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EXCEL - IDEA: XBRL DOCUMENT - WISCONSIN ELECTRIC POWER COFinancial_Report.xls

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 Ended June 30, 2011

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 (June 30, 2011):

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.

 

Form 10-Q

WISCONSIN ELECTRIC POWER COMPANY
_________________________

FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 2011



TABLE OF CONTENTS

Item
 
 
Page
 
 
 
 
 
Introduction
 
 
 
 
 
 
Part I -- Financial Information
 
 
 
 
 
 
1.
Financial Statements
 
 
 
 
 
 
 
Consolidated Condensed Income Statements
 
 
 
 
 
 
Consolidated Condensed Balance Sheets
 
 
 
 
 
 
Consolidated Condensed Statements of Cash Flows
 
 
 
 
 
 
Notes to Consolidated Condensed Financial Statements
 
 
 
 
 
2.
Management's Discussion and Analysis of
 
 
 
Financial Condition and Results of Operations
 
 
 
 
 
3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
4.
Controls and Procedures
 
 
 
 
 
 
Part II -- Other Information
 
 
 
 
 
 
1.
Legal Proceedings
 
 
 
 
 
1A.
Risk Factors
 
 
 
 
 
5.
Other Information
 
 
 
 
 
6.
Exhibits
 
 
 
 
 
 
Signatures
 







June 2011
2
Wisconsin Electric Power Company
            

Form 10-Q


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:
 
Primary Subsidiary and Affiliates
 
 
Bostco
 
Bostco LLC
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 1
 
Port Washington Generating Station Unit 1
PWGS 2
 
Port Washington Generating Station Unit 2
 
 
 
Other Affiliates
ATC
 
American Transmission Company LLC
 
 
 
Federal and State Regulatory Agencies
DOE
 
United States Department of Energy
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
MPSC
 
Michigan Public Service Commission
PSCW
 
Public Service Commission of Wisconsin
SEC
 
Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
Environmental Terms
BTA
 
Best Technology Available
CAMR
 
Clean Air Mercury Rule
CSAPR
 
Cross-State Air Pollution Rule
MACT
 
Maximum Achievable Control Technology
 
 
 
Other Terms and Abbreviations
AQCS
 
Air Quality Control System
ARRs
 
Auction Revenue Rights
Compensation Committee
 
Compensation Committee of the Board of Directors of Wisconsin Energy
ERISA
 
Employee Retirement Income Security Act of 1974
Exchange Act
 
Securities Exchange Act of 1934, as amended
Fitch
 
Fitch Ratings
FTRs
 
Financial Transmission Rights
LMP
 
Locational Marginal Price
MISO
 
Midwest Independent Transmission System Operator, Inc.
OSIP
 
Wisconsin Energy Corporation 1993 Omnibus Stock Incentive Plan, as amended and restated
OTC
 
Over-the-Counter
Plan
 
The Wisconsin Energy Corporation Retirement Account Plan

June 2011
3
Wisconsin Electric Power Company
            

Form 10-Q

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:
 
Point Beach
 
Point Beach Nuclear Power Plant
PTF
 
Power the Future
S&P
 
Standard & Poor's Ratings Services
WPL
 
Wisconsin Power and Light Company, a subsidiary of Alliant Energy Corp.
 
 
 
Measurements
 
 
Btu
 
British Thermal Unit(s)
Dth
 
Dekatherm(s) (One Dth equals one million Btu)
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
GAAP
 
Generally Accepted Accounting Principles
OPEB
 
Other Post-Retirement Employee Benefits
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


June 2011
4
Wisconsin Electric Power Company
            

Form 10-Q

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 (Exchange Act). 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, on-going legal proceedings, 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 terminology such as "anticipates," "believes," "estimates," "expects," "forecasts," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "should" 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 catastrophic weather-related or terrorism-related damage; cyber-security threats; 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.

Factors affecting the demand for electricity and natural gas, including weather and other natural phenomena; the economic climate in our service territories; customer growth and declines; customer business conditions, including demand for their products and services; and energy conservation efforts.

Timing, resolution and impact of pending and future rate cases and negotiations, including recovery of all costs associated with Wisconsin Energy Corporation's (Wisconsin Energy) Power the Future (PTF) strategy, as well as costs associated with environmental compliance, renewable generation, transmission service, distribution system upgrades, fuel and the Midwest Independent Transmission System Operator, Inc. (MISO) Energy Markets.

Increased competition in our electric and gas markets and continued industry consolidation.

The ability to control costs and avoid construction delays during the development and construction of new environmental controls and renewable generation.

The impact of recent and future federal, state and local legislative and regulatory changes, including any changes in rate-setting policies or procedures; electric and gas industry restructuring initiatives; transmission or distribution system operation and/or administration initiatives; any 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; changes to the Federal Power Act and related regulations under the Energy Policy Act and enforcement thereof by the Federal Energy Regulatory Commission (FERC) and other regulatory agencies; 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; changes in the application of existing laws and regulations; and changes in the interpretation or enforcement of permit conditions by the permitting agencies.

Internal restructuring options that may be pursued by Wisconsin Energy.

June 2011
5
Wisconsin Electric Power Company
            

Form 10-Q


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION -- (CONT'D)

Current and future litigation, regulatory investigations, proceedings or inquiries, including the pending lawsuit against the Wisconsin Energy Corporation Retirement Account Plan (Plan), FERC matters, and IRS audits and other tax matters.

Events in the global credit markets that may affect the availability and cost of capital.

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 Wisconsin Energy's pension and other post-retirement benefit trusts.

The financial performance of American Transmission Company LLC (ATC) and its corresponding contribution to our earnings.

The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any regulations promulgated thereunder.

The impact of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and any related regulations.

The effect of accounting pronouncements issued periodically by standard setting bodies, including any changes in regulatory accounting policies and practices and any requirement for U.S. registrants to follow International Financial Reporting Standards instead of Generally Accepted Accounting Principles (GAAP).

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 Securities and Exchange Commission (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, 2010.

We expressly disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.




June 2011
6
Wisconsin Electric Power Company
            

Form 10-Q

INTRODUCTION

Wisconsin Electric Power Company, a 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 Wisconsin Electric, the Company, our, us or we refer to Wisconsin Electric Power Company and its subsidiary, Bostco LLC (Bostco).

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 1,120,200 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 464,100 gas customers in Wisconsin and approximately 460 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 10 --Segment Information in the Notes to Consolidated Condensed Financial Statements in this report.

