UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
September 30, 2007
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Commission |
Registrant; State of Incorporation |
IRS Employer |
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File Number |
Address; and Telephone Number |
Identification No. |
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001-09057 |
WISCONSIN ENERGY CORPORATION |
39-1391525 |
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(A Wisconsin Corporation) |
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231 West Michigan Street |
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P.O. Box 1331 |
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Milwaukee, WI 53201 |
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(414) 221-2345 |
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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, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ].
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, 2007):
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Common Stock, $.01 Par Value, |
116,943,072 shares outstanding. |
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WISCONSIN ENERGY CORPORATION |
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FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2007 |
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TABLE OF CONTENTS |
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Item |
Page |
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Introduction |
8 |
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Part I -- Financial Information |
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1. |
Financial Statements |
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Consolidated Condensed Income Statements |
9 |
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Consolidated Condensed Balance Sheets |
10 |
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Consolidated Condensed Statements of Cash Flows |
11 |
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Notes to Consolidated Condensed Financial Statements |
12 |
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2. |
Management's Discussion and Analysis of |
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Financial Condition and Results of Operations |
24 |
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3. |
Quantitative and Qualitative Disclosures About Market Risk |
44 |
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4. |
Controls and Procedures |
44 |
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Part II -- Other Information |
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1. |
Legal Proceedings |
45 |
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1A. |
Risk Factors |
45 |
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2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
45 |
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6. |
Exhibits |
47 |
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Signatures |
48 |
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DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS |
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The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below. |
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Other Terms and Abbreviations |
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ALJ |
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Wisconsin Administrative Law Judge |
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Compensation Committee |
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Compensation Committee of the Board of Directors |
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CPCN |
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Certificate of Public Convenience and Necessity |
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Fitch |
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Fitch Ratings |
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FPL |
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FPL Group, Inc. |
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FTRs |
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Financial Transmission Rights |
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Junior Notes |
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Wisconsin Energy's 2007 Series A Junior Subordinated Notes due 2067 issued in May 2007 |
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LMP |
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Locational Marginal Price |
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MISO |
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Midwest Independent Transmission System Operator, Inc. |
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MISO Midwest Market |
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MISO bid-based energy market |
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Moody's |
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Moody's Investor Services |
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NEIL |
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Nuclear Electric Insurance Limited |
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PJM |
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PJM Interconnection, L.L.C. |
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PTF |
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Power the Future |
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PSEG |
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Public Service Enterprise Group |
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RCC |
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Replacement Capital Covenant dated May 11, 2007 |
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RSG |
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Revenue Sufficiency Guarantee |
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S&P |
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Standard & Poor's Corporation |
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UI |
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The United Illuminating Company |
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Measurements |
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MW |
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Megawatt(s) (One MW equals one million watts) |
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MWh |
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Megawatt-hour(s) |
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Accounting Terms |
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AFUDC |
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Allowance for Funds Used During Construction |
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CWIP |
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Construction Work in Progress |
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FASB |
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Financial Accounting Standards Board |
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FIN |
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FASB Interpretation |
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GAAP |
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Generally Accepted Accounting Principles |
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OPEB |
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Other Post-Retirement Employee Benefits |
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SFAS |
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Statement of Financial Accounting Standards |
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Accounting Pronouncements |
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FIN 46 |
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Consolidation of Variable Interest Entities |
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FIN 48 |
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Accounting for Uncertainty in Income Taxes |
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SFAS 109 |
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Accounting for Income Taxes |
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SFAS 123R |
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Share-Based Payment (Revised 2004) |
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SFAS 133 |
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Accounting for Derivative Instruments and Hedging Activities |
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SFAS 149 |
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Amendment of SFAS 133 on Derivative Instruments and Hedging Activities |
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SFAS 157 |
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Fair Value Measurements |
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SFAS 159 |
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The Fair Value Option for Financial Assets and Financial Liabilities |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained in this report and other documents or oral presentations are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 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 completion of construction projects, regulatory matters, fuel costs, sources of electric energy supply, use of the proceeds from the sale of Point Beach, 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," "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:
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.
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 report, 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 and We Power.
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 metro 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".
Sale of Point Beach: In September 2007, Wisconsin Electric completed the sale of Point Beach to an affiliate of FPL for approximately $924 million. In addition, the buyer assumed certain liabilities related to the plant, including responsibility to decommission Point Beach. Wisconsin Electric intends to use the net gain from the sale and certain decommissioning funds that it retained as a result of the sale to benefit customers, as determined by its regulators. See Note 4 -- Sale of Point Beach in the Notes to Consolidated Condensed Financial Statements in this report.
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 2006 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 2006 Annual Report on Form 10-K, including the financial statements and notes therein.
WISCONSIN ENERGY CORPORATION
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 2006 Annual Report on Form 10-K. In the opinion of management, we have included all adjustments, normal and recurring in nature, necessary to 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 nine months ended September 30, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year 2007 because of seasonal and other factors.
2 -- NEW ACCOUNTING PRONOUNCEMENTS
Uncertainty in Income Taxes: In July 2006, the FASB issued FIN 48, an interpretation of SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the enterprise's financial statements in accordance with SFAS 109. As of January 1, 2007, the adoption date for FIN 48, the amount of unrecognized tax benefits was approximately $41.7 million, which included estimated accrued interest and penalties of $5.4 million. The amount of unrecognized tax benefits excludes offsetting FIN 48 related deferred tax assets of $12.5 million. We recognize accrued interest and penalties in the provision for income taxes. The impact of adopting FIN 48 was not material. As of the date of adoption, the net amount of the unrecognized tax benefits that, if recognized, would impact the effective tax rate for continuing operations was approximately $10.5 million. We do not anticipate any significant increases or decreases in the total amounts of unrecognized tax benefits within the next 12 months. Our primary tax jurisdictions include federal and the State of Wisconsin. Currently, the tax years of 2004 through 2006 are subject to federal examination and the tax years of 2002 through 2006 are subject to examination by the State of Wisconsin.
Fair Value Measurements: In September 2006, the FASB issued SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities and also defines fair value, provides a framework for measuring fair value and expands disclosures related to fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the provisions of SFAS 157, and we expect to adopt it on January 1, 2008.
Fair Value Option : In February 2007, the FASB issued SFAS 159. SFAS 159 permits an entity to measure certain financial assets and financial liabilities at fair value and also establishes presentation and disclosure requirements. SFAS 159 is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. We are currently evaluating the provisions of SFAS 159, and we expect to adopt it on January 1, 2008.
3 -- ACCOUNTING AND REPORTING FOR POWER THE FUTURE GENERATING UNITS
Background: As part of our PTF strategy, our non-utility subsidiary, We Power, is building four new generating units (PWGS 1 and 2 and OC 1 and 2) that will be leased to our utility subsidiary, Wisconsin Electric, under long-term leases that have been approved by the PSCW, our primary regulator. The leases are designed to recover the capital costs of the plant including a return. PWGS 1 was placed in service in July 2005 and is being leased to Wisconsin Electric. Wisconsin Electric will be responsible for all of the operating costs, including fuel, of the PTF units once they are placed in service and we anticipate that we will recover the operating costs of these plants in rates. The accompanying consolidated financial statements eliminate all intercompany transactions between We Power and
During Construction: Under the terms of the leases, we collect in current rates amounts representing our pre-tax cost of capital (debt and equity) associated with capital expenditures for the PTF units. Our pre-tax cost of capital is approximately 14%. The carrying costs that we collect in rates are recorded as deferred revenue, and they will be amortized to revenue when the related assets are placed into service. During the construction of the PTF units, we capitalize interest costs at an overall weighted-average pre-tax cost of interest of approximately 6.0%. Capitalized interest is included in the total cost of the PTF units.
Cash Flows: The following table identifies key pre-tax cash outflows and inflows for the nine months ended September 30, 2007 and 2006 related to the construction of our PTF units as compared to Wisconsin Energy overall.
Capital Expenditures (Millions of Dollars)
Total
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
2007
$ -
$72.3
$334.6
$114.1
$521.0
$842.2
2006
$ -
$94.7
$189.9
$61.2
$345.8
$664.0
Capitalized Interest (Millions of Dollars)
Total
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
2007
$ -
$11.0
$30.1
$9.6
$50.7
$52.0
2006
$ -
$5.5
$12.8
$4.6
$22.9
$27.1
Deferred Revenue, net (Millions of Dollars)
Total
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
2007
$ -
$24.8
$69.9
$22.7
$117.4
$117.4
2006
$ -
$12.6
$29.9
$10.7
$53.2
$53.2
Balance Sheet:
As noted above, we collect in current rates carrying costs that are calculated based on the cash expenditures included in CWIP multiplied by our pre-tax cost of capital. The carrying costs are recorded as deferred revenue. Our total CWIP balance includes cash expenditures, capitalized interest and accruals. The following table identifies key amounts related to our PTF units that are recorded on our balance sheet as of September 30, 2007 and December 31, 2006:
CWIP - Cash Expenditures (Millions of Dollars)
Total
As of
PWGS 1
PWGS 2
OC 1
OC 2
PTF
September 30, 2007
$ -
$262.4
$811.2
$273.8
$1,347.4
December 31, 2006
$ -
$196.2
$487.7
$152.6
$836.5
Total CWIP (Millions of Dollars)
Total
As of
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
September 30, 2007
$ -
$284.9
$870.9
$294.4
$1,450.2
$1,563.1
December 31, 2006
$ -
$207.7
$517.3
$163.5
$888.5
$992.4
Net Plant in Service (Millions of Dollars)
Total
As of
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
September 30, 2007
$344.4
$ -
$ -
$ -
$344.4
$5,635.2
December 31, 2006
$350.1
$ -
$ -
$ -
$350.1
$5,841.7
Deferred Revenue (Millions of Dollars)
Total
As of
PWGS 1
PWGS 2
OC 1
OC 2
PTF
WEC
September 30, 2007
$66.2
$52.4
$135.9
$47.0
$301.5
$301.5
December 31, 2006
$68.3
$27.5
$66.0
$24.4
$186.2
$186.2
Income Statement:
Once the PTF units are placed in service, we expect to recover in rates the lease costs which reflect the authorized cash construction costs of the units plus a return. The authorized cash costs are established by the PSCW. The authorized cash costs exclude capitalized interest because carrying costs are recovered during the construction of the units. The lease payments are expected to be levelized, except that OC 1 and OC 2 will be recovered on a levelized basis that has a one time 10.6% escalation after the first five years of the leases. The leases establish a set return on equity component of 12.7% after tax. The interest component of the return is determined up to 180 days prior to the date that the units are placed in service.We recognize revenues related to the lease payments that are included in our rates. In addition, our revenues will include the amortization of the deferred revenues that reflect the carrying costs that are collected during construction. The deferred revenue will be amortized on a straight line basis over the lease term. We will depreciate the units on a straight line basis over their expected service life.
In July 2005, PWGS 1 was placed in service. This asset had a cost of approximately $364.3 million, which included approximately $31.1 million of capitalized interest. The asset is being depreciated over its estimated useful life of approximately 37 years. The cost of this asset, plus a return, is expected to be recovered through Wisconsin Electric's rates over a 25 year period at an annual amount of approximately $48 million.
On September 28, 2007, Wisconsin Electric sold Point Beach to an affiliate of FPL for approximately $924 million. Pursuant to the terms of the sale agreement, the buyer purchased Point Beach, its nuclear fuel and associated inventories and assumed the obligation to decommission the plant. Wisconsin Electric retained approximately $486 million of the sales proceeds, which represents the net book value of the assets sold and certain transaction costs. In addition, Wisconsin Electric has deferred the net gain on the sale of approximately $400 million as a regulatory liability and has deposited those proceeds in a restricted cash account.
In connection with the sale, Wisconsin Electric also transferred $390 million of decommissioning funds to the buyer. Wisconsin Electric then liquidated the balance of the decommissioning trust assets and
A long-term power purchase agreement with the buyer became effective upon closing of the sale pursuant to which Wisconsin Electric will purchase all of the existing energy and capacity of Point Beach. The power purchase agreement extends through 2030 for Unit 1 and 2033 for Unit 2. Based on the agreement, we will be paying the buyer a price per MWh for energy delivered according to a schedule that is established in the agreement. Under the agreement, if our credit rating and the credit rating of Wisconsin Electric from either S&P or Moody's fall below investment grade, or if the holders of any indebtedness in excess of $100 million accelerate or have the right to accelerate the maturity of such indebtedness as a result of a default, we would need to provide collateral in the amount of $100 million (escalating at 3% per year commencing in 2024).
Wisconsin Electric maintains insurance with NEIL through which it can recover up to $1.0 million per week, subject to a total limit of $24.5 million, during any prolonged outage at Point Beach caused by accidental property damage which results in Wisconsin Electric's inability to receive power under its power purchase agreement with the new owner of Point Beach. Under policies issued by NEIL, the insured member may be liable for a retrospective premium in the event of catastrophic losses exceeding the full financial resources of NEIL. Wisconsin Electric's maximum retrospective liability under this policy is $2.6 million.
