WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are with December 31, 2010. The company reported as Wisconsin Energy Corporation in this filing. It operates regulated electric, gas and steam utilities and a non-utility generation business. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Operating revenue | $1,328.7 million | $1,248.6 million; up 6.4% |
| Operating income | $295.6 million | $228.4 million; up $67.2 million |
| Net income | $170.9 million | $129.7 million; up $41.2 million |
| Diluted EPS | $0.72 | $0.55 |
| Cash from operations | $391.0 million | $303.7 million |
| Capital expenditures | $135.5 million | $194.6 million |
| Cash and cash equivalents | $236.0 million at March 31 | $24.5 million at December 31 |
| Long-term debt, including current portion | $4,818.9 million at March 31 | $4,405.4 million at December 31 |
| Short-term debt | $281.5 million at March 31 | $657.9 million at December 31 |
Reported operating margin was approximately 22.2%, versus 18.3% a year earlier; the comparison is affected by a $49.4 million Point Beach gain amortization recorded in Q1 2010 and none in Q1 2011. The 2011 effective tax rate was 34.3%, compared with 35.6%. Common dividends were $0.26 per share, versus $0.20.
At March 31, total capitalization was $9.0 billion including short-term debt; reported debt-to-capitalization was 56.4%, or 53.7% using management’s adjusted treatment of the Junior Notes. The company reported approximately $1.2 billion of available, undrawn credit lines and $281.5 million of commercial paper outstanding. Operating cash flow less capital expenditures was approximately $255.5 million.
Material changes and drivers
- Utility segment operating income increased $34.9 million to $213.0 million; non-utility segment operating income increased $31.9 million to $84.0 million, primarily reflecting the Oak Creek expansion units and associated lease revenues.
- Electric revenue rose $72.8 million. Management attributed the increase chiefly to approximately $49.4 million in 2011 pricing changes related to reduced Point Beach customer bill credits, favorable weather, and rate increases.
- Gas gross margin increased $13.9 million to $182.3 million, with colder weather estimated to account for $12.1 million. Q1 was 9.5% colder than the prior-year quarter and 5.7% colder than normal.
- The final Power the Future unit, Oak Creek Unit 2, entered service in January 2011. The company issued $420 million of long-term notes and used proceeds to repay short-term construction financing and for other corporate purposes.
- Net interest expense rose $14.0 million, primarily due to higher debt and reduced capitalized interest after Oak Creek Unit 2 entered service. The $122.4 million contribution to qualified benefit plans reduced operating cash flow relative to what it otherwise would have been.
- Net income comparisons also reflect $0.7 million of discontinued-operations income in Q1 2010; Edison Sault had been sold in 2010. The company sold its 25% interest in Edgewater Unit 5 in March 2011 for approximately $38 million.
Outlook, risks and unusual items
- Management expected a 2011 annual effective tax rate of 34%–35%, approximately $950 million of 2011 capital expenditures, and funding needs primarily from internally generated cash and short-term borrowing, supplemented as needed by debt issuance.
- Wisconsin Electric and Wisconsin Gas planned to file Wisconsin rate requests in Q2 2011. A PSCW decision increased annual Wisconsin retail electric rates by $25.4 million effective April 29, 2011; the PSCW also finalized a separate $60.5 million fuel-related rate increase on April 28.
- The proposed Rothschild biomass project was expected to cost approximately $255 million, excluding AFUDC, and be completed in fall 2013, subject to approvals. The PSCW raised customer-cost concerns, and opponents sought a contested-case hearing concerning the air permit.
- Environmental rulemaking could require future changes to cooling-water intake systems or other facility controls; the company said impacts of proposed rules were not yet determinable. It was assessing proposed hazardous-air-pollutant requirements.
- A class-action pension-plan lawsuit alleges underpayment of lump-sum benefits. The Plan acknowledged using an incorrect interest-crediting rate and determined some benefits should be recalculated; the plaintiff contests the committee’s actions. The company could not predict the outcome, and an adverse result could materially affect plan funding, expense and results.
- The company received a $45.5 million DOE settlement in Q1 for used nuclear fuel storage costs and expected to return the amount, net of costs, to customers in future rate cases. The cash was held as restricted cash.
- After quarter-end, $450 million of debt matured on April 1 and was retired using cash and short-term borrowings. On May 5, the board authorized up to $300 million in share repurchases through 2013 and adopted a policy targeting a dividend payout ratio trending to 60% of earnings over 2012–2015.
- In March, S&P revised the outlooks for the company and certain subsidiaries from stable to positive. Management cautioned that ratings can change and capital-market access depends on credit quality and market conditions.
Most important facts for investors to verify
- Whether earnings growth persists after accounting for the prior-year Point Beach gain amortization and the effects of weather, rates and new generation assets.
- Progress on rate cases and recovery of fuel, environmental and Power the Future costs, including the status of the biomass project.
- Debt and liquidity after the April 1 maturity repayment, and funding for the 2011 capital budget and planned repurchases.
- The outcome and financial exposure of the pension litigation, and the timing and amount of any participant benefit recalculations.
- Final environmental requirements and resulting compliance costs; management said potential impacts were not yet clear.
- Cash-flow quality, including the benefit-plan contribution, restricted DOE settlement proceeds and the timing of working-capital movements.