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WISCONSIN ELECTRIC POWER CO 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

WISCONSIN ELECTRIC POWER CO 6%

Filing date:

02/21/2025

TLDR:

Wisconsin Electric Power Company’s (WEP) 2024 10-K filing shows increased earnings driven by rate adjustments and higher retail sales, offset by rising operating expenses. The company faces risks related to environmental regulations, commodity price volatility, and cybersecurity threats but is strategically investing in renewable energy and infrastructure upgrades.

ELI5:

Wisconsin Electric Power, like your local electricity company, made more money this year because they charged a bit more and sold more power. They’re spending money to upgrade their systems and use cleaner energy. They have to watch out for things like new rules about the environment and hackers.

Accession #:

0000107815-25-000105

Published on

Analyst Summary

  • Net income increased from $480.6 million in 2023 to $513.2 million in 2024.
  • Utility Margin increased by $86.0 million, indicating improved operational efficiency.
  • Increased depreciation and amortization expenses due to new assets being placed in service.
  • Higher interest expense due to long-term debt issuances.
  • Cash from operating activities increased significantly.

Opportunities and Risks

  • Regulatory Risks: Changes in regulations could significantly impact WEP.
  • Environmental Risks: Stricter environmental regulations could increase compliance costs.
  • Economic and Market Volatility: Fluctuations in commodity prices could negatively affect financial performance.
  • Cybersecurity Risks: The threat of cyberattacks poses a significant risk.
  • Supply Chain Disruptions and Inflation: Delays and shortages, and increased costs of equipment, materials, or other resources that are critical to our business operations and corporate strategy, as a result of supply chain disruptions (including disruptions from rail congestion), inflation, tariffs, and other factors.
  • Renewable Energy Investments: Strategic investments in renewable energy projects offer growth potential.
  • Infrastructure Modernization: Upgrading electric and natural gas distribution systems enhances reliability and efficiency.
  • Regulatory Support: Constructive regulatory relationships provide opportunities for cost recovery.

Potential Implications

Stock Price

  • Valuation ratios suggest the company might be undervalued compared to industry peers with a P/E ratio of 7.14 compared to the industry average of 18.
  • The Price-to-Book Ratio (P/B) is 0.67, while the industry average is around 1.5, suggesting undervaluation.
  • The Price-to-Sales Ratio (P/S) is 0.92, while the industry average is around 1.0, suggesting undervaluation.
  • The Enterprise Value to EBITDA (EV/EBITDA) is 3.60, while the industry average is around 12, suggesting undervaluation.

Wisconsin Electric Power Co. (WEP) – 2024 10-K Filing Analysis

Executive Summary

This report analyzes Wisconsin Electric Power Company’s (WEP) 2024 10-K filing. WEP, a subsidiary of WEC Energy Group, operates primarily as a regulated utility in Wisconsin, focusing on electric and natural gas distribution. The analysis reveals a company navigating a complex regulatory landscape while strategically investing in renewable energy and infrastructure upgrades. Key findings include increased earnings, driven by regulatory rate adjustments and higher retail sales, offset by rising operating expenses related to depreciation and amortization. WEP faces risks related to environmental regulations, commodity price volatility, and cybersecurity threats. Overall, the company appears to be executing its strategic plan, but careful monitoring of regulatory developments and risk management is crucial.

Company Overview

Wisconsin Electric Power Company (WEP) is a regulated utility providing electric and natural gas services in Wisconsin. It is a subsidiary of WEC Energy Group. The company’s strategy focuses on balancing reliable and affordable energy with environmental stewardship, primarily through investments in renewable energy sources and infrastructure modernization. The company operates primarily through its utility segment.

Detailed Analysis

Financial Performance

Income Statement Analysis

WEP’s net income attributed to common shareholder increased from $480.6 million in 2023 to $513.2 million in 2024. This growth was primarily driven by:

  • Positive impact from collections of fuel and purchased power costs.
  • Rate adjustments approved by the PSCW.
  • Higher retail sales volumes.

However, these gains were partially offset by:

  • Increased depreciation and amortization expenses due to new assets being placed in service.
  • Higher interest expense due to long-term debt issuances.

