WEC Energy Group, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report. Comparisons are materially affected by the June 29, 2015 acquisition of Integrys; its operations are included only from the acquisition date.
Business context
WEC is a regulated electric and natural gas utility holding company operating in Wisconsin, Illinois, Michigan, and Minnesota, with generation, non-utility energy businesses, and an approximately 60% equity interest in electric transmission company ATC. The Integrys acquisition expanded the company’s utility footprint and increased its ATC ownership.
Financial performance and condition
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Operating revenues | $5,926.1 million | $4,997.1 million |
| Operating income | $1,250.5 million | $1,112.1 million |
| Net income attributable to common shareholders | $638.5 million | $588.3 million |
| Diluted earnings per share | $2.34 | $2.59 |
| Cash from operating activities | $1,293.6 million | $1,198.9 million |
| Capital expenditures | $1,266.2 million | $761.2 million |
- Operating income increased about 12%, while revenue rose about 19%; the approximate operating margin was 21.1%, versus 22.3% in 2014. Net income attributable to common shareholders increased about 9%, but diluted EPS fell about 10%, reflecting the substantial increase in shares issued for the acquisition.
- Cash used in investing activities was $2,517.5 million, including $1,329.9 million for the acquisition, net of cash acquired. Financing activities provided $1,211.8 million.
- At year-end, total assets were $29.4 billion, long-term debt excluding current maturities was $9.1 billion, and short-term debt was $1.1 billion. Total debt was $10.4 billion; debt was 54.4% of total capitalization (51.4% on management’s adjusted basis).
- Cash and cash equivalents were $49.8 million. Current liabilities exceeded current assets by $502.2 million; management cited available credit lines and capital-market access as liquidity support. The company had $1.387 billion of available capacity under bank backup credit facilities.
- Utility electric margins were $2,699.2 million and natural gas margins were $482.1 million. The filing emphasizes margins because fuel and commodity costs are largely passed through to customers.
Material changes versus the prior period
- Integrys contributed $1,416.8 million of 2015 revenue and $65.9 million of net income after closing. The transaction increased assets from $14.9 billion to $29.4 billion and added approximately $3.0 billion of debt assumed.
- Common shares outstanding rose substantially following issuance of approximately 90.2 million shares as acquisition consideration; weighted-average diluted shares increased to 272.7 million from 227.5 million.
- Acquisition-related costs were $107.6 million in 2015. A $20.8 million pretax gain on the sale of Minergy and its remaining financial assets also benefited results.
- Operating cash flow increased $94.7 million, including acquired-company cash flows. Capital expenditures increased $505.0 million, reflecting the acquisition and utility investment needs.
- The effective tax rate rose to 40.4% from 38.0%, primarily due to nondeductible acquisition expenses. Interest expense increased 37.9% to $331.4 million, primarily because of higher debt.
Outlook, commentary, risks, and contingencies
- Management forecast 2016 earnings-per-share accretion from the acquisition, based on preliminary estimates; it did not provide a numerical EPS forecast in the cited filing text. It expected a 2016 effective tax rate of 37.5%–38.5%.
- Capital expenditure estimates were $1.51 billion for 2016, $1.56 billion for 2017, and $1.55 billion for 2018. Major projects include PGL’s Chicago gas-main replacement program, expected investment of $250–$280 million annually over the next three years, and WPS’s approximately $342 million ReACT emissions-control project, targeted for completion in April 2016.
- Retail electric sales in the existing service territory were slightly lower on a weather-normalized basis in 2015. Management forecast flat to 0.5% annual retail electric sales growth over five years, excluding two Michigan iron ore mines; the mines’ owner announced plans to close one mine in 2017, potentially affecting about 2% of annual retail electric sales.
- The board raised the quarterly dividend to $0.495 per share beginning in 2016, or $1.98 annually, and reaffirmed a target payout ratio of 65%–70% of earnings.
- Key exposures include extensive utility regulation and rate-recovery risk; environmental compliance and remediation costs; weather and demand variability; commodity and interest-rate risk; generation outages and fuel-supply constraints; cyber and physical security; pension and OPEB funding; and successful integration of Integrys. Goodwill was $3.0 billion, including $2.6 billion from Integrys; no impairment was recorded in 2015.
- Environmental matters include the Clean Power Plan, which was stayed by the U.S. Supreme Court in February 2016 pending litigation, and estimated $70–$100 million of wastewater-treatment and bottom-ash system work. The company said compliance costs and cost recovery remain uncertain.
- Illinois regulators and the Illinois Attorney General were investigating allegations concerning PGL’s AMRP and related disclosures; the company said outcomes could not yet be estimated. A FERC complaint could reduce ATC’s authorized return on equity and result in customer refunds; management considered refunds probable but could not determine the outcome.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. It also reported that current debt covenants were met.
Important facts for investors to verify
- How much of 2015’s earnings growth reflects acquired operations versus recurring performance, and whether the acquisition becomes accretive as management expected.
- Integration costs, realized synergies, final purchase-price allocation, and the recoverability of $3.0 billion in goodwill.
- Debt repayment plans, refinancing needs, credit ratings, and liquidity following the acquisition and planned capital program.
- Regulatory decisions and cost recovery for the AMRP, ReACT, environmental remediation, and ATC return-on-equity proceedings.
- The timing and financial effects of the announced iron ore mine closure and any related changes to electric sales or customer arrangements.
- Final environmental compliance requirements and associated capital costs, particularly those affected by litigation or regulatory changes.