INTRODUCTION
Wisconsin Electric Power Company, a subsidiary of Wisconsin Energy, was incorporated in the state of Wisconsin in 1896. We maintain our principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms Wisconsin Electric, the Company, our, us or we refer to Wisconsin Electric Power Company and its subsidiary, Bostco LLC (Bostco).
We conduct our operations primarily in three operating segments: an electric utility segment, a natural gas utility segment and a steam utility segment. We serve approximately 1,122,500 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 466,000 gas customers in Wisconsin and approximately 465 steam customers in metropolitan Milwaukee, Wisconsin. For further financial information about our business segments, see Results of Operations in Item 7 and Note O -- Segment Reporting in the Notes to Consolidated Financial Statements in Item 8.
Wisconsin Energy is also the parent company of Wisconsin Gas LLC (Wisconsin Gas), a natural gas distribution utility, which serves customers throughout Wisconsin; and W.E. Power, LLC (We Power), a non-utility company that was formed in 2001 to design, construct, own and lease to us the new generating capacity included in Wisconsin Energy's PTF strategy. We have combined common functions with Wisconsin Gas and operate under the trade name of "We Energies."
Bostco is our non-utility subsidiary that develops and invests in real estate. As of December 31, 2011, Bostco had $33.9 million of assets.
Our annual and periodical filings with the SEC are available, free of charge, through Wisconsin Energy's Internet website www.wisconsinenergy.com. These documents are available as soon as reasonably practicable after such materials are filed (or furnished) with the SEC.
UTILITY OPERATIONS
ELECTRIC UTILITY OPERATIONS
We are the largest electric utility in the state of Wisconsin. We generate and distribute electric energy in a territory that includes southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan.
We participate in the MISO Energy Markets. The competitiveness of our generation offered in the MISO Energy Markets affects how our generating units are dispatched and how we buy and sell power. For further information, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.
Electric Sales
Our electric energy sales to all classes of customers totaled approximately 31.3 million MWh during 2011 and approximately 30.5 million MWh during 2010. We had approximately 1,122,500 electric customers as of December 31, 2011 and 1,120,200 electric customers as of December 31, 2010.
We are authorized to provide retail electric service in designated territories in the state of Wisconsin, as established by indeterminate permits, Certificates of Public Convenience and Necessity (CPCNs) or boundary agreements with other utilities, and in certain territories in the state of Michigan pursuant to franchises granted by municipalities. We also sell wholesale electric power within the MISO Energy Markets.
Electric Sales Growth: Our service territory continued to experience growth in 2011 in sustained recovery from the significant economic recession that occurred during late 2008 and 2009. Our normalized 2011 retail electric
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Wisconsin Electric Power Company
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ITEM 1. BUSINESS - (Cont'd) | 2011 Form 10-K |
ITEM 1. BUSINESS - (Cont'd)
2011 Form 10-K
sales, excluding our two largest customers, two iron ore mines, were approximately 0.4% higher than our normalized 2010 electric sales. As we look toward 2012 and beyond, we presently anticipate that total retail electric kWh sales of our utility energy segment and the associated peak electric demand will grow at annual rates of 0.5% to 1.0% over the next five years. These estimates assume normal weather and exclude the two iron ore mines.
Sales to Large Electric Retail Customers: We provide electric utility service to a diversified base of customers in such industries as mining, paper, foundry, food products and machinery production, as well as to large retail chains.
Our largest retail electric customers are two iron ore mines located in the Upper Peninsula of Michigan. The combined electric energy sales to the two mines accounted for 7.1% and 6.9% of our total electric utility energy sales during 2011 and 2010, respectively. The mines have notified us that they expect production at one of the mines to be reduced in 2012.
Sales to Wholesale Customers: During 2011, we sold wholesale electric energy to one municipally owned system, two rural cooperatives and two municipal joint action agencies located in the states of Wisconsin and Michigan. Our wholesale electric energy sales were also made to 14 other public utilities and power marketers throughout the region under rates approved by FERC. Wholesale sales accounted for approximately 13.1% of our total electric energy sales and 7.0% of total electric operating revenues during 2011, compared with 10.2% of total electric energy sales and 6.0% of total electric operating revenues during 2010.