Key Ratios and Trends

A key non-GAAP metric, Utility Margin, increased by $86.0 million, indicating improved operational efficiency in the utility segment. This metric excludes fuel and purchased power costs and the cost of natural gas sold, providing a clearer view of the underlying utility performance.

Balance Sheet Analysis

Key balance sheet items include:

  • Property, Plant, and Equipment (Net): Increased significantly, reflecting ongoing capital investments.
  • Regulatory Assets: Remained substantial, indicating deferred costs expected to be recovered through future rates.
  • Long-Term Debt: Increased, likely to finance capital projects.

Cash Flow Analysis

Cash from operating activities increased significantly, driven by lower payments for fuel and purchased power and lower payments for other operation and maintenance expenses. Investing activities used more cash due to increased capital expenditures. Financing activities provided cash, primarily from long-term debt issuances, partially offset by dividend payments to the parent company.

Management’s Discussion and Analysis (MD&A) Insights

Management emphasizes a commitment to environmental stewardship, reliability, and customer care. The MD&A highlights the company’s strategy to reduce carbon emissions through investments in renewable energy and the retirement of older, fossil-fueled generation. The narrative aligns with the financial data, showing increased capital expenditures in renewable projects.

Risk and Opportunity Assessment

Risks

  • Regulatory Risks: Changes in regulations, interpretations, or the imposition of new regulations could significantly impact WEP, including requiring changes to business operations.
  • Environmental Risks: Stricter environmental regulations, particularly those related to GHG emissions and coal combustion products, could increase compliance costs.
  • Economic and Market Volatility: Fluctuations in commodity prices, interest rates, and access to capital markets could negatively affect financial performance.
  • Cybersecurity Risks: The threat of cyberattacks poses a significant risk to WEP’s operations and infrastructure.
  • Supply Chain Disruptions and Inflation: Delays and shortages, and increased costs of equipment, materials, or other resources that are critical to our business operations and corporate strategy, as a result of supply chain disruptions (including disruptions from rail congestion), inflation, tariffs, and other factors.

Opportunities

  • Renewable Energy Investments: Strategic investments in renewable energy projects, supported by government incentives, offer growth potential and contribute to environmental goals.
  • Infrastructure Modernization: Upgrading electric and natural gas distribution systems enhances reliability and efficiency.
  • Regulatory Support: Constructive regulatory relationships with the PSCW and FERC provide opportunities for cost recovery and reasonable returns on investment.

Uncommon Metrics

The filing highlights the importance of Renewable Thermal Credits (RTCs) and Renewable Natural Gas (RNG) in achieving net-zero methane emissions. These metrics are crucial for evaluating the company’s progress towards its sustainability goals.

Conclusion and Actionable Insights

WEP demonstrates a commitment to long-term value creation through strategic investments and operational improvements. However, the company faces significant risks related to regulatory changes, environmental compliance, and market volatility. Investors should closely monitor these risks and assess the company’s ability to navigate the evolving energy landscape.

Overall Assessment: Hold. WEP’s strategic direction and financial performance warrant a hold rating. While the company is making progress in renewable energy and infrastructure, the risks associated with regulatory changes and market volatility require careful monitoring.

Recommendations:

  • Monitor Regulatory Developments: Closely track regulatory decisions related to rate adjustments, environmental regulations, and renewable energy incentives.
  • Manage Commodity Price Risk: Implement effective hedging strategies to mitigate the impact of commodity price volatility.
  • Strengthen Cybersecurity Defenses: Invest in robust cybersecurity measures to protect critical infrastructure and data.
  • Optimize Capital Allocation: Prioritize capital investments in projects that enhance reliability, efficiency, and sustainability.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin:

    • Calculation: ($3,979.9 – $1,300.3) / $3,979.9 = 67.33%
    • Trend: (($3,979.9 – $1,300.3) / $3,979.9) / (($4,045.0 – $1,451.4) / $4,045.0) – 1 = 1.78%
    • Industry: The average gross profit margin for the Utilities sector is around 45%. WE’s margin of 67.33% is significantly higher, indicating strong cost management or pricing power.
  • Operating Profit Margin:

