WEC ENERGY GROUP, INC. annual report, FY2013

Business context and reporting period

Wisconsin Energy Corporation’s Form 10-K covers the fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. Its principal businesses are regulated electric and gas utilities in Wisconsin and Michigan, generation leased to its utility, and a 26.2% investment in American Transmission Company (ATC). Amounts below are U.S. dollars.

Financial and operating performance

Revenue rose 6.4%, net income 5.7%, and diluted continuing-operations EPS 6.8%. Operating income increased 8.0%. Operating cash flow was higher year over year, while capital spending declined. The company reported $26.0 million of cash at year-end and approximately $1.2 billion of undrawn credit facilities; commercial paper outstanding was $537.4 million. Actual debt to total capitalization was 55.2% (52.5% on the company’s adjusted basis for rating-agency treatment of junior notes).

Fourth-quarter revenue was $1.178 billion versus $1.071 billion in 2012; operating income was $271.6 million versus $201.4 million; net income was $144.3 million versus $98.8 million; diluted EPS was $0.63 versus $0.43.

Material changes versus prior period

• Utility segment operating income grew to $719.4 million from $647.7 million, primarily due to colder winter weather and rate increases; higher operating and depreciation costs partly offset the gains.
• Gas deliveries increased 9.9% to 2,442.8 million therms, with colder weather supporting retail gas margin. Electric retail sales declined, while total delivered electricity increased, partly reflecting greater wholesale/resale volumes.
• Two Michigan iron ore mines switched to alternative suppliers on September 1, reducing large-customer electric sales. The company said it did not expect the loss to materially affect consolidated 2014 results, citing mitigation efforts.
• Non-utility operating income rose to $367.1 million from $358.8 million. The new 50 MW Rothschild biomass plant entered service in November 2013.
• Long-term debt declined, but short-term debt increased. Dividends paid rose to $328.9 million from $276.3 million; the company also repurchased $223.4 million of shares during 2013.

Outlook, risks and unusual items

• Management estimated 2014–2018 capital investment of $3.2–$3.5 billion; 2014–2016 planned capital expenditures total $711.0 million, $804.2 million and $621.8 million, respectively. Management expected comparable non-utility earnings in 2014 and relatively flat non-utility revenue.
• Management forecast roughly 0.5% annual retail electric sales growth over five years and flat to 0.5% annual retail gas-delivery growth through 2018, assuming normal weather and economic improvement. It expected a 2014 effective tax rate of 37.5%–38.5%.
• The Board’s dividend policy targeted a 65%–70% payout ratio in 2017. In January 2014 it raised the quarterly dividend to $0.39 per share. A new share repurchase authorization permits up to $300 million through 2017.
• An $82.6 million Section 1603 renewable-energy grant receivable was recorded for the biomass plant; $48.0 million was recognized as 2013 income, matching customer bill credits, with the remaining amount subject to regulatory treatment and future credits. The filing expected receipt in the first half of 2014.
• Key exposures include rate-case and regulatory recovery outcomes; environmental rules and related spending; commodity prices and generation availability; weather and demand; Michigan customer choice; financing access and interest rates; pension investment performance; cybersecurity and reliability; and litigation or remediation obligations.
• Environmental and regulatory uncertainty includes compliance choices and potential costs at Presque Isle Power Plant, proposed greenhouse-gas and water rules, and coal-combustion-product regulation. The Valley Power Plant conversion to natural gas was estimated at $65–$70 million, excluding AFUDC. Paris Generating Station Units 1 and 4 were subject to an operating restriction and alleged violations; potential penalties were not quantified.
• The company terminated a proposed Presque Isle joint venture and was evaluating the plant’s long-term future. A one-year MISO System Support Resource agreement effective February 2014 provided $4.4 million monthly fixed-cost payments plus variable operating costs, subject to FERC approval.

Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

• Whether the Treasury grant was received as expected and how grant proceeds, customer credits and related regulatory balances were ultimately reconciled.
• Actual financial impact of the Michigan mine departures, MISO support payments, and any related rate recovery.
• Final environmental requirements, compliance plans and recoverable costs, especially for Presque Isle, Paris Generating Station and the Valley conversion.
• Execution and funding of the multiyear capital plan, and effects on debt, liquidity, credit ratings and shareholder distributions.
• Regulatory asset recoverability: reported balances were $1.109 billion in assets and $879.1 million in liabilities at year-end 2013.