WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing; it also includes unaudited quarterly results. The company is a regulated utility holding company, primarily serving Wisconsin and Michigan, with utility and non-utility energy segments.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $4,486.4 million | $4,202.5 million | +6.8% |
| Operating income | $887.3 million | $810.4 million | +9.5% |
| Income from continuing operations | $512.8 million | $454.4 million | +12.9% |
| Net income | $526.2 million | $456.5 million | +15.3% |
| Diluted EPS, continuing operations | $2.18 | $1.92 | +13.5% |
| Diluted EPS, total | $2.24 | $1.93 | +16.1% |
| Operating cash flow | $993.4 million | $810.4 million | +$183.0 million |
| Capital expenditures | $830.8 million | $798.2 million | +$32.6 million |
Consolidated operating margin was approximately 19.8% (2010: 19.3%); net margin was approximately 11.7% (2010: 10.9%). Operating cash flow less capital expenditures was $162.6 million, compared with $12.2 million in 2010. The company contributed $277.4 million to qualified benefit plans in 2011, versus no qualified-plan contributions in 2010.
Utility-segment operating income declined to $544.8 million from $564.0 million, mainly due to higher operating and maintenance expense and less favorable weather. Non-utility operating income rose to $348.9 million from $252.4 million, principally as Oak Creek expansion units entered service. Equity earnings from ATC were $62.5 million. The 2011 effective tax rate was 34.0%, versus 35.5%.
Balance sheet, debt and liquidity
- Total assets were $13.86 billion, up from $13.06 billion. Cash and cash equivalents were $14.1 million; restricted cash of $45.5 million was DOE settlement proceeds designated for customers.
- Long-term debt, including current maturities, was $4.65 billion; short-term commercial paper was $669.9 million. Total debt was $5.32 billion, up from $5.06 billion. Reported debt-to-capitalization was 57.1% (54.4% on management’s adjusted basis for the Junior Notes).
- Current assets of $1.43 billion compared with current liabilities of $1.36 billion. Available undrawn backup credit facilities were approximately $1.2 billion, supporting $669.9 million of commercial paper. Management said it expected to fund requirements through internal cash generation, short-term borrowing and, as needed, debt issuance.
- Regulatory assets were $1.27 billion and regulatory liabilities $915.9 million. Their recovery or settlement depends on regulatory treatment.
Material changes and quarterly context
- Electric utility revenue increased 9.4%, with the end of Point Beach customer bill credits contributing approximately $198.4 million, alongside rate changes and higher wholesale/MISO revenue. The related gain amortization was zero in 2011, compared with $198.4 million in 2010; this makes year-over-year revenue comparisons less indicative of underlying growth.
- Electric sales rose 2.7% overall. Retail sales were slightly lower, with unfavorable weather offsetting economic growth; the two largest iron-ore customers accounted for 7.1% of electric utility sales.
- Gas utility gross margin increased 3.1% to $452.5 million, primarily on colder winter weather; gas revenue declined slightly as lower commodity costs flowed through customer rates.
- Fourth-quarter 2011 revenue was $1,113.2 million and operating income $193.0 million, versus $1,089.8 million and $215.7 million in Q4 2010. Continuing-operations income was $114.1 million versus $125.6 million; total net income was $116.0 million versus $125.9 million.
- The company completed Oak Creek Unit 2 in January 2011 and brought the 162 MW Glacier Hills wind project into service in December. The Oak Creek air-quality control project remained under construction.
Outlook, risks and unusual items
- Management expected 2012 non-utility operating income of $345–$350 million. It forecast annual retail electric sales and peak demand growth of 0.5%–1.0% over five years, excluding the two iron-ore mines; retail gas therm deliveries were forecast to remain flat over five years.
- Estimated capital expenditures were $740.2 million for 2012, $729.4 million for 2013 and $643.4 million for 2014. The Rothschild biomass project was expected to cost $245–$255 million, excluding AFUDC, and be completed in fall 2013.
- In January 2012, the board increased the quarterly dividend to $0.30 per share and set a target payout ratio trending toward 60% in 2014. The 2011 dividend was $1.04 per share. A share repurchase authorization of up to $300 million ran through 2013; $100 million had been repurchased under the program by year-end 2011.
- The PSCW approved the company’s alternative 2012 Wisconsin rate approach, with no 2012 base-rate increase and a traditional case anticipated for rates effective January 2013. A Michigan rate case sought $17.5 million; interim rates were implemented in January 2012, with a final decision expected in July 2012.
- Oak Creek expansion final costs were estimated at $181 million, or 8.3%, above initially approved costs; the company’s share was approximately $154 million. Recovery above the approved threshold and relief from liquidated damages depended on PSCW decisions.
- Environmental regulation creates material uncertainty. The company estimated compliance with the final utility MACT rule at approximately $16 million; CSAPR was stayed pending judicial review. Potential greenhouse-gas, water-discharge and coal-combustion-product rules could add costs, and cost recovery is not assured.
- An October 2011 Oak Creek bluff collapse released an estimated 23,000 cubic yards of soil, coal ash and water; cleanup was completed and permanent stabilization was planned for 2012. The company could not predict whether regulators would impose penalties; a citizens-suit notice had been received.
- A cash-balance pension-plan class settlement was agreed for $45 million, preliminarily approved by the court and expected to receive final approval in April 2012. The filing reports a 2011 earnings cost below $0.04 per share after insurance and prior reserves.
- Other exposures include manufactured-gas-plant remediation, stray-voltage claims, Point Beach spent-fuel storage (DOE settlement proceeds were designated for customers), pension funding and the possibility of higher borrowing costs or collateral requirements after a credit downgrade. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- Whether the 2013 Wisconsin rate case and Michigan rate proceedings permit recovery of Oak Creek, environmental and other costs, and how final Oak Creek costs and delay claims are resolved.
- Whether environmental rules, litigation or plant-specific requirements change projected compliance spending, particularly for Presque Isle and Valley Power Plant.
- Whether reported earnings growth is sustainable after separating the Point Beach bill-credit comparison, Oak Creek unit additions, weather effects and other regulatory accounting items.
- How 2012 capital spending, benefit-plan contributions, dividends and repurchases affect cash generation, debt levels and liquidity.
- The outcome and financial effect, if any, of the Oak Creek bluff investigation, pension settlement approval and other disclosed environmental and legal contingencies.