Wisconsin Energy Corporation (filing-era name) — Q1 2013 10-Q
Business and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. The company operated utility energy businesses (electric, gas and steam) and a non-utility energy segment, primarily We Power.
Financial performance
- Revenue: $1.275 billion, up 7.1% from $1.191 billion. Colder weather and rate changes contributed to higher utility revenue.
- Profit: Operating income rose 8.6% to $321.0 million; net income increased 2.6% to $176.6 million. Diluted EPS was $0.76 versus $0.74. Operating margin was approximately 25.2% versus 24.8%; net margin was approximately 13.9% versus 14.4%.
- Cash flow: Operating cash flow was $330.3 million, down from $340.5 million. Capital expenditures were $133.6 million; investing cash outflow was $145.3 million. Financing cash outflow was $195.9 million. Cash ended the quarter at $24.7 million.
- Debt and liquidity: Total debt was approximately $5.17 billion, including $4.44 billion long-term debt, $413.5 million current maturities and $316.7 million short-term debt. Debt was 55.0% of capitalization (52.3% on management’s adjusted basis for junior notes). The company reported about $1.2 billion of available undrawn credit facilities.
- Dividends and repurchases: Quarterly dividend was $0.34 per share, up from $0.30. The company paid $77.8 million in common dividends and used $66.5 million to purchase shares during the quarter.
Changes and drivers versus Q1 2012
- Utility segment operating income increased $22.0 million to $230.6 million; non-utility segment operating income rose $3.2 million to $91.6 million.
- Heating degree days were 33% higher than a year earlier and 6.7% above normal. This supported electric and gas demand; gas margin increased $12.9 million, with management estimating a $33.9 million weather benefit, partly offset by lower gas rates.
- Operating expenses increased, including fuel and purchased power, gas costs, and depreciation. Other income fell $11.6 million, mainly because equity AFUDC declined after Oak Creek emissions-control equipment entered service. Net interest expense rose $6.1 million, reflecting higher gross interest costs and lower capitalized interest.
- Operating cash flow declined $10.2 million, primarily due to higher working-capital requirements associated with colder weather. Capital expenditures were lower by $8.7 million year over year, partly reflecting completion of the Oak Creek AQCS project.
Outlook, risks and unusual items
- Management expected approximately $690 million of consolidated capital expenditures in 2013 and anticipated funding needs through internal cash generation, short-term borrowings and debt issuance as appropriate. It stated that liquidity was adequate for the foreseeable future.
- Management expected a 2013 annual effective tax rate of 37%–38% and said bonus depreciation meant it did not anticipate federal income tax payments for 2013.
- The company expected a roughly $72 million federal grant for its Rothschild biomass facility, targeted for completion in Q4 2013. Grant income recognition was expected then, creating a timing mismatch with customer bill credits during the first three quarters; management estimated quarterly EPS would have been about $0.03 higher in each of those quarters if grant income had been matched to credits.
- Regulatory rate changes effective January 1, 2013 included an electric retail non-fuel bill increase, partly offset by expected grant proceeds, and decreases in Wisconsin gas rates. The PSCW approved recovery of more than 99.5% of Oak Creek expansion construction costs, while deferring a decision on $24 million related to fuel flexibility.
- Environmental and regulatory exposure includes manufactured-gas-plant remediation, estimated at $16 million–$62 million over ten years, with $38.2 million accrued. The company said additional costs for the proposed federal wastewater rules could not yet be determined.
- Paris Generating Station units 1 and 4 were ordered out of service amid an environmental permitting dispute; the company expected them to remain unavailable until at least 2014 and noted potential fines or penalties. A contested case hearing was pending over the Oak Creek fuel-flexibility permit. The company also filed for approval of a western Wisconsin gas lateral estimated at $150 million–$170 million.
- Management reported no material change in market-risk disclosures or risk factors from its 2012 Form 10-K. It cautioned that quarterly results are seasonal and not necessarily indicative of full-year results.
Investor verification priorities
- Check subsequent filings for the biomass facility’s completion, grant receipt and accounting for customer bill credits.
- Track actual results against the $690 million capital-expenditure estimate, financing needs and the $1.2 billion of available credit.
- Monitor rate recovery and regulatory outcomes, including the deferred Oak Creek fuel-flexibility costs and the proposed western Wisconsin gas lateral.
- Assess developments affecting Paris Generating Station units 1 and 4, the Oak Creek permit challenge, and environmental remediation estimates.
- Separate weather-driven earnings and working-capital effects from underlying customer demand and recurring margins.