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SCHEDULE 14C
(RULE 14c-101)
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(c) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Check the appropriate box:
/ / Preliminary Information Statement / / Confidential,
for Use of the Commission Only
/X/ Definitive Information Statement (as permitted by Rule 14c-5(d)(2))
Wisconsin Electric Power Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transactions applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid: None
- --------------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed: 4/22/99
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April 22, 1999
Dear Wisconsin Electric Stockholder:
Wisconsin Electric Power Company will hold its annual meeting of stockholders at
10:00 a.m. on Wednesday, May 26, 1999 in Conference Room P140a at the Public
Service Building, 231 West Michigan Street, Milwaukee, Wisconsin. We are not
soliciting proxies for this meeting, as over 99% of the voting stock is owned,
and will be voted, by Wisconsin Electric's parent company, Wisconsin Energy
Corporation. If you wish, you may attend the meeting and vote your shares of
preferred stock; however, it will be a very short business meeting only.
On behalf of the directors and officers of Wisconsin Energy, I invite you to
attend Wisconsin Energy's annual meeting to be held Wednesday, June 2, 1999 at
10:00 a.m. The Wisconsin Energy meeting will be held at the Midwest Express
Center, 400 West Wisconsin Avenue, Milwaukee, Wisconsin. By attending this
meeting, you will have the opportunity to meet many of the Wisconsin Electric
officers and directors. Although you cannot vote your shares of Wisconsin
Electric preferred stock at the Wisconsin Energy meeting, you should find the
activities to be worthwhile. You will be asked to register before entering the
meeting.
The annual report to stockholders accompanies this information statement. If you
have any questions about the material presented or would like a copy of the
Wisconsin Energy Corporation summary annual report, please call our toll-free
Stockholder Hotline at 1-800-558-9663.
Sincerely,
/s/ Richard A. Abdoo
Richard A. Abdoo
Chairman of the Board
and Chief Executive Officer
<PAGE> 3
NOTICE
OF
ANNUAL MEETING OF STOCKHOLDERS
April 22, 1999
To the Stockholders of Wisconsin Electric Power Company:
The Annual Meeting of Stockholders of Wisconsin Electric Power Company will be
held at 10:00 a.m. on Wednesday, May 26, 1999 in Conference Room P140a at the
Public Service Building, 231 West Michigan Street, Milwaukee, Wisconsin, for the
following purposes:
1. To elect a Board of Directors to hold office until the 2000 Annual
Meeting of Stockholders; and
2. To consider any other matters which may properly come before the
meeting.
Stockholders of record at the close of business on March 25, 1999 will be
entitled to vote at the meeting.
By Order of the Board of Directors
/s/ Thomas H. Fehring
Thomas H. Fehring
Corporate Secretary
<PAGE> 4
[WISCONSIN ELECTRIC LOGO]
231 West Michigan Street
P.O. Box 2046
Milwaukee, Wisconsin 53201
INFORMATION STATEMENT
AND
ANNUAL REPORT TO STOCKHOLDERS
---------------------------
INFORMATION STATEMENT
This information statement is being furnished to stockholders beginning on or
about April 22, 1999 in connection with the annual meeting of stockholders of
Wisconsin Electric Power Company ("WE") to be held on May 26, 1999, at WE's
Public Service Building, 231 West Michigan Street, Milwaukee, Wisconsin, and all
adjournments of the meeting, for the purposes listed in the Notice of Annual
Meeting of Stockholders. The WE annual report to stockholders accompanies this
information statement.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
However, you may vote your shares of preferred stock at the meeting.
VOTING SECURITIES
As of March 25, 1999, WE had outstanding 44,498 shares of Six Per Cent.
Preferred Stock; 260,000 shares of $100 par value 3.60% Serial Preferred Stock;
and 33,289,327 shares of common stock. Each outstanding share of each class is
entitled to one vote. Stockholders of record at the close of business on March
25, 1999 will be entitled to vote at the meeting. A majority of the votes
entitled to be cast by the shares entitled to vote shall constitute a quorum.
All of WE's outstanding common stock, representing over 99% of its voting
securities, is owned by its parent company, Wisconsin Energy Corporation
("WEC"). A list of stockholders of record entitled to vote at the meeting will
be available for inspection by stockholders at WE's principal business office at
231 West Michigan Street, Milwaukee, Wisconsin, prior to and at the meeting.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT
PricewaterhouseCoopers or its predecessor has served as independent public
accountant for Wisconsin Electric continuously since 1932, and was appointed by
Wisconsin Energy's board of directors to serve as independent public accountant
of WEC and its subsidiaries, including WE, during the current year.
Representatives of the firm will not attend the annual meeting, but will be
present at Wisconsin Energy's annual meeting on June 2, 1999 to make any
statement they may consider appropriate and to respond to questions which may be
directed to them.
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THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors is responsible for overseeing the performance of WE. In
1998, the Board held 8 meetings. The average attendance of all directors for
Board and committee meetings was 99%.
WE has an Executive Committee, Compensation Committee and a Finance Committee;
it does not have audit or nominating committees. The Executive Committee, which
did not meet in 1998, may exercise all of the powers vested in the Board during
periods between Board meetings except action regarding dividends or other
distributions to stockholders, the filling of vacancies on the Board and other
powers which by law may not be delegated to a committee. Directors Abdoo,
Ahearne, Cornog, Grigg, Johnson and Stratton are members of the Executive
Committee. The Compensation Committee, which met five times in 1998, considers
succession planning issues and provides a competitive, performance-based
executive and director compensation program that enables WE to attract and
retain key individuals and to motivate them to achieve WE's short and long-term
goals. Directors Ahearne, Bergstrom, Cornog and MacDonough are members of the
Compensation Committee. The Finance Committee, which met once in 1998, may take
or authorize all necessary actions to effect financings, refinancings and
refundings pursuant to financing plans approved by the Board of Directors, thus
enhancing WE's ability to act quickly with respect to certain financing matters
when market conditions warrant. Directors Bergstrom, Grigg, MacDonough and
Porter are members of the Finance Committee.