    • Calculation: $1,061.2 / $3,979.9 = 26.67%
    • Trend: ($1,061.2 / $3,979.9) / ($1,022.2 / $4,045.0) – 1 = 4.32%
    • Industry: The average operating profit margin for the Utilities sector is around 15%. WE’s margin of 26.67% is higher, suggesting efficient operations.
  • Net Profit Margin:

    • Calculation: $514.4 / $3,979.9 = 12.93%
    • Trend: ($514.4 / $3,979.9) / ($481.8 / $4,045.0) – 1 = 8.03%
    • Industry: The average net profit margin for the Utilities sector is around 8%. WE’s margin of 12.93% is relatively high, indicating good profitability after all expenses.
  • Return on Assets (ROA):

    • Calculation: $514.4 / $17,199.6 = 2.99%
    • Trend: ($514.4 / $17,199.6) / ($481.8 / $15,841.4) – 1 = 10.89%
    • Industry: The average ROA for the Utilities sector is around 2%. WE’s ROA of 2.99% indicates effective asset utilization.
  • Return on Equity (ROE):

    • Calculation: $513.2 / $5,476.8 = 9.37%
    • Trend: ($513.2 / $5,476.8) / ($480.6 / $5,053.1) – 1 = 8.63%
    • Industry: The average ROE for the Utilities sector is around 10%. WE’s ROE of 9.37% is slightly below the industry average.
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Calculation: Assuming 33,289,327 shares outstanding, EPS = $513.2 / 33.289327 = $15.41
    • Trend: Assuming 33,289,327 shares outstanding, EPS = $513.2 / 33.289327 = $15.41 / ($480.6 / 33.289327) – 1 = 6.77%
    • Industry: EPS varies widely. A good EPS depends on the company’s growth stage and profitability.

Liquidity

  • Current Ratio:

    • Calculation: $1,272.9 / $1,458.4 = 0.87
    • Trend: ($1,272.9 / $1,458.4) / ($1,205.3 / $1,484.9) – 1 = 3.29%
    • Industry: A current ratio of 1.0 or higher is generally considered healthy. WE’s ratio of 0.87 indicates potential liquidity challenges.
  • Quick Ratio (Acid-Test Ratio):

    • Calculation: ($1,272.9 – $354.8) / $1,458.4 = 0.63
    • Trend: (($1,272.9 – $354.8) / $1,458.4) / (($1,205.3 – $310.6) / $1,484.9) – 1 = 0.32%
    • Industry: A quick ratio of 1.0 or higher is generally considered healthy. WE’s ratio of 0.63 suggests potential short-term liquidity issues.
  • Cash Ratio:

    • Calculation: $0.4 / $1,458.4 = 0.00027
    • Trend: ($0.4 / $1,458.4) / ($6.1 / $1,484.9) – 1 = -95.17%
    • Industry: A cash ratio of 0.5 or higher is generally considered healthy. WE’s ratio of 0.00027 indicates a very low level of cash to cover current liabilities.

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Calculation: ($3,728.0 + $259.2 + $2,742.9) / $5,476.8 = 1.23
    • Trend: (($3,728.0 + $259.2 + $2,742.9) / $5,476.8) / (($3,045.4 + $309.0 + $2,752.2) / $5,053.1) – 1 = 4.89%
    • Industry: The average debt-to-equity ratio for the Utilities sector is around 1.0. WE’s ratio of 1.23 indicates a higher level of debt relative to equity.
  • Debt-to-Assets Ratio:

    • Calculation: ($3,728.0 + $259.2 + $2,742.9) / $17,199.6 = 0.40
    • Trend: (($3,728.0 + $259.2 + $2,742.9) / $17,199.6) / (($3,045.4 + $309.0 + $2,752.2) / $15,841.4) – 1 = 4.04%
    • Industry: The average debt-to-assets ratio for the Utilities sector is around 0.5. WE’s ratio of 0.40 indicates a moderate level of debt relative to total assets.
  • Interest Coverage Ratio (Times Interest Earned):

    • Calculation: $1,061.2 / $489.4 = 2.17
    • Trend: ($1,061.2 / $489.4) / ($1,022.2 / $466.5) – 1 = 12.01%
    • Industry: An interest coverage ratio of 2.0 or higher is generally considered healthy. WE’s ratio of 2.17 indicates that the company can comfortably cover its interest expenses.

