Is WEC Energy’s High Leverage after Buying Integrys a Risk Alert?



Debt profile

Now let’s dig into WEC Energy’s (WEC) debt profile. At the end of the fourth quarter of 2015, WEC’s total debt was $10.3 billion. Its debt-to-equity ratio was 1.2x, and its debt-to-market capitalization was near 0.6x.

The graph below shows WEC’s total debt versus its debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio. The sudden surge in debt during 2Q15 was due to the Integrys acquisition. The transaction was completed with cash and stock worth $9.1 billion in June 2015.

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Assessing WEC’s leverage

As of December 31, 2015, WEC Energy’s debt-to-EBITDA multiple was 5.7x. Its three-year historical debt-to-EBITDA multiple is near 4.4x. By comparison, Eversource Energy (ES) is at 4.2x, and Xcel Energy is near 4.3x.

Utilities (RYU) are asset-rich businesses that carry heavy debt. Because of this, leverage is an important metric to use to analyze utilities (PUI). Debt-to-EBITDA ratio tells how many years the company would take to repay its debt if debt and EBITDA remained constant.

The debt-to-EBITDA ratio has been falling for the last two quarters due to increased contributions from Integrys to WEC’s EBITDA. As EBITDA continues to grow and debt is repaid, WEC’s leverage should come down to reasonable levels over time.

The debt-to-asset ratio represents the portion of a company’s assets that are financed by debt. It assesses a company’s financial risk. WEC Energy has a debt-to-asset ratio of 0.3x. DTE Energy (DTE) has a debt-to-asset ratio of 0.3x, and CMS Energy (CMS) has a debt-to-asset ratio of 0.4x.

Credit rating

Standard & Poor’s has given an A- rating and a stable outlook to WEC Energy Group. Utilities (XLU) on average had a BBB+ credit rating at the end of 4Q15. Peer Eversource Energy (ES) has an A rating, and DTE Energy has a BBB+ rating.

In the next part of the series, we’ll look at WEC Energy’s better-than-industry-average dividend growth.


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