ELECTION OF DIRECTORS
At the 1999 annual meeting, there will be an election of ten directors. The
individuals named below, who currently serve as WE directors, have been
nominated by the Board to serve one-year terms or until they are reelected or
until their respective successors are duly elected and qualified.
Under the Directors' Retirement Policy, Director Geneva B. Johnson will be
retiring effective with the 1999 Annual Meeting. The size of the Board will be
reduced by one at that time. The Board of Directors thanks Director Johnson for
her valuable service over the past eleven years.
Directors are elected by a plurality of the votes cast by the shares entitled to
vote in the election at a meeting at which a quorum is present. "Plurality"
means that the individuals who receive the largest number of votes are elected
as directors up to the maximum number of directors to be chosen in the election.
Therefore, any shares not voted, whether by withheld authority, broker non-vote
or otherwise, have no effect in the election of directors.
The nominees named below have consented to being nominated and to serve if
elected. The Board of Directors does not expect that any of the nominees will
become unavailable for any reason. If that should occur before the meeting,
another nominee or nominees may be selected by the WE Board of Directors.
Biographical information regarding each nominee is shown below. Ages are shown
as of December 31, 1998.
INFORMATION CONCERNING NOMINEES FOR TERMS EXPIRING IN 2000
RICHARD A. ABDOO. Age 54. Chairman of the Board, President and Chief Executive
Officer of WEC since 1991. Chairman of the Board and Chief Executive Officer of
Wisconsin Electric Power Company ("WE"), WEC's principal subsidiary, since 1990.
Director of WEC since 1988. Director of Wisconsin Electric since 1989. Chairman
of the Board and Chief Executive Officer of Wisconsin Natural Gas Company from
1990 to 1995. Wisconsin Natural was WEC's gas utility subsidiary and merged into
Wisconsin Electric effective January 1, 1996. Director of Wisconsin Natural from
1989 to 1995. Director of Marshall & Ilsley Corporation, Sundstrand Corporation,
United Wisconsin Services, Inc. and Universal Foods Corporation.
JOHN F. AHEARNE. Age 64. Director of the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that publishes American Scientist,
provides grants to graduate students and conducts national meetings on major
scientific issues, since 1989. Adjunct Scholar of Resources for the Future, an
economic
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research, non-profit institute, since 1993. Lecturer and Adjunct Professor, Duke
University, since 1995. Vice President and Senior Fellow of Resources for the
Future from 1984 to 1993. Commissioner of the United States Nuclear Regulatory
Commission from 1978 to 1983, serving as its Chairman from 1979 to 1981. Member,
National Academy of Engineering. Director of WEC and Wisconsin Electric since
1994.
JOHN F. BERGSTROM. Age 52. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997; President and Chief Executive Officer of
Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and operates
numerous automobile sales and leasing businesses. Director of WEC since 1987.
Director of Wisconsin Electric since 1985. Director of Bergstrom Corporation,
Banta Corporation, First National Bank-Fox Valley, Kimberly-Clark Corporation,
Midwest Express Holdings, Inc., Universal Foods Corporation and The Green Bay
Packers.
BARBARA L. BOWLES. Age 51. Founder, President and Chief Executive Officer of The
Kenwood Group, Inc. since 1989. The Kenwood Group is a Chicago-based investment
advisory firm that manages pension funds for corporations, public institutions
and endowments. Director of WEC and Wisconsin Electric since 1998. Director of
The Black & Decker Corporation, Fort James Corporation and Hyde Park Bank and
Trust Company.
ROBERT A. CORNOG. Age 58. Chairman of the Board, President and Chief Executive
Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is a developer,
manufacturer and distributor of professional hand and power tools, diagnostic
and shop equipment, and tool storage products. Director of WEC since 1993.
Director of Wisconsin Electric since 1994. Director of Snap-on Incorporated and
Johnson Controls, Inc.
RICHARD R. GRIGG. Age 50. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since 1995; Chief Nuclear Officer of
Wisconsin Electric from December 1996 to March 1998. President and Chief
Operating Officer of Wisconsin Natural during 1995. Group Executive and Vice
President of Wisconsin Electric from June to December 1994. Vice President of
Wisconsin Electric from 1990 to 1994. Director of WEC since 1995. Director of
Wisconsin Electric since 1994. Director of Wisconsin Natural during 1995.
JOHN N. MACDONOUGH. Age 55. Former Chairman and Chief Executive Officer of the
Miller Brewing Company, a manufacturer and brewer of malt beverages. Director of
WEC and Wisconsin Electric since 1998. Director of M&I Marshall & Ilsley Bank,
The Milwaukee Brewers, The Green Bay Packers and Ugly Duckling Corporation.
JULIA B. NORTH. Age 51. President and Chief Executive Officer of VSI Enterprises
Inc. since 1997. VSI Enterprises is an Atlanta-based company that designs,
manufactures, markets and supports videoconferencing software and services.
President from 1996 to 1997 and Vice President from 1994 to 1996 - Consumer
Services, BellSouth Telecommunications. Director of WEC and Wisconsin Electric
since 1998. Director of Winn-Dixie Stores, Inc. and ChoicePoint, Inc.
DAVID K. PORTER. Age 55. Senior Vice President of WE since 1989. Vice President
of Wisconsin Natural from 1989 to 1995. Director of WE since 1989. Director of
Wisconsin Natural from 1988 to 1995.
