10-Q 1 wec0331201210q.htm WEC MARCH 31, 2012 FORM 10-Q WEC 03.31.2012 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

Commission
Registrant; State of Incorporation
IRS Employer
File Number
Address; and Telephone Number
Identification No.
 
 
 
 
 
 
 
 
 
001-09057
WISCONSIN ENERGY CORPORATION
39-1391525
 
                   (A Wisconsin Corporation)
 
 
                   231 West Michigan Street
 
 
                   P.O. Box 1331
 
 
                   Milwaukee, WI 53201
 
 
                   (414) 221-2345
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes [X]    No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer [X]  
 
Accelerated filer [  ]
 
 
Non-accelerated filer [  ] (Do not
 
Smaller reporting company [  ]
 
 
check if a smaller reporting company)
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [  ]    No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date (March 31, 2012):

Common Stock, $.01 Par Value,
230,455,017 shares outstanding.




Form 10-Q

WISCONSIN ENERGY CORPORATION
_______________________

FORM 10-Q REPORT FOR THE QUARTER ENDED MARCH 31, 2012

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




March 2012
2
Wisconsin Energy Corporation

Form 10-Q

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS
 
 
 
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
 
 
 
Primary Subsidiaries
 
 
We Power
 
W.E. Power, LLC
Wisconsin Electric
 
Wisconsin Electric Power Company
Wisconsin Gas
 
Wisconsin Gas LLC
 
 
 
Significant Assets
 
 
OC 1
 
Oak Creek expansion Unit 1
OC 2
 
Oak Creek expansion Unit 2
PWGS 1
 
Port Washington Generating Station Unit 1
PWGS 2
 
Port Washington Generating Station Unit 2
VAPP
 
Valley Power Plant
 
 
 
Other Subsidiaries and Affiliates
 
 
ATC
 
American Transmission Company LLC
ERGSS
 
Elm Road Generating Station Supercritical, LLC
 
 
 
Federal and State Regulatory Agencies
DOE
 
United States Department of Energy
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
IRS
 
Internal Revenue Service
MPSC
 
Michigan Public Service Commission
PSCW
 
Public Service Commission of Wisconsin
SEC
 
Securities and Exchange Commission
WDNR
 
Wisconsin Department of Natural Resources
 
 
 
Environmental Terms
 
 
CAA
 
Clean Air Act
CAIR
 
Clean Air Interstate Rule
CO2
 
Carbon Dioxide
CSAPR
 
Cross-State Air Pollution Rule
MACT
 
Maximum Achievable Control Technology
MATS
 
Mercury and Air Toxics Standards
NOV
 
Notice of Violation
NOx
 
Nitrogen Oxide
SO2
 
Sulfur Dioxide
 
 
 
Other Terms and Abbreviations
 
 
AQCS
 
Air Quality Control System
Compensation Committee
 
Compensation Committee of the Board of Directors
ERISA
 
Employee Retirement Income Security Act of 1974
Exchange Act
 
Securities Exchange Act of 1934, as amended
FTRs
 
Financial Transmission Rights
Junior Notes
 
Wisconsin Energy's 2007 Series A Junior Subordinated Notes due 2067 issued in May 2007


March 2012
3
Wisconsin Energy Corporation

Form 10-Q

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS
 
 
 
The abbreviations and terms set forth below are used throughout this report and have the meanings assigned to them below:
 
 
 
MISO
 
Midwest Independent Transmission System Operator, Inc.
NDAA
 
National Defense Authorization Act
OTC
 
Over-the-Counter
Plan
 
The Wisconsin Energy Corporation Retirement Account Plan
Point Beach
 
Point Beach Nuclear Power Plant
PTF
 
Power the Future
WPL
 
Wisconsin Power and Light Company, a subsidiary of Alliant Energy Corp.
 
 
 
Measurements
 
 
Btu
 
British Thermal Unit(s)
Dth
 
Dekatherm(s) (One Dth equals one million Btu)
MW
 
Megawatt(s) (One MW equals one million Watts)
MWh
 
Megawatt-hour(s)
Watt
 
A measure of power production or usage
 
 
 
Accounting Terms
 
 
AFUDC
 
Allowance for Funds Used During Construction
GAAP
 
Generally Accepted Accounting Principles
OPEB
 
Other Post-Retirement Employee Benefits




March 2012
4
Wisconsin Energy Corporation

Form 10-Q

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). These statements are based upon management's current expectations and are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, completion of construction projects, regulatory matters, on-going legal proceedings, fuel costs, sources of electric energy supply, coal and gas deliveries, remediation costs, environmental and other capital expenditures, liquidity and capital resources and other matters. In some cases, forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as "anticipates," "believes," "estimates," "expects," "forecasts," "goals," "guidance," "intends," "may," "objectives," "plans," "possible," "potential," "projects," "seeks," "should," "targets" or similar terms or variations of these terms.

Actual results may differ materially from those set forth in forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with these statements, factors that could cause our actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect our future results of operations and financial condition include, among others, the following:

Factors affecting utility operations such as catastrophic weather-related or terrorism-related damage; cyber-security threats and disruptions to our technology network; availability of electric generating facilities; unscheduled generation outages, or unplanned maintenance or repairs; unanticipated events causing scheduled generation outages to last longer than expected; unanticipated changes in fossil fuel, purchased power, coal supply, gas supply or water supply costs or availability due to higher demand, shortages, transportation problems or other developments; unanticipated changes in the cost or availability of materials needed to operate new environmental controls at our electric generating facilities or replace and/or repair our electric and gas distribution systems; nonperformance by electric energy or natural gas suppliers under existing power purchase or gas supply contracts; environmental incidents; electric transmission or gas pipeline system constraints; unanticipated organizational structure or key personnel changes; collective bargaining agreements with union employees or work stoppages; or inflation rates.

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

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

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

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

The impact of recent and future federal, state and local legislative and regulatory changes, including any changes in rate-setting policies or procedures; electric and gas industry restructuring initiatives; transmission or distribution system operation and/or administration initiatives; any required changes in facilities or operations to reduce the risks or impacts of potential terrorist activities or cybersecurity threats; required approvals for new construction, and the siting approval process for new generation and transmission facilities and new pipeline construction; changes to the Federal Power Act and related regulations and enforcement thereof by the Federal Energy Regulatory Commission (FERC) and other regulatory agencies; changes in allocation of energy assistance, including state public benefits funds; changes in environmental, tax and other laws and regulations to which we are subject; changes in the application of existing laws and regulations; and changes in the interpretation or enforcement of permit conditions by the permitting agencies.

Restrictions imposed by various financing arrangements and regulatory requirements on the ability of our subsidiaries to transfer funds to us in the form of cash dividends, loans or advances.


