| Operating income | $1.682 billion | $1.251 billion |
| Net income attributable to common shareholders | $939.0 million | $638.5 million |
| Diluted EPS | $2.96 | $2.34 |
| Cash from operating activities | $2.104 billion | $1.294 billion |
| Capital expenditures | $1.424 billion | $1.266 billion |
| Long-term debt, excluding current portion | $9.158 billion | $9.124 billion |
| Short-term debt | $860.2 million | $1.095 billion |
Operating margin was approximately 22.5% of revenue, versus 21.1% in 2015. Cash from operations less capital expenditures was approximately $679.8 million; this is a simple cash-flow comparison, not a company-defined free-cash-flow measure. At year-end, total debt was $10.176 billion and debt was 53.2% of total capitalization. Cash and cash equivalents were $37.5 million. Current liabilities exceeded current assets by $262.9 million, while available capacity under bank credit facilities was $1.621 billion. The company reported compliance with debt covenants.
Fourth-quarter 2016 unaudited results were revenue of $1.963 billion, operating income of $361.7 million, common net income of $194.4 million, and diluted EPS of $0.61.
Material changes versus the prior comparable period
- Revenue increased 26.1%, common net income 47.1%, and diluted EPS 26.5%. Management attributed $201.7 million of the earnings increase to having a full year of Integrys results versus six months in 2015. Lower acquisition costs added a further $80.1 million after tax.
- Operating cash flow rose $809.9 million, reflecting Integrys inclusion and lower fuel and gas payments, among other factors. Capital spending increased $157.5 million.
- ATC equity earnings increased to $146.5 million from $96.1 million, primarily reflecting the larger ownership interest following the Integrys acquisition.
- Year-end total assets rose to $30.123 billion from $29.355 billion. Long-term debt was broadly stable; short-term debt declined.
Outlook, management commentary, risks, and unusual items
- Management forecast relatively flat retail electric sales over five years, excluding the Tilden mine, and natural gas delivery growth between flat and 0.5%, assuming normal weather. It expected a 2017 effective tax rate of 37%–38%.
- Estimated capital expenditures were $2.182 billion for 2017, $1.957 billion for 2018, and $1.899 billion for 2019. Major projects include Chicago pipeline modernization, Wisconsin distribution reliability work, and a proposed approximately 180 MW natural gas plant in Michigan’s Upper Peninsula. The latter was estimated at $265 million, or $275 million including AFUDC, subject to approvals.
- The board raised the quarterly dividend to $0.52 per share beginning in 2017, an annualized $2.08, and reaffirmed a target payout ratio of 65%–70% of earnings.
- Notable 2016 items included a $23.6 million pre-tax gain on repurchasing Integrys junior notes at a discount and gains on asset sales, including $19.6 million from Wisvest chilled-water assets and $10.9 million from the MCPP sale. Acquisition costs fell materially from 2015.
- Key risks include regulatory decisions and recovery of deferred costs; environmental rules and remediation; fuel, power, and interest-rate movements; weather and demand; capital-project cost or schedule overruns; cyber and physical security; and pension/OPEB assumptions. PGL’s infrastructure rider reconciliations and related investigations remained unresolved, with no assurance all costs would be recoverable. ATC’s lower allowed return on equity is expected to reduce future earnings and distributions.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate organic performance from the acquisition-driven increase in revenue and earnings, including the effect of acquisition costs and other gains.
- Review progress and regulatory recovery for PGL’s modernization program, WPS’s ReACT project, and other major capital investments.
- Track approval, final cost allocation, and schedule for UMERC’s proposed generation project and associated customer contract.
- Assess the outcome of ATC return-on-equity proceedings and their effect on equity earnings and cash distributions.
- Confirm that liquidity, debt maturities, pension funding, and the dividend target remain supportable under the planned capital program.