FREDERICK P. STRATTON, JR. Age 59. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines.
Director of WEC since 1987. Director of Wisconsin Electric since 1986. Director
of Briggs & Stratton Corporation, Bank One Corporation, Midwest Express
Holdings, Inc. and Weyco Group, Inc.
OTHER MATTERS
The Board of Directors is not aware of any other matters which may properly come
before the meeting. The WE Bylaws set forth the requirements that must be
followed should a stockholder wish to propose any floor nominations for director
or floor proposals at annual or special meetings of stockholders. In the case of
annual meetings, the
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Bylaws state, among other things, that notice and certain other documentation
must be provided to WE at least 70 days and not more than 100 days before the
scheduled date of the annual meeting. No such notices have been received by WE.
COMPENSATION
DIRECTORS' COMPENSATION
In order to further align the Board's interests with stockholders, a portion of
directors' fees is paid in WEC common stock. Directors can elect to receive the
fee in common stock or defer the fee in the WEC phantom common stock account
under the Directors' Deferred Compensation Plan.
During 1998, each nonemployee director received one annual retainer fee of
$18,000 for serving as a director of WE and WEC (half in WEC common stock and
half in cash) plus an attendance fee of $1,250 for each Board or committee
meeting attended. Effective January 1, 1999, the attendance fee was increased to
$1,500. In addition, a per diem fee of $1,000 for travel on company business is
paid for each day on which a Board or committee meeting is not also held.
Nonemployee directors are also paid $300 for each signed, written unanimous
consent in lieu of a meeting. Non-employee chairs of the committees of the Board
received a quarterly committee chair retainer of $1,250. Employee directors
receive no directors' fees. Although certain WE directors also serve on WEC's
board and its finance and compensation committees, only single fees are paid for
meetings held by both boards or committees on the same day. In these cases, fees
are allocated between WE and WEC based on services rendered.
Nonemployee directors may defer fees so long as they serve on the Board of WE
and/or its affiliates pursuant to the Directors' Deferred Compensation Plan.
Under the plan, fees may be deferred into an account which accrues interest
semiannually at the prime rate or into a WEC phantom common stock account, the
value of which will appreciate or depreciate based on the market performance of
WEC stock, as well as through the accumulation of any reinvested dividends.
Deferral amounts are credited to accounts in the name of each participating
director on the books of WE, are unsecured and are payable only in cash
following termination of the director's service to WE. The deferred amounts will
be paid out of the general corporate assets or the trust described under
"Retirement Plans" in this information statement.
Each nonemployee director annually receives one option to purchase 3,000 shares
of WEC common stock under WEC's 1993 Omnibus Stock Incentive Plan for serving as
a director of WE and WEC. The Omnibus Stock Incentive Plan is a long-term
incentive plan amended by the WEC board in 1998 to permit nonemployee directors
to receive such awards. Each option will have an exercise price equal to the
fair market value of the shares on the date the option is granted, will be
exercisable for 10 years after the date of grant, and will terminate no later
than five years after the nonemployee director ceases to be a director for any
reason. Options vest over a three year period; one-third on each anniversary
grant date. Upon a change in control of WEC, or upon retirement from the Board
after age 60, disability or death, these options shall become immediately
exercisable. The exercise price of an option may, at the nonemployee director's
election, be paid in cash or with previously owned shares of common stock or a
combination thereof.
A Directors' Charitable Awards Program has been established to help further the
company's policy of charitable giving. Under the program, the company intends to
contribute up to $100,000 per year for 10 years to a charitable organization(s)
chosen by each director, upon the director's death. Directors who serve on both
the WE and WEC boards are provided one charitable award benefit. Beneficiary
organizations under the program must be approved by the WEC Board's Nominating
and Board Affairs Committee. The program is funded by life insurance on the
lives of the Board members. Directors derive no financial benefit from the
program since all insurance proceeds and charitable deductions accrue solely to
the company. Because of the tax deductibility of these charitable donations, and
the use of insurance, the long-term cost to the company is expected to be
modest.
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EXECUTIVE OFFICERS' COMPENSATION
The following table shows, for the last three fiscal years, compensation awarded
to, earned by or paid to WE's Chief Executive Officer and each of WE's other
four most highly-compensated executive officers for services in all capacities
to WEC and its subsidiaries, including WE. The amounts shown in this and all
subsequent tables in this information statement are WEC consolidated
compensation data. The portion of time devoted by each officer to WE in 1998, as
determined by the percent of compensation paid by WE to each officer versus paid
by the other affiliated companies, is as follows: Mr. Abdoo (80%), Mr. Grigg
(95%), Mr. Sellman (100%), Mr. Baker (85%), and Ms. Krause (100%).