March 2012
5
Wisconsin Energy Corporation

Form 10-Q

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

Current and future litigation, regulatory investigations, proceedings or inquiries, including FERC matters and Internal Revenue Service (IRS) audits and other tax matters.

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

Other factors affecting our ability to access the capital markets, including general capital market conditions; our capitalization structure; market perceptions of the utility industry, us or any of our subsidiaries; and our credit ratings.

The investment performance of our pension and other post-retirement benefit trusts.

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

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

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

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

Unanticipated technological developments that result in competitive disadvantages and create the potential for impairment of existing assets.

Changes in the creditworthiness of the counterparties with whom we have contractual arrangements, including participants in the energy trading markets and fuel suppliers and transporters.

The ability to obtain and retain short- and long-term contracts with wholesale customers.

The cyclical nature of property values that could affect our real estate investments.

Changes to the legislative or regulatory restrictions or caps on non-utility acquisitions, investments or projects, including the State of Wisconsin's public utility holding company law.

Foreign governmental, economic, political and currency risks.

Other business or investment considerations that may be disclosed from time to time in our Securities and Exchange Commission (SEC) filings or in other publicly disseminated written documents, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011.

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



March 2012
6
Wisconsin Energy Corporation

Form 10-Q

INTRODUCTION

Wisconsin Energy Corporation is a diversified holding company which conducts its operations primarily in two operating segments: a utility energy segment and a non-utility energy segment. Unless qualified by their context when used in this document, the terms Wisconsin Energy, the Company, our, us or we refer to the holding company and all of its subsidiaries. Our primary subsidiaries are Wisconsin Electric Power Company (Wisconsin Electric), Wisconsin Gas LLC (Wisconsin Gas) and W.E. Power, LLC (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 metropolitan Milwaukee, Wisconsin; and Wisconsin Gas, which serves gas customers in Wisconsin. Wisconsin Electric and Wisconsin Gas operate under the trade name of "We Energies."

Non-Utility Energy Segment:   Our non-utility energy segment consists primarily of We Power. We Power was formed in 2001 to design, construct, own and lease to Wisconsin Electric the new generating capacity included in our PTF strategy. See Item 1. Business and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2011 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 2011 Annual Report on Form 10-K, including the financial statements and notes therein.




March 2012
7
Wisconsin Energy Corporation

Form 10-Q

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENTS
(Unaudited)
 
 
 
 
 
Three Months Ended March 31
 
2012

2011
 
(Millions of Dollars, Except Per Share Amounts)
 
 
 
 
Operating Revenues
$
1,191.2

 
$
1,328.7

 
 
 
 
Operating Expenses
 
 
 
Fuel and purchased power
253.8

 
267.6

Cost of gas sold
237.5

 
342.4

Other operation and maintenance
286.3

 
313.5

Depreciation and amortization
87.6

 
81.3

Property and revenue taxes
30.3

 
28.3

Total Operating Expenses
895.5

 
1,033.1

 
 
 
 
Operating Income
295.7

 
295.6

 
 
 
 
Equity in Earnings of Transmission Affiliate
15.6

 
15.5

Other Income, net
16.0

 
12.5

Interest Expense, net
58.9

 
63.4

 
 
 
 
Income Before Income Taxes
268.4

 
260.2

 
 
 
 
Income Tax Expense
96.3

 
89.3

 
 
 
 
Net Income
$
172.1

 
$
170.9

 
 
 
 
Earnings Per Share
 
 
 
Basic
$
0.75

 
$
0.73

Diluted
$
0.74

 
$
0.72

 
 
 
 
Weighted Average Common Shares Outstanding (Millions)
 
 
 
Basic
230.5

 
233.7

Diluted
233.2

 
236.6

 
 
 
 
Dividends Per Share of Common Stock
$
0.30

 
$
0.26

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


March 2012
8
Wisconsin Energy Corporation

Form 10-Q

WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
 
 
 
March 31, 2012
 
December 31, 2011
 
(Millions of Dollars)
Assets
 
 
 
Property, Plant and Equipment
 
 
 
In service
$
13,485.5

 
$
12,977.7

Accumulated depreciation
(3,855.5
)
 
(3,797.8
)
 
9,630.0

 
9,179.9

Construction work in progress
547.3

 
921.3

Leased facilities, net
57.7

 
59.2

Net Property, Plant and Equipment
10,235.0


10,160.4

Investments
 
 
 
Equity investment in transmission affiliate
355.0


349.7

Other
38.4


43.6

Total Investments
393.4

 
393.3

Current Assets
 
 
 
Cash and cash equivalents
18.1


14.1

Restricted cash
24.7


45.5

Accounts receivable, net
386.9


349.4

Accrued revenues
190.3


252.7

Materials, supplies and inventories
311.6


382.0

Prepayments and other
348.2


382.5

Total Current Assets
1,279.8

 
1,426.2

Deferred Charges and Other Assets
 
 
 
Regulatory assets
1,286.3


1,238.7

Goodwill
441.9


441.9

Other
184.9


201.6

Total Deferred Charges and Other Assets
1,913.1

 
1,882.2

Total Assets
$
13,821.3

 
$
13,862.1

 
 
 
 
Capitalization and Liabilities
 
 
 
Capitalization
 
 
 
Common equity
$
4,051.5


$
3,963.3

Preferred stock of subsidiary
30.4


30.4

Long-term debt
4,602.8


4,614.3

Total Capitalization
8,684.7

 
8,608.0

Current Liabilities
 
 
 
Long-term debt due currently
33.8


32.6

Short-term debt
557.3


669.9

Accounts payable
239.3


325.7

Accrued payroll and vacation
78.9


105.9

Other
262.6


230.4

Total Current Liabilities
1,171.9

 
1,364.5

Deferred Credits and Other Liabilities
 
 
 
Regulatory liabilities
911.6


902.0

Deferred income taxes - long-term
1,791.2


1,696.1

Deferred revenue, net
740.9


754.5

Pension and other benefit obligations
221.0


222.7

Other
300.0


314.3

Total Deferred Credits and Other Liabilities
3,964.7

 
3,889.6

Total Capitalization and Liabilities
$
13,821.3

 
$
13,862.1

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


March 2012
9
Wisconsin Energy Corporation

Form 10-Q

WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
 
 
Three Months Ended March 31
 
2012

2011
 
(Millions of Dollars)
Operating Activities
 
 
 
Net income
$
172.1


$
170.9

Reconciliation to cash
 
 
 
Depreciation and amortization
90.6


84.2

Deferred income taxes and investment tax credits, net
67.9


71.9

Contributions to qualified benefit plans


(122.4
)
Change in - Accounts receivable and accrued revenues
11.5

 
(40.9
)
Inventories
70.4

 
94.7

Other current assets
29.8

 
33.0

Accounts payable
(82.3
)
 