5 -- ASSET RETIREMENT OBLIGATIONS
The following table presents the change in our asset retirement obligations as of September 30, 2007.
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Balance at
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Liabilities
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Liabilities
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Cash Flow
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Balance at
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Asset Retirement Obligations |
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Our asset retirement obligations were significantly reduced due to the sale of Point Beach. Upon closing of the sale, the buyer assumed the liability to decommission the plant, including the asset retirement obligation, spent fuel and other requirements to return the site to greenfield status.
6 -- COMMON EQUITY
Share-Based Compensation Expense:
For a description of share-based compensation, including stock options, restricted stock and performance units, see Note J -- Common Equity in our 2006 Annual Report on Form 10-K. Effective January 1, 2006, we adopted SFAS 123R using the modified prospective method. We utilize the straight-line attribution method for recognizing share-based compensation expense under SFAS 123R. 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 outstanding stock options during the period. Shares purchased on the open market are currently used to satisfy share-based awards.
The following table summarizes recorded pre-tax share-based compensation expense and the related tax benefit for share-based awards made to our employees and directors.
Three Months Ended
Nine Months Ended
2007
2006
2007
2006
(Millions of Dollars)
Stock options
$2.4
$1.9
$9.6
$5.7
Performance units
1.0
1.8
2.4
4.5
Restricted stock
0.3
0.3
0.8
0.9
Share-based compensation expense
$3.7
$4.0
$12.8
$11.1
Related Tax Benefit
$1.4
$1.7
$5.1
$4.5
September 30
September 30
Stock Option Activity: During the first nine months of 2007, the Compensation Committee granted 1,371,590 options that had an estimated fair value of $8.72 per share. During the first nine months of 2006, the Compensation Committee granted 1,304,275 options that had an estimated fair value of $7.55 per share. The following assumptions were used to value the options using a binomial option pricing model:
2007
2006
Risk free interest rate
4.7% - 5.1%
4.3% - 4.4%
Dividend yield
2.2%
2.4%
Expected volatility
13.0% - 20.0%
17.0% - 20.0%
Expected forfeiture rate
2.0%
2.0%
Expected life (years)
6.0
6.3
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 our historical experience.
The following is a summary of our stock option activity through the three and nine months ended September 30, 2007.
Stock Options
Number of Options
Weighted-Average Exercise Price
Weighted-Average Remaining Contractual Life (Years)
Aggregate Intrinsic Value (Millions)
Outstanding as of July 1, 2007
7,945,432
$33.98
Granted
-
-
Exercised
(23,147)
$23.53
Forfeited
-
-
Outstanding as of September 30, 2007
7,922,285
$34.01
Outstanding as of January 1, 2007
7,721,826
$30.52
Granted
1,371,590
$47.76
Exercised
(1,160,167)
$27.03
Forfeited
(10,964)
$35.66
Outstanding as of September 30, 2007
7,922,285
$34.01
6.6
$91.0
Exercisable as of September 30, 2007
4,448,005
$28.85
5.3
$72.4
The intrinsic value of options exercised was $0.5 million and $24.7 million for the three and nine months ended September 30, 2007, and $3.8 million and $9.4 million for the same periods in 2006, respectively. Cash received from options exercised was $30.6 million and $12.5 million for the nine months ended September 30, 2007 and 2006, respectively. The related tax benefit for the same periods was approximately $9.1 million and $3.7 million, respectively.
The following table summarizes information about our non-vested options during the three and nine months ended September 30, 2007:
Three Months
Nine Months
Weighted
Weighted-
Non-Vested Stock Options
Number of Options
Average
Number of Options
Average
Non-vested - Beginning of Period
3,474,280
$8.21
2,587,849
$7.94
Granted
-
-
1,371,590
$8.72
Vested
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-
(477,995)
$8.22
Forfeited
-
-
(7,164)
$8.18
Non-vested as of September 30, 2007
3,474,280
$8.21
3,474,280
$8.21
Fair Value
Fair Value
As of September 30, 2007, total compensation costs related to non-vested stock options not yet recognized was approximately $10.7 million, which is expected to be recognized over the next 21 months on a weighted-average basis.
The following table summarizes information about stock options outstanding as of September 30, 2007:
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)
$12.79 to $23.05
1,133,389
$21.51
3.6
1,133,389
$21.51
3.6
$25.31 to $31.07
1,559,247
$27.03
4.9
1,559,247
$27.03
4.9
$33.44 to $47.76
5,229,649
$38.80
7.8
1,755,369
$35.20
6.7
7,922,285
$34.01
6.6
4,448,005
$28.85
5.3
Restricted Shares: The Compensation Committee has also approved restricted stock grants to certain key employees and directors. The following restricted stock activity occurred during the three and nine months ended September 30, 2007:
Three Months
Nine Months
Restricted Shares
Number of shares
Weighted-Average Grant Date Fair Value
Number of shares
Weighted-Average Grant Date Fair Value
Outstanding - Beginning of Period
155,003
184,665
Granted
-
-
14,139
$47.19
Released / Forfeited
(6,033)
$29.26
(49,834)
$27.06
Outstanding as of September 30, 2007
148,970
148,970
We record the market value of the restricted stock awards on the date of grant and then we charge their value to expense over the vesting period of the awards. The intrinsic value of restricted stock vesting
was $0.2 million and $2.7 million for the three and nine months ended September 30, 2007, respectively. The intrinsic value for the same periods in 2006 was $0.1 million and $0.4 million, respectively. The related tax benefit was zero and $0.9 million for the three and nine months ended September 30, 2007, respectively, and $0.1 million and $0.2 million for the same periods in 2006.
As of September 30, 2007, total compensation cost related to restricted stock not yet recognized was approximately $2.5 million, which is expected to be recognized over the next 44 months on a weighted-average basis.
Performance Units: In January 2007 and 2006, the Compensation Committee granted 136,905 and 150,821 performance units, respectively, to officers and other key employees under the Wisconsin Energy Performance Unit Plan. Under the grants, the ultimate number of units that will be awarded is dependent upon the achievement of certain financial performance of our stock over a three year period. We are accruing compensation costs over the three year period based on our estimate of the final expected value of the award. Performance units vesting were approximately $0.9 million, with a related tax benefit of $0.3 million, during the nine months ended September 30, 2007. Performance shares earned as of December 31, 2006, vested and were distributed during the first quarter of 2007 and had a total intrinsic value of $7.2 million. The tax benefit realized due to the distribution of performance shares was approximately $2.1 million. As of September 30, 2007, total compensation cost related to performance units not yet recognized was approximately $6.7 million, which is expected to be recognized over the next 22 months on a weighted-average basis.
Restrictions: Wisconsin Energy's ability as a holding company to pay common dividends primarily depends on the availability of funds received from its principal utility subsidiaries, Wisconsin Electric and Wisconsin Gas. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of our principal utility subsidiaries to transfer funds to us in the form of cash dividends, loans or advances. In addition, under Wisconsin law, Wisconsin Electric and Wisconsin Gas are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. See Note J --Common Equity in our 2006 Annual Report on Form 10-K for additional information on these restrictions.
We have the option to defer interest payments on the Junior Notes, from time to time, for one or more periods of up to 10 consecutive years per period. During any period in which we defer interest payments, we may not declare or pay any dividends or distributions on, or redeem, repurchase or acquire, our common stock.
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. We recorded the following total comprehensive income during the nine months ended September 30:
Comprehensive Income
2007
2006
(Millions of Dollars)
Net Income
$241.3
$239.4
Other Comprehensive Income
Hedging
0.3
0.3
Total Other Comprehensive Income
0.3
0.3
Total Comprehensive Income
$241.6
$239.7
7 -- LONG-TERM DEBT
Wisconsin Electric had a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust, which was treated as a capital lease. Under this arrangement, Wisconsin Electric leased and amortized nuclear fuel to fuel expense as power was generated. In connection with the sale of Point Beach, the nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust was dissolved in September 2007. Wisconsin Electric terminated the lease and paid off all of Wisconsin Electric Fuel Trust's outstanding commercial paper, aggregating $76.2 million.
In May 2007, we issued $500 million of Junior Notes. Due to certain features of the Junior Notes, rating agencies consider them to be hybrid instruments with a combination of debt and equity characteristics. The Junior Notes bear interest at 6.25% per year until May 15, 2017. Beginning May 15, 2017, the Junior Notes bear interest at the three-month London Interbank Offered Rate (LIBOR) plus 2.1125%, reset quarterly. The proceeds from this issuance were used to repay short-term debt incurred to both fund PTF and for other working capital purposes.
In connection with the issuance of the Junior Notes, we executed the RCC for the benefit of persons that buy, hold or sell a specified series of long-term indebtedness (covered debt). Our 6.20% Senior Notes due April 1, 2033 have been initially designated as the covered debt under the RCC. The RCC provides that we may not redeem, defease or purchase and our subsidiaries may not purchase any Junior Notes on or before May 15, 2037, unless, subject to certain limitations described in the RCC, during the 180 days prior to the date of redemption, defeasance or purchase, we have received a specified amount of proceeds from the sale of qualifying securities.
We follow SFAS 133, as amended by SFAS 149, effective July 1, 2003, which requires that every derivative instrument be recorded on the balance sheet as an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives under SFAS 133, the PSCW allows the effects of the fair market value accounting to be offset to regulatory assets and liabilities. As of September 30, 2007, we recognized $14.9 million in regulatory assets and $1.6 million in regulatory liabilities related to derivatives.
9 -- BENEFITS
The components of our net periodic pension and OPEB costs for the three and nine months ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
OPEB |
||||
|
|
|
|
|
|
|
|
|
|
|
2007 |
2006 |
2007 |
2006 |
|||||
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||||||
|
Three Months Ended September 30 |
||||||||
|
Net Periodic Benefit Cost |
||||||||
|
Service cost |
$7.5 |
$8.4 |
$2.9 |
$3.1 |
||||
|
Interest cost |
17.8 |
17.3 |
4.8 |
4.4 |
||||
|
Expected return on plan assets |
(21.2) |
(20.2) |
(3.8) |
(3.7) |
||||
|
Amortization of: |
||||||||
|
Transition obligation |
- |
- |
- |
0.1 |
||||
|
Prior service cost (credit) |
1.4 |
1.4 |
(3.3) |
(3.3) |
||||
|
Actuarial loss |
3.9 |
5.9 |
1.8 |
2.2 |
||||
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$9.4 |
|
$12.8 |
|
$2.4 |
|
$2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
OPEB |
||||
|
|
|
|
|
|
|
|
|
|
|
2007 |
2006 |
2007 |
2006 |
|||||
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||||||
|
Nine Months Ended September 30 |
||||||||
|
Net Periodic Benefit Cost |
||||||||
|
Service cost |
$22.6 |
$25.4 |
$8.7 |
$9.3 |
||||
|
Interest cost |
53.6 |
52.2 |
14.4 |
13.4 |
||||
|
Expected return on plan assets |
(63.4) |
(61.2) |
(11.4) |
(11.2) |
||||
|
Amortization of: |
||||||||
|
Transition obligation |
- |
- |
0.2 |
0.3 |
||||
|
Prior service cost (credit) |
4.3 |
4.1 |
(10.0) |
(10.1) |
||||
|
Actuarial loss |
12.9 |
17.6 |
5.5 |
6.6 |
||||
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
$30.0 |
$38.1 |
$7.4 |
$8.3 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We enter into various guarantees to provide financial and performance assurance to third parties on behalf of our affiliates. As of September 30, 2007, we had the following guarantees:
|
|
|
Maximum Potential Future Payments |
|
Outstanding as of
|
|
Liability Recorded
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
Wisconsin Energy |
|
|
|
|
|
|
|
Non-Utility Energy |
|
$ - |
|
$ - |
|
$ - |
|
Other |
|
2.5 |
|
2.5 |
|
- |
|
Wisconsin Electric |
|
2.8 |
|
0.1 |
|
- |
|
Subsidiary |
|
6.1 |
|
6.1 |
|
0.9 |
|
|
|
|
|
|
|
|
|
Total |
|
11.4 |
|
8.7 |
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A non-utility energy segment guarantee in support of Wisvest-Connecticut, which we sold in December 2002 to PSEG, provides financial assurance for potential obligations relating to environmental
remediation under the original purchase agreement for Wisvest-Connecticut with UI. The potential obligations for environmental remediation, which are unlimited, are reimbursable by PSEG under the terms of the sale agreement in the event that we are required to perform under the guarantee.
Other guarantees support obligations of our affiliates to third parties under loan agreements and surety bonds. In the event our affiliates fail to perform, we would be responsible for the obligations.
Wisconsin Electric guarantees the potential retrospective premiums that could be assessed under Wisconsin Electric's nuclear insurance program (see Note 4 -- Sale of Point Beach in this report).
Subsidiary guarantees support loan obligations and surety bonds between our affiliates and third parties. In the event our affiliates fail to perform, our subsidiary would be responsible for the obligations.
