Business context and reporting period
Wisconsin Energy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The company operated regulated electric, gas and steam utilities in Wisconsin and Michigan, alongside its non-utility generation subsidiary, We Power. Figures below are in millions of dollars except per-share data. Share and per-share amounts reflect the two-for-one stock split.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $991.7 | $890.9 | $2,320.4 | $2,139.5 |
| Operating income | $174.4 | $163.3 | $470.0 | $391.7 |
| Income from continuing operations | $98.0 | $87.5 | $268.9 | $216.5 |
| Net income | $109.5 | $88.7 | $280.4 | $218.4 |
| Diluted EPS | $0.46 | $0.37 | $1.19 | $0.92 |
| Net interest expense | $57.4 | $53.0 | $120.8 | $102.4 |
- Second-quarter utility segment operating income fell $9.7 million to $88.1 million; non-utility segment operating income rose $21.0 million to $87.9 million, principally reflecting the Oak Creek expansion units.
- For the first six months, utility and non-utility operating income increased to $301.1 million and $171.9 million, respectively. Consolidated operating income rose 20% year over year.
- Q2 revenue increased 11%, but included higher gas costs that generally flow through under recovery mechanisms. Electric revenue benefited from reduced Point Beach customer bill credits and rate increases, partly offset by weather-related weakness in electric sales. Gas margin increased on cooler weather.
- Q2 consolidated net income included $11.5 million from discontinued operations, primarily a favorable resolution of tax positions from a previously discontinued manufacturing business. The company reported no Q2 discontinued income in 2010.
Cash flow, debt and liquidity
- First-half operating cash flow was $648.6 million, versus $423.7 million a year earlier. Capital expenditures were $347.1 million; investing cash outflow was $367.5 million. Financing cash outflow was $295.0 million. Cash and cash equivalents ended June at $10.6 million.
- At June 30, total debt was $4,907.6 million, comprising $4,365.2 million of long-term debt and $542.4 million of short-term debt. Reported debt-to-total-capitalization was 55.2%; the company’s rating-agency-adjusted measure was 52.4%.
- The company reported approximately $1.2 billion of available, undrawn credit lines, supporting $542.4 million of commercial paper outstanding. It stated that existing facilities, capital-market access and internally generated cash should provide adequate funding for the foreseeable future.
- First-half dividends paid were $121.5 million. The quarterly dividend was increased 30% for 2011. A May 2011 authorization allows up to $300 million of share repurchases through 2013; none had been bought under that program by June 30.
Changes, outlook and key developments
- Net income rose 23% in Q2 and 28% in the first half. Comparisons were affected by the 2010 amortization of the Point Beach sale gain: $47.2 million in Q2 and $96.6 million in the first half, versus none in 2011, after customer bill credits were completed by year-end 2010.
- First-half net interest expense increased $18.4 million, mainly because interest capitalization declined after Oak Creek Unit 2 entered service in January 2011. The unit completed the company’s Power the Future generation buildout.
- Management expected a 2011 annual effective tax rate of 34%–35% and budgeted approximately $950 million of consolidated capital expenditures for 2011. No full-year earnings guidance is provided in the supplied filing text.
- Wisconsin Electric and Wisconsin Gas proposed an alternative 2012 rate approach intended to avoid a 2012 base-rate increase, subject to PSCW approval. If the proposal were not accepted, the filing describes expected rate requests; the PSCW decision was anticipated in August 2011. Wisconsin Electric also filed a $17.5 million Michigan rate request in July 2011.
- The company received a $45.5 million DOE settlement related to spent nuclear fuel and expected to return the amount, net of costs, to customers through future rate cases. The company also sold its 25% interest in Edgewater Unit 5 for approximately $38 million, at net book value.
- Risks include a pending ERISA cash-balance pension lawsuit—the Plan acknowledged an incorrect interest-crediting rate, and the outcome remained uncertain—as well as potential environmental compliance costs. Manufactured-gas-plant remediation costs were estimated at $35–$65 million over ten years, with $45.1 million reserved. The impacts of proposed or newly finalized environmental rules were not yet determinable.
- Management reported no material change in market-risk disclosures or risk factors; disclosure controls were considered effective. S&P upgraded the company’s junior unsecured debt to BBB from BBB- in June and changed the ratings outlooks to stable.
Important facts for investors to verify
- Whether utility rate-case outcomes permit recovery of fuel, environmental, renewable-generation and Oak Creek costs on the expected schedule.
- How much of the reported earnings and cash-flow improvement reflects recurring operations versus the prior-year Point Beach gain amortization and the 2011 tax resolution.
- Final environmental rules and resulting compliance capital needs, particularly for air emissions and cooling-water intake systems.
- The potential financial and funding impact of the ERISA pension litigation and the adequacy of remediation and other contingency reserves.
- Debt and liquidity trends, including commercial-paper balances, refinancing needs, capital spending, dividend commitments and execution of the announced repurchase authorization.