WEC ENERGY GROUP, INC. quarterly report, Q1 FY2010

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Business context and reporting period

Wisconsin Energy Corporation (the registrant named in this historical filing; the request identifies WEC Energy Group) reported unaudited results for the three months ended March 31, 2010, compared with the first quarter of 2009. The company operated utility and non-utility energy segments, primarily through Wisconsin Electric, Wisconsin Gas, and We Power. Results are seasonal and management cautioned that the quarter is not necessarily indicative of full-year performance.

Financial performance and position

  • Revenue and earnings: Operating revenue was $1,255.9 million, down from $1,396.2 million. Operating income was $229.7 million versus $243.0 million; net income was $129.7 million versus $141.5 million. Diluted EPS was $1.10 versus $1.20. Common dividends were $0.40 per share, up from $0.3375.
  • Margins and segment results: Utility gross margin was $615.3 million versus $625.3 million. Utility operating income declined to $179.4 million from $216.3 million, while non-utility operating income increased to $52.1 million from $27.9 million, reflecting the PTF generating assets, including OC 1 entering service in February 2010.
  • Cash flow and investment: Operating cash flow was $303.7 million versus $20.3 million; investing outflow was $171.1 million versus $143.0 million, including $194.6 million of capital expenditures. Financing used $140.7 million, compared with $107.3 million provided in the prior-year quarter. Management attributed most of the operating cash flow improvement to $289.3 million of benefit-plan contributions in Q1 2009, with none required in Q1 2010.
  • Debt and liquidity: At March 31, 2010, total debt was $4,916.8 million, including $478.0 million of short-term debt; the reported debt-to-total-capitalization ratio was 57.2% (54.3% using management’s adjusted presentation of junior notes). Cash and cash equivalents were $12.8 million, with $151.0 million of restricted cash. The company reported approximately $1.6 billion of available undrawn credit facilities, excluding a bankrupt Lehman affiliate’s commitments. Management said net debt declined approximately $78.8 million during the quarter.
  • Other metrics: Total assets were $12,721.5 million at quarter-end. Net interest expense rose to $49.4 million from $40.8 million. The effective tax rate on continuing operations was 35.6%, versus 36.5%.

Material changes versus the prior comparable period

  • Utility operating income fell primarily because of less favorable fuel cost recovery and warmer weather. The company reported approximately $24 million of unfavorable fuel recovery in Q1 2010, compared with approximately $28 million of favorable recovery in Q1 2009.
  • Warmer weather reduced electric revenue by an estimated $13.3 million; heating degree days were 9.1% lower year over year. Gas gross margin declined $15.8 million, with approximately $13.5 million attributed to lower weather-related sales volumes.
  • Gas revenue declined $162.7 million, mainly due to milder weather and lower natural gas costs; the related reduction in gas cost of sales partly offset the revenue decline.
  • Other operation and maintenance expense increased $28.5 million, including higher regulatory-related costs and costs associated with OC 1. Depreciation, decommissioning, and amortization expense fell $15.2 million, primarily following new depreciation rates in the 2010 Wisconsin rate order.
  • Amortization of the Point Beach sale gain, tied to customer bill credits, decreased to $49.4 million from $64.2 million. Management expected approximately $37 million less amortization in 2010 than in 2009, with remaining bill credits expected to be issued by year-end.

Outlook, commentary, risks, and unusual items

  • Management expected a 2010 annual effective tax rate of 35%–36%, and a consolidated capital expenditure budget of approximately $950.5 million. It anticipated funding remaining 2010 capital needs primarily with internally generated funds and short-term borrowings, supplemented as needed with debt issuance.
  • Management expected unfavorable fuel recovery for 2010 despite an interim $60.5 million annual Wisconsin rate increase effective March 25, 2010. Amounts collected are subject to refund with interest, pending final regulatory review, expected by year-end.
  • OC 1 entered service in February 2010; OC 2’s guaranteed in-service date was November 28, 2010. Management also expected a Michigan rate decision on a $42 million request in July 2010; the interim Michigan increase is subject to refund with interest.
  • Plans included the Glacier Hills wind project, expected to cost $360–$370 million excluding AFUDC, and a proposed biomass plant expected to cost approximately $255 million. Both remained subject to project execution and/or regulatory approvals.
  • Environmental risk includes forthcoming Clean Air Act regulation of greenhouse gas emissions from stationary sources, which management said could affect plant maintenance, modifications, and new construction. The Department of Energy appealed a court award of more than $50 million related to delayed removal of used nuclear fuel; any recovery would be included in future rate cases.
  • Other items: the Edison Sault sale for approximately $61.5 million closed on May 4, 2010, after quarter-end regulatory approval. The proposed sale of the company’s Edgewater Unit 5 interest remained subject to approvals, with expected proceeds of $40–$45 million if completed.
  • Management reported approximately $22.1 billion of contractual obligations and commercial commitments at March 31, 2010. It said known environmental contingencies and off-balance-sheet arrangements were not expected to have a material adverse effect; legal proceedings were also not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.

Important facts for investors to verify

  1. Whether final regulatory decisions resolve fuel recovery and Michigan rate requests without material refunds or adverse rate outcomes.
  2. OC 2’s construction progress and whether it meets its November 28, 2010 guaranteed in-service date.
  3. Full-year operating performance against the stated tax-rate and capital-spending expectations, including the effect of anticipated unfavorable fuel recovery.
  4. Progress and required approvals for the Edgewater sale and proposed renewable projects; confirm the Edison Sault transaction’s post-quarter completion and accounting treatment.
  5. The status and potential timing of the DOE appeal, and any resulting recovery or rate treatment.