WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. The company was a regulated utility holding company operating mainly in Wisconsin and Michigan, with electric, natural gas and steam utilities and a non-utility generation-leasing business.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $4,997.1 million | $4,519.0 million | +10.6% |
| Operating income | $1,112.1 million | $1,080.1 million | +3.0% |
| Net income | $588.3 million | $577.4 million | +1.9% |
| Diluted EPS | $2.59 | $2.51 | +3.2% |
| Cash from operations | $1,197.7 million | $1,231.0 million | -2.7% |
| Capital expenditures | $736.1 million | $687.4 million | +7.1% |
Consolidated operating margin was approximately 22.3%, versus 23.9% in 2013. Revenue growth substantially exceeded operating-income growth, reflecting, among other factors, higher pass-through gas costs. Electric gross margin was $2,187.1 million, up from $2,164.2 million; gas gross margin was $460.0 million, up from $439.6 million.
Fourth quarter: Revenue was $1,225.1 million versus $1,178.3 million; operating income was $243.5 million versus $271.6 million; net income was $121.4 million versus $144.3 million; diluted EPS was $0.53 versus $0.63.
Debt and liquidity: Year-end long-term debt, including current maturities, was $4,610.5 million and short-term commercial paper was $617.6 million; total debt on this basis was about $5.23 billion. Cash was $61.9 million. Current liabilities exceeded current assets by about $133.3 million. The company reported approximately $1.2 billion of available undrawn credit facilities, supporting outstanding commercial paper. Debt-to-total capitalization was 54.0% on a GAAP basis, or 51.4% on management’s adjusted basis for the junior notes.
Operating cash flow less capital expenditures was approximately $461.6 million, compared with $543.6 million in 2013. Common dividends paid totaled $352.0 million; the 2014 dividend was $1.56 per share.
Material changes versus the prior comparable period
- Utility energy operating income increased to $770.2 million from $719.4 million; non-utility energy operating income was nearly flat at $368.2 million.
- Gas utility revenue rose to $1,496.1 million from $1,113.7 million, largely alongside higher gas costs and colder winter weather; gas margin increased more moderately. Electric revenue rose 2.8%, supported by higher sales for resale and MISO System Support Resource (SSR) revenue, but affected by cool summer weather and the loss of two Michigan iron-ore mines as retail customers for most of the year.
- Utility operation and maintenance expense declined, primarily due to lower pension and medical benefit costs. Net interest expense also declined, mainly because of lower debt levels and average interest rates.
- The effective tax rate increased to 38.1% from 36.9%, partly due to reduced tax benefits, lower equity AFUDC and nondeductible acquisition costs. Acquisition-related external costs reduced 2014 earnings by approximately $0.06 per share.
- The company received $76.2 million from a renewable-energy Treasury Grant in 2014; recognized grant income was $17.4 million, compared with $48.0 million in 2013, reflecting customer bill-credit treatment.
Outlook, commentary, risks and unusual items
- Proposed Integrys acquisition: The transaction was expected to close in the second half of 2015, subject to approvals. Integrys shareholders were to receive 1.128 Wisconsin Energy shares and $18.58 cash per share. The company expected to issue about 91 million shares and $1.5 billion of debt, and assume Integrys debt with an estimated fair value of $3.3 billion. The combined company was to be named WEC Energy Group, Inc.
- Michigan assets and SSR: In January 2015, the company entered a non-binding term sheet to sell its Michigan electric distribution assets and Presque Isle Power Plant (PIPP) to UPPCO. It expected to seek recovery of about $190 million of net unrecovered plant costs, subject to approvals and final terms. The two mines returned as retail customers effective February 1, 2015; the company and mine owners sought termination of the PIPP SSR agreement. The filing says the outcome of the related MPSC proceeding was uncertain.
- Capital and demand outlook: Estimated capital expenditures for 2015–2017 totaled approximately $2.15 billion; the company estimated $3.3–$3.5 billion of capital investment over 2015–2019. Management forecast approximately 0.5% annual compound growth in electric sales and gas retail therm deliveries over five years, assuming normal weather and continued economic improvement. No specific earnings guidance is provided in the filing text.
- Dividend: In January 2015, the board raised the quarterly dividend to $0.4225 per share, or $1.69 annualized, and affirmed a target payout ratio of 65–70% of earnings in 2017. It anticipated a 7–8% dividend increase for shareholders upon completion of the acquisition.
- Environmental and operating exposure: Key uncertainties include future greenhouse-gas, air-emissions and wastewater rules; coal ash and remediation obligations; plant outages and fuel or purchased-power costs; weather, demand and regulatory rate recovery. The company estimated the Valley Power Plant coal-to-gas conversion at $65–$70 million, excluding AFUDC, with completion scheduled in 2015. It estimated manufactured-gas-plant investigation and remediation costs of $15–$47 million over ten years and had recorded $32.6 million in reserves.
- Other contingencies: Litigation relating to the Integrys transaction had a settlement framework awaiting court approval. Environmental permits and remediation, the PIPP disposition and recovery of plant costs, and potential FERC reductions to ATC’s allowed return on equity warrant monitoring. The company reported effective internal controls and received unqualified audit opinions.
Important facts for investors to verify
- Progress, final terms, approvals, financing, dilution and integration assumptions for the Integrys acquisition.
- Final UPPCO sale terms and regulatory approvals, the PIPP SSR termination and the amount and timing of any recovery of unrecovered plant costs.
- Whether the 2015–2019 capital program and environmental compliance costs remain within estimates and are recoverable through rates.
- Underlying utility earnings and margins apart from weather, gas-cost pass-throughs, SSR payments and Treasury Grant-related customer credits.
- Liquidity, debt and credit-rating effects of the acquisition and the planned dividend growth and payout targets.