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 EndedJune 30, 2008
Commission | Registrant; State of Incorporation | IRS Employer | |
File Number | Address; and Telephone Number | Identification No. | |
001-09057 | WISCONSIN ENERGY CORPORATION | 39-1391525 | |
(A Wisconsin Corporation) | |||
231 West Michigan Street | |||
P.O. Box 1331 | |||
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 [X] Accelerated filer [ ]
Non-accelerated filer [ ] (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 (June 30, 2008):
Common Stock, $.01 Par Value, | 116,919,941 shares outstanding. |
WISCONSIN ENERGY CORPORATION | |||||
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FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 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 ................................................................ | 25 | ||||
3. | Quantitative and Qualitative Disclosures About Market Risk ............................................... | 46 | |||
4. | Controls and Procedures ................................................................................................... | 46 | |||
Part II -- Other Information | |||||
1. | Legal Proceedings ............................................................................................................. | 47 | |||
1A. | Risk Factors ............................................................................................................................. | 47 | |||
2. | Unregistered Sales of Equity Securities and Use of Proceeds .............................................. | 48 | |||
4. | Submission of Matters to a Vote of Security Holders ......................................................... | 48 | |||
6. | Exhibits ............................................................................................................................ | 49 | |||
Signatures ....................................................................................................................... | 50 |
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 Energy Subsidiaries and Affiliates | ||
Primary Subsidiaries | ||
Edison Sault | Edison Sault Electric Company | |
We Power | W.E. Power, LLC | |
Wisconsin Electric | Wisconsin Electric Power Company | |
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 | |
Other Affiliates | ||
Minergy | Minergy LLC | |
Wispark | Wispark LLC | |
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 Standard | |
NOx | Nitrogen Oxide | |
PM2.5 | Fine Particulate Matter | |
SIP | State Implementation Plans | |
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 | |
Compensation Committee | Compensation Committee of the Board of Directors |
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: | ||
Energy Policy Act | Energy Policy Act of 2005 | |
Fitch | Fitch Ratings | |
FTRs | Financial Transmission Rights | |
Junior Notes | Wisconsin Energy's 2007 Series A Junior Subordinated Notes due 2067 issued in May 2007 | |
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 | |
PSEG | Public Service Enterprise Group | |
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 | |
CWIP | Construction Work in Progress | |
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-looking te rminology 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 our 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 our PTF strategy, including receipt of necessary state and federal regulatory approvals and permits; timely and successful resolution of legal challenges, including current challenges to the WPDES permit for the Oak Creek expansion; opposition to siting
5
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.
- 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.
- Restrictions imposed by various financing arrangements and regulatory requirements on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.
- The cost and other effects of legal and administrative proceedings, settlements, investigations, claims and changes in those matters.
- Factors affecting the availability or cost of capital, such as changes in interest rates and other general capital market conditions; our capitalization structure; market perceptions of the utility industry, us or any of our subsidiaries; or 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.
- The performance of projects undertaken by our non-utility businesses.
- The cyclical nature of property values that could affect our real estate investments.
- Changes to the legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law.
- 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 Energy Corporation expressly disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
INTRODUCTION
Wisconsin Energy Corporation is a diversified holding company which conducts its operations primarily in two operating segments: a utility energy segment and a non-utility energy segment. Unless qualified by their context when used in this document, the terms Wisconsin Energy, the Company, our, us or we refer to the holding company and all of its subsidiaries. Our primary subsidiaries are Wisconsin Electric, Wisconsin Gas, We Power and Edison Sault.
Utility Energy Segment: Our utility energy segment consists of: Wisconsin Electric, which serves electric customers in Wisconsin and the Upper Peninsula of Michigan, gas customers in Wisconsin and steam customers in metropolitan Milwaukee, Wisconsin; Wisconsin Gas, which serves gas customers in Wisconsin and water customers in suburban Milwaukee, Wisconsin; and Edison Sault, which serves electric customers in the Upper Peninsula of Michigan. Wisconsin Electric and Wisconsin Gas operate under the trade name of "We Energies".
Non-Utility Energy Segment: Our non-utility energy segment consists primarily of We Power. We Power was formed in 2001 to design, construct, own and lease to Wisconsin Electric the new generating capacity included in our PTF strategy. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2007 Annual Report on Form 10-K for more information on PTF.