Wisconsin Energy is also the parent company of Wisconsin Gas LLC (Wisconsin Gas), a natural gas distribution utility, which serves customers throughout Wisconsin; and W.E. Power, LLC (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 2010 Annual Report on Form 10-K. We have combined common functions with Wisconsin Gas and operate under the trade name of "We Energies."

Bostco is our non-utility subsidiary that develops and invests in real estate. As of June 30, 2011, Bostco had $34.8 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 2010 Annual Report on Form 10-K, including the financial statements and notes therein.





June 2011
7
Wisconsin Electric Power Company
            

Form 10-Q

PART I -- FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
 
2011
 
2010
 
2011
 
2010
 
 
(Millions of Dollars)
Operating Revenues
 
$
853.3

 
$
777.6

 
$
1,859.5

 
$
1,711.5

Operating Expenses
 
 
 
 
 
 
 
 
Fuel and purchased power
 
287.2

 
259.6

 
556.0

 
538.2

Cost of gas sold
 
50.2

 
39.6

 
196.4

 
191.7

Other operation and maintenance
 
353.8

 
351.5

 
709.2

 
695.3

Depreciation and amortization
 
54.8

 
54.0

 
109.2

 
107.8

Property and revenue taxes
 
26.1

 
23.9

 
52.2

 
48.1

Total Operating Expenses
 
772.1

 
728.6

 
1,623.0

 
1,581.1

 
 
 
 
 
 
 
 
 
Amortization of Gain
 

 
47.2

 

 
96.6

 
 
 
 
 
 
 
 
 
Operating Income
 
81.2

 
96.2

 
236.5

 
227.0

 
 
 
 
 
 
 
 
 
Equity in Earnings of Transmission Affiliate
 
13.4

 
13.3

 
27.0

 
26.6

Other Income, net
 
13.7

 
9.6

 
26.0

 
15.7

Interest Expense, net
 
23.3

 
25.5

 
47.5

 
51.6

 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
85.0

 
93.6

 
242.0

 
217.7

 
 
 
 
 
 
 
 
 
Income Taxes
 
26.9

 
32.2

 
76.4

 
76.9

 
 
 
 
 
 
 
 
 
Net Income
 
58.1

 
61.4

 
165.6

 
140.8

 
 
 
 
 
 
 
 
 
Preferred Stock Dividend Requirement
 
0.3

 
0.3

 
0.6

 
0.6

 
 
 
 
 
 
 
 
 
Earnings Available for Common Stockholder
 
$
57.8

 
$
61.1

 
$
165.0

 
$
140.2

 
 
 
 
 
 
 
 
 
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these financial
statements.
 
 
 
 
 
 
 
 



June 2011
8
Wisconsin Electric Power Company
            

Form 10-Q

WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
 
 
 
June 30, 2011
 
December 31, 2010
Assets
(Millions of Dollars)
Property, Plant and Equipment
 
 
 
In service
$
7,906.0

 
$
7,885.4

Accumulated depreciation
(2,899.2
)
 
(2,879.7
)
 
5,006.8

 
5,005.7

Construction work in progress
1,022.4

 
803.3

Leased facilities, net
2,476.9

 
1,850.7

Net Property, Plant and Equipment
8,506.1

 
7,659.7

Investments
 
 
 
Equity investment in transmission affiliate
300.0

 
290.6

Other
0.2

 
0.5

Total Investments
300.2

 
291.1

Current Assets
 
 
 
Cash and cash equivalents
9.7

 
23.3

Restricted cash
45.5

 
8.3

Accounts receivable
262.5

 
260.4

Accounts receivable from related parties
27.8

 
23.3

Accrued revenues
159.9

 
208.7

Materials, supplies and inventories
296.4

 
321.8

Prepayments
151.6

 
131.0

Regulatory assets
45.7

 
47.0

Other
24.1

 
20.4

Total Current Assets
1,023.2

 
1,044.2

Deferred Charges and Other Assets
 
 
 
Regulatory assets
1,035.0

 
1,009.0

Other
155.7

 
166.7

Total Deferred Charges and Other Assets
1,190.7

 
1,175.7

Total Assets
$
11,020.2

 
$
10,170.7

Capitalization and Liabilities
 
 
 
Capitalization
 
 
 
Common equity
$
3,147.5

 
$
3,065.1

Preferred stock
30.4

 
30.4

Long-term debt
1,971.7

 
1,970.9

Capital lease obligations
2,726.3

 
2,060.8

Total Capitalization
7,875.9

 
7,127.2

Current Liabilities
 
 
 
Long-term debt and capital lease obligations due currently
29.5

 
21.8

Short-term debt
233.0

 
210.5

Subsidiary note payable to Wisconsin Energy
27.5

 
27.6

Accounts payable
261.5

 
234.8

Accounts payable to related parties
86.5

 
83.7

Regulatory liabilities
14.5

 
14.5

Other
173.4

 
193.9

Total Current Liabilities
825.9

 
786.8

Deferred Credits and Other Liabilities
 
 
 
Regulatory liabilities
695.9

 
658.1

Deferred income taxes - long-term
1,064.6

 
925.4

Pension and other benefit obligations
305.6

 
403.7

Other
252.3

 
269.5

Total Deferred Credits and Other Liabilities
2,318.4

 
2,256.7

Total Capitalization and Liabilities
$
11,020.2

 
$
10,170.7

 
 
 
 
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these financial statements.

June 2011
9
Wisconsin Electric Power Company
            

Form 10-Q


WISCONSIN ELECTRIC POWER COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
 
 
 
 
Six Months Ended June 30
 
 
2011
 
2010
 
 
(Millions of Dollars)
Operating Activities
 
 
 
 
Net income
 
$
165.6

 
$
140.8

Reconciliation to cash
 
 
 
 
Depreciation and amortization

 
113.2

 
111.8

Amortization of gain
 

 
(96.6
)
Equity in earnings of transmission affiliate
 
(27.0
)
 
(26.6
)
Distributions from transmission affiliate
 
21.6

 
21.8

Deferred income taxes and investment tax credits, net
 
100.0

 
8.9

Contributions to qualified benefit plans
 
(107.1
)
 

Change in - Accounts receivable and accrued revenues
 
35.3

 
26.5

Inventories
 
25.4

 
(24.2
)
Other current assets
 
5.0

 
22.9

Accounts payable
 
(4.3
)
 
7.4

Accrued income taxes, net
 
(22.3
)
 
(14.6
)
Deferred costs, net
 
13.0

 
13.0

Other current liabilities
 
(2.7
)
 
