Business context and reporting period
WEC Energy Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. The company operates regulated electric and natural gas utilities across Wisconsin, Illinois, Michigan, and Minnesota, owns approximately 60% of American Transmission Company (ATC), and operates We Power. Comparisons with Q1 2015 are materially affected by the June 2015 acquisition of Integrys; 2016 results include its operations, while Q1 2015 generally does not.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $2,194.8 million | $1,387.9 million |
| Operating income | $589.3 million | $358.8 million |
| Net income attributable to common shareholders | $346.2 million | $195.8 million |
| Diluted EPS | $1.09 | $0.86 |
| Operating cash flow | $695.9 million | $330.0 million |
| Capital expenditures | $312.0 million | $153.2 million |
Revenue increased about 58% and common earnings about 77%, with the acquired Integrys businesses contributing $983.1 million in revenue and $158.2 million in net income. Management attributed the $150.4 million increase in common earnings primarily to Integrys; warmer weather reduced WE and WG margins by $29.2 million pretax ($17.5 million after tax). Diluted EPS rose despite a larger weighted-average share count (317.1 million versus 227.3 million). Operating margin was approximately 26.8%, compared with 25.9%.
Interest expense was $100.9 million, up $41.5 million, largely reflecting Integrys and acquisition-related debt. Other income included a $23.6 million gain from repurchasing Integrys junior notes at a discount. The effective tax rate was 38.1%, versus 38.4%. Common dividends were $0.495 per share for the quarter; the board raised the quarterly rate 8.2%, to an annualized $1.98.
At March 31, cash was $34.7 million; current assets were $1.896 billion and current liabilities $2.230 billion, a $333.4 million working-capital deficit. Short-term debt was $896.4 million and long-term debt, including current maturities, was approximately $9.108 billion. Reported debt was $10.005 billion, or 53.1% of total capitalization; management’s rating-agency-adjusted ratio was 50.4%. Revolving credit capacity totaled $2.5 billion, with $1.586 billion available. Management said existing credit facilities, capital-market access, and internally generated cash should provide adequate liquidity.
Material changes versus the prior comparable period
- The acquisition added Illinois, other-state gas utility operations, and a larger ATC interest to the consolidated comparison. ATC equity earnings increased to $38.5 million from $16.1 million, principally due to the higher ownership interest.
- Wisconsin segment operating income increased $51.0 million, including WPS, acquired in 2015. WEC and WG experienced lower margins from warmer weather.
- Operating cash flow increased $365.9 million, including $307.8 million from Integrys operations. Investing cash use rose with higher capital spending; financing cash use increased with debt repayment, dividends, and share purchases.
- Capital spending more than doubled, to $312.0 million. Cash from the sale of businesses was $106.5 million; the ITF sale was completed in the first quarter with no material gain or loss.
Outlook, risks, and unusual items
The filing provides no full-year earnings guidance. Management estimated a 2016 annual effective tax rate of 37.5%–38.5% and projected capital expenditures of $1.560 billion in 2016, $1.910 billion in 2017, and $1.550 billion in 2018. Major projects include WPS’s approximately $345 million Weston Unit 3 emissions-control project and PGL’s Chicago gas-main replacement program, expected to require $250–$280 million annually for three years. Planned ATC capital contributions for 2016–2018 were approximately $317 million.
Key risks include regulatory approval and recovery of deferred costs and major investments; ongoing Illinois investigations concerning PGL’s gas-system modernization program; potential environmental compliance spending; weather and energy demand; commodity, financing, and counterparty risks; and litigation. The company estimated $95–$130 million for certain wastewater-treatment and ash-handling compliance work. It recorded $617.6 million of environmental-remediation liabilities, substantially offset by regulatory assets; future remediation costs remain uncertain. The company also disclosed $12.494 billion of minimum future energy-related purchase commitments, which it expects to recover through customer rates.
The Clean Power Plan was stayed pending litigation, and its eventual requirements and cost impact were uncertain. FERC proceedings regarding ATC’s authorized return on equity could reduce future ATC earnings and distributions; management considered refunds probable but could not determine the outcome. The filing states that the quarter’s results are not necessarily indicative of full-year results because of seasonality.
Important facts investors should verify
- Separate acquisition-driven growth from underlying, comparable utility performance; confirm segment trends and the impact of weather.
- Track regulatory outcomes for the Illinois AMRP investigations, WPS project cost recovery, and ATC return-on-equity complaints.
- Assess funding and execution of projected capital spending, alongside debt levels, credit access, and dividend commitments.
- Monitor environmental compliance requirements, remediation estimates, and the timing and recoverability of related costs.
- Review the final terms and financial effects of the Integrys acquisition accounting and junior-note repurchase, including the $23.6 million gain.