(48.4
)
Accrued income taxes, net
15.5

 
39.7

Other current liabilities
15.2

 
61.6

Other, net
(50.2
)
 
46.7

Cash Provided by Operating Activities
340.5

 
391.0

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(142.3
)

(135.5
)
Investment in transmission affiliate
(2.6
)

(2.6
)
Proceeds from asset sales
2.7


38.3

Change in restricted cash
20.8


(37.2
)
Other, net
(9.0
)

(7.4
)
Cash Used in Investing Activities
(130.4
)
 
(144.4
)
 
 
 
 
Financing Activities
 
 
 
Exercise of stock options
12.9

 
13.0

Purchase of common stock
(29.2
)
 
(24.9
)
Dividends paid on common stock
(69.1
)

(60.8
)
Issuance of long-term debt

 
420.0

Retirement and repurchase of long-term debt
(8.0
)
 
(5.0
)
Change in short-term debt
(112.6
)
 
(376.4
)
Other, net
(0.1
)
 
(1.0
)
Cash Used in Financing Activities
(206.1
)
 
(35.1
)
 
 
 
 
Change in Cash and Cash Equivalents
4.0

 
211.5

 
 
 
 
Cash and Cash Equivalents at Beginning of Period
14.1


24.5

 
 
 
 
Cash and Cash Equivalents at End of Period
$
18.1

 
$
236.0

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



March 2012
10
Wisconsin Energy Corporation

Form 10-Q

WISCONSIN ENERGY CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)


1 -- GENERAL INFORMATION

Our accompanying unaudited consolidated condensed financial statements should be read in conjunction with Item 8, Financial Statements and Supplementary Data, in our 2011 Annual Report on Form 10-K. In the opinion of management, we have included all adjustments, normal and recurring in nature, necessary for a fair presentation of the results of operations, cash flows and financial position in the accompanying income statements, statements of cash flows and balance sheets. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year 2012 because of seasonal and other factors.


2 -- NEW ACCOUNTING PRONOUNCEMENTS

Presentation of Comprehensive Income:   In June 2011, the Financial Accounting Standards Board (FASB) issued guidance on the presentation of comprehensive income. This guidance eliminates the option of presenting components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance gives entities the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued an amendment to indefinitely defer one of the requirements contained in its June 2011 final standard. That requirement called for reclassification adjustments from accumulated other comprehensive income to be measured and presented by income statement line item in net income and also in other comprehensive income. This guidance, including the related deferral, is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied retrospectively. We adopted this guidance on January 1, 2012, and it did not have any material impact on us.

Fair Value Measurement:   In May 2011, the FASB issued guidance amending existing guidance for measuring fair value and for disclosing information about fair value measurements. Under the new guidance, required disclosures are expanded, particularly for fair value measurements that are categorized within Level 3 of the fair value hierarchy, for which quantitative information about the unobservable inputs, the valuation processes used by the entity, and the sensitivity of the measurement to the unobservable inputs will be required. Entities are also required to disclose the categorization, by level of the fair value hierarchy, of items that are not measured at fair value in the balance sheets but for which the fair value is required to be disclosed. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011 and must be applied prospectively. We adopted this guidance on January 1, 2012, and it did not have any material impact on us.


3 -- COMMON EQUITY

Share-Based Compensation Expense:   For additional information on share-based compensation, including stock options, restricted stock and performance units, see Note I -- Common Equity in our 2011 Annual Report on Form 10-K. We utilize the straight-line attribution method for recognizing share-based compensation expense. Accordingly, for employee awards, equity classified share-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the requisite service period. There were no modifications to outstanding stock options during the period. Shares purchased on the open market by our independent agents are currently used to satisfy share-based awards.



March 2012
11
Wisconsin Energy Corporation

Form 10-Q

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 March 31
 
2012
 
2011
 
(Millions of Dollars)
 
 
 
 
Performance units
$
11.8

 
$
1.0

Stock options
0.7

 
0.6

Restricted stock
0.8

 
0.5

Share-based compensation expense
$
13.3

 
$
2.1

 
 
 
 
Related Tax Benefit
$
5.3

 
$
0.8


Stock Option Activity:   During the first three months of 2012, the Compensation Committee granted 938,770 non-qualified stock options that had an estimated fair value of $3.34 per share. During the first three months of 2011, the Compensation Committee granted 458,180 non-qualified stock options that had an estimated fair value of $3.17 per share. The following assumptions were used to value the options using a binomial option pricing model:

 
2012
 
2011
 
 
 
 
Risk-free interest rate
0.1% - 2.0%

 
0.2% - 3.4%

Dividend yield
3.9
%
 
3.9
%
Expected volatility
19.0
%
 
19.0
%
Expected forfeiture rate
2.0
%
 
2.0
%
Expected life (years)
5.9

 
5.5


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 for the three months ended March 31, 2012:

 
 
 
 
 
 
Weighted-
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
Weighted-
 
Remaining
 
Aggregate
 
 
Number of
 
Average
 
Contractual Life
 
Intrinsic Value
Stock Options
 
Options
 
Exercise Price
 
(Years)
 
(Millions)
Outstanding as of January 1, 2012
 
10,638,750

 
$
21.65

 
 
 
 
Granted
 
938,770

 
$
34.88

 
 
 
 
Exercised
 
(718,669
)
 
$
18.01

 
 
 
 
Forfeited
 
(7,720
)
 
$
26.94

 
 
 
 
Outstanding as of March 31, 2012
 
10,851,131

 
$
23.03

 
5.7

 
$
131.8

 
 
 
 
 
 
 
 
 
Exercisable as of March 31, 2012
 
9,118,361

 
$
21.52

 
5.0

 
$
124.5


The intrinsic value of options exercised was $12.0 million and $9.1 million for the three months ended March 31, 2012 and 2011, respectively. Cash received from options exercised was $12.9 million and $13.0 million for the three months ended March 31, 2012 and 2011, respectively. The actual tax benefit realized for the tax deductions from option exercises for the same periods was zero and approximately $3.6 million, respectively.

All outstanding stock options to purchase shares of common stock were included in the computation of diluted earnings per share during the first quarter of 2012.