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
-------------------------
Awards
-------------------------
Annual Compensation
--------------------------------- Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Awards Options Compensation
($) ($) ($) ($) (1) (#) (2) ($) (3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RICHARD A. ABDOO
Chairman of the Board, President and 1998 585,000 209,935 11,176 235,000 40,000 64,996
Chief Executive Officer of WEC; 1997 585,000 0 9,974 0 0 70,312
Chairman of the Board and Chief 1996 560,000 306,472 8,953 0 38,000 113,297
Executive Officer of WE
- ------------------------------------------------------------------------------------------------------------------------
RICHARD R. GRIGG
Vice President of WEC; President and 1998 330,000 102,002 6,983 117,500 20,000 29,359
Chief Operating Officer of WE 1997 320,000 137,927 6,176 0 0 33,881
1996 295,000 62,835 5,206 0 19,000 43,412
- ------------------------------------------------------------------------------------------------------------------------
MICHAEL B. SELLMAN
Senior Vice President and Chief 1998 208,333 113,754(4) 9,465 58,750 10,000 5,863
Nuclear Officer of WE
(as of March 1998)
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CALVIN H. BAKER
Treasurer and Chief Financial Officer 1998 205,000 85,363 2,318 58,750 10,000 17,499
of WEC; Vice President-Finance and 1997 190,000 32,666 1,889 0 0 16,046
Chief Financial Officer of WE 1996 170,000 70,298 1,420 0 9,500 21,996
- ------------------------------------------------------------------------------------------------------------------------
KRISTINE M. KRAUSE
Vice President-Fossil Operations of 1998 215,000 66,874 0 58,750 10,000 19,738
WE 1997 205,000 26,454 0 0 0 19,770
1996 190,000 68,750 0 0 9,500 23,239
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</TABLE>
(1) On May 19, 1998, WEC restricted stock awards were granted to Messrs. Abdoo,
Grigg, Sellman, Baker and Ms. Krause in the amounts of 8,000 shares, 4,000
shares, 2,000 shares, 2,000 shares, and 2,000 shares, respectively, which are
subject to forfeiture until vested. The dollar values shown for these shares are
based on the WEC closing price of $29.375 per share on the grant date. The
shares awarded to these individuals are subject to a vesting schedule dependent
upon the attainment of cumulative earnings targets based on company performance,
with ultimate vesting occurring at the end of ten years. However, earlier
vesting may occur due to termination of employment by death, disability, or
normal retirement, a change in control of the company, or action by the
Compensation Committee. Dividends are paid on shares of restricted stock at the
same rate as on unrestricted shares and are used to acquire additional
restricted shares. As of December 31, 1998, the named executive officers held
the
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following number of shares of restricted stock, including restricted dividends,
with the following values (based on a closing price of $31.4375 on December 31,
1998): Mr. Abdoo - 8,208 shares ($258,039), Mr. Grigg - 4,104 shares ($129,020),
Mr. Sellman, Mr. Baker, and Ms. Krause - 2,052 shares ($64,510) each.
(2) The 1996 grants of options were in combination with contingent dividend
awards. Contingent dividend awards will be paid if total shareholder return
(appreciation in the value of WEC common stock plus reinvested dividends) over a
four-year period beginning on the grant date equals or exceeds the median return
earned by the companies included in a self-defined peer group. There will be no
payout if WEC's total shareholder return is negative over the course of such
period. If payable, each participant shall receive an amount equal to the actual
dividends paid on WEC common stock for the four-year period multiplied by the
number of performance units awarded to such participant.
(3) All Other Compensation for 1998 for Messrs. Abdoo, Grigg, Sellman, Baker,
and Ms. Krause, respectively, includes: (i) employer matching of contributions
by each named executive into the 401(k) plan in the amount of $5,000 for each
named executive officer, (ii) "make whole" payments under the Executive Deferred
Compensation Plan with respect to matching in the 401(k) plan on deferred salary
or salary received but not otherwise eligible for matching in the amounts of
$14,013, $4,950, $863, $2,540, and $3,354, respectively, and (iii) $45,983,
$19,409, $0, $9,959, and $11,384, respectively, which represents the present
value of interest projected to accrue for the executive's benefit on the current
year's insurance premiums paid by the company under a split-dollar life
insurance program. In 1997, the method of reporting insurance premiums was
changed to more accurately reflect the benefit received by the executive.
(4) Included in this total is a signing bonus in accordance with Mr. Sellman's
employment arrangement.
OPTION GRANTS IN LAST FISCAL YEAR
This table shows additional data regarding the options summarized above.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Grant Date
Individual Grants (1) Value
------------------------------------------------------------------------------------------------------------------
Percent of
Number of Total Grant
Securities Options Exercise Date
Underlying Granted to or Base Present
Options Employees in Price Expiration Value
Name Granted (#) Fiscal Year ($/Sh) Date ($) (2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard A. Abdoo 40,000 13.00% 29.34 5/18/2008 $121,376
Richard R. Grigg 20,000 6.50% 29.34 5/18/2008 $ 60,688
Michael B. Sellman 10,000 3.25% 29.34 5/18/2008 $ 30,344
Calvin H. Baker 10,000 3.25% 29.34 5/18/2008 $ 30,344
Kristine M. Krause 10,000 3.25% 29.34 5/18/2008 $ 30,344
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists of incentive and non-qualified stock options to purchase shares of
WEC common stock granted pursuant to the 1993 Omnibus Stock Incentive Plan on
May 19, 1998. These options have exercise prices equal to the fair market value
of the WEC shares on the date of grant and first become exercisable on the first
anniversary of the grant date, with 25% of the underlying shares becoming
exercisable at that time, an additional 25% of the option shares becoming
exercisable on each successive anniversary date, and full vesting on the fourth
anniversary date. Upon a "change in control" of WEC, as defined in the plan, or
upon retirement, permanent total disability or death of the option holder, these
options shall become immediately exercisable. These options were granted for a
term of ten years, subject to earlier termination in certain events related to
termination of employment. In the discretion of the Compensation Committee, the
exercise price may be paid by delivery (or attestation) of already-owned shares
and tax withholding obligations related to exercise may be satisfied by
withholding shares otherwise deliverable upon exercise, subject to certain
conditions. Subject to the limitations of the 1993 Omnibus Stock Incentive Plan,
the
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Compensation Committee has the power with the participant's consent to modify or
waive the restrictions on vesting of these options, to amend these options and
to grant extensions or to accelerate these options.
(2) An option pricing model (developed by Black-Scholes) was used to determine
the options' present value as of the date of the grant. The assumptions used in
the Black-Scholes equation are: market price of stock: $29.34; exercise price of
option: $29.34; stock volatility: 13.9%; annualized risk-free interest rate:
4.67%; exercise at the end of 10-year option term; and dividend yield: 5.13%.
