Business context and reporting period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2010. The issuer identifies itself as Wisconsin Energy Corporation; the filing does not use the name WEC Energy Group. Operations comprise a regulated utility segment serving electric, gas and steam customers and a non-utility segment focused primarily on power-generation assets leased to the utility.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $890.9 million, up 6.6% from $835.7 million | $2,139.5 million, down 3.8% from $2,224.1 million |
| Operating income | $163.3 million, up 37.9% from $118.4 million | $391.7 million, up 8.8% from $359.9 million |
| Net income | $88.7 million, up from $63.7 million | $218.4 million, up from $205.2 million |
| Diluted EPS | $0.75, versus $0.54 | $1.85, versus $1.74 |
Quarterly operating margin was approximately 18.3%, compared with 14.2% a year earlier; first-half operating margin was approximately 18.3%, versus 16.2%. The filing reports dividends per share of $0.40 for the quarter and $0.80 for the first half, compared with $0.3375 and $0.6750, respectively, in 2009.
- Cash flow: First-half cash provided by operations was $423.7 million, versus $231.0 million. Investing used $275.3 million, including $379.1 million of capital expenditures; financing used $158.1 million. Cash and cash equivalents ended the period at $10.5 million. The higher operating cash flow largely reflects $289.3 million of benefit-plan contributions in 2009 and none in 2010.
- Debt and liquidity: At June 30, total debt was $4,956.3 million, including current maturities and short-term debt; debt to total capitalization was 57.2% (54.3% using management’s adjusted treatment of junior notes). Current liabilities exceeded current assets by approximately $379.7 million. The company reported approximately $1.6 billion of available undrawn credit facilities and $520.4 million of short-term debt outstanding.
- Capital investment: Net property, plant and equipment was $9,290.0 million. Estimated capital expenditures were $817.2 million for 2010, $998.9 million for 2011 and $741.9 million for 2012.
Material changes versus prior comparable periods
- Second-quarter utility operating income rose $8.4 million, while non-utility operating income rose $36.1 million to $66.9 million, chiefly reflecting Oak Creek expansion Unit 1 (OC 1), placed in service in February 2010. First-half utility operating income fell $28.3 million, primarily from unfavorable fuel recovery and milder winter weather; non-utility operating income increased $60.3 million.
- Second-quarter electric revenue increased with 2010 rate changes, warmer cooling weather and stronger customer demand. First-half electric sales rose 4.2%; large commercial and industrial sales were particularly strong, including increased sales to two iron ore mines.
- Gas gross margin declined $3.2 million in the quarter and $19.1 million in the first half, mainly because milder weather reduced volumes. First-half gas revenue fell substantially as lower natural-gas prices flowed through cost-recovery mechanisms.
- First-half interest expense, net, increased $21.8 million to $102.4 million. The company issued $530 million of long-term notes in February 2010, partly replacing construction-related short-term borrowing; interest capitalization also declined after OC 1 entered service.
- Wisconsin Energy sold Edison Sault effective May 4, 2010, for approximately $63 million. Discontinued operations included a $1.1 million after-tax gain on sale.
Outlook, commentary, risks and unusual items
- Management expected a 2010 annual effective tax rate of 35%–36% and anticipated remaining 2010 capital needs would be met primarily through internally generated funds and short-term borrowing, with possible debt issuance. It stated that available liquidity and capital access were adequate for the foreseeable future.
- OC 2 was expected to enter service in fourth-quarter 2010; its guaranteed in-service date was November 28, 2010. The company expected to finance part of its construction with long-term debt upon commercial operation.
- Management expected an unfavorable fuel-recovery position for 2010. A $60.5 million annual Wisconsin electric rate increase was approved on an interim basis and is subject to refund with interest; final regulatory review was expected by year-end.
- Wisconsin’s final approval of a Michigan rate increase was issued July 1, 2010, effective July 2; the $23.5 million combined increase was subject to appeal. The proposed merger of Wisconsin Gas into Wisconsin Electric was anticipated to take effect January 1, 2011, subject to regulatory approval.
- Renewable projects include the 162 MW Glacier Hills wind park, then under construction and expected to begin full-year operation in 2012, and a proposed biomass plant expected to cost approximately $255 million and be completed in fall 2013, subject to approvals.
- Key risks include possible new environmental requirements for coal ash, greenhouse-gas regulation and proposed emissions rules; construction and regulatory uncertainty; weather, fuel costs and power availability; capital-market access; and litigation. A former employee’s pension-plan lawsuit sought class treatment, with relief unspecified. The Department of Energy appealed a judgment awarding the company more than $50 million related to used nuclear fuel; any recovery was expected to be addressed in future rate cases.
- Other notable items: share-based compensation expense rose to $15.2 million for the first half from $9.7 million, including higher performance-unit expense. The company reported approximately $21.7 billion of contractual obligations and commercial commitments at June 30.
Important facts for investors to verify
- Confirm the issuer and security identity: this historical filing is for Wisconsin Energy Corporation, although the request identifies WEC Energy Group.
- Track the final Wisconsin fuel-recovery determination, possible refunds, and the actual degree of fuel under-recovery.
- Monitor OC 2’s completion, final project costs, and the expected long-term financing and working-capital effects.
- Check regulatory and cost developments for the Michigan rate order, utility merger, renewable projects and environmental rules.
- Follow the pension litigation and DOE appeal, including any changes to potential exposure or recoveries.