March 2012
12
Wisconsin Energy Corporation

Form 10-Q

The following table summarizes information about stock options outstanding as of March 31, 2012:

 
 
Options Outstanding
 
Options Exercisable
 
 
 
 
Weighted-Average
 
 
 
Weighted-Average
 
 
 
 
 
 
Remaining
 
 
 
 
 
Remaining
 
 
Number of
 
Exercise
 
Contractual
 
Number of
 
Exercise
 
Contractual
Range of Exercise Prices
 
Options
 
Price
 
Life (Years)
 
Options
 
Price
 
Life (Years)
$12.71 to $19.74
 
2,750,199

 
$
17.81

 
2.9

 
2,750,199

 
$
17.81

 
2.9

$21.11 to $24.92
 
6,713,942

 
$
23.09

 
6.0

 
6,257,402

 
$
22.96

 
5.9

$29.35 to $34.88
 
1,386,990

 
$
33.09

 
9.4

 
110,760

 
$
32.59

 
9.3

 
 
10,851,131

 
$
23.03

 
5.7

 
9,118,361

 
$
21.52

 
5.0


The following table summarizes information about our non-vested options during the three months ended March 31, 2012:

 
 
 
 
Weighted-Average
Non-Vested Stock Options
 
Number of Options
 
Fair Value
Non-vested as of January 1, 2012
 
3,103,770

 
$
3.78

Granted
 
938,770

 
$
3.34

Vested
 
(2,302,050
)
 
$
3.96

Forfeited
 
(7,720
)
 
$
3.25

Non-vested as of March 31, 2012
 
1,732,770

 
$
3.31


As of March 31, 2012, total compensation costs related to non-vested stock options not yet recognized was approximately $3.0 million, which is expected to be recognized over the next 19 months on a weighted-average basis.

Restricted Shares:   During the first three months of 2012, the Compensation Committee granted 94,959 restricted shares to directors, officers and other key employees. These awards have a three-year vesting period, and generally, one-third of the award vests on each anniversary of the grant date. During the vesting period, restricted share recipients have voting rights and are entitled to dividends in the same manner as other shareholders.

The following restricted stock activity occurred during the three months ended March 31, 2012:

 
 
 
 
Weighted-Average
Restricted Shares
 
Number of Shares
 
Grant Date Fair Value
Outstanding as of January 1, 2012
 
192,558

 
 
Granted
 
94,959

 
$
34.46

Released
 
(72,660
)
 
$
33.09

Forfeited
 
(3,945
)
 
$
30.81

Outstanding as of March 31, 2012
 
210,912

 
 

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 $2.6 million and $2.1 million for the three months ended March 31, 2012 and 2011, respectively. The actual tax benefit realized for the tax deductions from released restricted shares was zero and $0.6 million for the three months ended March 31, 2012 and 2011, respectively.

As of March 31, 2012, total compensation cost related to restricted stock not yet recognized was approximately $4.8 million, which is expected to be recognized over the next 27 months on a weighted-average basis.

Performance Units:   In January 2012 and 2011, the Compensation Committee granted 346,570 and 435,690 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


March 2012
13
Wisconsin Energy Corporation

Form 10-Q

achievement of certain financial performance of our stock over a three-year period. Under the terms of the award, participants may earn between 0% and 175% of the base performance unit award. All grants are settled in cash. We are accruing compensation costs over the three-year period based on our estimate of the final expected value of the awards. Performance units earned as of December 31, 2011 and 2010 vested and were settled during the first quarter of 2012 and 2011, and had a total intrinsic value of $26.7 million and $12.6 million, respectively. The actual tax benefit realized for the tax deductions from the settlement of performance units was approximately $9.7 million and $4.3 million, respectively. As of March 31, 2012, total compensation cost related to performance units not yet recognized was approximately $28.6 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 non-utility subsidiary, We Power, and its utility subsidiaries. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of our 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 I -- Common Equity in our 2011 Annual Report on Form 10-K for additional information on these and other restrictions.

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

Comprehensive Income:   Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to owners.

There was no material other comprehensive income for the three months ended March 31, 2012 or 2011.

Share Repurchase Program:   In May 2011, our Board of Directors authorized a share repurchase program that allows us to repurchase up to $300 million of our common stock through the end of 2013. Through March 31, 2012, we have repurchased $100.0 million of our common stock pursuant to this program at an average cost of $30.79 per share. The share repurchase program does not obligate Wisconsin Energy to acquire any specific number of shares and may be suspended or terminated by the Board of Directors at any time. In addition, through our independent agents, we purchase shares on the open market to fulfill exercised stock options and restricted stock awards. The following table identifies the shares purchased by the company in the following periods:

 
Three Months Ended March 31
 
2012
 
2011
 
Shares
 
Cost
 
Shares
 
Cost
 
(In Millions)
Under May 2011 share repurchase program

 
$

 

 
$

To fulfill exercised stock options and restricted stock awards
0.8

 
$
28.3

 
0.8

 
$
24.2

Total
0.8

 
$
28.3

 
0.8

 
$
24.2



4 -- DIVESTITURES

Edgewater Generating Unit 5:   On March 1, 2011, we sold our 25% interest in Edgewater Generating Unit 5 to Wisconsin Power and Light Company, a subsidiary of Alliant Energy Corp. (WPL) for our net book value, including working capital, of approximately $38 million. This transaction was treated as a sale of an asset.


5 -- LONG-TERM DEBT

In January 2011, we issued a total of $420 million of long-term debt ($205 million aggregate principal amount of 4.673% Series B Senior Notes due January 19, 2031 and $215 million aggregate principal amount of 5.848% Series B Senior Notes due January 19, 2041) and used the net proceeds to repay short-term debt incurred to finance the construction of Oak Creek expansion Unit 2 (OC 2) and for other corporate purposes. The Series B Senior Notes are secured by a collateral assignment of the leases between Elm Road Generating Station


March 2012
14
Wisconsin Energy Corporation

Form 10-Q

Supercritical, LLC (ERGSS) and Wisconsin Electric related to OC 2.

On April 1, 2011, we used cash and short-term borrowings to retire $450 million of long-term debt that matured.


6 -- FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

Recurring Fair Value Measures
 
As of March 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Restricted Cash
 
$
24.7

 
$

 
$

 
$
24.7

Derivatives
 
0.9

 
12.3

 
2.2

 
15.4

Total
 
$
25.6

 
$
12.3

 
$
2.2

 
$
40.1

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
12.3

 
$
0.3

 
$

 
$
12.6

Total
 
$
12.3

 
$
0.3

 
$

 
$
12.6




March 2012
15
Wisconsin Energy Corporation

Form 10-Q

Recurring Fair Value Measures
 
As of December 31, 2011
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(Millions of Dollars)
Assets:
 
 
 
 
 
 
 
 
Restricted Cash
 
$
45.5

 
$

 
$

 
$
45.5

Derivatives
 
0.3

 
14.6

 
5.7

 
20.6

Total
 
$
45.8

 
$
14.6

 
$
5.7

 
$
66.1

Liabilities:
 
 
 
 
 
 
 
 
Derivatives
 
$
8.2

 
$
1.0

 
$

 
$
9.2

Total
 
$
8.2

 
$
1.0

 
$

 
$
9.2


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

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

 
 
2012
 
2011
 
 
(Millions of Dollars)
Balance as of January 1
 
$
5.7

 
$
5.9

Realized and unrealized gains (losses)
 