WE's use of this model should not be construed as an endorsement of its
accuracy. The ultimate value of the options, if any, will depend upon the future
value of the WEC common stock, which cannot be forecast with reasonable
accuracy, and the optionee's investment decisions.
AGGREGATED FISCAL YEAR-END OPTION VALUES
No stock options were exercised by the named executive officers in 1998. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the exercise
price and the year-end market price multiplied by the number of shares
underlying the option.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
(#) ($)
------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard A. Abdoo 47,500 116,000 187,710 259,798
Richard R. Grigg 13,000 58,000 51,181 129,899
Michael B. Sellman 0 10,000 0 16,870
Calvin H. Baker 6,000 27,100 23,622 63,348
Kristine M. Krause 7,750 29,000 31,987 64,950
--------------------------------------------------------------------------------------------------------
</TABLE>
SEVERANCE POLICY
In 1995, the WEC Board adopted a Senior Executive Severance Policy to encourage
certain executive officers and other key employees, whose expertise has been
critical to WE's success, to remain with WE. The Severance Policy provides for
payment of severance to participants whose employment is terminated under
certain circumstances (e.g., terminations by WE that are other than for cause,
disability or retirement; terminations resulting from certain mergers or sales
of a business by WE; and terminations resulting from reductions in participants'
salaries, responsibilities or benefits) at any time before April 28, 2000.
Messrs. Abdoo and Sellman do not participate in the Severance Policy.
The severance benefits under the Severance Policy consist of: (i) three years'
salary and annual incentive compensation; (ii) payment of the actuarial
equivalent of the additional retirement benefits the participant would have
earned if he or she had remained employed for three more years; (iii) continued
medical, dental and life insurance coverage for three years; (iv) outplacement
services or the use of office space and support; and (v) financial planning.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES. The Compensation Committee, which is
comprised entirely of independent nonemployee directors, is responsible for
making decisions regarding succession planning and executive compensation. The
committee, which functions as a combined Compensation Committee for WE and WEC,
seeks to provide a competitive, performance-based executive compensation program
that enables WE to attract and retain key individuals and motivate them to
achieve WE's short- and long-term goals.
The committee believes that a substantial portion of overall executive
compensation should be at risk. Compensation plans for executives have been
designed so that compensation will vary from year to year dependent
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on achievement of individual and corporate goals that are aligned with the
interests of WE's and WEC's stockholders and customers.
The committee employs a nationally recognized compensation consultant, Towers
Perrin, to advise it on matters relating to the administration and design of the
executive compensation program. The consultant provides the committee with
information regarding competitive compensation levels, practices and trends.
To be fully informed of competitive compensation for WE's executive officer
positions, the committee relies on (i) an analysis of compensation data from a
survey of approximately 85 utilities conducted by the Edison Electric Institute,
a consortium of utilities considered to be the company's industry peers, and
(ii) a survey of compensation practices in general industry. The committee does
not mathematically average the data from these analyses but, rather, considers
them as separate views of the external market.
The committee also applies subjective judgment in evaluating the relative
importance of the many factors that are the basis for determining the various
elements of compensation.
ELEMENTS OF COMPENSATION. The executive compensation program primarily consists
of three elements: base salary, annual incentive compensation and long-term
incentive compensation.
OVERVIEW OF COMPENSATION IN 1998. As noted above, the committee seeks to tie its
compensation program to performance. 1998 was a year of transition. While all
goals were not met, significant improvements were generated in most areas and
strategic direction was provided to set the stage for growth and success in 1999
and beyond. Specific values of 1998 compensation for the Chief Executive Officer
and the four other most highly-compensated executive officers are included in
the Summary Compensation Table. The committee's basis for determining
appropriate levels of executive compensation for 1998 base salary, annual
incentive compensation and long-term incentive compensation is described below.
BASE SALARY. To determine appropriate executive base salaries, the committee
considered factors such as individual experience, performance and potential,
changes in duties and responsibilities, customer satisfaction, the reputation of
WE's utility operations, competitiveness of utility service rates and impact of
cost-control achievements. In addition, the committee reviewed executive
compensation practices for comparable positions at industry peer group
companies. In general, base salaries are targeted at or near the 50th percentile
of the industry peer group.
Except for Mr. Sellman, who was hired in March 1998, the base salaries for 1998
as listed in the Summary Compensation Table were determined in January 1998 and
were effective as of January 1, 1998.
ANNUAL INCENTIVE COMPENSATION. The committee administers WEC's Short-Term
Performance Plan, which provides annual cash incentive opportunities to
executive officers and other key employees. This annual incentive plan is
designed to promote the achievement of shareholder, customer, and
employee-focused objectives of WEC and its utility subsidiaries, including WE,
while recognizing individual and team performance of participants.
Annual incentive compensation awards are targeted at approximately the 75th
percentile of industry peer group practices. In 1998, target incentive awards
were set for participants that ranged from 15% to 55% of base salary. Each
participant is eligible to receive an award if pre-established corporate
performance goals are met. Awards may be increased by up to 100% of targeted
amounts, or reduced to zero, based on individual and team performance.
Performance goals for 1998 for most executives were weighted as 40% operational,
30% corporate financial, 20% business unit/department financial performance, and
10% related to improving customer satisfaction. Operational goals related to,
among other things, energy supply and transmission availability, delivery
reliability, responsiveness to customers, safety of operations, service recovery
initiatives, environmental stewardship, and employee training and development.
Corporate financial goals focused on achievement of target earnings per share.
Business unit/departmental financial performance focused on achievements
specific to each area. Customer satisfaction was measured by surveys to
determine the perceived value of the company's products and services relative to
those provided by competitors.
