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WEC > SEC Filings for WEC > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for WISCONSIN ENERGY CORP

Form 10-K for WISCONSIN ENERGY CORP


27-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

CORPORATE DEVELOPMENTS

INTRODUCTION

Wisconsin Energy Corporation is a diversified holding company with subsidiaries primarily in 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 utility energy segment primarily consists of Wisconsin Electric and Wisconsin Gas, both doing business under the trade name of "We Energies." We generate and distribute electricity in Wisconsin and the Upper Peninsula of Michigan and we distribute natural gas in Wisconsin. Our non-utility energy segment primarily consists of We Power, which primarily owns and leases to Wisconsin Electric electric power generating facilities constructed as part of our PTF strategy.

CORPORATE STRATEGY

Business Opportunities

We have three primary investment opportunities and earnings streams: our regulated utility business; our investment in ATC; and our generation plants within our non-utility energy segment.

Our regulated utility business primarily consists of electric generation assets and the electric and gas distribution assets that serve our electric and gas customers under the trade name of We Energies. We Energies operates under a traditional rate regulated cost of service environment. During 2013, our regulated utility earned $719.4 million of operating income. Over the next five years, we expect to invest between $3.1 billion and $3.3 billion in this business.

We have a 26.2% ownership interest in ATC, a MISO member company regulated by FERC. Our investment in ATC totaled $402.7 million as of December 31, 2013, and our 2013 pre-tax earnings from ATC totaled $68.5 million. Over the next five years, in addition to any potential investment through our undistributed earnings in ATC, we expect to make capital contributions of approximately $130 million in ATC as it continues to invest in transmission projects.

Our non-utility energy segment consists primarily of the four generation plants constructed as part of our PTF strategy. All four plants have been placed in service and are being leased to Wisconsin Electric under long-term leases that run for 25 years (PWGS 1 and PWGS 2) and 30 years (OC 1 and OC 2). We recognize revenues on a levelized basis over the life of the leases. Our operating income from our non-utility business totaled $367.1 million during 2013, and we expect comparable earnings from this segment in 2014. The PTF strategy was developed with the primary goal of constructing these power plants. Over the next five years, we do, however, expect to invest approximately $117 million in this segment on smaller capital projects, including the Oak Creek expansion fuel flexibility project. For additional information on this project, see Factors Affecting Results, Liquidity and Capital Resources -- Other Matters.

42 Wisconsin Energy Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2013 Form 10-K
CONDITION AND RESULTS OF OPERATIONS - (Cont'd)

RESULTS OF OPERATIONS

CONSOLIDATED EARNINGS

The following table compares our operating income by business segment and our
net income for 2013, 2012 and 2011:

            Wisconsin Energy Corporation                   2013         2012        2011
                                                               (Millions of Dollars)

Utility Energy                                          $  719.4     $  647.7     $ 544.8
Non-Utility Energy                                         367.1        358.8       348.9
Corporate and Other                                         (6.4 )       (6.2 )      (6.4 )
Total Operating Income                                   1,080.1      1,000.3       887.3
Equity in Earnings of Transmission Affiliate                68.5         65.7        62.5
Other Income and Deductions, net                            18.8         34.8        62.7
Interest Expense, net                                      252.1        248.2       235.8
Income from Continuing Operations Before Income Taxes      915.3        852.6       776.7
Income Tax Expense                                         337.9        306.3       263.9
Income from Continuing Operations                          577.4        546.3       512.8
Income from Discontinued Operations, Net of Tax                -            -        13.4
Net Income                                              $  577.4     $  546.3     $ 526.2

Diluted Earnings Per Share
Continuing Operations                                   $   2.51     $   2.35     $  2.18
Discontinued Operations                                        -            -        0.06
Total Diluted Earnings Per Share                        $   2.51     $   2.35     $  2.24

An analysis of contributions to operating income by segment and a more detailed analysis of results follows.

UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

The following table summarizes our utility energy segment's operating income
during 2013, 2012 and 2011:

    Utility Energy Segment           2013         2012         2011
                                         (Millions of Dollars)
Operating Revenues
Electric                          $ 3,308.7    $ 3,193.9    $ 3,211.3
Gas                                 1,113.7        962.6      1,181.2
Other                                  39.6         34.3         39.0
Total Operating Revenues            4,462.0      4,190.8      4,431.5
Operating Expenses
Fuel and Purchased Power            1,158.1      1,103.8      1,174.5
Cost of Gas Sold                      674.1        545.8        728.7
Other Operation and Maintenance     1,522.0      1,476.5      1,613.4
Depreciation and Amortization         320.2        296.4        257.0
Property and Revenue Taxes            116.2        120.6        113.1
Total Operating Expenses            3,790.6      3,543.1      3,886.7
Treasury Grant                         48.0            -            -
Operating Income                  $   719.4    $   647.7    $   544.8

43 Wisconsin Energy Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2013 Form 10-K
CONDITION AND RESULTS OF OPERATIONS - (Cont'd)

2013 vs. 2012: Our utility energy segment contributed $719.4 million of operating income during 2013 compared with $647.7 million of operating income during 2012. The increase in operating income was primarily caused by favorable winter weather during 2013 and pricing increases, partially offset by an increase in operation and maintenance expense and depreciation.

2012 vs. 2011: Our utility energy segment contributed $647.7 million of operating income during 2012 compared with $544.8 million of operating income during 2011. The increase in operating income was primarily caused by decreased other operation and maintenance expense and decreased fuel and purchased power expenses.

Electric Utility Gross Margin

The following table compares our electric utility gross margin during 2013 with
similar information for 2012 and 2011, including a summary of electric operating
revenues and electric sales by customer class:

                                  Electric Revenues and Gross Margin                     MWh Sales
Electric Utility Operations        2013            2012          2011          2013         2012         2011
                                         (Millions of Dollars)                          (Thousands)
Customer Class
Residential                   $     1,208.6     $ 1,163.9     $ 1,159.2      8,141.9      8,317.7      8,278.5
Small Commercial/Industrial         1,048.0       1,013.6       1,006.9      8,860.4      8,860.0      8,795.8
Large Commercial/Industrial           711.9         744.3         763.7      8,673.4      9,710.7      9,992.2
Other - Retail                         23.4          22.8          22.9        152.3        154.8        153.6
Total Retail                        2,991.9       2,944.6       2,952.7     25,828.0     27,043.2     27,220.1
Wholesale - Other                     143.7         144.4         154.0      1,953.5      1,566.6      2,024.8
Resale - Utilities                    143.2          53.4          69.5      4,382.7      1,642.4      2,065.7
Other Operating Revenues               28.4          51.5          35.1            -            -            -
Total                               3,307.2       3,193.9       3,211.3     32,164.2     30,252.2     31,310.6
Electric Customer Choice
(a)                                     1.5             -             -        813.0            -            -
Total, including electric
customer choice                     3,308.7       3,193.9       3,211.3


Fuel and Purchased Power
Fuel                                  611.1         541.6         644.4
Purchased Power                       533.4         548.7         514.8
Total Fuel and Purchased
Power                               1,144.5       1,090.3       1,159.2
Total Electric Gross Margin   $     2,164.2     $ 2,103.6     $ 2,052.1

Weather - Degree Days (b)
Heating (6,580 Normal)                                                         7,233        5,704        6,633
Cooling (730 Normal)                                                             688        1,041          793

(a) Represents distribution sales for customers who have purchased power from an alternative electric supplier in Michigan.

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

Electric Utility Revenues and Sales

2013 vs. 2012: Our electric utility operating revenues increased by $114.8 million, or 3.6%, when compared to 2012. The most significant factors that caused a change in revenues were:

Wisconsin net retail pricing increases of $115.6 million ($177.7 million less $62.1 million related to Section 1603 Renewable Energy Treasury Grant (Treasury Grant) bill credits), which is primarily related to our 2013 Wisconsin Rate Case. For information on the Treasury Grant and the rate order in the 2013 rate case, see

44 Wisconsin Energy Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2013 Form 10-K
CONDITION AND RESULTS OF OPERATIONS - (Cont'd)

Factors Affecting Results, Liquidity and Capital Resources -- Accounting Developments and -- Utility Rates and Regulatory Matters, respectively.
A $89.8 million increase in sales for resale due to increased sales into the MISO Energy Markets as a result of increased availability of our generating units.

A $48.0 million decrease in large commercial/industrial sales due to the two iron ore mines that switched to an alternative electric supplier effective September 1, 2013. See Factors Affecting Results, Liquidity and Capital Resources -- Industry Restructuring and Competition -- Restructuring in Michigan, for a discussion of the impact of industry restructuring in Michigan on our electric sales.