 

Purchases
 

 

Issuances
 

 

Settlements
 
(3.5
)
 
(3.8
)
Transfers in and/or out of Level 3
 

 

Balance as of March 31
 
$
2.2

 
$
2.1

 
 
 
 
 
Change in unrealized gains (losses) relating to instruments still held as of March 31
 
$

 
$


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

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

 
 
March 31, 2012
 
December 31, 2011
Financial Instruments
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
(Millions of Dollars)
Preferred stock, no redemption required
 
$
30.4

 
$
25.0

 
$
30.4

 
$
25.1

Long-term debt, including current portion
 
$
4,533.4

 
$
5,077.0

 
$
4,541.4

 
$
5,179.9



March 2012
16
Wisconsin Energy Corporation

Form 10-Q


The carrying value of net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short-term nature of these instruments. The fair value of our preferred stock is estimated based upon the quoted market value for the same or similar issues. The fair value of our long-term debt, including the current portion of long-term debt, but excluding capitalized leases and unamortized discount on debt, is estimated based upon quoted market value for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows. Based on these assessments, the above items have been classified within Level 2.


7 -- DERIVATIVE INSTRUMENTS

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

We record derivative instruments on the balance sheet as an asset or liability measured at its fair value, and changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met or we receive regulatory treatment for the derivative. For most energy related physical and financial contracts in our regulated operations that qualify as derivatives, the PSCW allows the effects of the fair market value accounting to be offset to regulatory assets and liabilities. We do not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivatives executed with the same counterparty under the same master netting arrangement. As of March 31, 2012, we recognized $27.6 million in regulatory assets and $16.3 million in regulatory liabilities related to derivatives in comparison to $29.6 million in regulatory assets and $21.7 million in regulatory liabilities as of December 31, 2011.

We record our current derivative assets on the balance sheet in prepayments and other current assets and the current portion of the liabilities in other current liabilities. We had no long-term portion of derivative assets as of March 31, 2012, and the long-term portion of our derivative liabilities of $0.3 million is recorded in other deferred credits and other liabilities as of March 31, 2012. Our Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011 include:

 
 
March 31, 2012
 
December 31, 2011
 
 
Derivative Asset
 
Derivative Liability
 
Derivative Asset
 
Derivative Liability
 
 
(Millions of Dollars)
Natural Gas
 
$
2.5

 
$
12.6

 
$
2.1

 
$
9.1

Fuel Oil
 
0.9

 

 
0.3

 
0.1

FTRs
 
2.2

 

 
5.7

 

Coal
 
9.8

 

 
12.5

 

Total
 
$
15.4

 
$
12.6

 
$
20.6

 
$
9.2


Our Consolidated Condensed Income Statements include gains (losses) on derivative instruments used in our risk management strategies under fuel and purchased power for those commodities supporting our electric operations and under cost of gas sold for the natural gas sold to our customers. Our estimated notional volumes and gains (losses) were as follows:

 
 
Three Months Ended March 31, 2012
 
Three Months Ended March 31, 2011
 
 
Volume
 
Gains (Losses)
 
Volume
 
Gains (Losses)
 
 
 
 
(Millions of Dollars)
 
 
 
(Millions of Dollars)
Natural Gas
 
20.4 million Dth
 
$
(16.2
)
 
19.4 million Dth
 
$
(10.6
)
Fuel Oil
 
1.7 million gallons
 
0.6

 
3.2 million gallons
 
0.4

FTRs
 
5,358 MW
 
0.6

 
6,352 MW
 
3.8

Total
 
 
 
$
(15.0
)
 
 
 
$
(6.4
)
 
 
 
 
 
 
 
 
 


March 2012
17
Wisconsin Energy Corporation

Form 10-Q

As of March 31, 2012 and December 31, 2011, we posted collateral of $16.1 million and $11.9 million, respectively, in our margin accounts. These amounts are recorded on the balance sheets in other current assets.


8 -- BENEFITS

The components of our net periodic pension and Other Post-Retirement Employee Benefits (OPEB) costs for the three months ended March 31 were as follows:

 
 
Pension Costs
Benefit Plan Cost Components
 
2012
 
2011
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
Service cost
 
$
5.4

 
$
4.6

Interest cost
 
16.4

 
16.7

Expected return on plan assets
 
(22.6
)
 
(20.7
)
Amortization of:
 
 
 
 
Prior service cost
 
0.6

 
0.6

Actuarial loss
 
9.9

 
8.1

Net Periodic Benefit Cost
 
$
9.7

 
$
9.3


 
 
OPEB Costs
Benefit Plan Cost Components
 
2012
 
2011
 
 
(Millions of Dollars)
Net Periodic Benefit Cost
 
 
 
 
Service cost
 
$
2.8

 
$
2.8

Interest cost
 
5.1

 
5.3

Expected return on plan assets
 
(4.8
)
 
(4.3
)
Amortization of:
 
 
 
 
Transition obligation
 
0.1

 
0.1

Prior service (credit)
 
(0.5
)
 
(0.5
)
Actuarial loss
 
1.8

 
1.5

Net Periodic Benefit Cost
 
$
4.5

 
$
4.9


During the first quarter of 2011, we contributed $122.4 million to our qualified benefit plans. Future contributions to the plans will be dependent upon many factors, including the performance of existing plan assets and long-term discount rates.

Postemployment Benefits:   Postemployment benefits provided to former or inactive employees are recognized when an event occurs. The estimated liability for such benefits was $5.2 million as of March 31, 2012 and $15.3 million as of December 31, 2011.


9 -- SEGMENT INFORMATION

Summarized financial information concerning our operating segments for the three months ended March 31, 2012 and 2011 is shown in the following table:



March 2012
18
Wisconsin Energy Corporation

Form 10-Q

 
 
Operating Segments
 
 
 
Eliminations
 
 
 
 
Energy
 
Corporate &
 
& Reconciling
 
Total
Three Months Ended
 
Utility
 
Non-Utility
 
Other (a)
 
Items
 
Consolidated
 
 
(Millions of Dollars)
March 31, 2012
 
 
 
 
 
 
 
 
 
 
Operating Revenues (b)
 
$
1,178.4

 
$
107.3

 
$
0.3

 
$
(94.8
)
 
$
1,191.2

Other Operation and Maintenance
 
$
376.4

 
$
2.1

 
$
1.3

 
$
(93.5
)
 
$
286.3

Depreciation and Amortization
 
$
70.7

 
$
16.8

 
$
0.1

 
$

 
$
87.6

Operating Income (Loss)
 
$
208.6

 
$
88.4

 
$
(1.3
)
 
$

 
$
295.7

Equity in Earnings of Unconsolidated Affiliates
 
$
15.6

 
$

 
$

 
$

 
$
15.6

Interest Expense, Net
 
$
29.2

 
$
16.8

 
$
13.1

 
$
(0.2
)
 
