WEC Energy Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results reflect the June 29, 2015 acquisition of Integrys for only the post-acquisition period; comparisons with 2014 are therefore not like-for-like. The company serves approximately 1.6 million electric and 2.8 million natural gas customers.
Financial performance
| Metric | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $1,698.7 million | $1,033.3 million | $4,077.8 million | $3,772.0 million |
| Operating income | $345.7 million | $246.1 million | $870.3 million | $868.6 million |
| Net income | $182.5 million | $126.3 million | $459.2 million | $466.9 million |
| Diluted EPS | $0.58 | $0.56 | $1.78 | $2.05 |
| Interest expense | $103.8 million | $60.4 million | $225.6 million | $181.7 million |
Third-quarter net income increased $56.2 million, including $46.2 million attributable to Integrys. Nine-month net income decreased $7.7 million; reported diluted EPS fell partly amid higher share count following issuance of approximately 90.2 million shares for the acquisition. Third-quarter operating income included strong Wisconsin performance and higher ATC equity earnings, while acquisition-related debt increased interest expense.
For the nine months, operating cash flow was $1,073.2 million versus $1,034.6 million. Capital expenditures were $765.1 million, and acquisition spending net of acquired cash was $1,329.9 million; investing cash outflow totaled $2,095.9 million. Financing cash inflow was $983.0 million. Cash at period-end was $22.2 million.
At September 30, total assets were $28,769.6 million, long-term debt including current maturities was approximately $9.3 billion, and short-term debt was $661.5 million. Debt represented 53.4% of capitalization on the company’s GAAP basis, or 50.3% using its adjusted rating-agency treatment of junior notes. Current liabilities exceeded current assets by approximately $484.9 million. The company reported $1,620.5 million of available capacity under revolving credit agreements, after commercial paper and letters of credit.
Material changes and notable items
- Integrys acquisition consideration was $5.583 billion. The preliminary allocation included $2.947 billion of acquisition goodwill; total goodwill was $3.389 billion. The purchase-price allocation remained preliminary.
- WEC’s ATC ownership increased from 26.2% to approximately 60%; ATC remains an equity-method investment, not consolidated. Nine-month equity earnings from ATC were $70.4 million versus $52.8 million.
- Acquisition-related costs were $80.2 million pre-tax for the first nine months of 2015. A $20.8 million pre-tax gain from the sale of Minergy and remaining financial assets partly offset earnings pressures.
- Common shares outstanding were 315.7 million at September 30, versus 225.5 million at year-end 2014. The annualized dividend rate was raised to $1.83 per share; the fourth-quarter dividend was declared at $0.4575 per share.
- ITF, a compressed-natural-gas fueling business, was classified as held for sale; its sale was being actively marketed. It was not treated as a discontinued operation.
Outlook, risks and contingencies
- Management expected the acquisition to be accretive to EPS in 2016, its first full year after closing, but described the expectation as preliminary and subject to integration, transaction-cost and other uncertainties. The filing does not provide a numerical earnings forecast.
- Management said liquidity was adequate through operating cash flow, short-term borrowing, credit facilities and capital-market access, despite the working-capital deficit.
- Major planned investment includes the ReACT emissions-control project at Weston Unit 3, estimated at approximately $342 million excluding AFUDC and targeted for completion in April 2016; PGL’s pipeline replacement program, with anticipated investment of $250 million annually over the next five years; and the Western Gas Lateral, placed in service in early November 2015 at an approximate cost of $130 million excluding AFUDC.
- Regulatory matters include proposed 2016 rate increases at WPS, MERC and MGU; a two-year base-rate freeze for PGL and North Shore Gas; and earnings-sharing conditions for certain Wisconsin utilities beginning in 2016. Illinois investigations into allegations concerning PGL’s pipeline replacement program remained ongoing; management said the effect on cost recovery could not yet be determined.
- FERC complaints seek lower transmission-owner returns on equity, including ATC’s. WEC said refunds were probable, and ATC had recorded a reserve that reduced WEC’s equity earnings; the ultimate ruling and financial effect were uncertain.
- Environmental rules may require future compliance spending. WEC was assessing potential effects of the Clean Power Plan and wastewater requirements; some plant modifications and costs were not yet determined. Environmental remediation reserves were $611.3 million, substantially higher than year-end primarily because of Integrys balances; related regulatory assets were $676.2 million.
- Other exposures include $12.587 billion of minimum future purchase commitments, $297.8 million of guarantees, and acquisition-related shareholder litigation with a proposed settlement awaiting a final hearing scheduled for December 17, 2015. Management did not expect known environmental contingencies beyond accrued or disclosed amounts to be material, but actual outcomes remain uncertain.
Key investor verification points
- Confirm acquisition accounting, the final goodwill allocation and whether expected integration savings and 2016 EPS accretion are achieved.
- Track debt, interest expense, liquidity and refinancing needs as acquisition-related financing is absorbed.
- Review rate-case outcomes, earnings-sharing provisions, the Illinois pipeline-program investigations and potential ATC ROE refunds.
- Monitor environmental compliance costs, remediation recoverability and the status or sale terms of ITF.
- Assess the comparability of reported earnings and per-share results given the acquisition date, added shares, weather effects and one-time items.