8
<PAGE> 12
The performance goals for Chairman of the Board and Chief Executive Officer
Abdoo were weighted as 70% corporate financial, 20% operational and
employee-related and 10% toward improving customer satisfaction. The performance
weightings for President and Chief Operating Officer Grigg were comparable to
Mr. Abdoo, except corporate financial goals were weighted 30% and operational
and employee-related goals were weighted 60%.
Awards for the named executive officers are shown in the Summary Compensation
Table. The committee cited several accomplishments, including, among others:
- - continued progress made in improving the company's nuclear operations,
- - conversion to a state-of-the-art customer services system,
- - storm restoration efforts,
- - significant involvement in the creation of the Midwest Independent
System Operator for the transmission system, and
- - the recognition received for diversity initiatives and environmental
efforts.
LONG-TERM INCENTIVE COMPENSATION. The committee administers WEC's 1993 Omnibus
Stock Incentive Plan, a long-term incentive plan designed to link the interests
of executives and other key employees to long-term shareholder value. The
long-term incentive plan allows the company to grant stock options, stock
appreciation rights, stock awards and performance units to participants. Equity
interests in WEC common stock provide an incentive to improve the performance
and value of the company in exchange for a share in the appreciation of the
value of WEC common stock. Long-term incentive awards are targeted at the 75th
percentile of industry peer group grant practices.
In 1998, the committee reviewed the long-term incentive program to ensure its
effectiveness in focusing executives to achieve the corporation's long-term
objectives. Awards to named executive officers were granted as indicated in the
Summary Compensation Table.
The committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the long-term incentive plan, the committee has
implemented stock ownership guidelines for participants. Guidelines for
executive officers range from 150% to 300% of base salary.
CHIEF EXECUTIVE OFFICER COMPENSATION. Among the principal responsibilities of
the committee are the review of performance and determination of compensation
for the Chief Executive Officer.
The committee evaluated Mr. Abdoo's performance and compensation was determined
in accordance with the executive compensation policies described above.
As part of a procedure instituted in 1995, the Compensation Committee chair
requested that nonemployee directors provide a written evaluation of the CEO's
performance. The directors' written feedback was reviewed by committee members
as part of its compensation determinations and has been shared with the CEO.
Mr. Abdoo's base salary of $585,000 continues to approximate the 50th percentile
of the data reviewed by the committee and therefore was not adjusted for 1998.
With respect to annual incentive compensation for 1998, the Compensation
Committee reviewed Mr. Abdoo's performance against his 1998 objectives. The
committee believes that Mr. Abdoo made significant progress on a number of
matters which has positioned the company for continued growth. The committee
specifically noted the role of the CEO in several operational accomplishments,
including:
- - his work toward continued improvements in nuclear operations, including
his frequent dialogue with nuclear regulators on the company's
progress,
- - the successful operation of Wisconsin Electric's fossil plants to meet
increased system demands,
- - continued growth in the organization's customer base,
9
<PAGE> 13
- - the establishment of the Midwest Independent System Operator for the
transmission system,
- - expanded environmental initiatives to promote clean energy alternatives
and support the development of renewable energy sources,
- - his support of the use of state-of-the-art technologies, and
- - his consistent support of strong labor-management relationships,
cross-cultural sensitivity, equal opportunity and diversity.
With respect to long-term incentive compensation, in keeping with the
Compensation Committee's philosophy as stated above, Mr. Abdoo was awarded stock
options and restricted stock in 1998 as set forth in the "Long-Term Compensation
Awards" column of the Summary Compensation Table to specifically link a portion
of his compensation to the achievement of WEC's long-term goals.
COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION. It is the
company's policy to take reasonable steps to obtain the corporate tax deduction
for compensation paid to its executive officers by qualifying for the exemptions
from limitation on such deductibility under Section 162(m) of the Internal
Revenue Code of 1986.
Respectfully submitted to WE's stockholders by the Compensation Committee of the
Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
John N. MacDonough
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
WE directors, nominees and executive officers as a group (17 persons) do not own
any of WE's stock, but do beneficially own 230,397 shares, including phantom
shares, of common stock of its parent company, Wisconsin Energy (less than 1% of
total WEC common stock outstanding). The following table lists the beneficial
ownership of WEC common stock of each director, nominee and executive officer
named in the Summary Compensation Table below, as of March 5, 1999. Included are
shares owned by each individual's spouse, minor children or any other relative
sharing the same residence, as well as shares held in a fiduciary capacity or
held in WEC's Stock Plus Investment Plan and Wisconsin Electric's Employee
Retirement Savings Plan ("ERSP").
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Number of
Name Shares Name Shares
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard A. Abdoo 86,335 Geneva B. Johnson 3,955
John F. Ahearne 1,569 Kristine M. Krause 17,852
Calvin H. Baker 17,541 John N. MacDonough 552
John F. Bergstrom 6,675 Julia B. North 742
Barbara L. Bowles 398 David K. Porter 21,699
Robert A. Cornog 6,556 Michael B. Sellman 3,515
Richard R. Grigg 22,621 Frederick P. Stratton, Jr. 8,492
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The shares listed above include (i) shares that may be purchased within 60 days
of March 5, 1999, pursuant to outstanding stock options, as follows: Mr. Abdoo
(47,500), Mr. Grigg (13,000), Mr. Baker (6,000), Ms. Krause (7,750), Mr. Porter
(9,500) and all directors and executive officers as a group (92,250) and (ii)
share units held in the WEC phantom common stock account under WEC's deferred
compensation plans as follows: Mr. Abdoo (10,981), Mr. Baker (5,405), Mr.