A $23.1 million decrease in other operating revenues, primarily driven by the amortization of $25.9 million in 2012 related to the settlement with the United States Department of Energy (DOE). For additional information on the DOE settlement, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters -- 2012 Fuel Cost Plan Request.

A return to more normal summer weather as compared to the prior year that decreased electric revenues by an estimated $17.7 million.

As measured by cooling degree days, 2013 was 5.8% cooler than normal, and 33.9% cooler than 2012. Residential sales decreased by 2.1%, primarily due to the weather. Sales to our large commercial/industrial customers decreased by 10.7% primarily because of a decrease in sales to the two iron ore mines in Michigan. If the mines are excluded, sales to our large commercial/industrial customers decreased 3.0%. The two iron ore mines, which we served on an interruptible tariff rate, switched to an alternative electric supplier effective September 1, 2013. In addition, other smaller retail customers have switched to an alternative electric supplier. Wholesale - Other sales increased 24.7% primarily due to increased off-peak energy sales which generate lower incremental revenue because the majority of our wholesale revenue is tied to demand.

2012 vs. 2011: Our electric utility operating revenues decreased by $17.4 million, or 0.5%, when compared to 2011. The most significant factors that caused a change in revenues were:

Favorable weather as compared to 2011 that increased electric revenues by an estimated $28.5 million.

Other operating revenues increased by approximately $16.4 million, driven by the $25.9 million amortization of the settlement with the DOE.

A planned outage at an iron ore mine in 2012 and the conversion to self-generation of two other large customers decreased electric revenues by an estimated $20.4 million.

A $16.2 million reduction in sales for resale due to reduced sales into the MISO Energy Markets.

Lower MWh sales to our wholesale customers, which decreased revenue by an estimated $12.4 million as compared to 2011.

As measured by cooling degree days, 2012 was 49.6% warmer than normal, and 31.3% warmer than 2011. We believe the warmer summer weather was the primary reason for the 0.5% increase in residential sales and the 0.7% increase in small commercial/industrial sales. The increase due to warmer summer weather was partially offset by reduced sales from warmer winter weather in the first quarter of 2012 as compared to the first quarter of 2011.

Sales to our large commercial/industrial customers decreased by 2.8% primarily due to the planned outage at one of the iron ore mines in Michigan and the conversion to self-generation of two other large customers. Excluding sales to these three customers, MWh sales to large commercial/industrial customers increased by 1.1%. Wholesale sales decreased primarily due to the low market price of power in 2012 as compared to 2011, which caused some of these customers to obtain energy from the MISO market rather than through our contracts. The reduction did not impact the majority of revenue received from these customers, which is tied to demand. The lower market price of power also reduced our ability to sell energy into the MISO Energy Markets.

Electric Fuel and Purchased Power Expenses

2013 vs. 2012: Our electric fuel and purchased power costs increased by $54.2 million, or approximately 5.0%, when compared to 2012. This increase was primarily caused by a 6.3% increase in total MWh sales, partially offset by a decrease in our average cost of fuel because of outage timing and a decrease in coal costs.

45 Wisconsin Energy Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2013 Form 10-K
CONDITION AND RESULTS OF OPERATIONS - (Cont'd)

2012 vs. 2011: Our electric fuel and purchased power costs decreased by $68.9 million, or approximately 5.9%, when compared to 2011. This decrease was primarily caused by a 3.4% decrease in total MWh sales as well as a reduction in our average cost of fuel and purchased power because of lower natural gas prices.

Gas Utility Revenues, Gross Margin and Therm Deliveries

The following table compares our total gas utility operating revenues and gross
margin (total gas utility operating revenues less cost of gas sold) during 2013,
2012 and 2011.

Gas Utility Operations      2013        2012        2011
                               (Millions of Dollars)

Operating Revenues       $ 1,113.7    $ 962.6    $ 1,181.2
Cost of Gas Sold             674.1      545.8        728.7
Gross Margin             $   439.6    $ 416.8    $   452.5

We believe gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under GCRMs. The following table compares our gas utility gross margin and therm deliveries by customer class during 2013, 2012 and 2011:

