WEC ENERGY GROUP, INC. quarterly report, Q2 FY2012

Business context and reporting period

Wisconsin Energy Corporation (the registrant named in this 10-Q) is a diversified holding company operating utility and non-utility energy businesses, primarily in Wisconsin and Michigan. This unaudited filing covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods.

Financial performance and position

Net income was $119.3 million in Q2 and $291.4 million for the six months. 2011 included $11.5 million of discontinued-operations income from a favorable tax resolution; 2012 had none. Dividends were $0.30 per share in Q2 and $0.60 for the half year.

• Cash flow: First-half cash from operations was $608.7 million, versus $648.6 million. Investing used $312.6 million, including $314.0 million of capital expenditures; financing used $297.1 million. Cash and equivalents were $13.1 million at June 30.
• Liquidity and debt: Current liabilities exceeded current assets by $191.5 million. The company reported $1.2 billion of available undrawn credit facilities and $559.5 million of commercial paper outstanding. Long-term debt was $4,297.5 million, with $334.8 million due currently; short-term debt was $559.5 million. Debt to total capitalization was 55.8% on a GAAP basis and 53.1% on the company’s adjusted basis.
• Balance sheet: Total assets were $13,887.6 million and common equity $4,081.1 million at June 30, 2012.

Material changes versus prior period

• Q2 revenue decreased 4.7%, while operating income rose $48.2 million and continuing-operations income rose $21.3 million. For the half year, revenue declined 8.0%, while operating income increased $48.3 million and continuing-operations income increased $22.5 million.
• Higher utility operating income reflected lower fuel and purchased-power costs and lower operation and maintenance expense, including a one-year suspension of $148 million in regulatory-asset amortization authorized under the 2012 Wisconsin rate case. Depreciation rose as new plant and Oak Creek emissions equipment entered service.
• Warmer weather supported electric sales but reduced weather-sensitive gas deliveries and margins. Q2 gas margin fell $9.9 million; first-half gas margin fell $41.2 million. Electric revenue was slightly higher, despite lower total MWh sales.
• Cash from operations declined year over year. Comparability was affected by 2011 benefit-plan contributions, DOE settlement receipts, and regulatory-asset amortization that was suspended in 2012.

Outlook, management commentary, risks and contingencies

• Management expected 2012 capital expenditures of approximately $740 million and said it expected to fund requirements with internally generated cash, short-term borrowing and, as needed, debt issuance. No full-year earnings guidance is stated in the provided filing text.
• Management expected a 2012 annual effective tax rate of 35.5%–36.5%. It targeted completion of Oak Creek AQCS units 7 and 8 by late summer 2012; estimated project cost was approximately $750 million, or $900 million including AFUDC.
• Wisconsin Electric and Wisconsin Gas had pending 2013 rate requests, including a proposed $99.3 million net Wisconsin electric bill increase for 2013, offset in part by an anticipated renewable-energy grant. Outcomes remained subject to regulatory approval.
• The company was building a 50-MW biomass facility, targeting completion by year-end 2013, with expected investment of $245–$255 million excluding AFUDC. It anticipated pursuing a federal cash grant.
• Environmental and regulatory risks include potential compliance costs under utility air-pollution rules, uncertainty around the stayed CSAPR, and possible future greenhouse-gas requirements. Estimated capital costs for the utility MACT rule were $16–$25 million. Manufactured-gas-plant remediation costs were estimated at $21–$65 million over ten years, with $37.5 million accrued.
• After the Oak Creek bluff collapse, cleanup was completed, but Wisconsin authorities referred alleged storm-water and solid-waste violations to the state DOJ; management anticipated possible fines or penalties. The filing does not provide a clear estimate of potential exposure.
• A $45 million cash-balance pension settlement was court-approved in April 2012; substantially all payments had been made, and management did not anticipate further charges. The company reported compliance with debt covenants and effective disclosure controls.

Important facts for investors to verify

• Whether approved rate recovery and fuel-cost mechanisms support margins as weather and energy prices fluctuate.
• Progress, cost and regulatory recovery for Oak Creek emissions controls and the biomass project, including the expected grant.
• Available liquidity, commercial-paper refinancing needs, upcoming debt maturities and credit-rating developments.
• Resolution and any penalties from the Oak Creek bluff-collapse proceedings, and developments in environmental regulation and remediation estimates.
• Actual 2012 results against the stated capital-spending and tax-rate expectations; the filing provides no clear full-year earnings guidance.