Bergstrom (3,675), Mr. Cornog (2,762), Mr. Grigg (778), Mrs. Johnson (1,048),
Ms. Krause (686), Ms. North (693), Mr. Porter (411), Mr. Sellman (1,204), Mr.
Stratton (3,092), and all directors and executive officers as a group (32,744);
share units are intended to reflect the performance of WEC common stock and are
payable in cash.
10
<PAGE> 14
Except for unexercised options and phantom shares, each individual has sole
voting and investment power as to all shares listed for such individual, except
the following individuals have shared voting and/or investment power as
indicated: Mr. Abdoo (8,994), Mr. Baker (336), Mr. Cornog (150), Ms. Krause
(3,929), Mr. Stratton (2,400), and all directors and executive officers as a
group (16,285).
Information on beneficially owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as required for purposes of this information
statement. It is not necessarily to be construed as an admission of beneficial
ownership for other purposes.
As indicated above, all of WE's outstanding common stock is owned by WEC.
SECTION 16(A) BENFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, requires the corporation's
officers, directors, and persons owning more than ten percent of a registered
class of the corporation's equity securities to file reports of ownership of
equity and derivative securities of WE. To the company's knowledge, all required
reports for fiscal year 1998 were filed in a timely manner with the Securities
and Exchange Commission, except one report that was filed a few days late to
permit the company to obtain information regarding the initial WE stock
ownership position of Mr. MacDonough.
RETIREMENT PLANS
Wisconsin Electric maintains a defined benefit pension plan of the cash balance
type for most employees, including WE executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, with an adjustment to reflect the Social Security
integrated benefit. In addition, individuals participating in the plan as of
December 31, 1995 received a special one-time transition credit amount equal to
a specified percentage varying with age multiplied by credited service and 1994
base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit were also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to 5%
of base pay (including certain incentive payments, pre-tax deferrals and other
items), plus an interest credit on all prior accruals equal to 4% plus 75% of
the annual time-weighted trust investment return for the year in excess of 4%.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form. Individuals who were
participants in the plan on December 31, 1995 are in no event to receive any
less than what would have been provided under the prior formula, had it
continued, if they terminate on or before January 1, 2011.
For the individuals listed in the Summary Compensation Table, except for Mr.
Sellman who has a special agreement described below, estimated benefits under
the prior plan formula are higher than under the cash balance plan formula. As a
result, their benefits would currently be determined by the prior plan benefit
formula. The following table shows estimated annual benefits payable in life
annuity form on normal retirement for persons in various compensation and years
of service classifications during 1998, based on the continuation of the prior
plan formula (including supplemental amounts providing additional benefits
described below in the "Other Retirement Benefits" section):
11
<PAGE> 15
PENSION PLAN TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years of Service
- -----------------------------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35 40
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 10,715 $ 14,287 $ 17,859 $ 21,431 $ 23,498 $ 25,565
100,000 23,652 31,536 39,420 47,304 51,808 56,312
150,000 36,590 48,787 60,984 73,176 80,123 87,065
200,000 49,527 66,036 82,545 99,054 108,433 117,812
250,000 62,464 83,285 104,106 124,927 136,744 148,561
- -----------------------------------------------------------------------------------------------------------------
300,000 75,402 100,536 125,670 150,804 165,058 179,312
400,000 101,277 135,036 168,795 202,554 221,683 240,812
500,000 127,152 169,536 211,920 254,304 278,308 302,312
600,000 153,027 204,036 255,045 306,054 334,933 363,812
700,000 178,902 238,536 298,170 357,804 391,558 425,312
- -----------------------------------------------------------------------------------------------------------------
800,000 204,777 273,036 341,295 409,554 448,183 486,812
900,000 230,652 307,536 384,420 461,304 504,808 548,312
1,000,000 256,527 342,036 427,545 513,054 561,433 609,812
1,100,000 282,402 376,536 470,670 564,804 618,058 671,312
1,200,000 308,277 411,036 513,795 616,554 674,683 732,812
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The compensation for the individuals listed in the Summary Compensation Table in
the columns labeled "Salary" and "Bonus" is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans, except that Mr. Sellman's covered compensation is $272,087.
Messrs. Abdoo, Grigg, Sellman, Baker and Ms. Krause, currently have 23, 28, 1, 7
and 20 credited years of service, respectively.
As noted above, Mr. Sellman is not eligible under the prior plan benefit
formula. The estimated annual benefits payable in life annuity form at ages 60
and 65 for Mr. Sellman under the cash balance plan formula, utilizing current
assumptions under that plan and assuming average annual compensation increases
of approximately 4% and including supplemental amounts providing additional
benefits described below under "Other Retirement Benefits" are $92,469 and
$151,384, respectively.
OTHER RETIREMENT BENEFITS. Designated officers of WEC and WE, including all of
the individuals named in the Summary Compensation Table, participate in the
Supplemental Executive Retirement Plan ("SERP"). The SERP provides monthly
supplemental pension benefits to participants, which will be paid out of
unsecured corporate assets, or the grantor trust described below, as follows:
(i) an amount equal to the difference between the actual pension benefit payable
under the pension plan and what such pension benefit would be if calculated
without regard to any limitation imposed by the Internal Revenue Code on pension
benefits or covered compensation; and (ii) an amount calculated so as to provide
participants with a supplemental lifetime annuity, estimated to amount to
between 8% and 10% of final average compensation depending on which pension
payment option is selected. Except for a "change in control" of WEC, as defined
in the SERP, no payments are made until after the participant's retirement or
death. WEC and/or WE have entered into agreements with Messrs. Abdoo, Baker, and
Sellman who cannot accumulate by normal retirement age the maximum number of
years of credited service under the pension plan formula in effect immediately
before the change to the cash balance formula, as described below:
- - According to Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 58 or older substantially the same as those payable to
employees who are age 60 or older, who are in the same compensation bracket
and who became plan participants at the age of 25.