Activity/Efficiency

  • Inventory Turnover:

    • Calculation: $1,300.3 / $354.8 = 3.66
    • Trend: ($1,300.3 / $354.8) / ($1,451.4 / $310.6) – 1 = -19.18%
    • Industry: Inventory turnover varies widely. A good turnover depends on the company’s industry and business model.
  • Days Sales Outstanding (DSO):

    • Calculation: ($601.2 / $3,979.9) * 365 = 55.04
    • Trend: (($601.2 / $3,979.9) * 365) / (($573.0 / $4,045.0) * 365) – 1 = 4.99%
    • Industry: DSO varies widely. A good DSO depends on the company’s industry and credit terms.
  • Days Payable Outstanding (DPO):

    • Calculation: ($529.3 / $1,300.3) * 365 = 148.60
    • Trend: (($529.3 / $1,300.3) * 365) / (($332.1 / $1,451.4) * 365) – 1 = 62.30%
    • Industry: DPO varies widely. A good DPO depends on the company’s industry and payment terms.
  • Asset Turnover:

    • Calculation: $3,979.9 / $17,199.6 = 0.23
    • Trend: ($3,979.9 / $17,199.6) / ($4,045.0 / $15,841.4) – 1 = -5.98%
    • Industry: The average asset turnover for the Utilities sector is around 0.4. WE’s ratio of 0.23 indicates relatively low asset utilization.

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Calculation: $110.00 / $15.41 = 7.14
    • Industry: The average P/E ratio for the Utilities sector is around 18. WE’s ratio of 7.14 suggests that the company may be undervalued.
  • Price-to-Book Ratio (P/B):

    • Calculation: Market Cap = 33.289327 * $110.00 = $3,661.83 million. Book Value = $5,476.8 million. P/B = $3,661.83 / $5,476.8 = 0.67
    • Industry: The average P/B ratio for the Utilities sector is around 1.5. WE’s ratio of 0.67 suggests that the company may be undervalued.
  • Price-to-Sales Ratio (P/S):

    • Calculation: Market Cap = 33.289327 * $110.00 = $3,661.83 million. P/S = $3,661.83 / $3,979.9 = 0.92
    • Industry: The average P/S ratio for the Utilities sector is around 1.0. WE’s ratio of 0.92 suggests that the company may be undervalued.
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Calculation: EBITDA = $1,061.2 + $573.7 + $489.4 = $2,124.3 million. EV = $3,661.83 + $3,987.2 – $0.4 = $7,648.63 million. EV/EBITDA = $7,648.63 / $2,124.3 = 3.60
    • Industry: The average EV/EBITDA ratio for the Utilities sector is around 12. WE’s ratio of 3.60 suggests that the company may be undervalued.

Growth Rates

  • Revenue Growth:

    • Calculation: ($3,979.9 – $4,045.0) / $4,045.0 = -1.61%
  • Net Income Growth:

    • Calculation: ($514.4 – $481.8) / $481.8 = 6.77%
  • EPS Growth:

    • Calculation: ($15.41 – $14.44) / $14.44 = 6.72%

Other Relevant Metrics

  • Utility Margin (non-GAAP):

    • Description: This metric represents the gross margin less other operation and maintenance expenses, depreciation and amortization, and property and revenue taxes. It provides a view of profitability before considering these expenses.
    • Calculation: $2,679.6 million for 2024.
    • Trend: Increased from $2,593.6 million in 2023.
    • Assessment: This non-GAAP metric provides a view of the company’s core profitability from its utility operations. It excludes certain expenses to highlight underlying performance.

Commentary

Wisconsin Electric Power Company’s financial performance in 2024 shows a mixed picture. While profitability metrics like gross, operating, and net profit margins have increased, revenue growth is negative. Liquidity ratios indicate potential short-term challenges, but solvency ratios are within reasonable bounds. Valuation ratios suggest the company might be undervalued compared to industry peers. Overall, the company demonstrates solid profitability but needs to address revenue decline and liquidity concerns.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️