Postemployment benefits: Postemployment benefits provided to former or inactive employees are recognized when an event occurs. The estimated liability, excluding severance benefits, for such benefits was $13.5 million as of September 30, 2007 and $13.0 million as of December 31, 2006.
11 -- SEGMENT INFORMATION
Summarized financial information concerning our reportable operating segments for the three and nine months ended September 30, 2007 and 2006 is shown in the following table.
|
Reportable Operating Segments |
||||||||||||
|
Corporate & |
||||||||||||
|
Energy |
Other (a) |
|||||||||||
|
Reconciling |
Total |
|||||||||||
|
Wisconsin Energy Corporation |
Utility |
Non-Utility |
Items (c) |
Consolidated |
||||||||
|
|
|
|
|
|
|
|
|
|
||||
|
(Millions of Dollars) |
||||||||||||
|
Three Months Ended |
||||||||||||
|
September 30, 2007 |
||||||||||||
|
Operating Revenues (b) |
$872.0 |
$21.1 |
($11.6) |
$881.5 |
||||||||
|
Operating Income |
|
$136.9 |
|
$13.5 |
|
$2.7 |
|
$153.1 |
||||
|
Interest Expense |
$29.2 |
$1.8 |
$11.5 |
$42.5 |
||||||||
|
Income Tax Expense (Benefit) |
$52.4 |
$4.7 |
($3.9) |
$53.2 |
||||||||
|
Loss from Discontinued Operations, net |
$ - |
$ - |
($0.2) |
($0.2) |
||||||||
|
Net Income (Loss) |
$80.6 |
$7.2 |
($4.9) |
$82.9 |
||||||||
|
Capital Expenditures |
$98.9 |
$170.7 |
$0.1 |
$269.7 |
||||||||
|
September 30, 2006 |
||||||||||||
|
Operating Revenues (b) |
$835.7 |
$20.6 |
($16.5) |
$839.8 |
||||||||
|
Operating Income (Loss) |
$121.6 |
$12.9 |
($3.3) |
$131.2 |
||||||||
|
Interest Expense |
$25.6 |
$3.6 |
$12.3 |
$41.5 |
||||||||
|
Income Tax Expense (Benefit) |
$46.4 |
$4.0 |
($6.6) |
$43.8 |
||||||||
|
Net Income (Loss) |
$72.7 |
$6.5 |
($8.4) |
$70.8 |
||||||||
|
Capital Expenditures |
$104.0 |
$139.0 |
$0.1 |
$243.1 |
||||||||
|
Reportable Operating Segments |
||||||||
|
Corporate & |
||||||||
|
Energy |
Other (a) |
|||||||
|
Reconciling |
Total |
|||||||
|
Wisconsin Energy Corporation |
Utility |
Non-Utility |
Items (c) |
Consolidated |
||||
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||||||
|
Nine Months Ended |
||||||||
|
September 30, 2007 |
||||||||
|
Operating Revenues (b) |
$3,076.4 |
$56.7 |
($44.0) |
$3,089.1 |
||||
|
Operating Income (Loss) |
|
$409.1 |
|
$34.3 |
|
($0.7) |
|
$442.7 |
|
Interest Expense |
$86.4 |
$5.6 |
$35.2 |
$127.2 |
||||
|
Income Tax Expense (Benefit) |
$156.0 |
$11.2 |
($13.7) |
$153.5 |
||||
|
Loss from Discontinued Operations, net |
$ - |
$ - |
($0.6) |
($0.6) |
||||
|
Net Income (Loss) |
$241.9 |
$17.8 |
($18.4) |
$241.3 |
||||
|
Capital Expenditures |
$316.2 |
$524.1 |
$1.9 |
$842.2 |
||||
|
Total Assets |
$10,292.7 |
$1,807.4 |
($337.9) |
$11,762.2 |
||||
|
September 30, 2006 |
||||||||
|
Operating Revenues (b) |
$2,895.2 |
$55.0 |
($49.0) |
$2,901.2 |
||||
|
Operating Income (Loss) |
|
$405.7 |
|
$33.5 |
|
($9.3) |
|
$429.9 |
|
Interest Expense |
$80.2 |
$11.5 |
$37.6 |
$129.3 |
||||
|
Income Tax Expense (Benefit) |
$149.4 |
$9.8 |
($20.0) |
$139.2 |
||||
|
Income from Discontinued Operations, net |
$ - |
$ - |
$4.5 |
$4.5 |
||||
|
Net Income (Loss) |
$241.9 |
$13.7 |
($16.2) |
$239.4 |
||||
|
Capital Expenditures |
$317.1 |
$346.8 |
$0.1 |
$664.0 |
||||
|
Total Assets |
$9,538.9 |
$1,130.1 |
($44.8) |
$10,624.2 |
||||
|
(a) |
Other includes all other non-utility activities, primarily non-utility real estate investment and development by Wispark and non-utility investment in renewable energy and recycling technology by Minergy, as well as interest on corporate debt. |
|
(b) |
An elimination for intersegment revenues is included in Operating Revenues of $17.2 million and $16.7 million for the three months ended September 30, 2007 and 2006, respectively, and $51.4 million and $49.8 million for the nine months ended September 30, 2007 and 2006, respectively. |
|
(c) |
An elimination for the PWGS 1 lease between We Power and Wisconsin Electric is included in Total Assets of $307.5 million and $319.3 million at September 30, 2007 and 2006, respectively. |
12 -- COMMITMENTS AND CONTINGENCIES
EPA - Consent Decree:
In April 2003, Wisconsin Electric and the EPA announced that a consent decree had been reached that resolved all issues related to a request for information that had been issued by the EPA. In July 2003, the consent decree was amended to include the State of Michigan. Under the consent decree, Wisconsin Electric agreed to significantly reduce its air emissions from its coal-fired generating facilities. The reductions are expected to be achieved by 2013 through a combination of installing new pollution control equipment, upgrading existing equipment and retiring certain older units. Through September 30, 2007, we have spent approximately $371.0 million associated with implementing the EPA agreement. The total cost of implementing this agreement is estimated to be $1.0 billion through the year 2013. The U.S. District Court for the Eastern District of Wisconsin approved the amended consent decree and entered it in October 2007. Interveners in the case have the right to appeal the court's decision to the federal court of appeals.
Environmental Matters: We periodically review our exposure for remediation costs as evidence becomes available indicating that our remediation liability has changed. Based on 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.
Divestitures:
Over the past several years, we have sold various businesses and assets, including Point Beach. In connection with these sales, we have agreed to provide the respective buyers with customary indemnification provisions including, but not limited to, certain environmental, asbestos and product liability matters. We have established reserves as deemed appropriate for these indemnification provisions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2007
CONSOLIDATED EARNINGS
The following table compares our net income during the third quarter of 2007 with the third quarter of 2006 including favorable (better (B)) or unfavorable (worse (W)) variances.
|
|
Three Months Ended September 30 |
||||
|
|
|
|
|
|
|
|
|
2007 |
|
B (W) |
|
2006 |
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
Operating Income by Segment |
|
|
|
|
|
|
Utility Energy |
$136.9 |
|
$15.3 |
|
$121.6 |
|
Non-Utility Energy |
13.5 |
|
0.6 |
|
12.9 |
|
Corporate and Other |
2.7 |
|
6.0 |
|
(3.3) |
|
|
|
|
|
|
|
|
Total Operating Income |
153.1 |
|
21.9 |
|
131.2 |
|
Equity in Earnings of Transmission Affiliate |
10.9 |
|
1.2 |
|
9.7 |
|
Other Income, Net |
14.8 |
|
(0.4) |
|
15.2 |
|
Interest Expense |
42.5 |
|
(1.0) |
|
41.5 |
|
|
|
|
|
|
|
|
Income From Continuing Operations Before Income Taxes |
136.3 |
|
21.7 |
|
114.6 |
|
Income Taxes |
53.2 |
|
(9.4) |
|
43.8 |
|
|
|
|
|
|
|
|
Income From Continuing Operations |
83.1 |
|
12.3 |
|
70.8 |
|
Loss From Discontinued Operations, Net of Tax |
(0.2) |
|
(0.2) |
|
- |
|
|
|
|
|
|
|
|
Net Income |
$82.9 |
|
$12.1 |
|
$70.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
Continuing Operations |
$0.70 |
|
$0.10 |
|
$0.60 |
|
Discontinued Operations |
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
Total Diluted Earnings Per Share |
$0.70 |
|
$0.10 |
|
$0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME
Our utility energy segment contributed $136.9 million of operating income during the third quarter of 2007, an increase of $15.3 million, or 12.6%, compared with the third quarter of 2006. The following table summarizes the operating income of this segment between the comparative quarters.
Three Months Ended September 30
Utility Energy Segment
2007
B (W)
2006
(Millions of Dollars)
Operating Revenues
Electric
$732.6
$43.5
$689.1
Gas
133.4
(7.8)
141.2
Other
6.0
0.6
5.4
Total Operating Revenues
872.0
36.3
835.7
Fuel and Purchased Power
255.4
(24.6)
230.8
Cost of Gas Sold
78.0
7.1
85.1
Gross Margin
538.6
18.8
519.8
Other Operating Expenses
Other Operation and Maintenance
293.3
1.6
294.9
Depreciation, Decommissioning
and Amortization
82.4
78.9
Property and Revenue Taxes
26.0
(1.6)
24.4
Operating Income
$136.9
$15.3
$121.6
During September 2007, we completed the sale of Point Beach. In connection with the sale, a power purchase agreement with an affiliate of FPL became effective to purchase all of the existing energy and capacity produced by Point Beach. As a result of the sale and the power purchase agreement, we expect future income statements to look different than historical income statements. Prospectively, we expect to see significantly higher purchased power expense because we will be purchasing energy from the new owner of Point Beach. We also expect to see a reduction of other operation and maintenance costs, as well as lower depreciation, decommissioning and amortization costs because we no longer own Point Beach. Finally, under the power purchase agreement, we will pay higher amounts per MWh for purchased power in the summer months and lower amounts in the non-summer months.
Electric Utility Revenues and Sales
The following table compares electric utility operating revenues and MWh sales by customer class during the third quarter of 2007 with the third quarter of 2006.
|
Three Months Ended September 30 |
||||||||||||
|
|
|
|
||||||||||
|
Electric Revenues |
MWh Sales |
|||||||||||
|
|
|
|
|
|
||||||||
|
2007 |
B (W) |
2006 |
2007 |
B (W) |
2006 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
(Thousands) |
|||||||||||
|
Customer Class |
||||||||||||
|
Residential |
$254.4 |
$8.2 |
$246.2 |
2,363.7 |
23.5 |
2,340.2 |
||||||
|
Small Commercial/Industrial |
|
230.8 |
|
9.0 |
|
221.8 |
|
2,546.7 |
|
39.8 |
|
2,506.9 |
|
Large Commercial/Industrial |
|
177.8 |
|
7.1 |
|
170.7 |
|
2,985.9 |
|
59.0 |
|
2,926.9 |
|
Other-Retail |
4.6 |
0.1 |
4.5 |
39.3 |
(0.3) |
39.6 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Sales |
667.6 |
24.4 |
643.2 |
7,935.6 |
122.0 |
7,813.6 |
||||||
|
Wholesale-Other |
25.1 |
3.8 |
21.3 |
550.2 |
33.8 |
516.4 |
||||||
|
Resale-Utilities |
28.3 |
14.8 |
13.5 |
390.7 |
198.5 |
192.2 |
||||||
|
Other Operating Revenues |
|
11.6 |
|
0.5 |
|
11.1 |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$732.6 |
|
$43.5 |
|
$689.1 |
|
8,876.5 |
|
354.3 |
|
8,522.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weather -- Degree Days (a) |
||||||||||||
|
Cooling (531 Normal) |
567 |
(10) |
577 |
|||||||||
|
(a) |
As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
During the third quarter of 2007, total electric utility operating revenues increased by $43.5 million, or 6.3%, when compared with the third quarter of 2006. The two biggest drivers of the increase were revenues attributable to fuel and purchased power of approximately $14.6 million, and increased revenues related to Resale-Utilities of approximately $14.8 million. Our policy for electric fuel revenues is to not recognize revenue for any currently billable amounts if it is probable that we will refund those amounts to customers. In 2006, we experienced lower than expected fuel and purchased power costs, and we established $14.6 million of reserves to reflect amounts that we expected to refund to customers. No such reserves have been established in 2007, as we are experiencing higher fuel and purchased power costs. The increase in Resale-Utilities reflects our ability to sell electricity into the MISO and PJM markets due to increased availability of our base-load plants.
Total electric MWh sales volumes increased by 354.3 thousand MWh, or 4.2%, in the third quarter of 2007 compared with the same period in 2006. The largest increase came from sales to other utilities, as discussed above. Our retail sales increased by 1.6%, as compared to the same period last year. For the quarter, the weather, as measured by cooling degree days, was slightly warmer than normal and slightly cooler than the same period in 2006.
