Business context and reporting period
Wisconsin Energy Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011. The company operates regulated electric, gas and steam utilities and a non-utility energy business, primarily We Power, which leases generating assets to Wisconsin Electric. All figures below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $1,052.8 | $973.2 | $3,373.2 | $3,112.7 |
| Operating income | $224.3 | $203.0 | $694.3 | $594.7 |
| Continuing-operations income | $129.8 | $112.3 | $398.7 | $328.8 |
| Net income | $129.8 | $112.2 | $410.2 | $330.6 |
| Diluted EPS | $0.55 | $0.47 | $1.74 | $1.40 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $827.6 | $653.7 |
- Quarterly revenue grew 8.2%; nine-month revenue grew 8.4%. Operating income increased 10.5% for the quarter and 16.7% year to date. Reported operating margins were approximately 21.3% and 20.6%, respectively.
- Reported year-over-year income comparisons are affected by Point Beach sale-gain amortization: $55.2 in Q3 2010 and $151.8 in the first nine months of 2010, versus none in 2011. The company says customer bill credits associated with that gain were fully applied by the end of 2010.
- Q3 utility-segment operating income was $135.6, up $1.4; non-utility operating income was $89.8, up $20.8. The non-utility increase principally reflects Oak Creek expansion lease revenue, including a full quarter for OC 2, which entered service in January 2011.
- For the first nine months, operating cash flow was $827.6, capital expenditures were $612.2, and cash used in investing activities was $650.3. Cash and cash equivalents were $15.1 at September 30, compared with $24.5 at year-end 2010; restricted cash was $45.5.
- At September 30, long-term debt was $4,618.9, current maturities $31.8, and short-term debt $496.7. Total debt was $5,147.4; debt to total capitalization was 56.5% (53.7% on the company’s adjusted, non-GAAP basis for rating-agency treatment of junior notes). Available undrawn bank credit was approximately $1.2 billion.
- Capital spending was higher year over year, driven in part by Oak Creek environmental controls and Glacier Hills Wind Park. Management estimated 2011 consolidated capital expenditures of approximately $900.
Changes, outlook and significant developments
- Quarterly diluted EPS from continuing operations rose to $0.55 from $0.47; nine-month diluted EPS from continuing operations rose to $1.69 from $1.39. Nine-month net income also included $11.5 from discontinued operations, mainly from a favorable resolution of tax positions related to a discontinued manufacturing business.
- Revenue growth included reduced Point Beach customer bill credits, rate increases, increased energy sales into the MISO market and, for gas, colder weather in the first half. Weaker-than-prior-year cooling weather reduced electric revenue; electric sales volumes overall were also influenced by increased sales to two iron ore mines.
- Net interest expense increased to $56.8 in Q3 and $177.6 for nine months, principally because less interest was capitalized after OC 2 entered service. Wisconsin Electric issued $300 of 2.95% debentures due 2021 in September; the company also issued $420 of long-term notes in January and retired $450 of debt at maturity in April.
- Cash provided by operations benefited from higher earnings, deferred tax benefits and the absence of prior-year Point Beach gain amortization, but was reduced by $257.4 of qualified benefit-plan contributions. Management expected the operating-cash-flow trend to continue through year-end.
- Management forecast a 2011 annual effective tax rate of 34%–35%. No full-year earnings guidance is stated in the supplied filing text.
- The PSCW approved the utilities’ proposed 2012 Wisconsin rate-case alternative on October 6, 2011: no 2012 base-rate increase, with specified regulatory-cost and project-cost treatment and a 2013 rate proceeding. The final written order was pending when reported. A $50 fuel-cost rate request was filed, with new fuel rates expected in January 2012; a separate $26 DOE settlement refund to customers was expected to partly offset it. Wisconsin Electric also sought a $17.5 Michigan rate increase and expected to self-implement $7.7 subject to refund.
- The board authorized up to $300 of share repurchases through 2013; approximately $75 had been repurchased under the program through September 30. For 2012–2015, the company targeted a dividend payout ratio trending to 60% of earnings and management intended to recommend a 13%–15% dividend increase for 2012.
- Material uncertainties include evolving air- and water-quality regulations and potential compliance costs, particularly at Presque Isle and Valley; a pending ERISA cash-balance pension-plan lawsuit, for which the company could not predict the outcome; and a new stray-voltage lawsuit, which the company said it would defend. Manufactured-gas-plant remediation costs were estimated at $35–$65 over ten years, with $45.1 reserved. Management said known environmental contingencies beyond recorded or disclosed amounts were not expected to be material overall.
- Management reported adequate funding capacity through internal cash generation, borrowing facilities and capital-market access, while noting exposure to credit ratings, market access, construction execution, regulation, weather, fuel costs, outages and litigation. There were no material changes in market-risk disclosures or risk factors; disclosure controls were assessed as effective.
Most important facts for investors to verify
- How much earnings growth persists after separating the prior-year Point Beach gain amortization effect and the 2011 tax-resolution benefit.
- Whether the 2012 Wisconsin and Michigan rate outcomes and fuel-cost recovery requests provide timely recovery of generation, environmental and other costs.
- Actual capital spending, construction progress and eventual costs for Oak Creek environmental controls, Glacier Hills Wind Park and the biomass project.
- Debt, liquidity and cash-flow trends, including the impact of benefit-plan contributions, dividends, repurchases and planned financing.
- Final outcomes and financial exposure from the pension-plan litigation and environmental rules, especially requirements affecting Presque Isle and Valley.