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 ENERGY CORPORATION | |||||||||||||
CONSOLIDATED CONDENSED INCOME STATEMENTS | |||||||||||||
(Unaudited) | |||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
(Millions of Dollars, Except Per Share Amounts) | |||||||||||||
Operating Revenues | $946.1 | $906.5 | $2,377.9 | $2,207.6 | |||||||||
Operating Expenses | |||||||||||||
Fuel and purchased power | 298.1 | 232.3 | 636.3 | 461.8 | |||||||||
Cost of gas sold | 185.6 | 158.6 | 745.9 | 632.4 | |||||||||
Other operation and maintenance | 333.5 | 304.2 | 703.1 | 607.2 | |||||||||
Depreciation, decommissioning | |||||||||||||
and amortization | 80.5 | 81.2 | 158.2 | 165.3 | |||||||||
Property and revenue taxes | 27.2 | 25.1 | 54.3 | 51.3 | |||||||||
Total Operating Expenses | 924.9 | 801.4 | 2,297.8 | 1,918.0 | |||||||||
Amortization of Gain | 87.0 | - | 246.0 | - | |||||||||
Operating Income | 108.2 | 105.1 | 326.1 | 289.6 | |||||||||
Equity in Earnings of Transmission Affiliate | 12.1 | 10.5 | 23.6 | 21.2 | |||||||||
Other Income, net | 7.9 | 19.8 | 18.5 | 33.0 | |||||||||
Interest Expense, net | 35.4 | 42.0 | 74.6 | 84.7 | |||||||||
Income from Continuing | |||||||||||||
Operations Before Income Taxes | 92.8 | 93.4 | 293.6 | 259.1 | |||||||||
Income Taxes | 34.5 | 35.7 | 112.1 | 100.3 | |||||||||
Income from Continuing Operations | 58.3 | 57.7 | 181.5 | 158.8 | |||||||||
Loss from Discontinued | |||||||||||||
Operations, Net of Tax | (0.3) | (0.2) | (0.3) | (0.4) | |||||||||
Net Income | $58.0 | $57.5 | $181.2 | $158.4 | |||||||||
Earnings Per Share (Basic) | |||||||||||||
Continuing operations | $0.50 | $0.49 | $1.55 | $1.35 | |||||||||
Discontinued operations | - | - | - | - | |||||||||
Total Earnings Per Share (Basic) | $0.50 | $0.49 | $1.55 | $1.35 | |||||||||
Earnings Per Share (Diluted) | |||||||||||||
Continuing operations | $0.49 | $0.49 | $1.53 | $1.34 | |||||||||
Discontinued operations | - | - | - | - | |||||||||
Total Earnings Per Share (Diluted) | $0.49 | $0.49 | $1.53 | $1.34 | |||||||||
Weighted Average Common | |||||||||||||
Shares Outstanding (Millions) | |||||||||||||
Basic | 116.9 | 116.9 | 116.9 | 117.0 | |||||||||
Diluted | 118.3 | 118.5 | 118.3 | 118.6 | |||||||||
Dividends Per Share of Common Stock | $0.27 | $0.25 | $0.54 | $0.50 | |||||||||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these financial statements. | |||||||||||||
WISCONSIN ENERGY CORPORATION | |||||||
CONSOLIDATED CONDENSED BALANCE SHEETS | |||||||
(Unaudited) | |||||||
June 30, 2008 | December 31, 2007 | ||||||
(Millions of Dollars) | |||||||
Assets | |||||||
Property, Plant and Equipment | |||||||
In service | $ 9,727.8 | $ 8,959.1 | |||||
Accumulated depreciation | (3,225.9) | (3,123.9) | |||||
6,501.9 | 5,835.2 | ||||||
Construction work in progress | 1,551.2 | 1,764.1 | |||||
Leased facilities, net | 79.0 | 81.9 | |||||
Net Property, Plant and Equipment | 8,132.1 | 7,681.2 | |||||
Investments | |||||||
Restricted cash | 256.9 | 323.5 | |||||
Equity investment in transmission affiliate | 253.1 | 238.5 | |||||
Other | 36.2 | 42.7 | |||||
Total Investments | 546.2 | 604.7 | |||||
Current Assets | |||||||
Cash and cash equivalents | 26.6 | 27.4 | |||||
Restricted cash | 320.6 | 408.1 | |||||
Accounts receivable | 395.7 | 361.8 | |||||
Accrued revenues | 171.8 | 312.2 | |||||
Materials, supplies and inventories | 279.0 | 361.3 | |||||
Regulatory assets | 82.5 | 164.7 | |||||
Prepayments and Other | 246.6 | 214.2 | |||||
Total Current Assets | 1,522.8 | 1,849.7 | |||||
Deferred Charges and Other Assets | |||||||
Regulatory assets | 887.7 | 961.6 | |||||
Goodwill, net | 441.9 | 441.9 | |||||
Other | 194.3 | 181.2 | |||||