Fuel and Purchased Power
Our fuel and purchased power costs increased by $24.6 million, or 10.7%, when compared to the third quarter of 2006. As noted above, our total electric sales volume increased by approximately 4.2% in the quarter; however, our average fuel and purchased power cost per MWh increased by $1.72 or approximately 6.8%. The higher cost per MWh was due to an 8.3% increase in the cost of coal and coal transportation contracts between periods. In addition, we experienced higher utilization in our gas generation and purchased energy in the quarter ended September 30, 2007, as compared to the same period in 2006. This generation was primarily related to the increased revenue related to Resale-Utilities.
Gas Utility Revenues, Gross Margin and Therm Deliveries
A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the third quarter of 2007 with the third quarter of 2006. 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 margins decreased by $0.7 million, or 1.2%.
|
|
|
Three Months Ended September 30 |
||||
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
B (W) |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
|
|
|
|
|
|
|
|
Gas Operating Revenues |
|
$133.4 |
|
($7.8) |
|
$141.2 |
|
Cost of Gas Sold |
|
78.0 |
|
7.1 |
|
85.1 |
|
|
|
|
|
|
|
|
|
Gross Margin |
|
$55.4 |
|
($0.7) |
|
$56.1 |
|
|
|
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|
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|
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The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the third quarter of 2007 with the third quarter of 2006.
Three Months Ended September 30
Gross Margin
Therm Deliveries
2007
B (W)
2006
2007
B (W)
2006
(Millions of Dollars)
(Millions)
Customer Class
Residential
$33.0
($0.5)
$33.5
47.4
(3.2)
50.6
Commercial/Industrial
9.4
(0.5)
9.9
33.2
(1.6)
34.8
Interruptible
0.4
-
0.4
4.4
0.5
3.9
Total Retail Gas Sales
42.8
(1.0)
43.8
85.0
(4.3)
89.3
Transported Gas
11.2
0.1
11.1
201.3
0.5
200.8
Other
1.4
0.2
1.2
-
-
-
Total
$55.4
($0.7)
$56.1
286.3
(3.8)
290.1
Weather -- Degree Days (a)
Heating (132 Normal)
108
(20)
128
|
(a) |
As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
The decrease in gross margin was primarily related to mild weather in the third quarter of 2007 compared to the third quarter of 2006. As measured by heating degree days, the third quarter of 2007 was 15.6% warmer than the third quarter of 2006 and 18.2% warmer than normal.
CORPORATE AND OTHER CONTRIBUTION TO OPERATING INCOME
Corporate and other affiliates had operating income of $2.7 million during the third quarter of 2007 as compared to an operating loss of $3.3 million in the same period during 2006. The increase is primarily related to our Wispark operations, which had operating income during the third quarter of 2007 and operating losses in the third quarter of 2006.
CONSOLIDATED OTHER INCOME, NET
Other income, net decreased by $0.4 million, or 2.6%, when compared to the third quarter of 2006. The reduction primarily reflects a decrease in AFUDC of $3.2 million in connection with the new scrubber we put in service at our Pleasant Prairie Power Plant during the fourth quarter of 2006. This scrubber was installed as part of our EPA consent decree spending. For further information on the consent decree with the EPA, see Note 12 -- Commitments and Contingencies in the Notes to Consolidated Condensed Financial Statements in this report, as well as Note S -- Commitments and Contingencies in our 2006 Annual Report on Form 10-K. This reduction was offset, in part, by an increase of approximately $2.9 million related to gains on additional land sold in Northern Wisconsin and the Upper Peninsula of Michigan and capitalized carrying costs.
CONSOLIDATED INTEREST EXPENSE
|
|
|
Three Months Ended September 30 |
|||
|
|
|
|
|
|
|
|
Interest Expense |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|||
|
|
|
|
|
|
|
|
Gross Interest Costs |
|
$62.9 |
|
$52.5 |
|
|
Less: Capitalized Interest |
|
20.4 |
|
11.0 |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$42.5 |
|
$41.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Our gross interest costs increased by $10.4 million, or 19.8%, when compared to the third quarter of 2006 due to increased debt levels as a result of our PTF construction program. However, in connection with the PTF construction program we capitalize interest during construction. Our capitalized interest increased by $9.4 million due to higher levels of construction in progress at our PTF plants. As a result, our net interest expense increased $1.0 million for the quarter ended September 30, 2007 when compared to the same period in 2006.
CONSOLIDATED INCOME TAXES
For the third quarter of 2007, our effective tax rate applicable to continuing operations was 39.0% compared to 38.2% for the third quarter of 2006. We expect our 2007 annual effective tax rate to be between 38% and 39%.
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2007
CONSOLIDATED EARNINGS
The following table compares our net income during the first nine months of 2007 with the first nine months of 2006 including favorable (better (B)) or unfavorable (worse (W)) variances.
|
|
Nine Months Ended September 30 |
||||
|
|
|
|
|
|
|
|
|
2007 |
|
B (W) |
|
2006 |
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
Operating Income by Segment |
|
|
|
|
|
|
Utility Energy |
$409.1 |
|
$3.4 |
|
$405.7 |
|
Non-Utility Energy |
34.3 |
|
0.8 |
|
33.5 |
|
Corporate and Other |
(0.7) |
|
8.6 |
|
(9.3) |
|
|
|
|
|
|
|
|
Total Operating Income |
442.7 |
|
12.8 |
|
429.9 |
|
Equity in Earnings of Transmission Affiliate |
32.1 |
|
3.4 |
|
28.7 |
|
Other Income, Net |
47.8 |
|
3.0 |
|
44.8 |
|
Interest Expense |
127.2 |
|
2.1 |
|
129.3 |
|
|
|
|
|
|
|
|
Income From Continuing Operations Before Income Taxes |
395.4 |
|
21.3 |
|
374.1 |
|
Income Taxes |
153.5 |
|
(14.3) |
|
139.2 |
|
|
|
|
|
|
|
|
Income From Continuing Operations |
241.9 |
|
7.0 |
|
234.9 |
|
Income (Loss) From Discontinued Operations, Net of Tax |
(0.6) |
|
(5.1) |
|
4.5 |
|
|
|
|
|
|
|
|
Net Income |
$241.3 |
|
$1.9 |
|
$239.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
Continuing Operations |
$2.04 |
|
$0.06 |
|
$1.98 |
|
Discontinued Operations |
- |
|
(0.04) |
|
0.04 |
|
|
|
|
|
|
|
|
Total Diluted Earnings Per Share |
$2.04 |
|
$0.02 |
|
$2.02 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME
Our utility energy segment contributed $409.1 million of operating income during the first nine months of 2007, an increase of $3.4 million, or 0.8%, compared with the first nine months of 2006. The following table summarizes the operating income of this segment between the comparative periods.
Nine Months Ended September 30
Utility Energy Segment
2007
B (W)
2006
(Millions of Dollars)
Operating Revenues
Electric
$2,037.5
$136.5
$1,901.0
Gas
1,011.8
38.7
973.1
Other
27.1
6.0
21.1
Total Operating Revenues
3,076.4
181.2
2,895.2
Fuel and Purchased Power
719.2
(132.3)
586.9
Cost of Gas Sold
710.4
(15.3)
695.1
Gross Margin
1,646.8
33.6
1,613.2
Other Operating Expenses
Other Operation and Maintenance
919.0
(18.7)
900.3
Depreciation, Decommissioning
and Amortization
241.7
(7.7)
234.0
Property and Revenue Taxes
77.0
(3.8)
73.2
Operating Income
$409.1
$3.4
$405.7
During September 2007, we completed the sale of Point Beach. In connection with the sale, a power purchase agreement with an affiliate of FPL became effective to purchase all of the existing energy and capacity produced by Point Beach. As a result of the sale and the power purchase agreement, we expect future income statements to look different than historical income statements. Prospectively, we expect to see significantly higher purchased power expense because we will be purchasing energy from the new owner of Point Beach. We also expect to see a reduction of other operation and maintenance costs, as well as lower depreciation, decommissioning and amortization costs because we no longer own Point Beach. Finally, under the power purchase agreement, we will pay higher amounts per MWh for purchased power in the summer months and lower amounts in the non-summer months.
Electric Utility Revenues and Sales
The following table compares electric utility operating revenues and MWh sales by customer class during the first nine months of 2007 with the first nine months of 2006.
|
Nine Months Ended September 30 |
||||||||||||
|
|
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|
||||||||||
|
Electric Revenues |
MWh Sales |
|||||||||||
|
|
|
|
|
|
||||||||
|
2007 |
B (W) |
2006 |
2007 |
B (W) |
2006 |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
(Thousands) |
|||||||||||
|
Customer Class |
||||||||||||
|
Residential |
$701.4 |
$46.9 |
$654.5 |
6,474.0 |
226.6 |
6,247.4 |
||||||
|
Small Commercial/Industrial |
|
652.3 |
|
42.8 |
|
609.5 |
|
7,140.8 |
|
200.6 |
|
6,940.2 |
|
Large Commercial/Industrial |
|
519.3 |
|
32.9 |
|
486.4 |
|
8,510.0 |
|
12.4 |
|
8,497.6 |
|
Other-Retail |
14.4 |
0.5 |
13.9 |
122.8 |
(0.7) |
123.5 |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Sales |
1,887.4 |
123.1 |
1,764.3 |
22,247.6 |
438.9 |
21,808.7 |
||||||
|
Wholesale-Other |
72.6 |
14.6 |
58.0 |
1,590.4 |
33.0 |
1,557.4 |
||||||
|
Resale-Utilities |
45.5 |
(3.9) |
49.4 |
705.6 |
(283.3) |
988.9 |
||||||
|
Other Operating Revenues |
|
32.0 |
|
2.7 |
|
29.3 |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$2,037.5 |
|
$136.5 |
|
$1,901.0 |
|
24,543.6 |
|
188.6 |
|
24,355.0 |
|
|
|
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|
|
Weather -- Degree Days (a) |
||||||||||||
|
Heating (4,309 Normal) |
4,259 |
425 |
3,834 |
|||||||||
|
Cooling (714 Normal) |
755 |
35 |
720 |
|||||||||
|
(a) |
As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
During the first nine months of 2007, electric utility operating revenues increased by $136.5 million, or approximately 7.2%, when compared to the first nine months of 2006. The most significant increase in revenues relates to the recognition of revenues attributable to fuel and purchased power. Our policy for electric fuel revenues is to not recognize revenue for any currently billable amounts if it is probable that we will refund those amounts to customers. In 2006, we experienced lower than expected fuel and purchased power costs, and we established $48.7 million of reserves to reflect amounts that we expected to refund to customers. No such reserves have been established in 2007 as we are experiencing higher fuel and purchased power costs. In addition, we estimate that $33.5 million of the increase in operating revenues relates to pricing increases. This increase primarily reflects rate increases received in late January 2006 that were in effect for the entire nine month period ended September 30, 2007 and the wholesale rate increase effective in May 2007. We also estimate that $13.5 million of the increase was due to more favorable weather and $22.9 million relates to sales growth in residential and commercial sales. Approximately $9.0 million of the increase relates to the settlement in the second quarter of 2007 of a billing dispute with our largest customers, two iron ore mines.
Our retail electric sales volume increased by approximately 2.0%. The increase in retail sales was driven by growth in residential and commercial sales and favorable winter weather in 2007 as compared to the same period in 2006. As measured by heating degree days, the first nine months of 2007 were 11.1% colder than the same period in 2006, increasing heating load sales to residential customers who are more weather sensitive and contribute higher margins than other customer classes. The increase in retail sales was offset by a 28.6% decline in sales volumes to other utilities due to lower plant availability during the nine months ended September 30, 2007.
Fuel and Purchased Power
Our fuel and purchased power costs increased by $132.3 million, or 22.5%, when compared to the first nine months of 2006. Our total electric sales volume increased by approximately 0.8% in the first nine months of 2007. However, our average fuel and purchased power cost per MWh also increased by $5.01 or approximately 22.3%. In the first nine months of 2007, we had a 10.5% reduction in MWh output at our nuclear units due primarily to a planned refueling outage at Point Beach during the second quarter of 2007. In 2006, the scheduled refueling outage at Point Beach occurred in the fourth quarter. Additionally, generation from our coal units was 7.6% lower in the first nine months of 2007 due
primarily to coal unit outages in the first quarter of 2007 as compared to 2006. As a result of the reduced coal and nuclear output, approximately 23.4% of our MWh sales in the first nine months of 2007 were supplied by higher cost natural gas-fired generation and purchased power as compared to 15.8% in the first nine months of 2006.
For further information, see Factors Affecting Results, Liquidity and Capital Resources - Utility Rates and Regulatory Matters below.