$
58.9

Income Tax Expense (Benefit)
 
$
74.0

 
$
28.8

 
$
(6.5
)
 
$

 
$
96.3

Net Income (Loss)
 
$
136.2

 
$
43.0

 
$
172.6

 
$
(179.7
)
 
$
172.1

Capital Expenditures
 
$
137.6

 
$
1.9

 
$
2.8

 
$

 
$
142.3

Total Assets (c)
 
$
13,429.0

 
$
2,932.6

 
$
4,771.9

 
$
(7,312.2
)
 
$
13,821.3

 
 
 
 
 
 
 
 
 
 
 
March 31, 2011
 
 
 
 
 
 
 
 
 
 
Operating Revenues (b)
 
$
1,316.5

 
$
103.2

 
$
0.2

 
$
(91.2
)
 
$
1,328.7

Other Operation and Maintenance
 
$
400.9

 
$
1.5

 
$
1.1

 
$
(90.0
)
 
$
313.5

Depreciation and Amortization
 
$
63.4

 
$
17.7

 
$
0.2

 
$

 
$
81.3

Operating Income (Loss)
 
$
213.0

 
$
84.0

 
$
(1.4
)
 
$

 
$
295.6

Equity in Earnings of Unconsolidated Affiliates
 
$
15.5

 
$

 
$
(0.1
)
 
$

 
$
15.4

Interest Expense, Net
 
$
28.1

 
$
15.9

 
$
19.5

 
$
(0.1
)
 
$
63.4

Income Tax Expense (Benefit)
 
$
71.3

 
$
27.7

 
$
(9.7
)
 
$

 
$
89.3

Net Income (Loss)
 
$
141.0

 
$
40.5

 
$
170.8

 
$
(181.4
)
 
$
170.9

Capital Expenditures
 
$
127.2

 
$
8.2

 
$
0.1

 
$

 
$
135.5

Total Assets (c)
 
$
12,632.8

 
$
2,975.9

 
$
4,913.6

 
$
(7,333.7
)
 
$
13,188.6

 
 
 
 
 
 
 
 
 
 
 
(a)
Corporate & Other includes all other non-utility activities, primarily non-utility real estate investment and development by Wispark as well as interest on corporate debt.

(b)
An elimination for intersegment revenues is included in Operating Revenues. This elimination is primarily between We Power and Wisconsin Electric.

(c)
An elimination of $2,355.9 million and $2,437.8 million is included in Total Assets as of March 31, 2012 and 2011, respectively, for all PTF-related activity between We Power and Wisconsin Electric.


10 -- VARIABLE INTEREST ENTITIES

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

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

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


March 2012
19
Wisconsin Energy Corporation

Form 10-Q

power to direct the activities that would most significantly affect the economic performance of the entity over its remaining life.

We also have a purchased power agreement for 236 MW of firm capacity from a gas-fired cogeneration facility, which we account for as a capital lease. The agreement includes no minimum energy requirements over the remaining term of approximately 10 years. We have examined the risks of the entity including operations and maintenance, dispatch, financing, fuel costs and other factors, and have determined that we are not the primary beneficiary of the entity. We do not hold an equity or debt interest in the entity and there is no residual guarantee associated with the purchased power agreement.

We have approximately $296.7 million of required payments over the remaining term of these agreements. We believe that the required lease payments under these contracts will continue to be recoverable in rates. Total capacity and lease payments under these contracts for the three months ended March 31, 2012 and 2011 were $14.7 million and $15.0 million, respectively. Our maximum exposure to loss is limited to the capacity payments under the contracts.


11 -- COMMITMENTS AND CONTINGENCIES

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

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

Manufactured Gas Plant Sites:   We have identified several sites at which Wisconsin Electric, Wisconsin Gas, or a predecessor company historically owned or operated a manufactured gas plant. These sites have been substantially remediated or are at various stages of investigation, monitoring and remediation. We have also identified other sites that may have been impacted by historical manufactured gas plant activities. Based upon on-going analysis, we estimate that the future costs for detailed site investigation and future remediation costs may range from $21 million to $65 million over the next ten years. This estimate is dependent upon several variables including, among other things, the extent of remediation, changes in technology and changes in regulation. As of March 31, 2012, we have established reserves of $37.5 million related to future remediation costs.

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

Valley Power Plant Title V Air Permit:   The WDNR renewed Valley Power Plant's (VAPP) Title V operating permit in February 2011. The term of the permit is five years. Sierra Club and Clean Wisconsin requested and were granted an administrative hearing before the WDNR on certain conditions of the permit. We filed a motion for partial summary judgment in that proceeding on March 22, 2012. If the case proceeds to hearing, it would be held in early 2013. The Sierra Club petitioned the United States Environmental Protection Agency (EPA) for additional reductions and monitoring for particulate matter, and revisions to certain applicable requirements. No timeline has been set by the EPA to respond to that petition.

We believe that the permit was properly issued and that the plant is in compliance with all applicable regulations and standards. However, if as a result of either proceeding the permit is remanded to the WDNR, the plant will continue to operate under the previous operating permit.

We filed an application with the PSCW in December 2011 for authority to replace and upgrade the Lincoln Arthur natural gas main, which would also have the capability to accommodate the increased natural gas required if VAPP were to convert from coal to natural gas. Clean Wisconsin has requested intervenor status in the PSCW process.


March 2012
20
Wisconsin Energy Corporation

Form 10-Q


We also submitted a letter to the EPA in December 2011 with four voluntary goals which include: (1) reducing annual Sulfur Dioxide (SO2) emissions from the plant to no more than 4,500 tons (a 65% decrease from 2001 emission levels); (2) installing a dry sorbent injection system that is needed to meet the utility Maximum Achievable Control Technology (MACT) rules earlier than the rules require if the installation would provide a direct economic benefit to customers and is approved by the PSCW; (3) holding an open house and tour of VAPP in 2012 to help inform the community on the plant, the unique role that it plays in the community, and to share environmental successes and future plans; and (4) converting VAPP to natural gas fuel by the 2017/2018 timeframe, provided we can demonstrate a direct economic benefit to customers and obtain authorization from the PSCW to do so.

Divested Assets:   Pursuant to the sale of the Point Beach Nuclear Power Plant (Point Beach), we have agreed to indemnification provisions customary to transactions involving the sale of nuclear assets. We also provided customary indemnifications to WPL in connection with the sale of our interest in Edgewater Generating Unit 5. We have established reserves as deemed appropriate for these indemnification provisions.