(9.6
)
Other, net
 
54.4

 
29.0

Cash Provided by Operating Activities
 
370.1

 
210.5

 
 
 
 
 
Investing Activities
 
 
 
 
Capital expenditures
 
(293.4
)
 
(265.8
)
Investment in transmission affiliate
 
(4.0
)
 
(3.5
)
Proceeds from asset sales
 
38.5

 
0.4

Change in restricted cash
 
(37.2
)
 
81.8

Other, net
 
(24.3
)
 
(21.3
)
Cash Used in Investing Activities
 
(320.4
)
 
(208.4
)
 
 
 
 
 
Financing Activities
 
 
 
 
Dividends paid on common stock
 
(89.8
)
 
(89.8
)
Dividends paid on preferred stock
 
(0.6
)
 
(0.6
)
Change in total short-term debt
 
22.4

 
75.6

Other, net
 
4.7

 
4.3

Cash Used in Financing Activities
 
(63.3
)
 
(10.5
)
 
 
 
 
 
Change in Cash and Cash Equivalents
 
(13.6
)
 
(8.4
)
 
 
 
 
 
Cash and Cash Equivalents at Beginning of Period
 
23.3

 
18.3

 
 
 
 
 
Cash and Cash Equivalents at End of Period
 
$
9.7

 
$
9.9

 
 
 
 
 
The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these
financial statements.
 
 
 
 

June 2011
10
Wisconsin Electric Power Company
            

Form 10-Q

WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)


1 -- GENERAL INFORMATION

Our accompanying unaudited consolidated condensed financial statements should be read in conjunction with Item 8, Financial Statements and Supplementary Data, in our 2010 Annual Report on Form 10-K. In the opinion of management, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of the results of operations, cash flows and financial position in the accompanying income statements, statements of cash flows and balance sheets. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results which may be expected for the entire fiscal year 2011 because of seasonal and other factors.


2 -- NEW ACCOUNTING PRONOUNCEMENTS

No new accounting pronouncements were issued or adopted during the first six months of 2011 which would have a material impact on our financial condition, results of operations or cash flows.


3 -- COMMON EQUITY

On January 20, 2011, Wisconsin Energy's Board of Directors declared a two-for-one stock split effected by a 100% stock dividend paid on March 1, 2011 to shareholders of record on February 14, 2011. All share and per share data related to Wisconsin Energy equity compensation awards in these financial statements have been restated to reflect the stock split.

Share-Based Compensation Expense:   For a description of share-based compensation, including Wisconsin Energy stock options, restricted stock and performance units, see Note H -- Common Equity in our 2010 Annual Report on Form 10-K. We utilize the straight-line attribution method for recognizing share-based compensation expense. Accordingly, for employee awards, equity classified share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. There were no modifications to the terms of outstanding Wisconsin Energy stock options held by our employees during the period other than the necessary adjustments as a result of Wisconsin Energy's stock split.

The following table summarizes recorded pre-tax share-based compensation expense and the related tax benefit for Wisconsin Energy share-based awards made to our employees:

 
Three Months Ended June 30
 
Six Months Ended June 30
 
2011
 
2010
 
2011
 
2010
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
Stock options
$
0.6

 
$
1.7

 
$
1.2

 
$
3.4

Performance units
2.7

 
7.5

 
3.7

 
10.0

Restricted stock
0.3

 
0.2

 
0.6

 
0.4

Share-based compensation expense
$
3.6

 
$
9.4

 
$
5.5

 
$
13.8

 
 
 
 
 
 
 
 
Related tax benefit
$
1.5

 
$
3.8

 
$
2.2

 
$
5.6



June 2011
11
Wisconsin Electric Power Company
            

Form 10-Q

Stock Option Activity:   During the first six months of 2011, the Compensation Committee of the Board of Directors of Wisconsin Energy (Compensation Committee) granted 435,370 Wisconsin Energy non-qualified stock options to our employees that had an estimated fair value of $3.17 per share. During the first six months of 2010, the Compensation Committee granted 514,700 Wisconsin Energy stock options to our employees that had an estimated fair value of $3.36 per share. The following assumptions were used to value the Wisconsin Energy options using a binomial option pricing model:

 
2011
 
2010
 
 
 
 
Risk-free interest rate
0.2% - 3.4%

 
0.2% - 3.9%

Dividend yield
3.9
%
 
3.7
%
Expected volatility
19.0
%
 
20.3
%
Expected forfeiture rate
2.0
%
 
2.0
%
Expected life (years)
5.5

 
5.9


The risk-free interest rate is based on the U.S. Treasury interest rate whose term is consistent with the expected life of the stock options. Dividend yield, expected volatility, expected forfeiture rate and expected life assumptions are based on Wisconsin Energy's historical experience.

The following is a summary of Wisconsin Energy stock option activity by our employees during the three and six months ended June 30, 2011:

Stock Options
 
Number of
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual Life
(Years)
 
Aggregate
Intrinsic
Value
(Millions)
 
 
 
 
 
 
 
 
 
Outstanding as of April 1, 2011
 
11,797,494

 
$
21.42

 
 
 
 
Granted
 

 
$

 
 
 
 
Exercised
 
(798,812
)
 
$
19.69

 
 
 
 
Forfeited
 

 
$

 
 
 
 
Outstanding as of June 30, 2011
 
10,998,682

 
$
21.55

 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding as of January 1, 2011
 
12,034,614

 
$
20.95

 
 
 
 
Granted
 
435,370

 
$
29.35

 
 
 
 
Exercised
 
(1,471,302
)
 
$
18.96

 
 
 
 
Forfeited
 

 
$

 
 
 
 
Outstanding as of June 30, 2011
 
10,998,682

 
$
21.55

 
5.8

 
$
107.8

 
 
 
 
 
 
 
 
 
Exercisable as of June 30, 2011
 
8,010,492

 
$
21.05

 
4.9

 
$
82.5


The intrinsic value of Wisconsin Energy options exercised by our employees was $9.4 million and $17.6 million for the three and six months ended June 30, 2011, and $12.4 million and $21.0 million for the same periods in 2010, respectively. Cash received by Wisconsin Energy from exercises of its options by our employees was $27.9 million and $38.5 million during the six months ended June 30, 2011 and 2010, respectively. The actual tax benefit realized for the tax deductions from option exercises for the same periods was approximately $7.1 million and $8.3 million, respectively.