Gas Utility Revenues, Gross Margin and Therm Deliveries
A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the first nine months of 2007 with the first nine months of 2006. 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 margins increased by approximately $23.4 million, or 8.4%, primarily because of the new rates that went into effect at the end of January 2006.
|
|
|
Nine Months Ended September 30 |
||||
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
B (W) |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
|
|
|
|
|
|
|
|
Gas Operating Revenues |
|
$1,011.8 |
|
$38.7 |
|
$973.1 |
|
Cost of Gas Sold |
|
710.4 |
|
(15.3) |
|
695.1 |
|
|
|
|
|
|
|
|
|
Gross Margin |
|
$301.4 |
|
$23.4 |
|
$278.0 |
|
|
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|
|
The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the first nine months of 2007 with the first nine months of 2006.
Nine Months Ended September 30
Gross Margin
Therm Deliveries
2007
B (W)
2006
2007
B (W)
2006
(Millions of Dollars)
(Millions)
Customer Class
Residential
$190.6
$15.5
$175.1
533.7
54.8
478.9
Commercial/Industrial
65.0
7.1
57.9
316.7
26.4
290.3
Interruptible
1.5
0.1
1.4
16.8
2.2
14.6
Total Retail Gas Sales
257.1
22.7
234.4
867.2
83.4
783.8
Transported Gas
38.0
0.3
37.7
683.5
53.0
630.5
Other
6.3
0.4
5.9
-
-
-
Total
$301.4
$23.4
$278.0
1,550.7
136.4
1,414.3
Weather -- Degree Days (a)
Heating (4,309 Normal)
4,259
425
3,834
|
(a) |
As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
Our gas margins increased by $23.4 million, or 8.4%, when compared to the first nine months of 2006. We estimate that approximately $17.1 million of this increase related to increased sales as a result of more normal winter weather. The first nine months of 2007 were approximately 11.1% colder than the same period in 2006. As a result, our retail therm deliveries increased approximately 10.6% as compared to the first nine months of 2006. In addition, we estimate that our gas margins improved by
approximately $6.6 million due to a rate order that went into effect in the latter part of January 2006 and was effective for the entire nine month period ended September 30, 2007.
Other Operation and Maintenance Expenses
Our other operation and maintenance expenses increased by $18.7 million, or approximately 2.1%, when compared to the first nine months of 2006. In January 2006, we received a rate order to cover increased expenses related to transmission costs, bad debt costs and PTF costs. We estimate that for the first nine months of 2007, other operation and maintenance expenses (and revenues) were approximately $12.7 million higher than the same period last year as a result of the January 2006 rate order. In the first nine months of 2007, we had a scheduled nuclear refueling outage. We did not have a similar outage in the first nine months of 2006. This resulted in an increase of approximately $17.5 million in nuclear operation and maintenance expenses between the comparative periods. This increase was offset, in part, by a $16.2 million reduction in benefit related costs and other factors.
CORPORATE AND OTHER CONTRIBUTION TO OPERATING INCOME
Corporate and other affiliates had an operating loss of $0.7 million for the nine months ended September 30, 2007 compared with an operating loss of $9.3 million for the same period in 2006. The favorable change is primarily related to our Wispark operations, which had operating income during the first nine months of 2007 as compared to operating losses for the same period in 2006.
CONSOLIDATED OTHER INCOME, NET
Other income, net increased by approximately $3.0 million, or 6.7%, when compared to the nine months ended September 30, 2006. The increase reflects approximately $10.4 million of pre-tax gains on property sales in 2007 compared with a pre-tax gain on the sale of our investment in Guardian Pipeline LLC of $2.8 million during the same period in 2006. The largest gains in 2007 relate to land sold in Northern Wisconsin and the Upper Peninsula of Michigan. We had additional capitalized carrying costs and gross receipts tax of approximately $5.4 million during the nine months ended September 30, 2007. These increases were offset, in part, by a decrease of $8.1 million in AFUDC. This reduction primarily reflects the new scrubber we put in service at our Pleasant Prairie Power Plant during the fourth quarter of 2006. This scrubber was installed as part of our EPA consent decree spending. For further information on the consent decree with the EPA, see Note 12 -- Commitments and Contingencies in this report, as well as Note S -- Commitments and Contingencies in our 2006 Annual Report on Form 10-K. Furthermore, our interest in the earnings of unconsolidated affiliates decreased approximately $3.2 million when compared to the nine months ended September 30, 2006.
CONSOLIDATED INTEREST EXPENSE
|
|
|
Nine Months Ended September 30 |
|||
|
|
|
|
|
|
|
|
Interest Expense |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars) |
|||
|
|
|
|
|
|
|
|
Gross Interest Costs |
|
$179.2 |
|
$156.4 |
|
|
Less: Capitalized Interest |
|
52.0 |
|
27.1 |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
$127.2 |
|
$129.3 |
|
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|
Our gross interest costs increased by $22.8 million, or 14.6%, in the nine months ended September 30, 2007 when compared with the same period in 2006. This increase reflects higher debt levels as a result of our PTF construction program. However, in connection with the PTF construction program we capitalize interest during construction. Our capitalized interest increased by $24.9 million due to higher levels of construction in progress at our PTF plants. As a result, our net interest expense declined by $2.1 million, or 1.6%, as compared to the first nine months of 2006.
CONSOLIDATED INCOME TAXES
For the first nine months of 2007, our effective tax rate applicable to continuing operations was 38.8% compared to 37.2% for the first nine months of 2006. We expect our 2007 annual effective tax rate to be between 38.0% and 39.0%. For additional information, see Note H -- Income Taxes in our 2006 Annual Report on Form 10-K.
Income from discontinued operations, net of tax decreased by $5.1 million in the nine months ended September 30, 2007 as compared to the same period in 2006. In the nine months ended September 30, 2006, we had income of approximately $4.5 million related to the favorable resolution of tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes our cash flows during the first nine months of 2007 and 2006:
|
Nine Months Ended September 30 |
||||
|
|
|
|
|
|
|
Wisconsin Energy Corporation |
2007 |
2006 |
||
|
|
|
|
|
|
|
(Millions of Dollars) |
||||
|
Cash Provided by (Used in) |
||||
|
Operating Activities |
$632.7 |
$708.3 |
||
|
Investing Activities |
($386.4) |
($650.3) |
||
|
Financing Activities |
|
$216.7 |
|
($110.0) |
Operating Activities
Cash provided by operating activities was $632.7 million during the nine months ended September 30, 2007, or $75.6 million lower than the comparable period in 2006. This decline was due primarily to fuel recoveries, higher tax payments and changes in working capital requirements. Tax payments increased as a result of higher taxable income in 2007 and due to the prepaid balance of income taxes as of December 31, 2005, which reduced tax payments in 2006. In the nine months ended September 30, 2007, we had unfavorable recoveries of fuel and purchased power costs of $39.5 million. In the same period in 2006, we had favorable recoveries of fuel and purchased power costs of $56.7 million. In addition, we experienced an increase in working capital requirements.
Investing Activities
Cash used in investing activities was $386.4 million during the nine months ended September 30, 2007, or $263.9 million lower than the comparable period in 2006. In September 2007, we sold Point Beach to an affiliate of FPL and received approximately $924 million. In connection with the sale, we also transferred $390 million of decommissioning funds to the buyer and retained approximately $552 million of decommissioning funds. After subtracting the book value of the plant and transaction costs, the net gain from the sale, as well as the decommissioning funds that we retained, are expected to be used for the benefit of our customers, as determined by our regulators. To that end, we have placed approximately $969 million of proceeds in a separate interest bearing bank account for the benefit of our customers. We expect to use a portion of these proceeds to pay tax obligations related to the liquidation of the qualified decommissioning trust due in the fourth quarter of 2007, and to withdraw the remaining funds to offset the cash impact of bill credits that we expect to apply to our customers' bills over the next two years. We anticipate that substantially all of the $969 million of restricted cash, after the payment of related taxes, will be withdrawn to offset customer bill credits before December 31, 2009. The sales proceeds were offset by increased capital expenditures of $178.2 million for the nine months ended September 30, 2007, primarily due to the increased levels of construction at the PTF plants.
Financing Activities
Cash provided by financing activities was $216.7 million during the nine months ended September 30, 2007, or $326.7 million greater than the comparable period in 2006. During 2007, we received $523.4 million of cash proceeds from the issuance of debt, including the $500 million principal amount of Junior Notes sold in May 2007. We used the net proceeds of the Junior Notes to pay down short-term debt incurred both to fund PTF and for other working capital purposes. In addition, we paid off all of Wisconsin Electric Fuel Trust's outstanding commercial paper, aggregating $76.2 million.
In the first nine months of 2007, we received proceeds of $ 30.6 million related to the exercise of stock options, compared with $12.5 million in the first nine months of 2006. Instead of issuing new shares for these stock options, we instructed our plan agent to purchase common stock in the open market at a cost of $ 55.7 million, compared with $21.8 million in the first nine months of 2006. This cost is included in Purchase of common stock on our Consolidated Condensed Statements of Cash Flows.
CAPITAL RESOURCES AND REQUIREMENTS
Capital Resources
We anticipate meeting our capital requirements during the remaining three months of 2007 primarily through internally generated funds, short-term borrowings and the application of the proceeds from the sale of assets, supplemented by the issuance of intermediate or long-term debt securities depending on market conditions and other factors. Beyond 2007, we anticipate meeting our capital requirements through internally generated funds supplemented, when required, by short-term borrowings and the issuance of debt securities.
We have access to the capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We believe that we have adequate capacity to fund our operations for the foreseeable future through our existing borrowing arrangements, our access to capital markets and internally generated cash.
In May 2007, Wisconsin Energy filed a shelf registration statement with the SEC for an unspecified amount of debt securities, which became effective upon filing. We issued the Junior Notes pursuant to this registration statement in May 2007.
In August 2007, Wisconsin Electric filed a shelf registration statement with the SEC to issue up to $800 million in debt securities. The registration statement has been declared effective by the SEC and, subject to market conditions, is available for use.
Wisconsin Energy, Wisconsin Electric and Wisconsin Gas credit agreements provide liquidity support for each company's obligations with respect to commercial paper and for general corporate purposes.
As of September 30, 2007, we had approximately $1.7 billion of available unused lines of bank back-up credit facilities on a consolidated basis and approximately $831.3 million of total consolidated short-term debt outstanding.
We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The following table summarizes such facilities at September 30, 2007:
Letters of
Facility
Facility
(Millions of Dollars)
Wisconsin Energy
$900.0
$1.5
$898.5
April 2011
5 year
Wisconsin Electric
$500.0
$4.1
$495.9
March 2011
5 year
Wisconsin Gas
$300.0
$ -
$300.0
March 2011
5 year
Company
Total Facility
Credit
Credit Available
Expiration
Term
The following table shows our actual capitalization structure as of September 30, 2007, as well as, an adjusted capitalization structure that is consistent with the manner in which the rating agencies currently view the Junior Notes:
Capitalization Structure
Actual
Adjusted
(Millions of Dollars)
Common Equity
$3,034.6
39.6%
$3,284.6
42.8%
Preferred Stock of Subsidiary
30.4
0.4%
30.4
0.4%
Long-Term Debt (including
current maturities)
3,775.7
49.2%
3,525.7
46.0%
Short-Term Debt
831.3
10.8%
831.3
10.8%
Total Capitalization
$7,672.0
100.0%
$7,672.0
100.0%
Total Debt
$4,607.0
$4,357.0
Ratio of Debt to Total Capitalization
60.0%
56.8%
Included in Long-Term Debt as of September 30, 2007, is the $500 million aggregate principal amount of the Junior Notes as these debt securities are reflected as long-term debt on our Consolidated Condensed Balance Sheets. The adjusted presentation attributes $250 million of the Junior Notes to Common Equity and $250 million to Long-Term Debt. We believe this presentation is consistent with the way the majority of rating agencies treat the Junior Notes, where they attribute 50% equity credit to the Junior Notes.
The adjusted presentation of our consolidated capitalization structure is presented as a complement to our capitalization structure presented in accordance with GAAP. Management evaluates and manages Wisconsin Energy's capitalization structure, including its total debt to total capitalization ratio, using the GAAP calculation and the rating agency treatment of the Junior Notes. Therefore, we believe the non-GAAP adjusted presentation reflecting this treatment is useful and relevant to investors in understanding how management and the rating agencies evaluate our capitalization structure.
We received $486 million of unrestricted cash proceeds from the sale of Point Beach. The closing of the sale of Point Beach was expected to occur during the third quarter of 2007, subject to the receipt of regulatory approvals. However, as it turned out, the actual closing did not take place until the afternoon of the last business day of the third quarter of 2007. If the closing had occurred earlier in the third quarter of 2007, we intended to use all of the unrestricted cash proceeds to retire short-term debt during the third quarter. Due to the actual timing of the closing, we had to extend the maturity of some of our short-term debt beyond the end of the third quarter, and were unable to use such proceeds during the third quarter as intended. On October 1, 2007, we used $281.4 million of the unrestricted cash proceeds to repay short-term debt. We are continuing to use the remaining unrestricted cash proceeds to repay short-term debt as it matures and to fund current expenditures instead of borrowing additional funds. We expect to use all of the unrestricted cash proceeds in this manner during the fourth quarter. Had we been able to use all $486 million of unrestricted cash proceeds to repay short-term debt during the third quarter, our pro-forma debt to total capitalization ratio, adjusted to reflect the rating agency equity treatment, would have been 53.9% as of September 30, 2007. The pro forma capitalization structure would have reflected $3,284.6 million of common equity (45.7%), $30.4 million of preferred stock of subsidiary (0.4%), $3,525.7 million of long-term debt (49.1%) and $345.3 million of short-term debt (4.8%), with a total capitalization of $7,186.0 million. We expect that we will have to borrow additional amounts during the remainder of 2007 and that our adjusted debt to total capitalization ratio, adjusted to reflect the rating agency equity treatment, will be above 53.9% at the end of 2007.
