WEC ENERGY GROUP, INC. annual report, FY2009

Wisconsin Energy Corporation (now identified in the request as WEC Energy Group) — FY 2009 Form 10-K

Reporting period: Year ended December 31, 2009. The filing also provides unaudited fourth-quarter comparisons. The registrant in the filing is Wisconsin Energy Corporation; this is an annual report, not a standalone Q4 filing.

Business context

The company operated regulated electric and gas utilities, principally in Wisconsin and Michigan, and a non-utility generation business. Its Power the Future program included construction of the Oak Creek coal units and investment in gas-fired and renewable generation. It served about 1.14 million electric customers and 1.06 million gas customers at year-end.

Financial performance and position

Revenue declined largely because of lower gas costs passed through to customers and weaker electric sales amid recession and less favorable summer weather. Electric utility revenue rose 1.0%, while gas utility revenue fell 19.3%. Electric sales volumes declined 8.7%; normalized sales excluding the two largest mine customers were down 5.6%. Utility segment operating income fell to $554.3 million from $580.5 million, while non-utility segment operating income increased to $120.1 million from $89.3 million.

Operating income margin, calculated as operating income divided by revenue, was about 16.1% versus 14.9% in 2008; net margin was about 9.3% versus 8.1%. These are derived ratios, not company-reported measures. Lower fuel and purchased-power costs and lower operating expenses supported earnings despite reduced sales. The 2009 effective tax rate was 36.6%, versus 37.7%.

Fourth quarter: Revenue was $1,067.3 million, down from $1,199.8 million. Operating income was $196.6 million, compared with $195.4 million; continuing-operations income was $113.6 million versus $100.0 million; net income was $118.7 million versus $100.4 million. Diluted EPS was $1.00 versus $0.85, including discontinued-operations EPS of $0.04 in 2009.

At year-end, total assets were $12.70 billion and long-term debt, including current maturities, was $4.17 billion. Short-term debt was $825.1 million, including $820.9 million of commercial paper. Cash and cash equivalents were $20.9 million; current liabilities exceeded current assets by $420.2 million. The company reported $1.6 billion of available undrawn credit lines, excluding a bankrupt Lehman affiliate’s commitments. Debt-to-capitalization was 58.1% on the company’s stated GAAP basis (55.2% on its rating-agency-adjusted basis). Operating cash flow was reduced by $289.3 million of benefit-plan contributions, including a $270 million qualified pension contribution.

Changes, outlook and material matters

• Construction and financing: Oak Creek Unit 1 entered service February 2, 2010. Unit 2 was targeted for commercial operation by August 2010, with a guaranteed in-service date extended to November 28, 2010. The Bechtel settlement required $72 million in payments; Wisconsin Energy bears about 85% of the amount. Cost recovery remains subject to regulatory determinations.
• Rates: Wisconsin regulators approved 2010 rate changes effective January 1, including an $85.8 million (3.35%) electric increase for Wisconsin Electric, but reductions in several gas and steam rates. Michigan approved a $12 million provisional electric increase tied to Unit 1; the final decision on the company’s $42 million request was expected in July 2010. A $60.5 million Wisconsin fuel-cost recovery request was filed in February 2010, subject to approval and refund.
• Capital plans: Estimated capital expenditures were $950.5 million in 2010, $1.02 billion in 2011 and $834.9 million in 2012. Major items included environmental controls, Glacier Hills wind development and Oak Creek work. The company expected to finance operations through internal cash, short-term borrowing and debt issuance; it expected no 2010 pension contribution at the time of filing.
• Demand and growth: Management forecast five-year annual electric sales growth of 0.5%–1.0% and peak-demand growth of 1.0%–1.5%, assuming normal weather and excluding the two iron ore mines. Retail gas deliveries were forecast to remain flat through 2014. These forecasts were subject to economic and weather conditions.
• Projects and asset sales: The company agreed to sell Edison Sault for about $61.5 million, subject to approvals, and sold its water utility for about $14.5 million in 2009. Glacier Hills received regulatory approval in January 2010; a proposed 50 MW biomass plant was targeted for completion in 2013, subject to approvals.
• Risks and contingencies: Significant exposures included environmental regulation and remediation, potential greenhouse-gas and coal-ash rules, construction delays or costs, regulatory cost recovery, regional economic weakness, weather, fuel and purchased-power markets, pension investments, capital-market access, and utility regulation. A pension-plan lawsuit and environmental proceedings remained unresolved. The company reported more than $50 million awarded in its DOE used-nuclear-fuel case and expected an appeal.
• Unusual items: The 2009 income statement included $230.7 million of Point Beach sale-gain amortization as customer bill credits; this is not recurring operating revenue. A favorable resolution of an uncertain tax position contributed to discontinued-operations income. Point Beach bill credits were expected to end by 2010.

Key facts for investors to verify

• Reconcile annual and quarterly earnings, including the $5.2 million of 2009 discontinued-operations income and the effect of Point Beach customer credits.
• Check final regulatory recovery of the Bechtel settlement and any Oak Creek costs above approved limits, and confirm Unit 2’s final cost and operating date.
• Review the outcome of the Michigan rate case and Wisconsin fuel-cost request, including any refunds or changes to allowed returns.
• Assess liquidity and refinancing needs after the reported negative working capital, commercial paper balance and subsequent $530 million February 2010 debt issuance.
• Monitor actual electric demand, industrial customer conditions, environmental compliance costs, pension funding and the unresolved legal and regulatory matters.