June 2011
12
Wisconsin Electric Power Company
            

Form 10-Q

The following table summarizes information about Wisconsin Energy stock options held by our employees and outstanding as of June 30, 2011:

 
 
Options Outstanding
 
Options Exercisable
 
 
 
 
Weighted-Average
 
 
 
Weighted-Average
Range of Exercise Prices
 
Number of
Options
 
Exercise
Price
 
Remaining
Contractual
Life
(Years)
 
Number of
Options
 
Exercise
Price
 
Remaining
Contractual
Life
(Years)
$11.33  to  $17.10
 
2,265,340

 
$
16.23

 
2.8

 
2,265,340

 
$
16.23

 
2.8

$19.74  to  $21.11
 
3,532,982

 
$
20.61

 
6.4

 
1,448,622

 
$
19.89

 
4.8

$23.88  to  $29.35
 
5,200,360

 
$
24.50

 
6.6

 
4,296,530

 
$
23.98

 
6.1

 
 
10,998,682

 
$
21.55

 
5.8

 
8,010,492

 
$
21.05

 
4.9


The following table summarizes information about our employees' non-vested Wisconsin Energy stock options during the three and six months ended June 30, 2011:

Non-Vested Stock Options
 
Number of
Options
 
Weighted-Average
Fair Value
Non-vested as of April 1, 2011
 
3,038,340

 
$
3.78

Granted
 

 
$

Vested
 
(50,150
)
 
$
3.77

Forfeited
 

 
$

Non-vested as of June 30, 2011
 
2,988,190

 
$
3.78

 
 
 
 
 
Non-vested as of January 1, 2011
 
4,996,650

 
$
4.27

Granted
 
435,370

 
$
3.17

Vested
 
(2,443,830
)
 
$
4.66

Forfeited
 

 
$

Non-vested as of June 30, 2011
 
2,988,190

 
$
3.78


As of June 30, 2011, our total compensation costs related to non-vested Wisconsin Energy stock options held by our employees and not yet recognized was approximately $1.7 million, which is expected to be recognized over the next 14 months on a weighted-average basis.

Restricted Shares:   The Compensation Committee also approved Wisconsin Energy restricted stock grants to certain of our key employees. These awards have a three-year vesting period, with one-third of the award vesting on each anniversary of the grant date. During the vesting period, restricted share recipients have voting rights and are entitled to dividends in the same manner as other shareholders.


June 2011
13
Wisconsin Electric Power Company
            

Form 10-Q

The following restricted stock activity related to our employees occurred during the three and six months ended
June 30, 2011:

Restricted Shares
 
Number of
Shares
 
Weighted-Average
Grant Date
Fair Value
Outstanding as of April 1, 2011
 
129,930

 
 
Granted
 

 
$

Released
 
(8,150
)
 
$
13.02

Forfeited
 

 
$

Outstanding as of June 30, 2011
 
121,780

 
 
 
 
 
 
 
Outstanding as of January 1, 2011
 
124,460

 
 
Granted
 
51,690

 
$
29.00

Released
 
(52,494
)
 
$
16.63

Forfeited
 
(1,876
)
 
$
25.89

Outstanding as of June 30, 2011
 
121,780

 
 

Wisconsin Energy records the market value of the restricted stock awards on the date of grant and then we amortize our share of allocated expense over the vesting period of the awards. The intrinsic value of Wisconsin Energy restricted stock vesting and held by our employees was $0.2 million and $1.5 million for the three and six months ended June 30, 2011, and $0.2 million for the same periods in 2010. The actual tax benefit realized for the tax deductions from released restricted shares for the same periods was $0.1 million and $0.6 million for the three and six months ended June 30, 2011, and $0.1 million for the same periods in 2010.

As of June 30, 2011, total compensation cost related to our share of Wisconsin Energy restricted stock not yet recognized was approximately $2.3 million, which is expected to be recognized over the next 25 months on a weighted-average basis.

Performance Units:   In January 2011 and 2010, the Compensation Committee awarded 413,990 and 520,620 Wisconsin Energy performance units, respectively, to our officers and other key employees under the Wisconsin Energy Performance Unit Plan. Under the grants, the ultimate number of units which will be awarded is dependent upon the achievement of certain financial performance of Wisconsin Energy's common stock over a three-year period. Under the terms of the award, participants may earn between 0% and 175% of the base performance unit award. All grants are settled in cash. We are accruing our share of compensation costs over the three-year period based on our estimate of the final expected value of the award. Performance units earned as of December 31, 2010 and 2009 vested and were settled during the first quarter of 2011 and 2010, and had a total intrinsic value of $12.1 million and $9.3 million, respectively. The actual tax benefit realized for the tax deductions from the settlement of performance units was approximately $4.2 million and $3.2 million, respectively. As of June 30, 2011, total compensation cost related to our share of Wisconsin Energy performance units not yet recognized was approximately $19.2 million, which is expected to be recognized over the next 22 months on a weighted-average basis.

Restrictions:   Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. In addition, under Wisconsin law, we are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. See Note H -- Common Equity in our 2010 Annual Report on Form 10-K for additional information on these and other restrictions.

We do not believe that these restrictions will materially affect our operations or limit any dividend payments in the foreseeable future.

Comprehensive Income:   Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to owners. During the six months ended June 30, 2011 and 2010, total comprehensive income was equal to net income.


June 2011
14
Wisconsin Electric Power Company
            

Form 10-Q


4 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

On January 12, 2011, Oak Creek expansion Unit 2 (OC 2) was placed into service. We now have care, custody and control of OC 2 and will operate and maintain it over the 30 year life of the lease. As a result of the commercial operation of OC 2, in January 2011, we recorded an additional capital lease asset and capital lease obligation related to the Oak Creek expansion totaling approximately $650 million. The lease payments are expected to be recovered through our rates, as supported by the Wisconsin 2001 Leased Generation Law. The total obligation under the capital lease for the Oak Creek expansion was approximately $2.0 billion as of June 30, 2011 and will decrease to zero over the remaining life of the contract.


5 -- DIVESTITURES

Edgewater Generating Unit 5:   On March 1, 2011, we sold our 25% interest in Edgewater Generating Unit 5 to Wisconsin Power and Light Company (WPL) for our net book value, including working capital, of approximately $38 million.


6 -- FAIR VALUE MEASUREMENTS

Fair value measurements require enhanced disclosures about assets and liabilities that are measured and reported at fair value and establish a hierarchal disclosure framework which prioritizes and ranks the level of observable inputs used in measuring fair value.