Absent the circumstances described above, Wisconsin Energy would not maintain such a large cash balance at the end of a quarter. Therefore, we believe it is important for our investors to understand how our adjusted capitalization structure would have looked if we had received the proceeds from the sale of Point Beach in time to use the unrestricted cash to repay short-term debt during the third quarter.
For additional information related to the proceeds received from the sale of Point Beach, see Note 4 -- Sale of Point Beach in the notes to consolidated Condensed Financial Statements in this report.
Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the ratings of our debt securities and the debt securities and preferred stock of our subsidiaries by S&P, Moody's and Fitch as of September 30, 2007.
S&P
Moody's
Fitch
Wisconsin Energy
Commercial Paper
A-2
P-2
F2
Unsecured Senior Debt
BBB+
A3
A-
Unsecured Junior Notes
BBB-
Baa1
BBB+
Wisconsin Electric
Commercial Paper
A-2
P-1
F1
Unsecured Debt
A-
A1
A+
Preferred Stock
BBB
A3
A
Wisconsin Gas
Commercial Paper
A-2
P-1
F1
Unsecured Senior Debt
A-
A1
A+
Wisconsin Energy Capital Corporation
Unsecured Debt
BBB+
A3
A-
In July 2007, S&P affirmed the corporate credit ratings of Wisconsin Energy, Wisconsin Electric, Wisconsin Gas and Wisconsin Energy Capital Corporation and revised the ratings outlooks assigned each company from negative to stable.
For additional information on these security ratings and other ratings outlooks assigned to Wisconsin Energy and its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Requirements -- Capital Resources in our 2006 Annual Report on Form 10-K.
We believe these security ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agencies only. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. Any rating can be revised upward or downward or withdrawn at any time by a rating agency if it decides that the circumstances warrant the change. Each rating should be evaluated independently of any other rating.
Capital Requirements
Capital requirements during the remainder of 2007 are expected to be principally for capital expenditures and long-term debt maturities. Wisconsin Electric expects to retire at the scheduled maturity date, $250 million of 3.50% debentures due December 1, 2007. Our 2007 annual consolidated capital expenditure budget, excluding the purchase of nuclear fuel, is approximately $1,371.0 million.
In anticipation of the sale of Point Beach, in September 2007, Wisconsin Electric terminated its nuclear fuel lease and paid off all of Wisconsin Electric Fuel Trust's outstanding commercial paper, aggregating $76.2 million.
Off-Balance Sheet Arrangements:
We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. We continue to believe that these agreements do not have, and are not reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors. For further information, see Note 10 -- Guarantees in the Notes to Consolidated Condensed Financial Statements in this report.
We have identified three tolling and purchased power agreements with third parties but have been unable to determine if we are the primary beneficiary of any of these three variable interest entities as defined by FIN 46. As a result, we do not consolidate these entities. Instead, we account for one of these contracts as a capital lease and for the other two contracts as operating leases. For additional information, see Note G -- Variable Interest Entities in our 2006 Annual Report on Form 10-K. We have included our contractual obligations under all three of these contracts in our evaluation of Contractual Obligations/Commercial Commitments discussed below.
Contractual Obligations/Commercial Commitments: Our total contractual obligations and other commercial commitments increased to approximately $22.0 billion as of September 30, 2007 compared with $10.2 billion as of December 31, 2006. This increase was due primarily to the implementation of the Point Beach Nuclear Plant Power Purchase Agreement, which is a 26 year agreement, the issuance in May 2007 of the Junior Notes and agreements entered into in connection with our wind generation project. This increase was offset, in part, by assigning obligations related to Point Beach to an affiliate of FPL as part of the sale of Point Beach. In addition, we made periodic payments related to these types of obligations in the ordinary course of business during the nine months ended September 30, 2007. For purposes of determining our contractual obligations and commercial commitments only, we assumed the Junior Notes would be retired in 2017 with the proceeds from the issuance of qualifying securities pursuant to the terms of the RCC.
FACTORS AFFECTING RESULTS, LIQUDITY AND CAPITAL RESOURCES
The following is a discussion of certain factors that may affect our results of operations, liquidity and capital resources. The following discussion should be read together with the information under the heading "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 of our 2006 Annual Report on Form 10-K, which provides a more complete discussion of factors affecting us, including market risks and other significant risks, our PTF strategy, utility rates and regulatory matters, electric system reliability, environmental matters, legal matters, industry restructuring and competition and other matters.
POWER THE FUTURE
Under our PTF strategy, we expect to meet a significant portion of our future generation needs through the construction of the PWGS and the Oak Creek expansion by We Power. We Power will lease the new units to Wisconsin Electric under long-term leases, and we expect Wisconsin Electric to recover the lease payments in its electric rates. See Note E -- Accounting and Reporting for Power the Future Generating Units in the Notes to Consolidated Financial Statements and Factors Affecting Results, Liquidity and Capital Resources -- Power the Future in Item 7 of our 2006 Annual Report on Form 10-K and Note 3 -- Accounting and Reporting for Power the Future Generating Units in the Notes to Consolidated Condensed Financial Statements in this report for additional information on PTF.
Port Washington: Construction of PWGS 2 is well underway. Site preparation, including removal of the old coal units at the site, was completed in early 2006, and all of the major components have been procured. The unit is expected to begin commercial operation during the second quarter of 2008.
Oak Creek Expansion: The Oak Creek expansion includes a new coal handling system that will serve both the existing units at Oak Creek and OC 1 and OC 2. The new coal handling system is expected to be placed into service during the fourth quarter of 2007 at a cost of approximately $170 million. We estimate the annual revenues associated with the coal handling system will be approximately $23 million.
The CPCN granted for the construction of the Oak Creek expansion was the subject of a number of legal challenges by third parties; these legal challenges were resolved in June 2005. We have received all permits necessary to commence construction, which began in June 2005. Certain of these permits continue to be contested but remain in effect unless and until overturned by a reviewing court or ALJ.
A contested case hearing for the WPDES permit was held in March 2006. The ALJ upheld the issuance of the permit in a decision issued in July 2006. In August 2006, the opponents filed in Dane County Circuit Court for judicial review of the ALJ's decision upholding the issuance of the permit. In March 2007, the Dane County Circuit Court affirmed in part the decision by the ALJ to uphold the WDNR's issuance of the permit. The Court also remanded certain aspects of the ALJ's decision for further consideration based on the January 2007 decision by the Federal Court of Appeals for the Second Circuit concerning the federal rule on cooling water intake systems for existing facilities (the Phase II rule) (Riverkeeper, Inc. v. EPA, 475 F.3d 83 (2d Cir. 2007)). The Second Circuit found certain portions of the Phase II rule impermissible and remanded several parts of the Phase II rule to the EPA for further consideration or potential additional rulemaking. Consistent with its announcement in March, in July 2007, the EPA formally suspended the Phase II rule in its entirety and directed states to use their "best professional judgment" in evaluating intake systems.
In light of these actions, we have requested that the WDNR modify the WPDES permit. We have submitted additional information to the WDNR as part of that process. In early May 2007, we requested that the ALJ stay the proceedings on remand pending WDNR's review of our request to modify the WPDES permit. The ALJ granted our motion for a stay; however, based on a request from the opponents, the Dane County Circuit Court subsequently issued a decision "clarifying" its March order of remand. Thereafter, in August 2007, the ALJ issued a new scheduling order. According to that schedule, we anticipate a decision on the issue before the ALJ by the end of November 2007. After the ALJ's decision, WDNR will proceed to complete the permit modification process, which we expect could take until early 2008. When a permit is modified through the modification procedure under state law, as under federal regulations, the existing permit continues in full force and effect during the modification process.
UTILITY RATES AND REGULATORY MATTERS
2008 Rate Case
In May 2007, Wisconsin Electric and Wisconsin Gas initiated rate proceedings with the PSCW. Wisconsin Electric has asked the PSCW to approve a comprehensive plan which would result in net price increases of 7.5% in 2008 and 7.5% in 2009 for its electric customers in Wisconsin, a 1.8% price increase in 2008 for its gas customers and approximately 16.0% price increases in 2008 for all steam customers in Milwaukee. Wisconsin Gas has filed for a 4.1% price increase in 2008 for its gas customers.
Electric pricing increases are largely needed to allow us to continue progress on previously approved initiatives, including: costs associated with generation capacities, primarily the new PTF plants approved by the PSCW in 2002 and 2003; recovery of costs associated with transmission; compliance with environmental regulations; continuation of investment in renewable and efficiency programs, including the new wind facilities approved by the PSCW in February 2007; and scheduled recovery of regulatory assets.
The proposed net price increase for electric customers in Wisconsin reflects credits expected to be applied from the sale of Point Beach. In our May 2007 filing, we anticipated that there would be approximately $653 million of credits available for Wisconsin customers. Now, we anticipate that there
2006 Rate Order
Electric Rates: In January 2006, Wisconsin Electric received an order from the PSCW that allowed it to increase annual electric revenues by approximately $222.0 million, or 10.6%, to recover increased costs associated with investments in our PTF units, transmission services and fuel and purchased power, as well as costs associated with additional sources of renewable energy. The rate increase was based on an authorized return on equity of 11.2%. The order also required Wisconsin Electric to refund to customers, with interest, any fuel revenues that it received in excess of fuel and purchased power costs that it incurred, as defined by the Wisconsin fuel rules. The original order stipulated that any refund would also include interest at short-term rates. This refund provision expired December 31, 2006.
During 2006, we experienced lower than expected fuel and purchased power costs. In September 2006, we requested and received approval from the PSCW to refund favorable fuel recoveries including accrued interest at short-term rates. In addition, in September 2006 the PSCW determined that if the total recoveries for 2006 exceeded $36 million, interest on the amount in excess of $36 million would be paid at the rate of 11.2%, our authorized return on equity, rather than at short-term rates as originally set forth in the order. During October 2006, we refunded $28.7 million, including interest, to Wisconsin retail customers as a credit on their bill and an additional $10.3 million, including interest, in the first quarter of 2007.
In 2007, Wisconsin Electric returned to the traditional fuel cost adjustment clause in the Wisconsin retail jurisdiction whereby fuel revenues may be adjusted prospectively if fuel and purchased power costs fall outside a pre-established annual band of plus or minus 2%.
Gas Rates: Our gas operations went through a traditional rate proceeding whereby the revenues were set to recover projected costs and to provide a return on rate base. The January 2006 order provided for increases in gas revenues totaling $60.1 million annually ($21.4 million, or 2.9%, for Wisconsin Electric gas operations and $38.7 million, or 3.7%, for Wisconsin Gas gas operations). The rate increases were based on an authorized return on equity of 11.2% for the gas operations of both Wisconsin Electric and Wisconsin Gas.
Steam Rates: The steam rate proceeding was a traditional rate proceeding. The January 2006 order provided for an increase in steam rates of $7.8 million, or 31.5%, to be phased in over a two year period beginning in 2006. The rate increase was based on an authorized return on equity of 11.2%.
Limited Rate Adjustment Requests
2005 Fuel Recovery Filing: In February 2005, Wisconsin Electric filed an application with the PSCW for an increase in electric rates in the amount of $114.9 million due to the increased costs of fuel and purchased power as a result of customer growth and the increase in our reliance upon natural gas as a
Other Regulatory Matters
Coal Generation Forced Outage - 2007: In March 2007, we requested and received approval from the PSCW to defer as a regulatory asset approximately $13.2 million related to replacement power costs due to a forced outage of Unit 1 at the Pleasant Prairie Power Plant. The outage extended from February 2007 through March 2007.
Wholesale Electric Rates: In August 2006, Wisconsin Electric filed a wholesale rate case with FERC. The filing requested an annual increase in rates of approximately $16.7 million applicable to four existing wholesale electric customers. This includes a mechanism for fuel and other cost adjustments. In November 2006, FERC accepted the rate filing subject to refund with interest. Three of the existing customers' rates were effective in January 2007. The remaining largest wholesale customer's rates were effective in May 2007. FERC approved a settlement of the rate filing in September 2007.
