WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q1 2014 Form 10-Q
Business context and reporting period. The unaudited filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company operated utility energy and non-utility energy segments, principally through Wisconsin Electric, Wisconsin Gas and We Power. Results are seasonal and are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $1,695.0 million | $1,275.2 million | +$419.8 million |
| Operating income | $381.8 million | $321.0 million | +$60.8 million |
| Net income | $207.6 million | $176.6 million | +$31.0 million |
| Diluted EPS | $0.91 | $0.76 | +$0.15 |
| Cash from operating activities | $385.1 million | $330.3 million | +$54.8 million |
| Capital expenditures | $129.2 million | $133.6 million | -$4.4 million |
Revenue increased mainly because colder weather and higher delivered gas prices lifted gas utility revenues; higher gas costs largely pass through under gas cost recovery mechanisms. Gas gross margin was $186.5 million, up $22.6 million (13.8%). Utility-segment operating income rose $62.1 million to $292.7 million, while non-utility operating income declined $1.4 million to $90.2 million. The first quarter was 16.2% colder than the prior-year quarter and 23.8% colder than normal.
Other notable results: fuel and purchased power costs increased $47.6 million; operation and maintenance expense declined $13.0 million, primarily due to lower benefit costs; net interest expense fell $2.7 million to $62.3 million, mainly due to lower debt. The effective tax rate increased to 38.6% from 36.2%, principally due to lower tax benefits associated with Treasury Grant income and lower equity AFUDC.
Balance sheet, cash flow and liquidity
- At March 31, 2014, cash was $27.6 million; total assets were $14.8 billion; common equity was $4.322 billion.
- Long-term debt, including current maturities, was $4.693 billion, and short-term debt was $422.2 million. Total debt was $5.115 billion; debt to total capitalization was 54.0% on a GAAP basis and 51.4% using management’s rating-agency-adjusted presentation.
- Operating cash flow of $385.1 million exceeded investing outflows of $139.1 million; financing outflows were $244.4 million. Financing outflows included $88.1 million of common dividends and $52.6 million of share purchases.
- Available, undrawn bank credit facilities totaled approximately $1.2 billion; consolidated commercial paper outstanding was $422.2 million. Management stated it expected adequate funding from internal cash generation, borrowings and capital-market access.
Material changes and outlook
- Net income rose 17.6% and diluted EPS increased from $0.76 to $0.91. Revenue growth substantially exceeded profit growth, in part because of pass-through gas costs.
- Electric revenue increased $73.5 million. Higher resale sales into MISO markets and colder weather were partly offset by the loss of two Michigan iron-ore mines as retail customers, which reduced large commercial/industrial sales.
- The company recognized $3.5 million of Treasury Grant income in Q1 2014. It had recorded an $82.6 million grant receivable and expected to receive the grant during 2014; customer bill credits and regulatory accounting affect the timing and benefit of the grant.
- Management estimated 2014 consolidated capital expenditures of approximately $711 million and expected a 2014 annual effective tax rate of 37.5%–38.5%. It planned to seek new electric, gas and steam rates in a filing expected in Q2 2014, for rates effective January 2015.
- The quarterly dividend was increased to $0.39 per share, equivalent to $1.56 annually. A share-repurchase authorization permits purchases of up to $300 million through 2017; $18.6 million had been repurchased under the program by March 31.
Risks, contingencies and unusual items
- Michigan generation and customer choice: The two iron-ore mines switched suppliers in September 2013. MISO’s System Support Resource agreement for Presque Isle Power Plant (PIPP) took effect February 1, 2014, with specified fixed monthly payments of $4.4 million plus variable costs. FERC conditionally accepted the agreement on April 1, subject to further review. The company filed on April 15 to retire PIPP effective October 15, 2014; MISO reliability decisions and any replacement support agreement remain uncertain.
- Environmental obligations: Estimated future manufactured-gas-plant investigation and remediation costs were $19 million–$56 million over ten years; reserves were $36.9 million. The filing says additional costs beyond accrued or disclosed amounts for known quantifiable environmental contingencies were not expected to be material, but some future costs could not yet be estimated.
- Paris Generating Station: Units 1 and 4 remained unavailable under a WDNR order concerning alleged permitting violations. The company expected the units to remain out of service at least through Q2 2014 and disclosed potential fines and penalties.
- Regulation and projects: Pending or proposed air- and water-quality requirements could require controls or modifications, with costs not yet fully determinable. The Valley Power Plant conversion to natural gas was estimated at $65 million–$70 million, excluding AFUDC, with completion expected by late 2015 or early 2016.
- Total contractual obligations and other commercial commitments were approximately $21.9 billion at quarter-end. Management reported no material change in market-risk disclosures or risk factors from the 2013 Form 10-K. Disclosure controls were considered effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether earnings growth persists when weather normalizes, and how much Q1’s results depended on unusually cold conditions versus underlying customer demand and rates.
- Whether the PIPP SSR arrangement receives final regulatory approval, payments are recovered as expected, and MISO permits the proposed retirement or requires continued operation.
- The timing and receipt of the Treasury Grant, associated customer credits, and any reconciliation under the approved escrow treatment.
- Updates to environmental compliance spending, manufactured-gas-plant remediation estimates, and the Paris Generating Station proceeding and potential penalties.
- Progress on the expected 2015 rate filing, planned capital spending, and the company’s ability to maintain liquidity and debt metrics while funding capital needs, dividends and share repurchases.