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

In November 2011, we entered into a settlement agreement with the plaintiffs for $45.0 million, and the court promptly issued an order preliminarily approving the settlement. As part of the settlement agreement, we agreed to class certification for all similarly situated plaintiffs. The resolution of this matter resulted in a cost of less than $0.04 per share for 2011 after considering insurance and reserves established in the prior year. The court approved the settlement on April 3, 2012 and issued its written order on April 20, 2012. The plaintiffs have 30 days from the date of the written order to appeal this decision.

We do not anticipate further charges as a result of the settlement, other than certain process-related costs we expect to incur to implement the settlement.

Income Taxes:   During the first quarter of 2012, the IRS issued guidance applicable to taxpayers that have taken positions within prior year tax returns relating to the conversion of capitalized assets to repair expense. As a result of this guidance, we have decreased our unrecognized tax benefits by approximately $7.4 million, exclusive of accrued interest.


12 -- SUPPLEMENTAL CASH FLOW INFORMATION

During the three months ended March 31, 2012, we paid $26.5 million in interest, net of amounts capitalized, and paid $15.3 million in income taxes, net of refunds. During the three months ended March 31, 2011, we paid $12.5 million in interest, net of amounts capitalized, and received $24.8 million in net refunds from income taxes.

As of March 31, 2012 and 2011, the amount of accounts payable related to capital expenditures was $12.6 million and $20.6 million, respectively.

During the three months ended March 31, 2012 and 2011, total amortization of deferred revenue was $13.7 million and $13.2 million, respectively.

During the three months ended March 31, 2012 and 2011, our equity in earnings from ATC was $15.6 million and $15.5 million, respectively. During the three months ended March 31, 2012 and 2011, distributions received from ATC were $12.9 million and $12.4 million, respectively.




March 2012
21
Wisconsin Energy Corporation

Form 10-Q

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


RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2012


CONSOLIDATED EARNINGS

The following table compares our operating income by business segment and our net income during the first quarter of 2012 with the first quarter of 2011, including favorable (better (B)) or unfavorable (worse (W)) variances:

 
 
Three Months Ended March 31
 
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
Utility Energy Segment
 
$
208.6

 
$
(4.4
)
 
$
213.0

Non-Utility Energy Segment
 
88.4

 
4.4

 
84.0

Corporate and Other
 
(1.3
)
 
0.1

 
(1.4
)
Total Operating Income
 
295.7

 
0.1

 
295.6

Equity in Earnings of Transmission Affiliate
 
15.6

 
0.1

 
15.5

Other Income, net
 
16.0

 
3.5

 
12.5

Interest Expense, net
 
58.9

 
4.5

 
63.4

Income Before Income Taxes
 
268.4

 
8.2

 
260.2

Income Tax Expense
 
96.3

 
(7.0
)
 
89.3

Net Income
 
$
172.1

 
$
1.2

 
$
170.9

Diluted Earnings Per Share
 
$
0.74

 
$
0.02

 
$
0.72



UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

Our utility energy segment contributed $208.6 million of operating income during the first quarter of 2012, a decrease of $4.4 million, or 2.1%, compared with the first quarter of 2011. The following table summarizes the operating income of this segment between the comparative quarters:

 
 
Three Months Ended March 31
Utility Energy Segment
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
Operating Revenues
 
 
 
 
 
 
Electric
 
$
777.3

 
$
0.7

 
$
776.6

Gas
 
388.5

 
(136.2
)
 
524.7

Other
 
12.6

 
(2.6
)
 
15.2

Total Operating Revenues
 
1,178.4

 
(138.1
)
 
1,316.5

Fuel and Purchased Power
 
255.1

 
13.7

 
268.8

Cost of Gas Sold
 
237.5

 
104.9

 
342.4

Gross Margin
 
685.8

 
(19.5
)
 
705.3

Other Operating Expenses
 
 
 
 
 
 
Other Operation and Maintenance
 
376.4

 
24.5

 
400.9

Depreciation and Amortization
 
70.7

 
(7.3
)
 
63.4

Property and Revenue Taxes
 
30.1

 
(2.1
)
 
28.0

Total Operating Expenses
 
969.8

 
133.7

 
1,103.5

Operating Income
 
$
208.6

 
$
(4.4
)
 
$
213.0




March 2012
22
Wisconsin Energy Corporation

Form 10-Q

Electric Utility Revenues and Sales

The following table compares electric utility operating revenues and MWh sales by customer class during the first quarter of 2012 with the first quarter of 2011:

 
 
Electric Revenues
 
MWh Sales
Electric Utility Operations
 
2012
 
B (W)
 
2011
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
 
(Thousands)
Customer Class
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
274.6

 
$
(8.4
)
 
$
283.0

 
1,942.9

 
(87.1
)
 
2,030.0

Small Commercial/Industrial
 
245.2

 
(1.2
)
 
246.4

 
2,151.6

 
(47.1
)
 
2,198.7

Large Commercial/Industrial
 
184.4

 
5.8

 
178.6

 
2,444.3

 
70.6

 
2,373.7

Other - Retail
 
6.0

 
(0.1
)
 
6.1

 
40.4

 
0.4

 
40.0

Total Retail
 
710.2

 
(3.9
)
 
714.1

 
6,579.2

 
(63.2
)
 
6,642.4

Wholesale - Other
 
36.7

 
0.7

 
36.0

 
332.7

 
(146.1
)
 
478.8

Resale - Utilities
 
17.0

 
(0.5
)
 
17.5

 
597.1

 
28.5

 
568.6

Other Operating Revenues
 
13.4

 
4.4

 
9.0

 

 

 

Total
 
$
777.3

 
$
0.7

 
$
776.6

 
7,509.0

 
(180.8
)
 
7,689.8

 
 
 
 
 
 
 
 
 
 
 
 
 
Weather -- Degree Days (a)
 
 
 
 
 
 
 
 
 
 
 
 
Heating (3,306 Normal)
 
 
 
 
 
 
 
2,610

 
(834
)
 
3,444

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

Our electric utility operating revenues increased by $0.7 million, or 0.1%, when compared to the first quarter of 2011. The most significant factors that caused a change in revenues were:

Unfavorable weather as compared to the prior year that decreased electric revenues by an estimated $19.3 million.
Net pricing increases totaling $8.8 million, which primarily includes rates related to our request to review 2011 fuel costs that became effective April 29, 2011. For additional information, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters.
A $4.4 million increase in other operating revenues, which includes the amortization of $6.7 million related to the DOE settlement used to offset an increase in fuel costs authorized by the PSCW. For additional information on the DOE settlement, see Factors Affecting Results, Liquidity and Capital Resources -- Nuclear Operations.

As measured by heating degree days, the first quarter of 2012 was 24.2% warmer than the same period in 2011 and 21.1% warmer than normal. The decrease in residential sales volumes in 2012 is primarily attributable to the warmer weather.