Fuel Rules: In June 2006, the PSCW opened a docket (01-AC-224) in which it was looking into revising the current fuel rules (Chapter PSC 116). In February 2007, five Wisconsin utilities regulated by the fuel rules, including Wisconsin Electric, filed a joint proposal to modify the existing rules in this docket. The proposal recommends modifying the rules to allow for escrow accounting for fuel costs outside a plus or minus 1% annual band of fuel costs allowed in rates. It further recommends that the escrow balance be trued-up annually following the end of each calendar year. We are unable to predict if or when the PSCW will make any changes to the existing fuel rules.
See Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters in Item 7 of our 2006 Annual Report on Form 10-K for additional information regarding our utility rates and other regulatory matters .
WIND GENERATION
In June 2005, we purchased the development rights to two wind farm projects (Blue Sky Green Field) from Navitas Energy Inc. In March 2006, we filed for approval of a CPCN with the PSCW. Hearings were held at the end of November 2006. In February 2007, the PSCW issued a written notice approving the CPCN. During March 2007, we entered into a final agreement with Vestas Wind Systems for the purchase of wind turbines with a combined generating capacity of 145 MW. In May 2007, we entered into an agreement with Alliant Energy EPC, LLC to construct the wind farm. In addition to the CPCN approval, we secured other required permits, including all requested Federal Aviation Administration permits, and began construction in June 2007. Equipment is expected to begin arriving at the site during the fourth quarter of 2007. We have also entered into service and warranty agreements with Vestas Wind Systems that will cover the first two years of operation. We estimate that the capital cost of the project,
NUCLEAR OPERATIONS
In September 2007, Wisconsin Electric sold Point Beach to an affiliate of FPL for approximately $924 million. Upon closing of the sale, the power purchase agreement became effective for the existing energy and capacity produced by Point Beach. See Note 4 -- Sale of Point Beach in the Notes to Consolidated Condensed Financial Statements in this report and Factors Affecting Results, Liquidity and Capital Resources -- Nuclear Operations in Item 7 of our 2006 Annual Report on Form 10-K for additional information regarding the sale of Point Beach.
ELECTRIC TRANSMISSION
MISO:
In connection with its status as a FERC approved Regional Transmission Organization, MISO implemented a bid-based energy market, the MISO Midwest Market, which commenced operations on April 1, 2005. In April 2006, FERC issued an order determining that MISO had not applied its energy markets tariff correctly in the assessment of RSG charges. FERC ordered MISO to resettle all affected transactions retroactive to April 1, 2005. In October 2006 and March 2007, we received additional rulings from FERC on these issues. FERC's rulings have been challenged by MISO and numerous other market participants. MISO commenced with the resettlement of the market in accordance with the orders in July 2007. Completion is anticipated in January 2008. Based on the current resettlement results, we are estimating net costs to increase by $9.0 million for the resettlement period. Several entities have filed official complaints with FERC on the assessment of these charges. We filed in support of these complaints. These challenges could partially reverse the current rulings.As part of this energy market, MISO developed a market-based platform for valuing transmission congestion and losses premised upon the LMP system that has been implemented in certain northeastern and mid-Atlantic states. The LMP system includes the ability to mitigate or eliminate congestion costs through the use of FTRs. FTRs are allocated to market participants by MISO. A new allocation of FTRs was completed in April 2007 for the period June 1, 2007 through May 31, 2008. We were granted substantially all of the FTRs that we were permitted to request during the allocation process.
MISO is in the process of developing a market for two ancillary services, regulation reserves and contingency reserves. In February 2007, MISO filed tariff revisions to include ancillary services. In June 2007, FERC rejected this tariff filing. In September 2007, MISO filed a revised tariff, and it is currently under FERC review. The MISO ancillary services market is proposed to begin in 2008. We currently self-provide both regulation reserves and contingency reserves. In the MISO ancillary services market, we expect that we will buy/sell regulation and contingency reserves from/to the market. We expect the MISO ancillary services market to reduce overall ancillary services costs in the MISO footprint. We anticipate achieving a net reduction in fuel costs but are unable to determine the amount of savings we will realize at this time. The MISO ancillary services market is also expected to enable MISO to assume significant balancing area responsibilities such as frequency control and disturbance control .
See Factors Affecting Results, Liquidity and Capital Resources -- Industry Restructuring and Competition -- Electric Transmission and Energy Markets in Item 7 of our 2006 Annual Report on Form 10-K for additional information regarding MISO.
ENVIRONMENTAL MATTERS
Clean Water Act: Section 316(b) of the Clean Water Act requires that the location, design, construction and capacity of cooling water intake structures reflect the BTA for minimizing adverse environmental impact. This law dates back to 1972; however, prior to September 2004, there were no federal rules that defined precisely how states and EPA regions determined that an existing intake met BTA requirements. The Phase II rule established, for the first time, national performance standards and compliance alternatives for existing facilities that are designed to minimize the potential adverse environmental impacts to aquatic organisms associated with water withdrawals from cooling water intakes. Costs associated with implementation of the Phase II rule for Wisconsin Electric's Oak Creek Power Plant, We Power's Oak Creek expansion and PWGS were included in project costs.
In January 2007, the Federal Court of Appeals for the Second Circuit issued a decision concerning the Phase II rule for existing facilities (Riverkeeper, Inc. v. EPA, 475 F.3d 83 (2d Cir. 2007)). The Second Circuit found certain portions of the rule impermissible and remanded several parts of the Phase II rule to the EPA for further consideration or potential additional rulemaking. Consistent with its announcement in March, in July 2007, the EPA formally suspended the Phase II rule in its entirety and directed states to use their "best professional judgment" in evaluating intake systems. We will work with the relevant state agencies as permits for our facilities come due for renewal to determine what, if any, actions need to be taken. Until the EPA completes its reconsideration and rulemaking, we cannot predict what impact these changes to the federal rules may have on our facilities. For additional information on this matter related to the Oak Creek expansion, see Factors Affecting Results, Liquidity and Capital Resources -- Power the Future -- Oak Creek Expansion in this report.
Greenhouse Gases: We continue to take voluntary measures to reduce our emissions of greenhouse gases. We also continue to analyze the state and federal legislative proposals for greenhouse gas regulation, including mandatory restrictions on CO 2 ; however, we are unable at this time to definitively determine the impact of such future regulations on our operations or rates. In addition, we continue to support flexible, market-based strategies to curb greenhouse gas emissions. Our emissions in future years will continue to be influenced by several actions completed, planned or underway as part of the PTF strategy.
National Ambient Air Quality Standards:
8-hour Ozone Standard: In June 2007, the EPA announced its proposal to further lower the 8-hour standard. The proposal is undergoing public comment. Until this proposal becomes a final rule, we are unable to predict the impact on the operation of our existing coal-fired generation facilities or our new PTF generating units.
PM
2.5
Standard:
In December 2006, a more restrictive federal standard became effective, which may place some counties in Southeastern Wisconsin into non-attainment status. This standard is currently being litigated. Until such time as the states develop rules and submit State
Clean Air Visibility Rule: The EPA issued the CAVR in June 2005 to address regional haze, or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines BART requirements for electric generating units and how BART will be addressed in the 28 states subject to EPA's CAIR. Under CAVR, states are required to identify certain industrial facilities and power plants that affect visibility in the nation's 156 Class I protected areas. States are then required to determine the types of emission controls that those facilities must use to control their emissions. The pollutants from power plants that reduce visibility include particulate matter or compounds that contribute to fine particulate formation, NO x , SO 2 and ammonia. States must submit plans to implement CAVR to the EPA by December 2007. The reductions associated with the state plans are scheduled to begin to take effect in 2014, with full implementation before 2018. Wisconsin has issued draft rules which cover only one aspect of the regulations. Michigan has not yet issued a draft rule. Until the rules are final, we are unable to predict the impact on our system.
See Factors Affecting Results, Liquidity and Capital Resources -- Environmental Matters in Item 7 of our 2006 Annual Report on Form 10-K for additional information regarding environmental matters affecting our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning market risk exposures at Wisconsin Energy Corporation, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Results, Liquidity and Capital Resources -- Market Risks and Other Significant Risks, in Part II of our 2006 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures:
Internal Control Over Financial Reporting: There has not been any change in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II -- OTHER INFORMATION
The following should be read in conjunction with Item 3. Legal Proceedings in Part I of our 2006 Annual Report on Form 10-K and Item 1. Legal Proceedings in Part II of our Quarterly Report on Form 10-Q for the periods ended March 31 and June 30, 2007.
In addition to those legal proceedings discussed in our reports to the SEC, we are currently, and from time to time, subject to claims and suits arising in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, we believe, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a material adverse effect on our financial condition.
UTILITY RATES AND REGULATORY MATTERS
See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters in Part I of this report for information concerning rate matters in the jurisdictions where Wisconsin Electric, Wisconsin Gas and Edison Sault do business.
Power the Future: See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Factors Affecting Results, Liquidity and Capital Resources -- Power the Future in Part I of this report for information concerning our PTF strategy.
ITEM 1A. RISK FACTORS
See Item 1A. Risk Factors in our 2006 Annual Report on Form 10-K for a discussion of certain risk factors applicable to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information regarding the purchases of our equity securities made by or on behalf of us or any affiliated purchaser (as defined in Exchange Act Rule 10b-18) during the three-month period ended September 30, 2007.
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(Millions of Dollars)
July 1-
-
$ -
August 1-
464
$43.31
-
September 1-
546
$45.28
Total
1,010
$44.41
-
$ -
2007
Total Number of Shares
Purchased (a)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
July 31
-
$ -
August 31
$ -
September 30
-
$ -
|
(a) |
This table does not include shares purchased by independent agents to satisfy obligations under our employee benefit plans and stock purchase and dividend reinvestment plan. All shares reported during the quarter were surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock. |
ITEM 6. EXHIBITS
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
WISCONSIN ENERGY CORPORATION |
|
|
(Registrant) |
|
|
/s/STEPHEN P. DICKSON |
|
|
Date: November 1, 2007 |
Stephen P. Dickson, Vice President and Controller, Principal Accounting Officer and duly authorized officer |
Exhibit 10.1
WISCONSIN ENERGY CORPORATION
TERMS and CONDITIONS GOVERNING
NON-QUALIFIED STOCK OPTION AWARD
2007
All capitalized terms used in this option and not otherwise defined herein are defined in the attached Appendix or in the Plan.
The Company grants to the Employee an option to purchase shares of common stock of the Company (the "Common Stock"), the amount of which is specified in the notice of the grant, at an option price also specified in the notice. This option is not intended to qualify as an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Except as otherwise provided herein, this option shall be exercisable only prior to the Expiration Date (as defined in paragraph 4), and then only as set forth in the following schedule:
|
Years from Date of Option Grant |
% of Shares Exercisable |
|
Less than 3
|
0%
|
Notwithstanding the foregoing, this option shall become immediately exercisable upon the occurrence of any of the following events (the "Special Vesting Events"):
(i) the termination of the Employee's employment with the Company or a subsidiary by reason of Retirement, Disability or death, or
(ii) the occurrence of a Change in Control of the Company while the Employee is employed by the Company or a subsidiary.
Any unvested shares are immediately forfeited upon the Employee's cessation of employment with the Company or a subsidiary prior to the occurrence of a Special Vesting Event. However, the Committee may, in its discretion, vest options upon separation.
All rights to exercise this option shall terminate on the Expiration Date which is the earliest of the following dates:
(i) three months after the Employee's termination of employment with the Company or a subsidiary prior to the occurrence of a Special Vesting Event,
(ii) ten years from the date of grant after the Employee's termination of employment with the Company or a subsidiary on or after the occurrence of a Special Vesting Event, or
(iii) ten years from the date of grant.
This option may be exercised only by appropriate notice in writing delivered to the Corporate Secretary of the Company and accompanied by:
(i) a check payable to the order of the Company for the full purchase price of the shares purchased, or delivery of shares of Common Stock owned by the Employee and acceptable to the Committee (or an attestation of the Employee's ownership of such shares in lieu of delivery) valued at fair market value on the date of exercise, or some combination of a check and use of such shares (and shares acquired in a prior option exercise may not be used for this purpose until the shares have been held by the Employee for six months), and
(ii) such other documents or representations (and satisfaction of any applicable tax withholding obligations) as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of the option .
This option is not transferable by the Employee otherwise than by will or the laws of descent and distribution, except for transfers to family members and family partnerships. This option is exercisable during the Employee's lifetime only by the Employee.
If the Employee dies after termination of employment without any Special Vesting Event having occurred but during the option period and before the Expiration Date specified in paragraph 4 hereof, this option may be exercised, to the extent otherwise vested, in the manner described in paragraph 5 hereof, by the Employee's "Designated Beneficiary" (defined below) or if none or if the Designated Beneficiary does not survive the Employee, by the Employee's estate or the person to whom the option passes by will or the laws of descent and distribution, but only within a period of:
(a) two years after the Employee's death, or
(b) ten years from the date of grant, whichever period is shorter.
