UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period EndedSeptember 30, 2008
Commission | Registrant; State of Incorporation | IRS Employer | |
File Number | Address; and Telephone Number | Identification No. | |
001-01245 | WISCONSIN ELECTRIC POWER COMPANY | 39-0476280 | |
(A Wisconsin Corporation) | |||
231 West Michigan Street | |||
P.O. Box 2046 | |||
Milwaukee, WI 53201 | |||
(414) 221-2345 | |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] (Do not Smaller reporting company [ ]
check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (September 30, 2008):
Common Stock, $10 Par Value, | 33,289,327 shares outstanding. |
All of the common stock of Wisconsin Electric Power Company is owned by Wisconsin Energy Corporation.
WISCONSIN ELECTRIC POWER COMPANY | |||||
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FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2008 | |||||
TABLE OF CONTENTS | |||||
Item | Page | ||||
Introduction | 7 | ||||
Part I -- Financial Information | |||||
1. | Financial Statements | ||||
Consolidated Condensed Income Statements | 8 | ||||
Consolidated Condensed Balance Sheets | 9 | ||||
Consolidated Condensed Statements of Cash Flows | 10 | ||||
Notes to Consolidated Condensed Financial Statements | 11 | ||||
2. | Management's Discussion and Analysis of | ||||
Financial Condition and Results of Operations | 21 | ||||
3. | Quantitative and Qualitative Disclosures About Market Risk | 40 | |||
4T. | Controls and Procedures | 40 | |||
Part II -- Other Information | |||||
1. | Legal Proceedings | 41 | |||
1A. | Risk Factors | 41 | |||
5. | Other Information | 41 | |||
6. | Exhibits | 42 | |||
Signatures | 43 | ||||
DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS | ||
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below. | ||
Wisconsin Electric Subsidiary and Affiliates | ||
Primary Subsidiary and Affiliates | ||
Bostco | Bostco LLC | |
Edison Sault | Edison Sault Electric Company | |
We Power | W.E. Power, LLC | |
Wisconsin Energy | Wisconsin Energy Corporation | |
Wisconsin Gas | Wisconsin Gas LLC | |
Significant Assets | ||
OC 1 | Oak Creek expansion Unit 1 | |
OC 2 | Oak Creek expansion Unit 2 | |
PWGS | Port Washington Generating Station | |
PWGS 1 | Port Washington Generating Station Unit 1 | |
PWGS 2 | Port Washington Generating Station Unit 2 | |
Federal and State Regulatory Agencies | ||
DOE | United States Department of Energy | |
EPA | Environmental Protection Agency | |
FERC | Federal Energy Regulatory Commission | |
IRS | Internal Revenue Service | |
MDEQ | Michigan Department of Environmental Quality | |
MPSC | Michigan Public Service Commission | |
PSCW | Public Service Commission of Wisconsin | |
SEC | Securities and Exchange Commission | |
WDNR | Wisconsin Department of Natural Resources | |
Environmental Terms | ||
BART | Best Available Retrofit Technology | |
CAIR | Clean Air Interstate Rule | |
CAMR | Clean Air Mercury Rule | |
CAVR | Clean Air Visibility Rule | |
NAAQS | National Ambient Air Quality Standards | |
NOx | Nitrogen Oxide | |
PM2.5 | Fine Particulate Matter | |
SIP | State Implementation Plan | |
SO2 | Sulfur Dioxide | |
WPDES | Wisconsin Pollution Discharge Elimination System | |
Other Terms and Abbreviations | ||
ALJ | Wisconsin Administrative Law Judge | |
ARRs | Auction Revenue Rights | |
Bechtel | Bechtel Power Corporation | |
DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS | ||
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below. | ||
Compensation Committee | Compensation Committee of the Board of Directors of Wisconsin Energy | |
CPCN | Certificate of Public Convenience and Necessity | |
Energy Policy Act | Energy Policy Act of 2005 | |
Fitch | Fitch Ratings | |
FTRs | Financial Transmission Rights | |
LMP | Locational Marginal Price | |
LSEs | Load Serving Entities | |
MISO | Midwest Independent Transmission System Operator, Inc. | |
MISO Energy Markets | MISO bid-based energy markets | |
Moody's | Moody's Investor Services | |
OTC | Over-the-Counter | |
Point Beach | Point Beach Nuclear Power Plant | |
PTF | Power the Future | |
RSG | Revenue Sufficiency Guarantee | |
S&P | Standard & Poor's Rating Services | |
Measurements | ||
MW | Megawatt(s) (One MW equals one million watts) | |
MWh | Megawatt-hour(s) | |
Watt | A measure of power production or usage | |
Accounting Terms | ||
AFUDC | Allowance for Funds Used During Construction | |
FASB | Financial Accounting Standards Board | |
FIN | FASB Interpretation | |
FSP | FASB Staff Position | |
GAAP | Generally Accepted Accounting Principles | |
OPEB | Other Post-Retirement Employee Benefits | |
SFAS | Statement of Financial Accounting Standards | |
Accounting Pronouncements | ||
FIN 46 | Consolidation of Variable Interest Entities | |
FSP SFAS 157-b | Determination of Impairment for Nonfinancial Assets and Nonfinancial Liabilities | |
SFAS 71 | Accounting for the Effects of Certain Types of Regulation | |
SFAS 123R | Share-Based Payment (Revised 2004) | |
SFAS 133 | Accounting for Derivative Instruments and Hedging Activities | |
SFAS 149 | Amendment of SFAS 133 on Derivative Instruments and Hedging Activities | |
SFAS 157 | Fair Value Measurements | |
SFAS 159 | The Fair Value Option for Financial Assets and Financial Liabilities | |