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. Accordingly, we also utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. We are able to classify fair value balances based on the observability of those inputs. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 -- Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an on-going basis. Instruments in this category consist of financial instruments such as exchange-traded derivatives, cash equivalents and restricted cash investments.

Level 2 -- Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Instruments in this category include non-exchange-traded derivatives such as Over-the-Counter (OTC) forwards and options.

Level 3 -- Pricing inputs include significant inputs that are generally less observable from objective sources. The inputs in the determination of fair value require significant management judgment or estimation. At each balance sheet date, we perform an analysis of all instruments subject to fair value reporting and include in Level 3 all instruments whose fair value is based on significant unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the instrument.


June 2011
15
Wisconsin Electric Power Company
            

Form 10-Q

The following tables summarize our financial assets and liabilities by level within the fair value hierarchy:

Recurring Fair Value Measures
 
As of June 30, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Restricted Cash
 
$
45.5

 
$

 
$

 
$
45.5

Derivatives
 
3.9

 
4.1

 
14.6

 
22.6

Total
 
$
49.4

 
$
4.1

 
$
14.6

 
$
68.1

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
1.5

 
$

 
$

 
$
1.5

Total
 
$
1.5

 
$

 
$

 
$
1.5


Recurring Fair Value Measures
 
As of December 31, 2010
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Restricted Cash
 
$
8.3

 
$

 
$

 
$
8.3

Derivatives
 
4.5

 
3.7

 
5.9

 
14.1

Total
 
$
12.8

 
$
3.7

 
$
5.9

 
$
22.4

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
3.0

 
$
3.3

 
$

 
$
6.3

Total
 
$
3.0

 
$
3.3

 
$

 
$
6.3



Restricted cash consists of certificates of deposit and government backed interest bearing securities and represents (i) for 2010, the remaining funds to be distributed to customers resulting from the net proceeds received from the sale of the Point Beach Nuclear Power Plant (Point Beach), and (ii) for 2011, the settlement we received from the United States Department of Energy (DOE) during the first quarter of 2011, which will be returned, net of costs incurred, to customers in future rate cases. Derivatives reflect positions we hold in exchange-traded derivative contracts and OTC derivative contracts. Exchange-traded derivative contracts, which include futures and exchange-traded options, are generally based on unadjusted quoted prices in active markets and are classified within Level 1. Some OTC derivative contracts are valued using broker or dealer quotations, or market transactions in either the listed or OTC markets utilizing a mid-market pricing convention (the mid-point between bid and ask prices), as appropriate. In such cases, these derivatives are classified within Level 2. Certain OTC derivatives may utilize models to measure fair value. Generally, we use a similar model to value similar instruments. Valuation models utilize various inputs which include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs (i.e., inputs derived principally from or corroborated by observable market data by correlation or other means). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain OTC derivatives are in less active markets with a lower availability of pricing information which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.


June 2011
16
Wisconsin Electric Power Company
            

Form 10-Q

The following table summarizes the fair value of derivatives classified as Level 3 in the fair value hierarchy:

 
 
Quarter to Date
 
Year to Date
 
 
2011
 
2010
 
2011
 
2010
 
 
(Millions of Dollars)
Beginning Balance
 
$
2.1

 
$
1.9

 
$
5.9

 
$
5.8

Realized and unrealized gains (losses)
 

 

 

 

Purchases, issuances and settlements
 
12.5

 
14.0

 
8.7

 
10.1

Transfers in and/or out of Level 3
 

 

 

 
 
Balance as of June 30
 
$
14.6

 
$
15.9

 
$
14.6

 
$
15.9

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) relating to instruments still held as of June 30
 
$

 
$

 
$

 
$


Derivative instruments reflected in Level 3 of the hierarchy include MISO Financial Transmission Rights (FTRs) that are measured at fair value each reporting period using monthly or annual auction shadow prices from relevant auctions. Changes in fair value for Level 3 recurring items are recorded on our balance sheet. See Note 7 -- Derivative Instruments for further information on the offset to regulatory assets and liabilities.

The carrying amount and estimated fair value of certain of our recorded financial instruments are as follows:

 
 
June 30, 2011
 
December 31, 2010
Financial Instruments
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
 
 
(Millions of Dollars)
Preferred stock, no redemption required
 
$
30.4

 
$
21.9

 
$
30.4

 
$
23.5

Long-term debt, including current portion
 
$
1,987.0

 
$
2,161.0

 
$
1,987.0

 
$
2,158.7


The carrying value of net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short-term nature of these instruments. The fair value of our preferred stock is estimated based upon the quoted market value for the same or similar issues. The fair value of our long-term debt, including the current portion of long-term debt, but excluding unamortized discount on debt, is estimated based upon quoted market value for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows.


7 -- DERIVATIVE INSTRUMENTS

We utilize derivatives as part of our risk management program to manage the volatility and costs of purchased power, generation and natural gas purchases for the benefit of our customers. Our approach is non-speculative and designed to mitigate risk and protect against price volatility. Regulated hedging programs require prior approval by the Public Service Commission of Wisconsin (PSCW).

We record derivative instruments on the balance sheet as an asset or liability measured at its fair value, and changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of the fair market value accounting to be offset to regulatory assets and liabilities. We do not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement. As of
June 30, 2011, we recognized $5.3 million in regulatory assets and $24.5 million in regulatory liabilities related to derivatives in comparison to $11.0 million in regulatory assets and $13.7 million in regulatory liabilities as of
December 31, 2010.


June 2011
17
Wisconsin Electric Power Company
            

Form 10-Q

We record our current derivative assets on the balance sheet in Other current assets and the current portion of the liabilities in Other current liabilities. The long-term portion of our derivative assets of $0.1 million is recorded in Other deferred charges and other assets and the long-term portion of our derivative liabilities of $0.1 million is recorded in Other deferred credits and other liabilities as of June 30, 2011. Our Consolidated Condensed Balance Sheet as of June 30, 2011 and December 31, 2010 includes:

 
 
June 30, 2011
 
December 31, 2010
 
 
Derivative
Asset
 
Derivative
Liability
 
Derivative
Asset
 
Derivative
Liability
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
$
1.7

 
$
1.5

 
$
0.9

 
$
6.3

Fuel Oil
 
3.9

 

 
4.4

 

FTRs
 
14.6

 

 
5.9

 

Coal
 
2.4

 

 
2.9

 

