WEC Energy Group, Inc. (then Wisconsin Energy Corporation) — Q3 2009 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2009. Wisconsin Energy was a diversified holding company with utility energy and non-utility energy segments, principally Wisconsin Electric, Wisconsin Gas, and We Power. The interim statements are unaudited. The filing does not use the current WEC Energy Group name.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Operating revenues | $821.9 million | $851.5 million | $3,060.6 million | $3,228.0 million |
| Operating income | $104.9 million | $138.4 million | $467.1 million | $463.8 million |
| Income from continuing operations | $58.7 million | $76.6 million | $263.6 million | $257.8 million |
| Net income | $58.5 million | $77.5 million | $263.7 million | $258.7 million |
| Diluted EPS | $0.50 | $0.65 | $2.24 | $2.19 |
| Dividends per common share | $0.3375 | $0.27 | $1.0125 | $0.81 |
- Q3 revenue fell about 3.5% and net income about 24.5% year over year; nine-month revenue fell about 5.2%, while net income rose about 1.9%.
- Q3 operating income declined $33.5 million, primarily from lower utility-segment results. The utility segment’s operating income fell $37.4 million; non-utility operating income increased $3.6 million.
- For the first nine months, utility operating income fell $27.3 million, partly offset by a $28.1 million increase in non-utility operating income, principally from generating assets entering service.
- Comparisons are affected by Point Beach sale-gain amortization: $57.9 million in Q3 2009 versus $157.4 million in Q3 2008, and $177.2 million versus $403.4 million for the nine-month periods. The 2008 amounts included one-time items.
- Q3 electric sales volumes declined 14.2%; nine-month volumes declined 11.0%. Management attributed weakness mainly to the economic downturn and cooler summer weather. Nine-month gas gross margin decreased $7.1 million; lower gas prices reduced reported gas revenue.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $436.5 million, down from $643.0 million. The company cited a $289.3 million contribution to benefit plans, compared with $48.4 million in the prior period, and working-capital use related to coal inventories.
- Investing cash outflow was $478.6 million, versus $681.7 million; capital expenditures were $555.8 million, down from $888.9 million. Financing cash inflow was $20.3 million. Cash and cash equivalents ended at $10.7 million.
- At September 30, total debt was approximately $4.88 billion, including $938.0 million of short-term debt and $3.94 billion of long-term debt including current maturities. Actual debt-to-total capitalization was 58.1%; management’s rating-agency-adjusted measure was 55.1%.
- Current assets were $1.33 billion and current liabilities $2.01 billion. The company reported approximately $1.6 billion of available undrawn credit lines, excluding Lehman Brothers commitments, supporting $938.0 million of short-term debt.
- Restricted cash was $237.0 million at quarter-end and primarily represented remaining Point Beach sale proceeds designated for taxes and customer benefits; it should not be treated as unrestricted liquidity.
Outlook, commentary, and material risks
- Management expected to fund remaining 2009 capital needs primarily with internal cash and short-term borrowings, supplemented as needed by debt issuance. The 2009 capital expenditure budget was approximately $875 million. Management stated it believed funding capacity was adequate for the foreseeable future.
- Management expected the 2009 effective tax rate to be 35%–37%. It anticipated continued weakness in commercial and industrial electric sales and estimated the 2009 Wisconsin retail electric rate reduction from lower fuel costs would reduce revenues by approximately $45.8 million.
- Wisconsin Electric and Wisconsin Gas had requested rate increases for 2010, including a revised Wisconsin Electric retail electric request of $126.0 million; decisions were pending. Wisconsin Electric also requested a $42 million Michigan rate increase.
- Oak Creek expansion construction remained exposed to schedule and cost disputes. Contractor Bechtel sought approximately $413 million for alleged weather and labor impacts plus approximately $72 million for alleged company-directed changes and delays. The company disputed the claims; mediation failed and binding arbitration was expected to conclude in 2010 or early 2011. Unit 1’s then-current target was December 29, 2009, with possible further delay.
- Environmental requirements, including potential greenhouse-gas regulation and air-quality standards, could require significant spending and affect generation economics. Management said impacts were not yet quantifiable and recovery of compliance costs through rates was uncertain.
- A class-certification effort in a cash-balance pension plan lawsuit alleged lump-sum benefits were underpaid; the company said it believed calculations were correct but could not predict the outcome or impact. Management also disclosed uncertainty regarding MISO market resettlements and regulatory proceedings.
- In October 2009, the company agreed to sell Edison Sault for approximately $61.5 million, subject to regulatory and other conditions, with closing expected in 2010. The company expected to retain Edison Sault’s ATC membership interest.
Important facts for investors to verify
- Whether the Oak Creek units meet revised completion targets and the outcome, costs, and schedule effects of Bechtel’s arbitration claims.
- Final decisions and effective dates for pending Wisconsin and Michigan rate cases, and the resulting recovery of capital and environmental costs.
- Trends in electric and gas sales, particularly commercial and industrial demand, and the impact of weather and lower fuel-cost rates.
- Cash generation, benefit-plan funding requirements, short-term borrowing, and access to credit facilities and capital markets.
- Developments in environmental rules, MISO proceedings, and the pension litigation, including potential financial effects not clearly quantifiable in this filing.
- Completion and proceeds of the proposed Edison Sault sale, including the retained ATC interest.