To the extent that this option may be exercisable after the death of the Employee (whether before or after termination of employment), this option may be exercised by the "Designated Beneficiary" of the Employee. The "Designated Beneficiary" shall be the beneficiary or beneficiaries designated by the Employee in a writing filed with the Committee in such form and at such time as the Committee may require. In the absence of a living Designated Beneficiary, any rights or benefits that would have been exercisable by or distributable to the Employee shall be exercised by or distributed to the legal representative of Employee's estate or the person to whom the option passes by will or by the laws of descent and distribution. If a Designated Beneficiary who has survived the Employee dies before exercise of all rights option or before complete distribution of benefits under this option, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
If at any time during the option period the Company shall be advised by its counsel that shares deliverable upon exercise of the option are required to be registered under the Securities Act of 1933 ("Act") or any state securities laws, or that delivery of the shares must be accompanied or preceded by a prospectus meeting the requirements of that Act or such state securities laws, the Company will use its best efforts to effect the registration or provide the prospectus not later than a reasonable time following each exercise of this option, but delivery of shares by the Company may be deferred until the registration is effected or the prospectus is available. The Employee shall have no interest in shares covered by this option until certificates for the shares are issued, or in lieu of certificates, shares are credited to the Employee's account in the book-entry form.
If the Company shall at any time change the number of shares of its Common Stock without new consideration to the Company (such as by stock dividend, stock split or similar transaction), the total number of shares then remaining subject to purchase hereunder shall be changed in proportion to the change in issued shares and the option price per share shall be adjusted so that the total consideration payable to the Company upon the purchase of all shares not theretofore purchased shall not be changed. If during the term of this option, the Common Stock of the Company shall be changed into another kind of stock or into securities of another corporation, cash, evidence of indebtedness, other property or any combination thereof (the "Acquisition Consideration"), whether as a result of reorganization, sale, merger, consolidation, or other similar transaction, the Committee shall cause adequate provision to be made whereby the Employee shall thereafter be entitled to receive upon the due exercise of this option the Acquisition Consideration the Employee would have been entitled to receive for Common Stock acquired through exercise of this option immediately prior to the effective date of such transaction.
Employee may satisfy any tax withholding obligations arising with respect to the exercise of this option in whole or in part by tendering a check to the Company for any required amount, by election to have a portion of the shares that would otherwise be issued withheld to defray all or a portion of any applicable taxes, or by election to have the Company or its subsidiaries withhold the required amounts from other compensation payable to the Employee.
The income attributable to the exercise of this option shall not be includable as compensation or earnings for purposes of any other benefit plan or program offered by the Company or its subsidiaries.
Notwithstanding anything in this option, the terms of this option shall be subject to the terms of the Plan, a copy of which may be obtained by the Employee from the Secretary of the Company, and this option is subject to all interpretations, amendments, rules and regulations established by the Committee from time to time pursuant to the Plan.
APPENDIX
This is an appendix to the Wisconsin Energy Corporation Terms and Conditions Governing an award of Non-Qualified Stock Options.
As used in the Terms & Conditions, the terminology set forth below shall have the following meanings:
(a) "Cause" means:
(i) the willful and continued failure of the Employee to substantially perform the Employee's duties (other than a failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Employee by the Board of Directors of the Company, the Compensation Committee or an elected officer of the Company which specifically identifies the manner in which the Board, the Committee or the elected officer believes that the Employee has not substantially performed the Employee's duties, or
(ii) the willful engaging by the Employee in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. However no act, or failure to act, on the Employee's part shall be considered "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that the Employee's action or omission was in the best interest of the Company.
(b) "Disability" means separation from the service of the Company or a subsidiary because of such illness or injury as renders the Employee unable to perform the material duties of the Employee's job.
(c) "Retirement" means separation from the Service of the Company or a subsidiary either at or after attainment of age 55 and completion of at least ten years of service or at or after age 60.
Exhibit 10.2
Wisconsin Energy Corporation
Performance Unit Plan
(a) designate the employees to whom Performance Units shall be granted;
(b) determine the number of Performance Units to be granted to each employee;
(c) impose such limitations, restrictions and conditions upon any such Performance Units as the Committee shall deem appropriate;
(d) waive in whole or in part any limitations, restrictions or conditions imposed upon any such Performance Units as the Committee shall deem appropriate; and
(e) interpret the provisions of the Plan.
All decisions of the Committee shall be final and binding upon all parties including the Company, its stockholders and Employees.
(a) Performance Unit Defined. A Performance Unit is a right to receive a cash payment from the Company that is based upon the value of shares of Company Stock and is contingent on the Company's Total Shareholder Return during a three-year performance period. The Committee may establish the three-year performance periods. The Performance Units granted under this Plan will be reflected in a book account maintained by the Company for each Employee until they have become vested or have been forfeited.
(b) Regular Vesting Of Performance Units. Except as otherwise provided in paragraph (c) below, Performance Units shall be vested based upon the Company's rank in Total Shareholder Return over the three-year performance period, relative to selected benchmark electric utilities with similar long- term strategies. The regular vesting schedule for the Performance Units is as set forth in the following schedule:
Percentile Rank
Vesting %
<25
th
Percentile
25
th
Percentile
Target (50th Percentile)
75
th
Percentile
90
th
Percentile or above
0%
25%
100%
125%
175%
The calculation of the Employee's vesting percentage shall be subject to the following rules:
(i) The Committee shall select the benchmark electric utilities at the beginning of the three-year performance period.
(ii) The Committee shall make appropriate changes to the percentile rank calculations to reflect corporate transactions affecting the benchmark electric utilities (e.g., corporate mergers). The Committee's determination regarding such changes shall be binding upon the Company and Employees.
(iii) In the event that the Company's percentile rank is between the benchmarks identified in the left hand column, the vesting percentage shall be determined by interpolating the appropriate vesting percentage. For example, if the Company ranks 12th best of 30 benchmark electric utilities (or 60th percentile), the vesting percentage would be 110%, and if the Company ranks 6th best of the 30 benchmark electric utilities (or 80th percentile), the vesting percentage would be 141.66%.
Except as provided in paragraph (c) below, any unvested Performance Units are immediately forfeited upon the Employee's cessation of employment with the Company or a subsidiary prior to the completion of the three-year performance period.
(c) Special Vesting Of Performance Units . The Performance Units shall become immediately vested at the Target 100% rate upon the occurrence of any of the following events (the "Special Vesting Events"):
(i) the termination of the Employee's employment with the Company or a subsidiary by reason of Disability or death, or
(ii) the occurrence of a Change in Control of the Company while the Employee is employed by the Company or a subsidiary.
Further, a prorated number of the Performance Units shall become vested upon the termination of the Employee's employment with the Company or a subsidiary by reason of Retirement prior to the end of the three-year performance period. The number of Performance Units becoming vested shall be determined by multiplying the number of Performance Units at the Target 100% rate by a fraction, with the numerator of the fraction being the number of completed calendar months between Employee's Retirement date and the beginning of the performance period and the denominator being thirty-six (36). Therefore, if Employee retires on September 15 of the second year in the three-year performance period, the number of Performance Units becoming vested as a result of Employee's Retirement shall be equal to the number of Performance Units at the Target 100% rate times 20/36.
(d) Cash Dividend Adjustment. Whenever the Company declares a cash dividend on Company Stock, an Employee who is employed on the dividend declaration date shall be entitled to receive a cash amount determined by multiplying (a) the number of Performance Units at the Target 100% rate on the dividend declaration date, times (b) the amount of the cash dividend paid by the Company on a share of Company Stock. The deemed dividend equivalent shall be paid to the Employee within a reasonable period of time after the dividends are paid to Company stockholders.
(e) Settlement Of Performance Units . As soon as practicable after the Performance Units become vested pursuant to paragraph (b) or (c) above, the Company shall pay to the Employee an amount in cash determined by multiplying (i) the number of Performance Units which have become vested, by (ii) the Fair Market Value of the Company Stock. In no event shall payment be made later than March 15 of the taxable year following the taxable year in which such Performance Units vest pursuant to paragraph (b) or (c) above.
5. Shareholder Rights; Voting. An Employee shall not, by reason of any Performance Units granted hereunder, have any rights of a shareholder of the Company and shall have no voting rights with respect to any Performance Units.
6. Non-transferability. Performance Units are not transferable otherwise than by will or the laws of descent and distribution. If an Employee dies prior to the payment, any amount payable under the Plan shall be paid to the Employee's "Designated Beneficiary." The "Designated Beneficiary" shall be the beneficiary or beneficiaries designated by the Employee in a writing filed with the Committee in such form and at such time as the Committee may require. In the absence of a living Designated Beneficiary, any rights or benefits that would have been exercisable by or distributable to the Employee shall be exercised by or distributed to the legal representative of Employee's estate or the person to whom the benefit passes by will or by the laws of descent and distribution.
7. Adjustments. Notwithstanding any other provision herein, in the event of any merger, reorganization, consolidation, recapitalization, liquidation, stock dividend, split-up, share combination, or other change in the corporate structure of the Company affecting the Company Stock, such adjustment shall be made in the number of Performance Units granted to Employees as may be determined by the Committee, in its sole discretion, to be appropriate and equitable to prevent dilution or enlargement of rights.
8. Definitions . For Plan purposes, except where the context clearly indicates otherwise, the following terms shall have the meanings set forth below:
(a) " Beneficial Owner " shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
(b) " Board " shall mean the Board of Directors of the Company
(c) " Change in Control " shall be deemed to have occurred if the event set forth in any one of the following subparagraphs shall have occurred:
(i) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (iii) below; or
(ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation immediately following which the directors of the Company immediately prior to such merger or consolidation continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 20% or more of the combined voting power of the Company's then outstanding securities; or
(iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement (or series of related agreements) for the sale or disposition by the Company of all or substantially all of the Company's assets, disregarding any sale or disposition to a company at least a majority of the directors of which were directors of the Company immediately prior to such sale or disposition; or
(v) the Committee determines in its sole and absolute discretion that there has been a Change in Control of the Company.
(d) " Committee " means the Compensation Committee of the Company's Board.
(e) " Company " means Wisconsin Energy Corporation, or any successor thereto.
(f) " Company Stock " shall mean the common stock of the Company, and such other stock and securities as may be substituted therefore.
(g) " Disability " means separation from the service of the Company or a subsidiary because of such illness or injury as renders the Employee unable to perform the material duties of the Employee's job.
(h) " Employee " shall mean an employee who has been selected to participate in the Plan by the Committee.
(i) " Exchange Act " means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto.
(j) "Fair Market Value" means:
(i) for purposes of determining the amount payable pursuant to paragraph (b), the closing price for a share of Company Stock on the last day in the performance period on which the New York Stock Exchange (or such other exchange or over the counter on which Company Stock is listed) is open for active trading; and
(ii) for purposes of determining the amount payable pursuant to paragraph (c), the closing price for a share of Company Stock on the date the Performance Units become vested pursuant to such paragraph. If the New York Stock Exchange (or such other exchange or over the counter on which Company Stock is listed) is not open for active trading on such date, then the nearest date before such date on which the New York Stock Exchange (or such other exchange or over the counter on which Company Stock is listed) is open shall be used.
(k) " Person " shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company.
(l) " Plan " means the Wisconsin Energy Corporation Performance Unit Plan.
(m) " Retirement " means separation from the service of the Company or a subsidiary at or after age 60.
(n) " Total Shareholder Return " means: the calculation of total return (stock price appreciation plus reinvested dividends) for a peer electric utility based upon an initial investment of $100 and subsequent $100 investments at the end of each quarter during the three-year performance period.
9. Tax Withholding . The Company shall have the right to deduct from any payment made under the Plan the amount of any federal, state or local taxes of any kind required by law to be withheld with respect to the grant, vesting, payment or settlement of an award under this Plan, or to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes.
10. Governing Law . The law of the State of Wisconsin, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan.
11. Plan Amendment and Termination . The Committee may, in its sole discretion, amend, suspend or terminate the Plan at any time, with or without advance notice to Employees, provided that no amendment, modification or termination of the Plan may adversely affect in a material manner any right of any Employee with respect to any Performance Units theretofore granted without such Employee's written consent.
Exhibit 31.1
Certification Pursuant to
Rule 13a-14(a) or 15d-14(a),
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Gale E. Klappa, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wisconsin Energy Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 1, 2007
/s/Gale E. Klappa
Gale E. Klappa
Chief Executive Officer
Exhibit 31.2
Certification Pursuant to
Rule 13a-14(a) or 15d-14(a),
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Allen L. Leverett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wisconsin Energy Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 1, 2007
/s/ALLEN L. LEVERETT
Allen L. Leverett
Chief Financial Officer
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Wisconsin Energy Corporation (the "Company") on Form 10-Q for the period ended September 30, 2007, as filed with the Securities and Exchange Commission on November 1, 2007 (the "Report"), I, Gale E. Klappa, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/GALE E. KLAPPA
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Wisconsin Energy Corporation (the "Company") on Form 10-Q for the period ended September 30, 2007, as filed with the Securities and Exchange Commission on November 1, 2007 (the "Report"), I, Allen L. Leverett, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Allen L. Leverett