WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. The company operated regulated electric, natural gas and steam utilities and a non-utility generation business, primarily We Power. Interim results are unaudited and may not indicate full-year results because of seasonality.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $973.2 million | $815.5 million | $3,112.7 million | $3,039.6 million |
| Operating income | $203.0 million | $104.4 million | $594.7 million | $464.3 million |
| Net income | $112.2 million | $58.5 million | $330.6 million | $263.7 million |
| Diluted EPS | $0.95 | $0.50 | $2.79 | $2.24 |
| Cash from operations | Not separately presented | Not separately presented | $653.7 million | $433.7 million |
- Q3 revenue rose about 19% and net income about 92%; nine-month revenue increased about 2% and net income about 25%. Reported operating margin was approximately 20.9% for Q3 and 19.1% year to date, versus 12.8% and 15.3%, respectively, in 2009.
- Q3 utility operating income increased $59.9 million, driven largely by warmer weather, rate increases and higher sales. Non-utility operating income rose $36.5 million, principally reflecting Oak Creek Unit 1 (OC 1) entering service in February 2010.
- For the first nine months, electric revenue rose $220.1 million, while gas revenue fell $167.3 million, mainly from lower gas prices and milder winter weather. Gas gross margin declined $18.4 million. Utility operating income increased $31.6 million year over year.
- Operating cash flow increased $220.0 million year over year, primarily because no benefit-plan contributions were required in 2010 (versus $289.3 million in 2009) and cash earnings were higher. Capital expenditures were $545.6 million; investing cash outflow was $410.0 million.
Balance sheet, debt and liquidity
- At September 30, 2010, cash and cash equivalents were $11.2 million; restricted cash was $62.7 million. Current assets of $1.189 billion were below current liabilities of $1.609 billion, a working-capital deficit of approximately $420.8 million.
- Consolidated debt was $4.927 billion, including $3.9357 billion of long-term debt, $472.7 million due currently and $518.6 million of short-term debt. The company reported debt to total capitalization of 56.7%, or 53.9% on its rating-agency-adjusted presentation.
- Available, undrawn backup credit facilities totaled approximately $1.6 billion. Management expected to fund near-term requirements with internally generated funds and short-term borrowings, potentially supplemented by debt issuance.
- Dividends paid were $140.3 million in the first nine months; dividends per share were $1.20, versus $1.0125 in 2009. The company also spent $128.5 million purchasing shares in the open market, primarily in connection with stock-option awards.
Changes, outlook and key risks
- OC 1 began commercial operation in February 2010. OC 2 was expected to enter service in Q4 2010, with a guaranteed in-service date of November 28, 2010. Management anticipated issuing long-term debt after OC 2 entered service to refinance construction-related short-term debt.
- Estimated capital expenditures were $817.2 million for 2010, $998.9 million for 2011 and $741.9 million for 2012. The company expected its 2010 effective tax rate to be 35%–36%.
- Management attributed higher electric sales partly to weather and economic improvement. Nine-month electric sales increased 8.1%; retail sales to weather-sensitive residential and smaller business customers increased 5.2%. The company nevertheless expected to be in an unfavorable fuel-recovery position for 2010.
- A $60.5 million annual Wisconsin fuel-rate increase was in effect on an interim basis, subject to refund with 10.4% interest; final review was expected by year-end 2010. A separate 2011 fuel-cost rate request sought a $38.4 million annual increase. The company also said new Wisconsin fuel rules were expected to take effect in 2011.
- Environmental uncertainty includes proposed federal coal-ash rules and greenhouse-gas and interstate-pollution requirements that could constrain operations or require additional spending. The company said more stringent proposed emissions limits could require further expenditures.
- A class-action pension-plan lawsuit, amended to add Wisconsin Energy as a defendant, seeks additional benefits but does not specify damages; the company said an adverse outcome could materially affect plan funding, expense and results. In a separate DOE spent-fuel case, the company had obtained a judgment of more than $50 million; the DOE appealed.
- Other developments included the May 2010 sale of Edison Sault for approximately $63 million and a pending sale of the company’s 25% interest in Edgewater Unit 5, subject to remaining regulatory approvals. Management stated it believed liquidity was adequate for the foreseeable future.
Important facts for investors to verify
- Whether OC 2 entered service on schedule and how its financing affected short-term debt and liquidity.
- Final outcomes of the interim fuel-rate proceedings, including any customer refunds, and the company’s expected 2010 fuel-recovery shortfall.
- Actual capital-spending requirements and the cost and timing of environmental compliance and renewable projects.
- Developments in the pension-plan litigation and the DOE appeal, including any change in potential financial exposure.
- Whether Q3 earnings growth persists after accounting for unusually favorable cooling weather, rate changes, and OC 1’s contribution.