                                     Gross Margin                    Therm Deliveries
 Gas Utility Operations       2013        2012       2011       2013       2012       2011
                                 (Millions of Dollars)                  (Millions)
Customer Class
Residential                 $  284.2    $ 267.9    $ 290.2      872.0      676.4      776.8
Commercial/Industrial           96.5       88.8      101.5      499.9      390.6      461.7
Interruptible                    1.8        1.7        1.8       18.1       14.6       16.0
Total Retail                   382.5      358.4      393.5    1,390.0    1,081.6    1,254.5
Transported Gas                 51.7       52.9       52.6    1,052.8    1,140.4      899.6
Other Operating                  5.4        5.5        6.4          -          -          -
Total                       $  439.6    $ 416.8    $ 452.5    2,442.8    2,222.0    2,154.1

Weather - Degree Days (a)
Heating (6,580 Normal)                                          7,233      5,704      6,633

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

2013 vs. 2012: Our total retail gas margin increased by $24.1 million, or approximately 6.7%, when compared to 2012. We estimate that colder winter weather increased gas margins by approximately $56.9 million. As measured by heating degree days, 2013 was 26.8% colder than 2012 and 9.9% colder than normal. Gas margins were reduced by $42.3 million because of lower gas rates that became effective January 1, 2013.

2012 vs. 2011: Our total retail gas margin decreased by $35.1 million, or approximately 8.9%, when compared to 2011 primarily because of a decrease in sales volumes as a result of warmer winter weather. As measured by heating degree days, 2012 was 14.0% warmer than 2011 and 14.4% warmer than normal.

Transported gas volumes increased by 26.8% when compared to 2011. Virtually all of the volume increase related to gas used in electric generation, which has a small impact on margin.

46 Wisconsin Energy Corporation


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 2013 Form 10-K
CONDITION AND RESULTS OF OPERATIONS - (Cont'd)

Other Operation and Maintenance Expense

2013 vs. 2012: Our other operation and maintenance expense increased by $45.5 million, or approximately 3.1%, when compared to 2012. This increase was primarily driven by the reinstatement of $148.0 million of regulatory amortizations, offset in part by a $50.1 million reduction in bad debt expense related to our natural gas customers and continued cost control efforts across our utilities. For additional information on the regulatory amortizations, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters -- 2012 Wisconsin Rate Case.

Our utility operation and maintenance expenses are influenced by, among other things, labor costs, employee benefit costs, plant outages and amortization of regulatory assets.

2012 vs. 2011: Our other operation and maintenance expense decreased by $136.9 million, or approximately 8.5%, when compared to 2011. This decrease is primarily due to the one year suspension of $148.0 million of amortization expense on certain regulatory assets as authorized under our 2012 Wisconsin Rate Case.

Depreciation and Amortization Expense

2013 vs. 2012: Depreciation and Amortization expense increased by $23.8 million, or approximately 8.0%, when compared to 2012. This increase was primarily because of an overall increase in utility plant in service. The emission control equipment for units 5 and 6 of the Oak Creek Air Quality Control System (AQCS) project went into service in March 2012, and for units 7 and 8 in September 2012. In addition, our new biomass plant went into service in November 2013. For additional information on the AQCS and biomass facility, see Factors Affecting Results, Liquidity and Capital Resources -- Utility Rates and Regulatory Matters -- Oak Creek Air Quality Control System and -- Renewables, Efficiency, and Conservation, respectively.

We expect depreciation and amortization expense to increase in 2014 primarily as a result of an increase in utility plant in service related to the biomass plant, which will have been in service a full year.

2012 vs. 2011: Depreciation and Amortization expense increased by $39.4 million, or approximately 15.3%, when compared to 2011. This increase was primarily because of an overall increase in utility plant in service. The Glacier Hills Wind Park went into service in December 2011. In addition, the emission control equipment for units 5 and 6 of the Oak Creek AQCS project went into service in March 2012, and for units 7 and 8 in September 2012.

Treasury Grant

During 2013, we recognized $48 million of income related to a Treasury Grant associated with our recently completed biomass plant. The grant income that we recognized in income is equal to the bill credits provided to our retail electric customers in Wisconsin before related tax benefits. For additional information on the Treasury Grant, see Factors Affecting Results, Liquidity and Capital Resources -- Accounting Developments.

During 2014, we expect to recognize approximately $13 million of grant income. This amount is equal to the bill credits we expect to provide to our retail electric customers in Wisconsin before related tax benefits.

NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO OPERATING INCOME

Our non-utility energy segment consists primarily of our PTF units (PWGS 1,
PWGS 2, OC 1 and OC 2).

This segment reflects the lease revenues on the new units as well as the depreciation expense. Operating and maintenance costs and limited management fees associated with the plants are the responsibility of Wisconsin Electric and are recorded in the utility segment.