Total
 
$
22.6

 
$
1.5

 
$
14.1

 
$
6.3


Our Consolidated Condensed Income Statements include gains (losses) on derivative instruments used in our risk management strategies under Fuel and purchased power for those commodities supporting our electric operations and under Cost of gas sold for the natural gas sold to our customers. Our estimated notional volumes and gains (losses) for the three and six months ended June 30, 2011 and 2010 were as follows:

 
 
Three Months Ended June 30, 2011
 
Three Months Ended June 30, 2010
 
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
 
 
 
 
(Millions of Dollars)
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
8.0 million Dth
 
$
(2.9
)
 
8.8 million Dth
 
$
(2.9
)
Power
 
zero MWh
 

 
102,400 MWh
 
(0.2
)
Fuel Oil
 
3.4 million gallons
 
2.1

 
2.0 million gallons
 
(0.2
)
FTRs
 
6,191 MW
 
1.5

 
6,657 MW
 
3.2

Total
 
 
 
$
0.7

 
 
 
$
(0.1
)

 
 
Six Months Ended June 30, 2011
 
Six Months Ended June 30, 2010
 
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
 
 
 
 
(Millions of Dollars)
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
Natural Gas
 
16.8 million Dth
 
$
(7.8
)
 
21.5 million Dth
 
$
(10.3
)
Power
 
zero MWh
 

 
159,600 MWh
 

Fuel Oil
 
6.6 million gallons
 
2.5

 
3.8 million gallons
 

FTRs
 
12,543 MW
 
5.3

 
12,088 MW
 
12.2

Total
 
 
 
$

 
 
 
$
1.9


As of June 30, 2011 and December 31, 2010, we posted collateral of $1.5 million and $4.2 million, respectively, in our margin accounts. These amounts are recorded on the balance sheet in Other current assets.


June 2011
18
Wisconsin Electric Power Company
            

Form 10-Q



8 -- BENEFITS

The components of our net periodic pension and Other Post-Retirement Employee Benefits (OPEB) costs for the three and six months ended June 30 were as follows:

 
 
Pension Costs
 
 
Three Months Ended June 30
 
Six Months Ended June 30
Benefit Plan Cost Components
 
2011
 
2010
 
2011
 
2010
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
3.2

 
$
4.6

 
$
7.3

 
$
11.0

Interest cost
 
14.7

 
14.7

 
29.2

 
29.5

Expected return on plan assets
 
(15.8
)
 
(14.8
)
 
(31.9
)
 
(29.8
)
Amortization of:
 
 
 
 
 
 
 
 
Prior service cost
 
0.6

 
0.6

 
1.1

 
1.1

Actuarial loss
 
6.3

 
4.8

 
12.1

 
9.4

Net Periodic Benefit Cost
 
$
9.0

 
$
9.9

 
$
17.8

 
$
21.2


 
 
OPEB Costs
 
 
Three Months Ended June 30
 
Six Months Ended June 30
Benefit Plan Cost Components
 
2011
 
2010
 
2011
 
2010
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
2.3

 
$
2.6

 
$
5.0

 
$
5.3

Interest cost
 
4.2

 
4.3

 
8.5

 
8.7

Expected return on plan assets
 
(2.8
)
 
(2.3
)
 
(5.6
)
 
(4.6
)
Amortization of:
 
 
 
 
 
 
 
 
Transition obligation
 
0.1

 
0.1

 
0.2

 
0.2

Prior service (credit)
 
(0.5
)
 
(3.0
)
 
(1.0
)
 
(5.9
)
Actuarial loss
 
1.1

 
2.1

 
2.1

 
4.1

Net Periodic Benefit Cost
 
$
4.4

 
$
3.8

 
$
9.2

 
$
7.8


In January 2011, we contributed $107.1 million to Wisconsin Energy's qualified benefit plans. Future contributions to the plans will be dependent upon many factors, including the performance of existing plan assets and long-term discount rates.

Postemployment Benefits:   Postemployment benefits provided to former or inactive employees are recognized when an event occurs. The estimated liability for such benefits was $9.9 million as of June 30, 2011 and
$10.7 million as of December 31, 2010.
 

June 2011
19
Wisconsin Electric Power Company
            

Form 10-Q



9 -- GUARANTEES

We enter into various guarantees to provide financial and performance assurance to third parties. As of
June 30, 2011, we had the following guarantees:

 
Maximum Potential
 
 
 
 
 
Future Payments
 
Outstanding
 
Liability Recorded
 
(Millions of Dollars)
Guarantees
$
2.8

 
$
0.1

 
$

Letters of Credit
$
1.5

 
$
0.6

 
$


We are subject to the potential retrospective premiums that could be assessed under our insurance program.


10 -- SEGMENT INFORMATION

Summarized financial information concerning our operating segments for the three and six months ended June 30, 2011 and 2010 is shown in the following table:

 
 
Operating Segments
 
 
 
 
Electric
 
Gas
 
Steam
 
Total
 
 
(Millions of Dollars)
Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
 
Operating Revenues (a)
 
$
762.6

 
$
83.2

 
$
7.5

 
$
853.3

Operating Income (Loss)
 
$
79.9

 
$
3.6

 
$
(2.3
)
 
$
81.2

June 30, 2010
 
 
 
 
 
 
 
 
Operating Revenues (a)
 
$
701.7

 
$
69.2

 
$
6.7

 
$
777.6

Operating Income
 
$
95.8

 
$
0.4

 
$

 
$
96.2

 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
 
Operating Revenues (a)
 
$
1,539.2

 
$
297.6

 
$
22.7

 
$
1,859.5

Operating Income
 
$
193.8

 
$
40.1

 
$
2.6

 
$
236.5

June 30, 2010
 
 
 
 
 
 
 
 
Operating Revenues (a)
 
$
1,405.5

 
$
284.4

 
$
21.6

 
$
1,711.5

Operating Income
 
$
193.2

 
$
29.3

 
$
4.5

 
$
227.0


(a)
We account for all intersegment revenues at rates established by the PSCW. Intersegment revenues were not material.

As of June 30, 2011, our total assets in our electric utility segment increased by approximately $850 million as compared to December 31, 2010 primarily because of the commencement of commercial operation of OC 2 in January 2011, at which time we recorded an additional capital lease asset of approximately $650 million, and an increase of approximately $219 million in construction work in progress.

June 2011
20
Wisconsin Electric Power Company
            

Form 10-Q



11 -- VARIABLE INTEREST ENTITIES

The primary beneficiary of a variable interest entity must consolidate the related assets and liabilities. Certain disclosures are required by sponsors, significant interest holders in variable interest entities and potential variable interest entities.