Fuel and Purchased Power

Our fuel and purchased power costs decreased by $13.7 million, or 5.1%, when compared to the first quarter of 2011. This decrease was primarily caused by a 2.4% decrease in total MWh sales as well as lower generating costs driven by a decrease in natural gas prices as compared to the first quarter of 2011.

Gas Utility Revenues, Gross Margin and Therm Deliveries

A comparison follows of gas utility operating revenues, gross margin and gas deliveries during the first quarter of 2012 with the first quarter of 2011. We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms. Between the comparative periods, total gas operating revenues decreased by $136.2 million, or 26.0%, and cost of gas sold decreased by $104.9 million, or 30.6%, due to the significantly warmer winter weather, which resulted in lower therm deliveries, and a decline in the commodity cost of natural gas.



March 2012
23
Wisconsin Energy Corporation

Form 10-Q

 
Three Months Ended March 31
 
2012
 
B (W)
 
2011
 
(Millions of Dollars)
 
 
 
 
 
 
Gas Operating Revenues
$
388.5

 
$
(136.2
)
 
$
524.7

Cost of Gas Sold
237.5

 
104.9

 
342.4

Gross Margin
$
151.0

 
$
(31.3
)
 
$
182.3


The following table compares gas utility gross margin and natural gas therm deliveries by customer class during the first quarter of 2012 with the first quarter of 2011:

 
 
Gross Margin
 
Therm Deliveries
Gas Utility Operations
 
2012
 
B (W)
 
2011
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
 
(Millions)
Customer Class
 
 
 
 
 
 
 
 
 
 
 
 
Residential
 
$
97.9

 
$
(20.7
)
 
$
118.6

 
298.2

 
(92.8
)
 
391.0

Commercial/Industrial
 
35.8

 
(9.4
)
 
45.2

 
170.6

 
(50.8
)
 
221.4

Interruptible
 
0.6

 

 
0.6

 
5.0

 
(1.4
)
 
6.4

Total Retail
 
134.3

 
(30.1
)
 
164.4

 
473.8

 
(145.0
)
 
618.8

Transported Gas
 
14.7

 
(0.9
)
 
15.6

 
324.1

 
60.4

 
263.7

Other
 
2.0

 
(0.3
)
 
2.3

 

 

 

Total
 
$
151.0

 
$
(31.3
)
 
$
182.3

 
797.9

 
(84.6
)
 
882.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Weather -- Degree Days (a)
 
 
 
 
 
 
 
 
 
 
 
 
Heating (3,306 Normal)
 
 
 
 
 
 
 
2,610

 
(834
)
 
3,444

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

Our gas margin decreased by $31.3 million, or approximately 17.2%, when compared to the first quarter of 2011 as a result of record warm winter weather. The first quarter of 2012 was the warmest winter in 122 years. As measured by heating degree days, the first quarter of 2012 was 24.2% warmer than the same period in 2011 and 21.1% warmer than normal.

Other Operation and Maintenance Expense

Our other operation and maintenance expense decreased by $24.5 million, or approximately 6.1%, when compared to the first quarter of 2011. This decrease, which we expect to continue through the remainder of the year, is primarily due to the one year suspension of $148 million of amortization expense on certain regulatory assets as authorized under our 2012 Wisconsin Rate Case. For additional information on the 2012 rate case, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters.

Depreciation and Amortization Expense

Our depreciation and amortization expense increased by $7.3 million, or approximately 11.5%, when compared to the first quarter of 2011 primarily because of an overall increase in utility plant in service. The Glacier Hills Wind Park went in service in December 2011. We expect depreciation expense to increase in 2012 related to the in-service events of the Oak Creek Air Quality Control System (AQCS) project. For additional information, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters -- Oak Creek Air Quality Control System.



March 2012
24
Wisconsin Energy Corporation

Form 10-Q

NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

Our non-utility energy segment consists primarily of our PTF units (Port Washington Generating Station Unit 1 (PWGS 1), Port Washington Generating Station Unit 2 (PWGS 2), Oak Creek expansion Unit 1 (OC 1) and OC 2). PWGS 1 and PWGS 2 were placed in service in July 2005 and May 2008, respectively. The common facilities associated with the Oak Creek expansion include the water intake system, which was placed in service in January 2009, the coal handling system, which was placed in service in November 2007, and other smaller assets. OC 1 and OC 2 were placed in service in February 2010 and January 2011, respectively.

The table below reflects a full quarter's earnings in 2012 and 2011 for PWGS 1, PWGS 2, OC 1 and the common facilities for the Oak Creek expansion. It also reflects a full quarter's earnings in 2012 and approximately two and a half months of earnings in 2011 for OC 2. This segment reflects the lease revenues on the new units as well as the depreciation expense. Operating and maintenance costs associated with the plants are the responsibility of Wisconsin Electric and are recorded in the utility segment.

 
Three Months Ended March 31, 2012
 
Port Washington
 
Oak Creek Expansion
 
All Other
 
Total
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
Operating Revenues
$
26.5

 
$
80.3

 
$
0.5

 
$
107.3

Operation and Maintenance Expense
0.1

 
0.5

 
1.5

 
2.1

Depreciation Expense
4.9

 
11.7

 
0.2

 
16.8

Operating Income (Loss)
$
21.5

 
$
68.1

 
$
(1.2
)
 
$
88.4


 
Three Months Ended March 31, 2011
 
Port Washington
 
Oak Creek Expansion
 
All Other
 
Total
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
Operating Revenues
$
26.0

 
$
77.2

 
$

 
$
103.2

Operation and Maintenance Expense
0.1

 
0.6

 
0.8

 
1.5

Depreciation Expense
4.9

 
12.3

 
0.5

 
17.7

Operating Income (Loss)
$
21.0

 
$
64.3

 
$
(1.3
)
 
$
84.0



CONSOLIDATED OTHER INCOME, NET

 
 
Three Months Ended March 31
 
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
AFUDC - Equity
 
$
14.8

 
$
2.7

 
$
12.1

Other, net
 
1.2

 
0.8

 
0.4

Other Income, net
 
$
16.0

 
$
3.5

 
$
12.5


Other income, net increased by $3.5 million, or approximately 28.0%, when compared to the first quarter of 2011. The increase in AFUDC - Equity is primarily related to the construction of the Oak Creek AQCS project and the Rothschild biomass facility. We expect AFUDC-Equity to decrease after the Oak Creek AQCS project goes in service. For additional information, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters -- Oak Creek Air Quality Control System.



March 2012
25
Wisconsin Energy Corporation

Form 10-Q

CONSOLIDATED INTEREST EXPENSE, NET

 
 
Three Months Ended March 31
 
 
2012
 
B (W)
 
2011
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
Gross Interest Costs
 
$
65.3

 
$
4.6

 
$
69.9

Less: Capitalized Interest
 
6.4