  47 Wisconsin Energy Corporation


--------------------------------------------------------------------------------
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL          2013 Form 10-K
         CONDITION AND RESULTS OF OPERATIONS - (Cont'd)



                                    2013        2012       2011
                                       (Millions of Dollars)

Operating Revenues                $  446.7    $ 439.9    $ 435.1
Operation and Maintenance Expense     12.5       14.0       13.7
Depreciation Expense                  67.1       67.1       72.5
Operating Income                  $  367.1    $ 358.8    $ 348.9

2013 vs. 2012: Non-utility energy segment operating income increased $8.3 million, or approximately 2.3%, when compared to 2012. The increase primarily relates to the increase in operating revenues related to the final approved construction costs for the Oak Creek expansion as part of the 2013 Wisconsin Rate Case.

In 2014, we expect our non-utility energy segment operating revenue to stay relatively flat compared to 2013.

2012 vs. 2011: Non-utility energy segment operating income increased $9.9 million, or approximately 2.8%, when compared to 2011. This increase primarily relates to a decrease in depreciation expense related to finalized depreciable lives of the Oak Creek expansion units and a full year's earnings in 2012 for OC 2 compared to eleven and a half months of earnings for 2011.

CORPORATE AND OTHER CONTRIBUTION TO OPERATING INCOME

2013 vs. 2012: Corporate and other affiliates had an operating loss of $6.4 million in 2013 compared with an operating loss of $6.2 million in 2012.

2012 vs. 2011: Corporate and other affiliates had an operating loss of $6.2 million in 2012 compared with an operating loss of $6.4 million in 2011.

CONSOLIDATED OTHER INCOME AND DEDUCTIONS, NET

   Other Income and Deductions, net          2013         2012      2011
                                               (Millions of Dollars)

AFUDC - Equity                           $   18.3       $ 35.3     $ 59.4
Other, net                                    0.5         (0.5 )      3.3
Total Other Income and Deductions, net   $   18.8       $ 34.8     $ 62.7

2013 vs. 2012: Other income and deductions, net decreased by approximately $16.0 million, or 46.0%, when compared to 2012. This decrease primarily relates to lower AFUDC - Equity related to the Oak Creek AQCS project which emission control equipment went into service in March 2012 for units 5 and 6 and September 2012 for units 7 and 8, partially offset by the biomass plant which went into service in November 2013.

During 2014, we expect to see a reduction in AFUDC - Equity as we expect to have fewer large construction projects.

2012 vs. 2011: Other income and deductions, net decreased by approximately $27.9 million, or 44.5%, when compared to 2011. This decrease primarily relates to lower AFUDC - Equity related to the Glacier Hills Wind Park, which went into service in December 2011, as well as the Oak Creek AQCS project which emission control equipment went into service in March 2012 for units 5 and 6 and September 2012 for units 7 and 8.

  48 Wisconsin Energy Corporation


--------------------------------------------------------------------------------
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL          2013 Form 10-K
         CONDITION AND RESULTS OF OPERATIONS - (Cont'd)



CONSOLIDATED INTEREST EXPENSE, NET

  Interest Expense, net        2013        2012       2011
                                  (Millions of Dollars)

Gross Interest Costs         $  261.5    $ 264.1    $ 262.5
Less: Capitalized Interest        9.4       15.9       26.7
Interest Expense, net        $  252.1    $ 248.2    $ 235.8

2013 vs. 2012: Our net interest expense increased by $3.9 million, or 1.6%, as compared to 2012 primarily because of lower capitalized interest. Our capitalized interest decreased by $6.5 million primarily because of lower construction work in progress.

During 2014, we expect to see slightly lower net interest expense as gross interest costs are expected to decrease due to a lower weighted average embedded interest rate on our long-term debt. We expect this decrease will be partially offset by a reduction in capitalized interest as a result of the biomass plant going into service in 2013.

2012 vs. 2011: Our net interest expense increased by $12.4 million, or 5.3%, as compared to 2011 primarily because of lower capitalized interest. Our capitalized interest decreased by $10.8 million primarily because we stopped capitalizing interest on the Oak Creek AQCS project when the emission control equipment went into service in March 2012 for units 5 and 6 and September 2012 for units 7 and 8, and the Glacier Hills Wind Park which went into service in December 2011.

CONSOLIDATED INCOME TAX EXPENSE

2013 vs. 2012: Our effective tax rate applicable to continuing operations was . . .

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