Total Deferred Charges and Other Assets | 1,523.9 | 1,584.7 | |||||
Total Assets | $ 11,725.0 | $ 11,720.3 | |||||
Capitalization and Liabilities | |||||||
Capitalization | |||||||
Common equity | $ 3,217.7 | $ 3,099.2 | |||||
Preferred stock of subsidiary | 30.4 | 30.4 | |||||
Long-term debt | 3,126.6 | 3,172.5 | |||||
Total Capitalization | 6,374.7 | 6,302.1 | |||||
Current Liabilities | |||||||
Long-term debt due currently | 381.0 | 352.8 | |||||
Short-term debt | 949.4 | 900.7 | |||||
Accounts payable | 343.5 | 478.3 | |||||
Regulatory liabilities | 444.6 | 563.1 | |||||
Other | 231.3 | 207.9 | |||||
Total Current Liabilities | 2,349.8 | 2,502.8 | |||||
Deferred Credits and Other Liabilities | |||||||
Regulatory liabilities | 1,255.9 | 1,314.3 | |||||
Deferred income taxes - long-term | 662.7 | 551.7 | |||||
Deferred revenue, net | 447.6 | 347.7 | |||||
Pension and other benefit obligations | 270.5 | 310.1 | |||||
Other | 363.8 | 391.6 | |||||
Total Deferred Credits and Other Liabilities | 3,000.5 | 2,915.4 | |||||
Total Capitalization and Liabilities | $ 11,725.0 | $ 11,720.3 | |||||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part | |||||||
of these financial statements. | |||||||
WISCONSIN ENERGY CORPORATION | ||||||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||||||
(Unaudited) | ||||||||
Six Months Ended June 30 | ||||||||
2008 | 2007 | |||||||
(Millions of Dollars) | ||||||||
Operating Activities | ||||||||
Net income | $ 181.2 | $ 158.4 | ||||||
Reconciliation to cash | ||||||||
Depreciation, decommissioning and amortization | 164.6 | 170.2 | ||||||
Equity in earnings of transmission affiliate | (23.6) | (21.2) | ||||||
Distributions from transmission affiliate | 18.4 | 15.8 | ||||||
Deferred income taxes and investment tax credits, net | 123.8 | (23.6) | ||||||
Deferred revenue | 102.0 | 71.9 | ||||||
Change in - | Accounts receivable and accrued revenues | 106.5 | 111.9 | |||||
Inventories | 82.3 | 83.5 | ||||||
Other current assets | (27.5) | 2.4 | ||||||
Accounts payable | (47.2) | (74.8) | ||||||
Accrued income taxes, net | (15.9) | (28.1) | ||||||
Deferred costs, net | 56.6 | (38.9) | ||||||
Pension plan contribution | (48.4) | - | ||||||
Other current liabilities and other | (98.9) | 28.1 | ||||||
Cash Provided by Operating Activities | 573.9 | 455.6 | ||||||
Investing Activities | ||||||||
Capital expenditures | (642.2) | (572.5) | ||||||
Proceeds from asset sales, net | 9.5 | 16.0 | ||||||
Change in restricted cash | 154.1 | - | ||||||
Proceeds from investments within nuclear decommissioning trust | - | 213.4 | ||||||
Purchases of investments within nuclear decommissioning trust | - | (213.4) | ||||||
Other | (56.0) | (40.3) | ||||||
Cash Used in Investing Activities | (534.6) | (596.8) | ||||||
Financing Activities | ||||||||
Exercise of stock options | 7.6 | 30.0 | ||||||
Purchase of common stock | (14.9) | (54.7) | ||||||
Dividends paid on common stock | (63.1) | (58.5) | ||||||
Issuance of long-term debt | 156.0 | 523.4 | ||||||
Retirement and repurchase of long-term debt | (174.3) | (30.6) | ||||||
Change in short-term debt | 48.7 | (268.2) | ||||||
Other, net | (0.1) | (0.5) | ||||||
Cash (Used in) Provided by Financing Activities | (40.1) | 140.9 | ||||||
Change in Cash and Cash Equivalents | (0.8) | (0.3) | ||||||
Cash and Cash Equivalents at Beginning of Period | 27.4 | 37.0 | ||||||
Cash and Cash Equivalents at End of Period | $ 26.6 | $ 36.7 | ||||||
Supplemental Information - Cash Paid For | ||||||||
Interest (net of amount capitalized) | $ 90.7 | $ 93.5 | ||||||
Income taxes (net of refunds) | $ 0.9 | $ 142.0 | ||||||
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these | ||||||||
financial statements. | ||||||||