Business context and reporting period
Wisconsin Energy Corporation’s unaudited Form 10-Q covers the three and nine months ended September 30, 2014. The company operated regulated electric and gas utilities and a non-utility generation-leasing business. The filing predates the planned change of the combined company’s name to WEC Energy Group.
Financial results and position
Amounts are in millions of dollars except per-share figures. Comparisons are with the corresponding 2013 periods.
| Metric | Third quarter 2014 | Third quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $1,033.3 | $1,053.2 | $3,772.0 | $3,340.7 |
| Operating income | $246.1 | $258.0 | $868.6 | $808.5 |
| Net income | $126.3 | $137.5 | $466.9 | $433.1 |
| Diluted EPS | $0.56 | $0.60 | $2.05 | $1.88 |
| Cash from operations | Not separately reported | Not separately reported | $1,034.6 | $1,050.3 |
- Third-quarter revenue fell 1.9%, net income fell 8.1%, and diluted EPS fell $0.04. Operating and net margins were approximately 23.8% and 12.2%, respectively, versus 24.5% and 13.1% a year earlier.
- Nine-month revenue rose 12.9%, net income rose 7.8%, and diluted EPS increased from $1.88 to $2.05. Operating and net margins were approximately 23.0% and 12.4%, compared with 24.2% and 13.0% in 2013.
- Nine-month capital expenditures were $513.0 million, producing operating cash flow less capital expenditures of $521.6 million. Cash from operations declined $15.7 million year over year.
- At September 30, cash was $88.7 million; current assets were $1,274.5 million and current liabilities $1,065.6 million. Short-term debt was $475.8 million. Long-term debt, including current maturities, plus short-term debt totaled approximately $5.09 billion. The reported debt-to-capitalization ratio was 53.5%, or 50.9% using management’s adjusted presentation of junior notes.
- The company reported $1.2 billion of available, undrawn bank credit lines; commercial paper outstanding was $475.8 million. Nine-month dividends paid were $264.0 million, and the quarterly dividend was $0.39 per share.
Material changes versus prior comparable periods
- The third-quarter decline reflected lower electric revenue, including cooler summer weather and the loss of two Michigan iron ore mines as retail customers. The company estimated cooler weather reduced electric revenue by $40.5 million. Lower operation and maintenance expense partly offset the impact.
- Nine-month utility operating income increased $70.2 million. Gas margin rose $25.0 million, mainly because colder weather increased heating volumes; electric revenue also benefited from increased sales for resale and MISO system-support revenues.
- Nine-month total revenue growth largely reflected higher gas commodity costs passed through to customers: gas revenue increased $366.1 million while cost of gas sold increased $341.1 million. Gas margin, a more informative measure than gas revenue, increased $25.0 million.
- Third-quarter corporate and other operating loss widened to $5.9 million, including approximately $3.6 million in external Integrys acquisition costs. Nine-month acquisition-related costs were approximately $8.6 million.
- Interest expense declined year over year, while the effective tax rate increased to 38.9% in the quarter and 37.9% year to date. The filing cites acquisition costs, reduced tax benefits related to the Treasury Grant, and lower AFUDC equity earnings among the factors affecting tax or other income.
Outlook, management commentary, risks and unusual items
- Integrys transaction: The proposed acquisition was valued at approximately $5.4 billion based on the September 30 share price. Consideration was 1.128 Wisconsin Energy shares and $18.58 cash per Integrys share; the company expected to issue approximately $1.5 billion of holding-company debt and about 91 million shares. Closing was anticipated in the second half of 2015, subject to shareholder and regulatory approvals. The DOJ closed its HSR review after the reporting date, on October 24, 2014. Acquisition-related litigation sought to block the transaction; the company said it believed the cases lacked merit. A $175 million termination fee could apply under specified circumstances.
- Management outlook: The company expected 2014 capital expenditures of approximately $711 million and an annual effective tax rate of 37.5%–38.5%. Before the acquisition closes, it planned to continue a dividend policy providing for 7%–8% annual increases; after closing, it expected a combined-company payout target of 65%–70% of earnings. The filing provides no specific full-year earnings guidance.
- Regulatory matters: A proposed settlement in the 2015 Wisconsin rate case included requested electric, gas and steam rate changes; a final PSCW order was anticipated by year-end. The filing also describes an MISO system-support resource arrangement for Presque Isle Power Plant (PIPP), with estimated monthly payments of approximately $8.1 million under a new agreement effective October 15, 2014, subject to FERC approval and cost true-up.
- Environmental and operating risks: The company warned that proposed greenhouse-gas rules could require significant compliance spending and adversely affect operating costs. PIPP’s continued operation for reliability, air-quality compliance and related cost recovery remain uncertain. Two Paris Generating Station units were expected to remain out of service until at least the first half of 2015 amid permitting disputes. Potential manufactured-gas-plant remediation was estimated at $19 million–$56 million over ten years; recorded reserves were $36.9 million.
- Other notable items: The company received approximately $76.2 million in Treasury Grant proceeds in June 2014 and recognized grant income to match customer bill credits. It recorded $3.5 million of grant income in the quarter and $10.1 million year to date. The share repurchase program was terminated in connection with the Integrys transaction. Management said liquidity was adequate for the foreseeable future, while noting that acquisition-related rating outlooks for Wisconsin Energy and WECC had been revised to negative or placed on negative watch.
Important facts for investors to verify
- Progress and final terms of required approvals, financing and integration plans for the Integrys acquisition, including the potential termination fee and pending shareholder litigation.
- Whether the expected 2015 rate-case outcomes and MISO/PIPP cost-recovery arrangements are approved, and how they affect earnings and customer rates.
- Drivers of the lower third-quarter earnings and weaker year-to-date margins, particularly weather, Michigan customer switching, acquisition costs and gas-cost pass-through effects.
- Debt, commercial-paper usage, available credit and credit-rating developments as the acquisition approaches.
- Potential costs and recoverability of environmental compliance and remediation, including greenhouse-gas regulation, PIPP requirements and the Paris Generating Station matter.