WEC Energy Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. WEC is a regulated electric and natural gas utility holding company serving customers in Wisconsin, Illinois, Michigan and Minnesota; it also owns approximately 60% of transmission company ATC and operates We Power. WEC acquired Integrys on June 29, 2015, making year-to-date comparisons materially affected by the acquisition.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,712.5 million | $1,698.7 million | $5,509.3 million | $4,077.8 million |
| Operating income | $399.0 million | $345.7 million | $1,320.4 million | $870.3 million |
| Net income attributable to common shareholders | $217.0 million | $182.5 million | $744.6 million | $459.2 million |
| Diluted EPS | $0.68 | $0.58 | $2.35 | $1.78 |
| Operating margin | 23.3% | 20.4% | 24.0% | 21.3% |
Q3 common earnings rose $34.5 million. Management attributed the improvement chiefly to a $47.7 million increase in Wisconsin electric margins, driven by higher sales in warmer weather, alongside lower interest expense; ATC earnings and other income were lower. Nine-month earnings rose $285.4 million, but management said $263.3 million of the increase reflected Integrys results included in 2016’s first six months and higher 2015 acquisition costs. Q3 results are more directly comparable than year-to-date results.
For the nine months, operating cash flow was $1,721.9 million (2015: $1,074.4 million); capital expenditures were $1,000.1 million (2015: $791.8 million). Investing used $841.6 million and financing used $905.1 million. Cash was $25.0 million at quarter-end.
Balance sheet, liquidity and capital
- Total assets were $29,443.5 million; long-term debt was $9,088.1 million, current maturities $89.4 million and short-term debt $789.4 million. The company reported total debt of $9,966.9 million and debt-to-total-capitalization of 52.8% (51.4% using its rating-agency-adjusted presentation).
- Current assets of $1,817.7 million were below current liabilities of $2,025.5 million, a $207.8 million working-capital deficit. Management said this was not expected to impair liquidity, citing available credit and capital-market access.
- Revolving credit capacity totaled $2.5 billion, with $1,684.6 million available after commercial paper and letters of credit. Commercial paper outstanding was $789.4 million at a weighted-average rate of 0.69%.
- Dividends paid in the first nine months were $468.6 million. The quarterly dividend was $0.495 per share; the board declared the same amount for payment in December 2016.
Changes, outlook and notable items
- Q3 Wisconsin electric margins increased $47.7 million year over year, including a $28.2 million contribution from higher volumes associated with warmer weather. Nine-month comparisons also include WPS, PGL, NSG, MERC and MGU for a longer period following the Integrys acquisition.
- Management forecast a 2016 annual effective tax rate of 37.5%–38.5%. It did not provide an earnings-per-share forecast in the supplied filing text.
- Estimated capital expenditures were $1,485.4 million for 2016, $1,952.2 million for 2017 and $1,956.8 million for 2018, plus anticipated ATC capital contributions of approximately $328 million over 2016–2018. Major projects include PGL’s gas-system modernization, WPS reliability and emissions projects, and a proposed 170-MW Michigan gas generation project estimated at $255 million.
- Management reported no goodwill impairment in its 2016 annual tests. Q2 asset-sale gains included $10.9 million on Milwaukee County Power Plant assets and $19.6 million on Wisvest chilled-water assets. A $23.6 million gain arose from repurchasing Integrys junior notes at a discount.
- ATC’s allowed return on equity is subject to FERC complaints. A September 2016 order affirmed a lower base ROE and required refunds for a past period; a second complaint remained unresolved, with a FERC order expected in Q2 2017. Management expects lower ATC earnings and distributions as a result.
Risks and contingencies
- Environmental compliance remains a material area of uncertainty. The company estimated $80–$110 million for wastewater-treatment and bottom-ash system improvements under federal rules. Future requirements related to air emissions, water, climate regulation and plant operations may add costs; some rules and legal challenges remained pending.
- Manufactured-gas-plant remediation had $681.8 million of regulatory assets and $608.1 million of reserves at September 30, 2016. Recovery of deferred costs depends on regulatory approval.
- Minimum future energy-related purchase commitments were $12,048.8 million. Other guarantees totaled $237.4 million. Management stated that it could not estimate certain future remediation costs beyond amounts disclosed.
- Regulatory matters include an ICC investigation and review of PGL’s modernization program, with a final order expected in Q1 2017; the company said the long-term impact was uncertain. Recovery of some PGL infrastructure-rider costs was also not assured.
- Formation of UMERC and its Tilden supply agreement remained subject to regulatory approval. If approved, the utility was expected to begin operations January 1, 2017; the new generation was expected online in 2019 and could enable PIPP’s retirement in late 2019 or 2020.
- Management identified weather, regulatory decisions and cost recovery, capital-project execution, environmental rules, commodity supply and prices, credit-market access, litigation, cybersecurity and goodwill valuation among forward-looking risks. It reported no material changes to the prior annual report’s risk factors and no material changes in market-risk disclosures.
Key facts for investors to verify
- How much of future earnings growth is organic versus attributable to the Integrys acquisition and changes in the comparison period.
- Whether regulators approve recovery of deferred project and infrastructure costs, particularly for PGL and WPS.
- The timing, final terms and earnings effect of FERC decisions on ATC’s allowed ROE and refunds.
- Actual environmental compliance spending versus the disclosed estimates, and the status of Clean Power Plan and water-rule litigation.
- Execution, regulatory approval and customer-cost allocation for the UMERC/Tilden generation project and related PIPP retirement plans.
- Progress against capital-spending plans, liquidity needs, debt levels and the sustainability of dividend payments.