Wisconsin Energy Beats, Revs Down

Wisconsin Energy Inc. (WEC - Analyst Report) posted second-quarter 2012 earnings per share of 51 cents, up 24.4% year over year from 41 cents per share. The reported quarter’s earnings also comfortably surpassed the Zacks Consensus Estimate of 44 cents per share.

The significant increase was driven by warm summer temperatures, lower operation and maintenance costs, as well as the company's share repurchase program.

Total Revenue

Revenue in the second quarter of 2012 was $944.7 million, down 4.7% from $991.7 million in the year-ago quarter. Revenue also fell short of Zacks Consensus Estimate by $44.3 million.

During the reported quarter, residential sales were up 8.3% year over year. Electricity sales to small commercial and industrial customers were up 5%, however, it declined 3.7% for large commercial and industrial customers.

Operation Highlights

Total operating expenses in the reported quarter were $722.1 million, down 11.6% from the prior-year period. The decline reflects year-over-year decrease in fuel and purchased power expenses, cost of gas sold and other operation and maintenance expenses by 9.5%, 38.4% and 10.4%, respectively. However, it also reflects 27.6% year-over-year increase in operating income to $222.6 million.

Financial Screening

Cash and cash equivalents as of June 30, 2012 were $13.1 million versus $10.6 million as of June 30, 2011. Long-term debt as of June 30, 2012 was $4,297.5 million versus $4,334.6 million as of June 30, 2011. For the six months ended June 30, 2012, the company has repurchased $38.4 million of common stock versus $22 million at the end of June 30, 2011.

At the Peer

One of the company’s peer, Northeast Utilities (NU - Analyst Report) reported second-quarter 2012 pro forma earnings of 45 cents per share, in line with the Zacks Consensus Estimate of 45 cents per share, but surpassing the year-ago earnings by a penny.

The company reported quarterly operating revenue of $1,629.0 million, up 55.4% from $1,048.0 million a year ago. Revenue in the reported quarter edged past the Zacks Consensus Estimate of $1,503 million.

Our View

Though in line with Wisconsin Energy’s expectations, commercial and industrial sales were down due to a planned outage that affected the operations of the company’s largest customer. Further, the company indicated that this outage will continue in third quarter of 2012. However, the company was able to beat our expectation in the reported quarter.

Construction of the company’s biomass-fueled power plant in northern Wisconsin is also in process. Going forward, we expect the company to earn considerable profits based on its capital spending focus, increase in the company’s electric generating capacity based on its projects and a renewed focus on core electric and gas operations.

Moreover, in order to return better value to the shareholders, the company has targeted a dividend payout ratio that will trend to 60% of earnings in fiscal 2014. Also, the company has authorized a share repurchase program for up to $300 million of its common stock through the end of 2013.

However, we remain concerned about the temperature fluctuations as well as current and future legislations. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

Milwaukee-based Wisconsin Energy Corporation is a diversified holding company, engaged in generation and distribution of electricity in southeastern, east central, and northern Wisconsin, as well as in the upper peninsula of Michigan.

The company also distributes natural gas; and owns, develops, and operates hydro, coal, nuclear, and wind electricity generating facilities, as well as invests in other energy-related entities. It also develops and invests in real estate.