SFAS 161 | Disclosures about Derivative Instruments and Hedging Activities | |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based upon management's current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of construction projects, regulatory matters, fuel costs, sources of electric energy supply, coal and gas deliveries, remediation costs, environmental and other capital expenditures, liquidity and capital resources and other matters. In some cases, forward-looking statements may be identified by reference to a future period or periods or by the use of forward-lookin g terminology such as "anticipates," "believes," "estimates," "expects," "forecasts," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects" or similar terms or variations of these terms.
Actual results may differ materially from those set forth in forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with these statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect our future results of operations and financial condition include, among others, the following:
- Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related or terrorism-related damage; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated events causing scheduled generation outages to last longer than expected; unanticipated changes in fossil fuel, purchased power, coal supply, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; environmental incidents; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; or inflation rates.
- Increased competition in our electric and gas markets and continued industry consolidation.
- Timing, resolution and impact of pending and future rate cases and negotiations, including recovery for new investments as part of Wisconsin Energy's PTF strategy, environmental compliance, transmission service, fuel costs and costs associated with the implementation of the MISO Energy Markets.
- Regulatory factors such as changes in rate-setting policies or procedures; changes in regulatory accounting policies and practices; industry restructuring initiatives; transmission or distribution system operation and/or administration initiatives; required changes in facilities or operations to reduce the risks or impacts of potential terrorist activities; required approvals for new construction; and the siting approval process for new generation and transmission facilities and new pipeline construction.
- Factors affecting the economic climate in our service territories such as customer growth; customer business conditions, including demand for their products and services; and changes in market demand and demographic patterns.
- Factors which impede or delay execution of Wisconsin Energy's PTF strategy, including receipt of necessary state and federal regulatory approvals and permits; timely and successful resolution of legal challenges; opposition to siting of new generating facilities; the adverse interpretation or enforcement of permit conditions by the permitting agencies; construction delays; and obtaining the investment capital from outside sources necessary to implement the strategy.
- Factors which may affect successful implementation of the settlement agreement with the two parties who were challenging the WPDES permit for the Oak Creek expansion.
- The impact of recent and future federal, state and local legislative and regulatory changes, including electric and gas industry restructuring initiatives; implementation of the Energy Policy Act; changes in allocation of energy assistance, including state public benefits funds; changes in environmental, tax and other laws and regulations to which we are subject; and changes in the application of existing laws and regulations.
- The cost and other effects of legal and administrative proceedings, settlements, investigations, claims and changes in those matters.
- Impacts of the significant contraction in the global credit markets affecting the availability and cost of capital, including higher interest rates and shortened maturities for our commercial paper.
- Other factors affecting our ability to access the capital markets, including general capital market conditions; our capitalization structure; market perceptions of the utility industry, us or our subsidiary; and our credit ratings.
- The investment performance of our pension and other post-retirement benefit plans.
- The effect of accounting pronouncements issued periodically by standard setting bodies.
- Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets.
- Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading markets and fuel suppliers and transporters.
- Other business or investment considerations that may be disclosed from time to time in our SEC filings or in other publicly disseminated written documents, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2007.
Wisconsin Electric Power Company expressly disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Wisconsin Electric Power Company, a wholly owned subsidiary of Wisconsin Energy, was incorporated in the state of Wisconsin in 1896. We maintain our principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms the Company, our, us or we refer to Wisconsin Electric and its subsidiary.
We conduct our operations primarily in three operating segments: an electric utility segment, a natural gas utility segment and a steam utility segment. We serve approximately 1,111,000 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 458,000 gas customers in Wisconsin and approximately 470 steam customers in metropolitan Milwaukee, Wisconsin. For further financial information about our business segments, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9 -- Segment Information in the Notes to Consolidated Condensed Financial Statements.
