WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing reports full-year results and unaudited quarterly data, including fourth quarter. The registrant’s name in this filing was Wisconsin Energy Corporation.
Business context
The company operated regulated electric, gas and steam utilities, primarily through We Energies, and a non-utility generation leasing business, principally We Power. Its service territory included Wisconsin and Michigan’s Upper Peninsula. At year-end it served about 1.12 million electric and 1.06 million gas customers. Three of four Power the Future generation units were in service at year-end; Oak Creek Unit 2 entered service on January 12, 2011.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $4,202.5 million | $4,100.9 million |
| Operating income | $810.4 million | $660.3 million |
| Continuing-operations net income | $454.4 million | $375.7 million |
| Net income, including discontinued operations | $456.5 million | $382.4 million |
| Diluted EPS, continuing operations | $3.84 | $3.19 |
| Operating cash flow | $810.4 million | $628.9 million |
| Capital expenditures | $798.2 million | $814.6 million |
| Long-term debt, including current maturities, and capital leases | $4,405.4 million | $4,171.5 million |
Operating revenue rose 2.5%, operating income 22.7%, and continuing-operations net income 20.9%. Electric utility gross margin increased to $1,844.8 million from $1,632.9 million; gas utility gross margin declined to $438.7 million from $455.9 million. The utility segment’s operating income increased to $564.0 million from $550.9 million, while non-utility energy operating income more than doubled to $252.4 million from $120.1 million, principally as Oak Creek Unit 1 entered service.
Fourth-quarter operating revenue was $1,089.8 million versus $1,061.3 million a year earlier; continuing-operations income was $125.6 million versus $113.1 million, and diluted EPS from continuing operations was $1.06 versus $0.96.
Cash provided by operations increased largely because the company made no qualified benefit-plan contribution in 2010, compared with $289.3 million in 2009. Year-end current liabilities exceeded current assets by approximately $390 million, primarily reflecting short-term borrowing for Oak Creek Unit 2 and other investment. The company reported $657.9 million of commercial paper outstanding and approximately $1.2 billion of available undrawn credit facilities. Its reported debt-to-total-capitalization ratio was 56.9% (54.1% on management’s adjusted basis). Cash and cash equivalents were $24.5 million.
Material changes and outlook
- Utility operating income benefited from warmer summer weather, rate changes and improved economic activity, but was partly offset by unfavorable fuel-cost recovery: approximately $44 million unfavorable in 2010, compared with approximately $19 million favorable in 2009.
- Electric sales increased 5.5%; normalized retail electric sales excluding the two largest mine customers increased about 0.2%. Gas deliveries declined 3.6%, mainly reflecting warmer winter weather.
- Net interest expense rose 31.7% to $206.4 million, due mainly to higher debt and lower capitalized interest after Oak Creek Unit 1 entered service.
- Management expected 2011 non-utility energy operating income of $340–$350 million, with Oak Creek Unit 2 contributing for a full year. It forecast electric and gas demand trends to remain modest and weather-sensitive; electric sales growth of 0.5%–1.0% annually over five years was anticipated, excluding the two mines.
- Estimated capital expenditures were $951.2 million in 2011, $656.1 million in 2012 and $536.4 million in 2013. Management expected a 2011 effective tax rate of 35%–36% and estimated bonus-depreciation cash benefits of $100 million in 2011 and $200 million in 2012.
- In January 2011, the company issued $420 million of long-term debt to repay construction-related short-term borrowing. The board also raised the quarterly dividend to $0.52 per pre-split share, targeting a 50%–55% payout ratio, and approved a two-for-one stock split effective March 2011.
Risks, contingencies and unusual items
- Oak Creek expansion costs were estimated at $191 million, or 8.7%, above the amount initially approved; the company’s share was estimated at $162 million. Recovery of costs above regulatory limits and relief from construction-delay liquidated damages depended on PSCW decisions.
- Environmental rules could require substantial additional investment and operating costs. The company estimated up to $400 million of potential capital spending above expected Consent Decree costs for proposed and other new requirements; compliance costs may not be fully recovered in rates. Greenhouse-gas, air-quality, water-discharge and coal-combustion-product regulation were material uncertainties.
- The company had $45.1 million reserved for future manufactured-gas-plant remediation; estimated future investigation and remediation costs were $35–$65 million over ten years. A class-action pension-plan lawsuit could materially affect plan funding and expense, though its outcome and potential exposure were not clear. Other disclosed matters included environmental proceedings and stray-voltage claims.
- Results were exposed to weather, fuel and purchased-power prices, generation outages, regulatory rate recovery, capital-market access and pension investment performance. A below-investment-grade downgrade could trigger collateral or termination payments estimated at $201.6 million at year-end.
- Point Beach customer bill credits from the plant sale were completed by year-end 2010. The company had sold Edison Sault for approximately $63 million in May 2010; the proposed sale of its Edgewater Unit 5 interest remained subject to Michigan approval.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- PSCW and MPSC decisions on Oak Creek cost recovery, delay relief, and remaining rate appeals; confirm whether claimed costs are ultimately recoverable from customers.
- Actual performance and earnings contribution from Oak Creek Unit 2, and progress, approvals and costs for Glacier Hills wind, biomass and environmental-control projects.
- Trends in fuel-cost recovery, customer demand, weather normalization and gas margins, particularly following 2010’s favorable summer weather.
- Debt, commercial-paper usage, credit ratings and liquidity after the January 2011 refinancing; assess planned capital spending and dividend commitments against cash generation.
- Developments in environmental regulation and remediation estimates, the cash-balance pension-plan litigation, and pension contributions and assumptions.