Business context and reporting period
Wisconsin Energy Corporation (the registrant named in the filing; the request metadata identifies WEC Energy Group) filed this unaudited Form 10-Q for the quarter ended June 30, 2009. It operates regulated electric, natural gas and steam utilities, alongside non-utility energy businesses, principally We Power. Results are compared with 2008; interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
Amounts are in millions of dollars, except per-share figures and where stated otherwise.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $842.5 | $945.4 | $2,238.7 | $2,376.5 |
| Operating income | $119.2 | $107.9 | $362.2 | $325.4 |
| Income from continuing operations | $63.4 | $58.2 | $204.9 | $181.2 |
| Net income | $63.7 | $58.0 | $205.2 | $181.2 |
| Diluted EPS | $0.54 | $0.49 | $1.74 | $1.53 |
- Revenue fell 10.9% in Q2 and 5.8% for the first half, while net income rose 9.8% and 13.2%, respectively. Lower gas prices and weaker electric sales reduced revenue; lower fuel and gas costs, improved non-utility earnings and other factors supported earnings.
- Q2 utility gross margin was $483.0, up $24.1 year over year; gas gross margin was $79.5, down $0.7. First-half utility gross margin was $1,108.4, up $116.4; gas gross margin was $263.8, down $6.2.
- Electric sales volumes declined 12.6% in Q2 and 9.2% in the first half; management attributed the weakness chiefly to economic conditions, particularly lower commercial and industrial demand. First-half gas margin also faced pressure from milder weather and weaker economic conditions.
- Operating cash flow was $232.4 for the first half, versus $573.7 in 2008. The principal drag was $289.3 of benefit-plan contributions, compared with $48.4 a year earlier. Capital expenditures were $365.1, down from $642.0; investing cash use was $306.3. Financing provided $53.9, including a net debt increase.
- At June 30, cash and cash equivalents were $12.5; current assets were $1,300.1 and current liabilities $1,821.0. Long-term debt including current maturities was $4,093.1, and short-term debt was $780.2. Reported debt to total capitalization was 58.2% (55.2% on management’s adjusted basis for the junior notes).
- Common-equity dividends were $0.3375 per share for Q2 and $0.6750 for the first half, up from $0.27 and $0.54, respectively, in 2008.
Material changes and unusual items
- Operating income increased despite lower revenue, in part because utility fuel and purchased-power recoveries improved; management cautioned that a substantial portion of the favorable first-half fuel recoveries was expected to reverse by year-end following a rate reduction.
- The Point Beach sale gain is being amortized as customer bill credits are issued: $55.1 in Q2 and $119.3 in the first half of 2009, versus $87.0 and $246.0 in 2008. The lower 2009 amortization reflects, among other factors, a one-time $85.0 million 2008 entry.
- Wisconsin Energy sold its water utility to the City of Mequon on April 30, 2009, for approximately $14.5 million; its results are presented as discontinued operations. The filing reports no material subsequent events through August 4, 2009.
- Non-utility operating income rose to $30.8 in Q2 from $20.0, and to $58.7 for the first half from $34.2, mainly reflecting PWGS 2 and the Oak Creek water intake system entering service.
Outlook, risks and contingencies
- Management forecast a 2009 annual effective tax rate of 35%–37%. It expected to meet remaining 2009 capital needs primarily with internally generated funds and short-term borrowings, with debt issuance depending on market conditions. The 2009 capital expenditure budget was approximately $875 million.
- Management said it had approximately $1.6 billion of available, undrawn bank credit lines at June 30, excluding an $80 million commitment from a Lehman affiliate; $780.2 million of short-term debt was outstanding. It stated that it believed liquidity was adequate for the foreseeable future, while noting continued credit-market uncertainty.
- For 2010, Wisconsin Electric and Wisconsin Gas sought rate increases in Wisconsin; Wisconsin Electric later raised its electric request to $126.0 million, with lower sales also creating $24.0 million of additional Point Beach bill credits. Wisconsin Electric also filed a $42 million Michigan rate request. Outcomes remained subject to regulators.
- Bechtel sought approximately $413 million for alleged weather and labor impacts and approximately $72 million for alleged owner-directed changes and delays on the Oak Creek expansion. The company said it believed the claims were without merit; mediation failed and binding arbitration was underway, with a conclusion anticipated in 2010. Unit 1 was forecast three months later than its guaranteed date, and unit 2 one month earlier, but the contractor had not fully kept pace with its revised schedule.
- Oak Creek air-control project cost estimates increased to approximately $800 million, or $960 million including AFUDC, from $750 million, or $830 million including AFUDC. Completion was expected in 2012. The company also cited possible material cost and operational effects from future greenhouse-gas and other environmental rules; such costs and rate recovery could not yet be quantified.
- FERC proceedings concerning MISO revenue-sufficiency-guarantee charges and refunds remained unresolved, and their net effects were uncertain. A retiree lawsuit alleging underpayment of cash-balance pension lump sums was filed June 30; the company said it believed the plan calculations were correct but could not predict the outcome or impact.
- The company could not determine whether it was the primary beneficiary of two purchased-power/tolling variable-interest entities; it did not consolidate them and disclosed approximately $446.2 million of required payments over the remaining contract terms.
Most important facts to verify
- Whether electric demand and industrial sales stabilize, and how the 2009 fuel-rate decrease and expected reversal of favorable fuel recoveries affect earnings.
- Progress and final cost/timing of the Oak Creek expansion and environmental controls, and the outcome of Bechtel’s arbitration claims.
- Regulatory decisions on the 2010 Wisconsin and Michigan rate requests, and the eventual impact of MISO/FERC refund and cost-allocation proceedings.
- Liquidity and refinancing capacity, including short-term borrowings, undrawn facilities and credit-rating outlook changes.
- Environmental compliance exposure, pension-plan lawsuit risk, and the company’s ability to recover related costs in regulated rates.