Wisconsin Energy is also the parent company of Wisconsin Gas, a natural gas distribution utility, which serves customers throughout Wisconsin; Edison Sault, an electric utility which serves customers in the Upper Peninsula of Michigan; and We Power, an unregulated company that was formed in 2001 to design, construct, own and lease to us the new generating capacity included in Wisconsin Energy's PTF strategy, which is described further in this report and in our 2007 Annual Report on Form 10-K. We have combined common functions with Wisconsin Gas and operate under the trade name of "We Energies."
Other: Bostco is our non-utility subsidiary that develops and invests in real estate. As of September 30, 2008, Bostco had $37.5 million of assets.
We have prepared the unaudited interim financial statements presented in this Form 10-Q pursuant to the rules and regulations of the SEC. We have condensed or omitted some information and note disclosures normally included in financial statements prepared in accordance with GAAP pursuant to these rules and regulations. This Form 10-Q, including the financial statements contained herein, should be read in conjunction with our 2007 Annual Report on Form 10-K, including the financial statements and notes therein.
PART I -- FINANCIAL INFORMATION | ||||||||
ITEM 1. FINANCIAL STATEMENTS | ||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||
CONSOLIDATED CONDENSED INCOME STATEMENTS | ||||||||
(Unaudited) | ||||||||
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
2008 | 2007 | 2008 | 2007 | |||||
(Millions of Dollars) | ||||||||
Operating Revenues | $ 750.9 | $ 784.7 | $ 2,518.8 | $ 2,458.4 | ||||
Operating Expenses | ||||||||
Fuel and purchased power | 344.7 | 253.2 | 981.6 | 712.9 | ||||
Cost of gas sold | 41.9 | 32.5 | 359.2 | 299.4 | ||||
Other operation and maintenance | 313.1 | 263.9 | 971.1 | 821.2 | ||||
Depreciation, decommissioning | ||||||||
and amortization | 65.4 | 71.1 | 190.6 | 207.8 | ||||
Property and revenue taxes | 23.8 | 23.3 | 72.4 | 68.8 | ||||
Total Operating Expenses | 788.9 | 644.0 | 2,574.9 | 2,110.1 | ||||
Amortization of Gain | 157.4 | - | 403.4 | - | ||||
Operating Income | 119.4 | 140.7 | 347.3 | 348.3 | ||||
Equity in Earnings of Transmission Affiliate | 12.6 | 9.5 | 33.4 | 28.2 | ||||
Other Income, net | 6.0 | 13.9 | 19.4 | 41.5 | ||||
Interest Expense, net | 20.3 | 24.2 | 62.5 | 71.1 | ||||
Income Before Income Taxes | 117.7 | 139.9 | 337.6 | 346.9 | ||||
Income Taxes | 43.7 | 54.8 | 127.5 | 135.7 | ||||
Net Income | 74.0 | 85.1 | 210.1 | 211.2 | ||||
Preferred Stock Dividend Requirement | 0.3 | 0.3 | 0.9 | 0.9 | ||||
Earnings Available for Common Stockholder | $ 73.7 | $ 84.8 | $ 209.2 | $ 210.3 | ||||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these financial statements. | ||||||||
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WISCONSIN ELECTRIC POWER COMPANY | ||||||||
CONSOLIDATED CONDENSED BALANCE SHEETS | ||||||||
(Unaudited) | ||||||||
September 30, 2008 | December 31, 2007 | |||||||
(Millions of Dollars) | ||||||||
Assets | ||||||||
Property, Plant and Equipment | ||||||||
In service | $ 7,490.7 | $ 7,052.8 | ||||||
Accumulated depreciation | (2,696.8) | (2,577.4) | ||||||
4,793.9 | 4,475.4 | |||||||
Construction work in progress | 133.8 | 302.1 | ||||||
Leased facilities, net | 863.7 | 547.3 | ||||||
Net Property, Plant and Equipment | 5,791.4 | 5,324.8 | ||||||
Investments | ||||||||
Restricted cash | 215.4 | 323.5 | ||||||
Equity investment in transmission affiliate | 234.1 | 209.9 | ||||||
Other | 0.5 | 0.4 | ||||||
Total Investments | 450.0 | 533.8 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | 16.7 | 22.0 | ||||||
Restricted cash | 235.5 | 408.1 | ||||||
Accounts receivable | 267.7 | 264.8 | ||||||
Accrued revenues | 141.7 | 213.4 | ||||||
Materials, supplies and inventories | 300.4 | 285.6 | ||||||