Electric System Reliability Matters: Our electric sales are impacted by seasonal factors and varying weather conditions. We sell more electricity during the summer months because of the residential cooling load. The Public Service Commission of Wisconsin (PSCW) has planning reserve requirements consistent with the MISO calculated planning reserve margin. The Michigan Public Service Commission (MPSC) has not yet established guidelines in this area. In accordance with the MISO calculated planning reserve margin requirements, we had adequate capacity to meet all of our firm electric load obligations during 2011 and expect to have adequate capacity to meet all of our firm obligations during 2012. For additional information, see Factors Affecting Results, Liquidity and Capital Resources in Item 7.
Electric Supply
Our electric supply strategy is to provide our customers with energy from plants using a diverse fuel mix that is expected to maintain a stable, reliable and affordable supply of electricity. We supply a significant amount of electricity to our customers from power plants that we own or lease. We supplement our internally generated power supply with long-term power purchase agreements, including the Point Beach Nuclear Power Plant (Point Beach) power purchase agreement discussed later in this report, and through spot purchases in the MISO Energy Markets.
Our installed capacity by fuel type as of December 31 is shown below:
Dependable Capability in MW (a)
2011
2010
2009
Coal (b)
3,880
3,646
3,131
Natural Gas - Combined Cycle
1,090
Natural Gas/Oil - Peaking Units (c)
1,150
Renewables (d)
118
86
Total
6,238
5,972
5,457
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The table below indicates our sources of electric energy supply as a percentage of sales for the three years ended December 31, 2011, as well as an estimate for 2012:
Estimate
Actual
2012
Coal
48.6
%
54.2
53.9
52.8
Wind
2.0
1.0
1.2
Hydroelectric
1.1
0.8
8.2
6.6
8.4
7.6
Natural Gas/Oil - Peaking Units
0.1
0.3
0.2
Net Generation
60.0
62.9
64.6
62.6
Purchased Power
40.0
37.1
35.4
37.4
100.0
Our average fuel and purchased power costs per MWh by fuel type for the years ended December 31 are shown below:
$
29.78
26.44
25.01
Natural Gas - Combined Cycle
38.02
43.14
51.67
119.83
97.36
121.18
42.79
43.11
42.21
Historically, the fuel costs for coal have been under long-term contracts, which helped with price stability. Coal and associated transportation services have continued to see volatility in pricing due to increased domestic and world-wide demand for coal and the impacts of diesel costs which are incorporated into fuel surcharges on rail transportation.
Natural gas costs have been volatile. We have a PSCW-approved hedging program to help manage our natural gas price risk. This hedging program is generally implemented on a 36-month forward-looking basis. Proceeds related to the natural gas hedging program are reflected in the average costs of natural gas and purchased power shown above.
Coal-Fired Generation
Coal Supply: We diversify the coal supply for our power plants by purchasing coal from mines in Wyoming, Pennsylvania and Montana, as well as from various other states. During 2012, 100% of our projected coal requirements of 9.7 million tons are under contracts which are not tied to 2012 market pricing fluctuations. At the end of 2011, our coal-fired generation consisted of six operating plants with a dependable capability of approximately 3,880 MW.
The annual tonnage amounts contracted for 2012 through 2014 are as follows:
Year
Annual Tonnage
(Thousands)
9,868
2013
6,205
2014
3,270
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Coal Deliveries: Approximately 100% of our 2012 coal requirements are expected to be delivered by unit trains owned or leased by us. The unit trains will transport coal for the Oak Creek and Pleasant Prairie Power Plants from Wyoming mines, and transport coal for the Oak Creek expansion units from Pennsylvania and West Virginia. Coal from a Montana mine is also transported via rail to Lake Michigan transfer docks and delivered by lake vessel to the Milwaukee harbor for Milwaukee-based power plants. Montana and Wyoming coal for the Presque Isle Power Plant is transported via rail to Superior, Wisconsin, placed in dock storage and reloaded into lake vessels for plant delivery.