We assess our relationships with potential variable interest entities such as our coal suppliers, natural gas suppliers, coal and gas transporters, and other counterparties in power purchase agreements and joint ventures. In making this assessment, we consider the potential that our contracts or other arrangements provide subordinated financial support, the potential for us to absorb losses or rights to residual returns of the entity, the ability to directly or indirectly make decisions about the entities' activities and other factors.

We have identified two tolling and purchased power agreements with third parties that represent variable interests. We account for one of these agreements, with an independent power producer, as an operating lease. The agreement has a remaining term of two years. We have examined the risks of the entity including the impact of operations and maintenance, dispatch, financing, fuel costs, remaining useful life and other factors, and have determined that we are not the primary beneficiary of this entity. We have concluded that we do not have the power to direct the activities that would most significantly affect the economic performance of the entity over its remaining life.

We also have a purchased power agreement for 236 MW of firm capacity from a gas-fired cogeneration facility, which we account for as a capital lease. The agreement includes no minimum energy requirements over the remaining term of 11 years. We have examined the risks of the entity including operations and maintenance, dispatch, financing, fuel costs and other factors, and have determined that we are not the primary beneficiary of the entity. We do not hold an equity or debt interest in the entity and there is no residual guarantee associated with the purchased power agreement.

We have approximately $337.7 million of required payments over the remaining term of these agreements. We believe that the required lease payments under these contracts will continue to be recoverable in rates. Total capacity and lease payments under these contracts for the six months ended June 30, 2011 and 2010 were $32.1 million and $31.0 million, respectively. Our maximum exposure to loss is limited to the capacity payments under the contracts.


12 -- COMMITMENTS AND CONTINGENCIES

Environmental Matters:   We periodically review our exposure for remediation costs as evidence becomes available indicating that our liability has changed. Given current information, we believe that future costs in excess of the amounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to our financial position or results of operations.

We have a program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal-combustion product disposal sites. We perform ongoing assessments of our manufactured gas plant sites and related disposal sites, as well as our coal combustion product disposal/landfill sites. We are working with the Wisconsin Department of Natural Resources (WDNR) in our investigation and remediation planning. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.

Manufactured Gas Plant Sites:   We have identified several sites at which we or a predecessor company historically owned or operated a manufactured gas plant. We have substantially completed planned remediation activities at some of these sites and certain other sites are at various stages of investigation, monitoring and remediation. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. Based upon on-going analysis, we estimate that the future costs for detailed site investigation and future remediation costs may range from $10 million to $25 million over the next ten years. This estimate is dependent upon several variables including, among other things, the extent of remediation, changes in technology and changes in regulation. As of June 30, 2011, we have established reserves of $13.7 million related to future remediation costs.


June 2011
21
Wisconsin Electric Power Company
            

Form 10-Q

The PSCW has allowed Wisconsin utilities, including us, to defer the costs spent on the remediation of manufactured gas plant sites, and has allowed for these costs to be recovered in rates over five years. Accordingly, we have recorded a regulatory asset for remediation costs.

Indemnifications:   In connection with the sale of Point Beach, we agreed to provide the buyer with indemnification provisions customary to transactions involving the sale of nuclear assets. We also provided customary indemnifications to WPL in connection with the sale of our interest in Edgewater Generating Unit 5.

Cash Balance Pension Plan:   In June 2009, a lawsuit was filed by Alan M. Downes, a former employee, against the Plan in the U.S. District Court for the Eastern District of Wisconsin. Counsel representing the plaintiff has sought class certification for other similarly situated plaintiffs. The complaint alleges that Plan participants who received a lump sum distribution under the Plan prior to their normal retirement age did not receive the full benefit to which they were entitled in violation of the Employee Retirement Income Security Act of 1974 (ERISA) and are owed additional benefits, because the Plan failed to apply the correct interest crediting rate to project the cash balance account to their normal retirement age. In September 2010, the plaintiff filed a First Amended Class Action Complaint alleging additional claims under ERISA and adding Wisconsin Energy as a defendant. The plaintiff has not specified the amount of relief he is seeking.

In March 2011, after the matter was addressed by the Plan's Employee Benefits Committee and following the Committee's review and analysis of the facts and evolving state of the law, the Plan acknowledged in an amended answer that it had used an incorrect interest crediting rate in computing lump sum payments prior to normal retirement age. The Committee determined the interest crediting rates that should be applied to address the interest crediting rate calculation and determined that the benefits for certain eligible participants should be recalculated. The plaintiff is opposing the Committee's actions and the Court has not yet decided what deference, if any, to give to the Committee's decision. Therefore, we are currently unable to predict the final outcome or impact of this litigation. An adverse outcome of this lawsuit could have a material adverse effect on Plan funding and expense and our results of operations.

Income Taxes:   During the second quarter of 2011, our state and federal unrecognized tax benefits decreased by approximately $4.6 million exclusive of accrued interest, of which $2.0 million relates to the payment of a state tax obligation and $2.6 million the result of effective settlements with state and federal taxing authorities.


13 -- SUPPLEMENTAL CASH FLOW INFORMATION

During the six months ended June 30, 2011, we paid $46.6 million in interest, net of amounts capitalized, and received $6.3 million in net refunds from income taxes. During the six months ended June 30, 2010, we paid $51.2 million in interest, net of amounts capitalized, and $75.2 million in income taxes, net of refunds.

As of June 30, 2011 and 2010, the amount of accounts payable related to capital expenditures was $50.5 million and $14.4 million, respectively.

June 2011
22
Wisconsin Electric Power Company
            

Form 10-Q



ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                 AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS -- THREE MONTHS ENDED JUNE 30, 2011
 
EARNINGS

Electric Utility Revenues and Sales

The following table compares electric utility operating revenues and MWh sales by customer class during the second quarter of 2011 with the second quarter of 2010, including favorable (better (B)) or unfavorable (worse (W)) variances:

 
 
Three Months Ended June 30
 
 
Electric Revenues
 
MWh Sales
Electric Utility Operations
 
2011
 
B (W)
 
2010
 
2011
 
B (W)
 
2010
 
 
(Millions of Dollars)
 
(Thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer Class
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
259.8

 
$
8.4

 
$
251.4

 
1,835.6

 
(38.3
)
 
1,873.9

Small Commercial/Industrial
 
240.7

 
10.3

 
230.4

 
2,065.2

 
(81.1
)
 