Prepayments | 77.4 | 105.3 | ||||||
Regulatory assets | 69.9 | 153.0 | ||||||
Other | 77.4 | 81.1 | ||||||
Total Current Assets | 1,186.7 | 1,533.3 | ||||||
Deferred Charges and Other Assets | ||||||||
Regulatory assets | 760.3 | 787.3 | ||||||
Other | 151.6 | 133.6 | ||||||
Total Deferred Charges and Other Assets | 911.9 | 920.9 | ||||||
Total Assets | $ 8,340.0 | $ 8,312.8 | ||||||
Capitalization and Liabilities | ||||||||
Capitalization | ||||||||
Common equity | $ 2,562.5 | $ 2,656.2 | ||||||
Preferred stock | 30.4 | 30.4 | ||||||
Long-term debt | 1,339.1 | 1,338.1 | ||||||
Capital lease obligations | 978.2 | 646.6 | ||||||
Total Capitalization | 4,910.2 | 4,671.3 | ||||||
Current Liabilities | ||||||||
Long-term debt and capital lease obligations due currently | 8.8 | 5.7 | ||||||
Short-term debt | 326.9 | 354.3 | ||||||
Accounts payable | 317.7 | 371.0 | ||||||
Regulatory liabilities | 335.0 | 560.8 | ||||||
Dividends declared | 150.1 | 0.1 | ||||||
Other | 215.2 | 186.3 | ||||||
Total Current Liabilities | 1,353.7 | 1,478.2 | ||||||
Deferred Credits and Other Liabilities | ||||||||
Regulatory liabilities | 857.9 | 1,011.0 | ||||||
Deferred income taxes - long-term | 580.3 | 468.5 | ||||||
Pension and other benefit obligations | 366.4 | 395.4 | ||||||
Other long-term liabilities | 271.5 | 288.4 | ||||||
Total Deferred Credits and Other Liabilities | 2,076.1 | 2,163.3 | ||||||
Total Capitalization and Liabilities | $ 8,340.0 | $ 8,312.8 | ||||||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part | ||||||||
of these financial statements. | ||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||
(Unaudited) | ||||
Nine Months Ended September 30 | ||||
2008 | 2007 | |||
(Millions of Dollars) | ||||
Operating Activities | ||||
Net income | $ 210.1 | $ 211.2 | ||
Reconciliation to cash | ||||
Depreciation, decommissioning and amortization | 199.6 | 214.9 | ||
Amortization of gain | (403.4) | - | ||
Equity in earnings of transmission affiliate | (33.4) | (28.2) | ||
Distributions from transmission affiliate | 24.4 | 21.6 | ||
Deferred income taxes and investment tax credits, net | 140.6 | (28.2) | ||
Pension plan contribution | (47.7) | - | ||
Change in - Accounts receivable and accrued revenues | 68.8 | 84.5 | ||
Inventories | (14.8) | (14.8) | ||
Other current assets | 4.6 | 26.1 | ||
Accounts payable | 3.4 | 41.7 | ||
Accrued income taxes, net | (15.3) | 39.3 | ||
Deferred costs, net | 69.9 | (60.5) | ||
Other current liabilities | 44.6 | (1.6) | ||
Other, net | 47.9 | (91.8) | ||
Cash Provided by Operating Activities | 299.3 | 414.2 | ||
Investing Activities | ||||
Capital expenditures | (372.9) | (276.8) | ||
Proceeds from asset sales, net | 6.6 | 935.6 | ||
Change in restricted cash | 280.7 | (969.1) | ||
Proceeds from liquidation of nuclear decommissioning trust | - | 552.4 | ||
Investment in transmission affiliate | (15.3) | - | ||
Proceeds from investments within nuclear decommissioning trust | - | 1,528.7 | ||
Purchases of investments within nuclear decommissioning trust | - | (1,528.7) | ||
Other | (12.4) | (39.7) | ||
Cash (Used in) Provided by Investing Activities | (113.3) | 202.4 | ||
Financing Activities | ||||
Dividends paid on common stock | (162.8) | (89.8) | ||
Dividends paid on preferred stock | (0.9) | (0.9) | ||
Issuance of long-term debt | 147.0 | 23.4 | ||
Retirement and repurchase of long-term debt | (147.0) | (95.4) | ||
Change in short-term debt | (27.4) | 18.3 | ||
Other | (0.2) | 5.4 | ||
Cash Used in Financing Activities | (191.3) | (139.0) | ||
Change in Cash and Cash Equivalents | (5.3) | 477.6 | ||
Cash and Cash Equivalents at Beginning of Period | 22.0 | 18.2 | ||
Cash and Cash Equivalents at End of Period | $ 16.7 | $ 495.8 | ||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of | ||||
these financial statements. | ||||