Business context and reporting period
Wisconsin Energy Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2013. The company operates a utility energy segment, serving electric, gas and steam customers, and a non-utility energy segment primarily comprising We Power’s generating assets. Results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Three months ended June 30, 2013 | Prior-year period | Six months ended June 30, 2013 | Prior-year period |
|---|---|---|---|---|
| Operating revenue | $1,012.3 million | $944.7 million | $2,287.5 million | $2,135.9 million |
| Operating income | $229.5 million | $222.6 million | $550.5 million | $518.3 million |
| Net income | $119.0 million | $119.3 million | $295.6 million | $291.4 million |
| Diluted EPS | $0.52 | $0.51 | $1.28 | $1.25 |
| Cash from operating activities | Not separately provided | Not separately provided | $681.5 million | $608.7 million |
| Capital expenditures | Not separately provided | Not separately provided | $307.3 million | $314.0 million |
For the quarter, operating revenue rose about 7.2%, while operating income increased about 3.1% and net income was nearly unchanged. Higher utility operating income and transmission affiliate earnings were offset in part by lower other income, higher interest expense and taxes. The six-month increase in operating income was partly offset below the operating line by lower AFUDC-equity income and higher net interest expense.
Quarterly electric utility revenue increased $20.6 million year over year, including higher rates and increased sales for resale, partly offset by weather-related weakness. Retail electric sales volume fell 5.5%; sales to large commercial and industrial customers declined, particularly at two Michigan iron ore mines. Gas utility gross margin increased $5.7 million in the quarter and $18.6 million in the first half, primarily due to cooler weather and higher delivery volumes; lower gas rates offset some of the increase. Consolidated cost of gas sold and fuel and purchased power costs increased.
Cash, debt and liquidity
At June 30, cash was $21.0 million, compared with $35.6 million at December 31, 2012. Current assets were $1,271.1 million and current liabilities $1,280.7 million, a working-capital deficit of approximately $9.6 million. Management said it expected no liquidity impact, citing available credit facilities and capital-market access.
Balance-sheet long-term debt was $4,383.2 million, with $414.6 million due currently and $335.9 million of short-term debt. The company reported total debt of $5,133.7 million and a debt-to-total-capitalization ratio of 54.9% (52.2% using its rating-agency-adjusted presentation for junior notes). Wisconsin Electric issued $250 million of 1.70% debentures due 2018 and used proceeds to repay short-term debt and for other corporate purposes; it also retired $300 million of maturing long-term debt using short-term borrowings.
Six-month cash from operations was $681.5 million; investing used $336.6 million and financing used $359.5 million. The company had approximately $1.2 billion of available, undrawn bank credit lines and $335.9 million of commercial paper outstanding. It paid $155.6 million in common dividends and repurchased $135.7 million of stock during the first half.
Material changes versus prior period
- First-half revenue rose 7.1% and operating income rose 6.2%, while net income increased 1.4% and diluted EPS rose from $1.25 to $1.28.
- First-half operating cash flow increased $72.8 million, supported by higher net income, depreciation and regulatory amortization.
- Net interest expense rose $7.9 million in the first half, mainly because capitalized interest declined as construction work in progress fell, alongside higher gross interest costs.
- First-half electric revenue benefited from rate increases and greater wholesale/resale sales, but total retail electric sales volume declined. Gas margin benefited from unusually cool weather relative to 2012.
Outlook, management commentary and risks
- Management estimated 2013 consolidated capital expenditures of approximately $690 million and expected to fund requirements with internal cash, short-term borrowing and, as needed, intermediate- or long-term debt. It provided no full-year earnings guidance in the supplied filing text; it expected a 2013 annual effective tax rate of 36%–37%.
- The company expected a roughly $72 million federal Section 1603 grant for its Rothschild biomass plant, targeted for completion by year-end 2013. Grant income was expected in the fourth quarter, creating a timing mismatch with customer bill credits during the first three quarters. Management estimated that matching grant income to credits would have increased each of the first three quarters’ earnings by approximately $0.03 per share.
- On July 18, 2013, after quarter-end, the board declared a quarterly dividend of $0.3825 per share, increasing the annual rate from $1.36 to $1.53, and affirmed a target payout ratio trending to 65%–70% in 2017.
- Two Paris Generating Station units remained out of service under a Wisconsin environmental agency order and were expected to remain unavailable until at least 2014. The company was evaluating options to return them to service and could face fines or penalties; it said no short-term replacement generation was needed.
- Michigan iron ore mines and other customers had indicated plans to switch electric suppliers from September 2013. Management did not expect a material consolidated impact in 2013 but was assessing mitigation options for 2014 and beyond.
- Environmental and regulatory uncertainties include potential greenhouse-gas rules, air-quality requirements and the contested permit for Oak Creek fuel-flexibility work. The company stated that the ultimate cost of proposed wastewater rules could not yet be determined. It estimated manufactured-gas-plant remediation costs of $16 million–$62 million over ten years and had accrued $38.2 million.
- The PSCW approved recovery in rates of more than 99.5% of Oak Creek expansion construction costs, while deferring a decision on $24 million related to the fuel-flexibility project. A Bechtel warranty settlement resolved several Oak Creek claims without material financial-statement impact; two items remained under discussion.
- Rating agencies affirmed most ratings in June, but S&P revised outlooks from positive to stable and Fitch lowered Wisconsin Gas’s senior unsecured rating from A+ to A. Management said it believed current ratings supported financing flexibility.
Most important facts for investors to verify
- Whether quarterly earnings trends persist after accounting for weather, rate changes, the Section 1603 grant timing and the effect of Michigan customer switching.
- Completion, final costs and rate recovery for the Rothschild biomass plant and remaining Oak Creek matters, including the deferred $24 million fuel-flexibility decision.
- Progress on restoring Paris Generating Station Units 1 and 4, and any resulting penalties or reliability or operating costs.
- Actual capital spending, cash generation, debt refinancing needs and continued access to credit facilities and capital markets.
- Whether environmental rulemaking, litigation or remediation estimates change materially; management’s disclosed estimates remain subject to regulatory and other uncertainties.