WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The filing is for Wisconsin Energy Corporation, a holding company with utility and non-utility energy segments; interim results are unaudited and subject to seasonal variation.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating revenue | $1,191.2 million | $1,328.7 million |
| Operating income | $295.7 million | $295.6 million |
| Net income | $172.1 million | $170.9 million |
| Diluted EPS | $0.74 | $0.72 |
| Operating cash flow | $340.5 million | $391.0 million |
| Capital expenditures | $142.3 million | $135.5 million |
| Dividends per share | $0.30 | $0.26 |
Operating margin, calculated as operating income divided by revenue, was approximately 24.8%, versus 22.3% a year earlier. Utility-segment operating income declined $4.4 million to $208.6 million; non-utility operating income rose $4.4 million to $88.4 million. The effective tax rate increased to 35.9% from 34.3%. Net interest expense fell $4.5 million to $58.9 million.
Balance sheet and liquidity
- At March 31, 2012, cash and cash equivalents were $18.1 million; short-term debt was $557.3 million and long-term debt, including current maturities, was approximately $4.64 billion.
- Management reported approximately $1.2 billion of available, undrawn bank credit facilities. Consolidated commercial paper outstanding was $557.3 million.
- Reported debt-to-total capitalization was 56.0%; management’s rating-agency-adjusted ratio, reflecting partial equity credit for junior notes, was 53.3%.
- Cash used in financing was $206.1 million, compared with $35.1 million in Q1 2011. No long-term debt was issued in Q1 2012, versus $420 million issued in Q1 2011.
Changes and drivers
- Revenue fell $137.5 million, largely due to lower gas revenues and costs following unusually warm weather and lower natural-gas commodity prices. Q1 2012 was the warmest winter in 122 years; heating degree days were 24.2% below Q1 2011 and 21.1% below normal.
- Gas gross margin decreased $31.3 million, or 17.2%, to $151.0 million. Electric revenue was nearly flat; electric sales volume declined 2.4% overall.
- Lower operating and maintenance expense, including the authorized 2012 suspension of amortization on certain regulatory assets, and reduced interest expense helped offset weather-related pressure. Depreciation increased with additional plant in service.
- Operating cash flow decreased $50.5 million. Comparisons were affected by Q1 2011 benefit-plan contributions of $122.4 million, DOE settlement receipts and regulatory accounting items.
Outlook, risks and unusual items
- Management expected a 2012 annual effective tax rate of 35.5%–36.5%, approximately $740 million of consolidated capital expenditures in 2012, and funding needs to be met primarily through internal cash generation and short-term borrowing, with debt issuance as needed.
- The board raised the quarterly dividend to $0.30 per share and set a policy targeting a payout ratio trending toward 60% of earnings in 2014. The $300 million share-repurchase authorization runs through 2013; $100 million had been repurchased under it through March 31, 2012. Q1 purchases shown in the filing were for employee award-related purposes, not under the public program.
- Wisconsin utilities filed 2013 rate requests in March 2012, including a proposed $99.3 million net electric increase for Wisconsin Electric, partly offset by anticipated renewable-energy grant proceeds. Outcomes were pending. A Michigan rate case decision was expected in July 2012.
- Construction and compliance commitments include the Oak Creek air-quality project, expected to cost approximately $750 million ($900 million including AFUDC), and a biomass facility expected to cost $245–$255 million, excluding AFUDC, and be completed in fall 2013. Estimated capital costs to comply with the MATS rule were $16–$25 million.
- Environmental and regulatory uncertainty includes the stayed CSAPR rule, greenhouse-gas regulation, a WDNR notice of violation related to the 2011 Oak Creek bluff collapse, and possible penalties or citizen litigation. Management said cleanup was completed and sampling had not indicated a serious health or environmental risk.
- A $45 million cash-balance pension-plan settlement was approved by the court in April 2012, after quarter-end; plaintiffs had a period to appeal. The company did not anticipate further charges beyond implementation costs.
- Total contractual obligations and commercial commitments were approximately $21.9 billion. Management stated it believed liquidity was adequate and known environmental contingencies would not materially affect financial position or results; actual outcomes remain subject to regulatory, operational, market and legal risks.
Investor verification priorities
- Track weather-normalized utility demand and gas margins, and whether the unusually warm Q1 effect reverses or persists.
- Verify rate-case decisions, fuel-cost recovery, and treatment of anticipated renewable-energy grant proceeds.
- Monitor Oak Creek and biomass project costs, schedules, and environmental compliance requirements.
- Review cash generation, commercial-paper reliance, capital spending, debt ratios and dividend coverage against management’s outlook.
- Follow the pension settlement appeal period and the Oak Creek bluff-collapse enforcement and litigation developments.