Business Context and Reporting Period
Company: Wisconsin Energy Corporation (WEC Energy Group, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A diversified holding company operating primarily in two segments: Utility Energy (electric, gas, and steam services in Wisconsin and Michigan) and Non-Utility Energy (generation assets leased to the utility segment). The company is a large accelerated filer with 116.9 million shares of common stock outstanding.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Operating Revenues | $1,396.2 | $1,431.1 |
| Operating Income | $243.0 | $217.5 |
| Net Income | $141.5 | $123.2 |
| Diluted EPS | $1.20 | $1.04 |
| Cash from Operating Activities | $20.3 | $343.8 |
| Capital Expenditures | $171.4 | $348.2 |
| Short-Term Debt | $791.3 | $602.3 |
| Long-Term Debt | $4,083.4 | $4,074.7 |
| Total Assets | $12,411.1 | $12,617.8 |
Margins: Operating margin for Q1 2009 was approximately 17.4% ($243.0M / $1,396.2M). The effective tax rate for continuing operations was 36.5%.
Material Changes vs. Prior Period
- Net Income Increase: Net income rose 14.9% to $141.5 million, driven by a $25.5 million increase in operating income.
- Utility Segment Performance: Utility operating income increased $10.0 million. This was primarily due to favorable fuel recoveries ($28 million in Q1 2009 vs. unfavorable $14 million in Q1 2008) and lower fuel costs, despite a 6.0% decline in total electric sales volumes due to economic downturns and milder weather.
- Non-Utility Segment Growth: Operating income for the non-utility segment more than doubled to $27.9 million, largely due to earnings from the PWGS 2 unit (placed in service May 2008) and the new Oak Creek water intake system (placed in service Jan 2009).
- Amortization of Gain: The amortization of the gain on the sale of Point Beach decreased significantly to $64.2 million from $159.0 million in the prior year, as the one-time amortization of $85.0 million recorded in 2008 did not recur.
- Cash Flow Volatility: Cash provided by operating activities dropped sharply to $20.3 million from $343.8 million. This was primarily due to a $289.3 million contribution to benefit plans (pension/OPEB) in Q1 2009 compared to $48.4 million in Q1 2008, and a reduction in accounts payable.
Guidance, Outlook, and Risks
- Rate Filings: The company filed a request in April 2009 to decrease retail electric rates by $67.2 million for 2009 due to lower fuel costs; this was approved effective May 1, 2009. A 2010 rate case was initiated seeking increases of approximately $76.5 million for electric and $22.1 million for gas.
- Capital Requirements: The 2009 consolidated capital expenditure budget is approximately $875 million, focused on the Oak Creek expansion and environmental controls. The company expects to fund this through internal funds and short-term borrowings.
- Construction Delays (Oak Creek): Contractor Bechtel notified the company of a forecasted three-month delay for Unit 1 of the Oak Creek expansion (targeted in-service date now late December 2009). Bechtel has submitted claims for cost relief totaling approximately $413 million related to weather and labor conditions, which the company disputes.
- Regulatory and Environmental Risks: Significant uncertainty remains regarding the MISO Revenue Sufficiency Guarantee (RSG) cost allocation, with a potential refund of up to $17 million not yet recognized. Environmental compliance costs are rising, with the Oak Creek air quality control project cost estimate increasing to approximately $800 million.
- Liquidity: Despite global credit market turmoil, the company maintains access to capital markets with approximately $1.6 billion in available, undrawn bank credit facilities (excluding Lehman Brothers commitments).
Investor Verification Checklist
- Benefit Plan Contributions: Verify the sustainability of cash flows given the $289.3 million pension/OPEB contribution in Q1 2009 and the impact of market returns on plan assets.
- Oak Creek Expansion Status: Monitor the resolution of the dispute with Bechtel regarding the $413 million cost claim and the likelihood of liquidated damages due to the Unit 1 delay.
- Rate Case Outcomes: Track the approval of the 2010 rate increase requests and the impact of the 2009 fuel cost decrease on annual revenue.
- MISO RSG Resolution: Watch for final rulings on the MISO RSG cost allocation, which could result in a $17 million refund or further costs.
- Debt Levels: Review the increase in short-term debt to $791.3 million and the company's ability to refinance or manage interest costs in a volatile credit environment.