2,146.3

Large Commercial/Industrial
 
193.4

 
22.1

 
171.3

 
2,502.1

 
43.5

 
2,458.6

Other - Retail
 
5.2

 
0.2

 
5.0

 
34.9

 
(0.9
)
 
35.8

Total Retail
 
699.1

 
41.0

 
658.1

 
6,437.8

 
(76.8
)
 
6,514.6

Wholesale - Other
 
39.9

 
9.8

 
30.1

 
526.1

 
126.1

 
400.0

Resale - Utilities
 
15.2

 
7.1

 
8.1

 
437.6

 
126.9

 
310.7

Other Operating Revenues
 
8.4

 
3.0

 
5.4

 

 

 

Total
 
$
762.6

 
$
60.9

 
$
701.7

 
7,401.5

 
176.2

 
7,225.3

Weather -- Degree Days (a)
 
 
 
 
 
 
 
 
 
 
 
 
Heating (936 Normal)
 
 
 
 
 
 
 
1,037

 
366

 
671

Cooling (171 Normal)
 
 
 
 
 
 
 
113

 
(95
)
 
208

 
 
 
 
 
 
 
 
 
 
 
 
 
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a
20-year moving average.
 
 
 
 
 
 
 
 
 
 
 
 

Our electric utility operating revenues increased by $60.9 million, or 8.7%, when compared to the second quarter of 2010. The most significant factors that caused a change in revenues were:

2011 increase of approximately $47.2 million, reflecting the reduction of Point Beach bill credits to retail customers.
Net pricing increases totaling $10.2 million, which includes rates to recover the increase in 2011 fuel costs that became effective April 29, 2011. For additional information, see Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters.
Unfavorable weather that decreased electric revenues by an estimated $22.5 million as compared to the second quarter of 2010.

As measured by cooling degree days, the second quarter of 2011 was 45.7% cooler than the same period in 2010 and 33.9% cooler than normal. Collectively, retail sales to our residential and small commercial and industrial customers, who are more weather sensitive, decreased by 3.0%. Electric sales to our largest customers, two iron ore mines, increased significantly for the quarter. If these sales are excluded, sales to our large commercial and industrial customers decreased slightly for the second quarter of 2011 as compared to the second quarter of 2010.


June 2011
23
Wisconsin Electric Power Company
            

Form 10-Q

Fuel and Purchased Power

Our fuel and purchased power costs increased by $27.6 million, or 10.6%, when compared to the second quarter of 2010. This increase was primarily caused by a 2.4% increase in total MWh sales, increased coal and transportation costs, and changes in the mix of MWh generation caused by plant outages that resulted in increased costs as compared to the second quarter of 2010.

Gas Utility Revenues, Gross Margin and Therm Deliveries

A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the second quarter of 2011 with the second quarter of 2010. We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms. Between the comparative periods, total gas operating revenues increased by $14.0 million, or 20.2%, primarily because of cooler weather in the second quarter of 2011.

 
 
Three Months Ended June 30
 
 
2011
 
B (W)
 
2010
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
Gas Operating Revenues
 
$
83.2

 
$
14.0

 
$
69.2

Cost of Gas Sold
 
50.2

 
(10.6
)
 
39.6

Gross Margin
 
$
33.0

 
$
3.4

 
$
29.6


The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the second quarter of 2011 with the second quarter of 2010:

 
 
Three Months Ended June 30
 
 
Gross Margin
 
Therm Deliveries
Gas Utility Operations
 
2011
 
B (W)
 
2010
 
2011
 
B (W)
 
2010
 
 
(Millions of Dollars)
 
(Millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer Class
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
22.0

 
$
2.6

 
$
19.4

 
52.6

 
13.1

 
39.5

Commercial/Industrial
 
6.7

 
1.4

 
5.3

 
31.7

 
9.5

 
22.2

Interruptible
 
0.1

 

 
0.1

 
1.1

 
0.2

 
0.9

Total Retail
 
28.8

 
4.0

 
24.8

 
85.4

 
22.8

 
62.6

Transported Gas
 
3.8

 
0.4

 
3.4

 
68.3

 
2.5

 
65.8

Other
 
0.4

 
(1.0
)
 
1.4

 

 

 

Total
 
$
33.0

 
$
3.4

 
$
29.6

 
153.7

 
25.3

 
128.4

Weather -- Degree Days (a)
 
 
 
 
 
 
 
 
 
 
 
 
Heating (936 Normal)
 
 
 
 
 
 
 
1,037

 
366

 
671

 
 
 
 
 
 
 
 
 
 
 
 
 
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon
a 20-year moving average.

Our gas margin increased by $3.4 million, or approximately 11.5%, when compared to the second quarter of 2010. This increase primarily relates to an increase in sales volumes as a result of cooler weather during the second quarter of 2011 that increased heating loads. As measured by heating degree days, the second quarter of 2011 was 54.5% cooler than the same period in 2010 and 10.8% cooler than normal.


June 2011
24
Wisconsin Electric Power Company
            

Form 10-Q

Other Operation and Maintenance Expense

Our other operation and maintenance expense increased by $2.3 million, or approximately 0.7%, when compared to the second quarter of 2010.

Depreciation and Amortization Expense

Our depreciation and amortization expense increased by $0.8 million, or approximately 1.5%, when compared to the second quarter of 2010, primarily because of an overall increase in utility plant in service.

Amortization of Gain

In connection with the September 2007 sale of Point Beach, we reached an agreement with our regulators to allow for the net gain on the sale to be used for the benefit of our customers. The majority of the benefits were returned to customers in the form of bill credits. The net gain was originally recorded as a regulatory liability, and it was amortized to the income statement as we issued bill credits to customers. When the bill credits were issued to customers, we transferred cash from the restricted accounts to the unrestricted accounts, adjusted for taxes. All bill credits associated with the sale of Point Beach were applied to customers as of December 31, 2010, and as a result, the Amortization of Gain was zero during the second quarter of 2011 as compared to $47.2 million during the second quarter of 2010.

Other Income, net

Other income, net increased by $4.1 million, or approximately 42.7%, when compared to the second quarter of 2010. This increase primarily relates to increased Allowance for Funds Used During Construction (AFUDC) - Equity related to the construction of the Oak Creek Air Quality Control System (AQCS) project and the Glacier Hills Wind Park.

Interest Expense, net

 
 
Three Months Ended June 30
Interest Expense
 
2011
 
B (W)
 
2010
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
Gross Interest Costs
 
$
28.9

 
$
(0.3
)
 
$
28.6

Less: Capitalized Interest