- - According to Mr. Baker's agreement, Mr. Baker at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 60 or older substantially the same as those payable to
employees who are in the same compensation bracket and who became plan
participants at the age of 25.
- - Mr. Sellman has a special contingent deferred compensation benefit under
which he would receive a lump sum payment on his termination of employment
with WE at or after age 60 or because of disability or death at any time.
The payment would be equal to the total amount that would have resulted if
an amount of $422,000 had
12
<PAGE> 16
been initially credited to him as of January 1, 1998, in the WE pension
plan described above and is credited with the same investment results as if
held in such plan. This amount has been included in the estimated annual
life annuity benefits information provided for Mr. Sellman described above.
The benefit is forfeitable should Mr. Sellman's employment cease prior to
age 60 other than because of disability or death.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's, Mr.
Baker's and Mr. Sellman's agreements. The plans and agreements provide for
optional lump sum payments and, in the instance of a change in control,
mandatory lump sum payouts without regard to whether the executive's employment
has terminated. In each case, the interest rate benchmark formula for
calculating the lump sum amount is the five-year U. S. Treasury Note yield as of
the last business day of the month prior to date of payment.
AVAILABILITY OF FORM 10-K
A COPY (WITHOUT EXHIBITS) OF THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
AVAILABLE WITHOUT CHARGE TO ANY STOCKHOLDER OF RECORD OR BENEFICIAL OWNER OF WE
COMMON STOCK BY WRITING TO THE CORPORATE SECRETARY, THOMAS H. FEHRING, 231 WEST
MICHIGAN STREET, P. O. BOX 2046, MILWAUKEE, WISCONSIN 53201. FINANCIAL
STATEMENTS AND CERTAIN OTHER INFORMATION FOUND IN THE FORM 10-K ARE INCLUDED IN
THE ACCOMPANYING WE 1998 ANNUAL REPORT TO STOCKHOLDERS.
13
<PAGE> 17
WISCONSIN ELECTRIC POWER COMPANY
1998 ANNUAL REPORT TO STOCKHOLDERS
ACCOMPANYING INFORMATION STATEMENT
TABLE OF CONTENTS
ITEM PAGE
---- ----
Business A-2
Market for Common Equity and Related Stockholder Matters A-2
Selected Financial Data A-3
Management's Discussion and Analysis of Financial Condition
and Results of Operations A-4
Income Statement A-35
Balance Sheet
Assets A-36
Capitalization and Liabilities A-37
Statement of Cash Flows A-38
Capitalization Statement A-39
Common Equity Statement A-40
Notes to Financial Statements A-41
Report of Independent Accountants A-54
Directors A-55
Executive Officers A-55
A-1
<PAGE> 18
BUSINESS
Wisconsin Electric Power Company ("Wisconsin Electric") is an electric, gas
and steam utility incorporated in the State of Wisconsin in 1896.
Wisconsin Electric's operations are conducted in the following three
business segments.
ELECTRIC OPERATIONS: Wisconsin Electric's electric operations generate,
transmit, distribute and sell electric energy in a territory of
approximately 12,000 square miles with a population estimated at 2,300,000
in southeastern (including the metropolitan Milwaukee area), east central
and northern Wisconsin and in the Upper Peninsula of Michigan.
GAS OPERATIONS: Wisconsin Electric's gas operations purchase, distribute
and sell natural gas to retail customers and transport customer-owned gas
in four distinct service areas of about 3,800 square miles in Wisconsin:
west and south of the City of Milwaukee, the Appleton area, the Prairie du
Chien area and areas within Iron and Vilas Counties. The gas service
territory has an estimated population of approximately 1,200,000.
STEAM OPERATIONS: Wisconsin Electric's steam operations generate,
distribute and sell steam supplied by its Valley and Milwaukee County Power
Plants. Steam is used by customers for space heating and processing in the
metropolitan Milwaukee area.
For additional financial information about Wisconsin Electric's business
segments, see "Note K - Segment Reporting" in the Notes to Financial
Statements.
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Cash dividends declared on Wisconsin Electric Power Company's common stock
during the two most recent fiscal years are set forth below. Dividends
were paid to Wisconsin Electric's sole common stockholder, Wisconsin Energy
Corporation.
<TABLE>
<CAPTION>
Total Dividend
------------------------
Quarter 1998 1997
------- ---- ----
<S> <C> <C>
First $ 44,322,000 $ 80,726,000
Second 44,893,000 44,322,000
Third 44,893,000 44,322,000
Fourth 44,893,000 44,322,000
------------ ------------
Total $179,001,000 $213,692,000
============ ============
</TABLE>
A-2
<PAGE> 19
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
SELECTED FINANCIAL DATA
(Thousands of Dollars)
---------------------------------------------------------------
Financial 1998 1997 1996 1995 1994
- --------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Earnings available for
common stockholder $ 182,971 $ 69,412 (a) $ 210,112 $ 239,465 $ 180,403 (b)
Operating revenues
Electric $1,641,403 $1,412,115 $1,393,270 $1,437,480 $1,403,562
Gas 295,848 355,172 364,875 318,262 324,349
Steam 20,506 22,315 15,675 14,742 14,281
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,957,757 $1,789,602 $1,773,820 $1,770,484 $1,742,192
========== ========== ========== ========== ==========
At December 31
Total assets $4,768,942 $4,667,840 $4,507,160 $4,318,924 $4,202,193
Long-term debt and preferred
stock - redemption required $1,512,531 $1,448,558 $1,371,446 $1,325,169 $1,257,776
Sales and Customers - Utility 1998 1997 1996 1995 1994
- -------------------------------- ---- ---- ---- ---- ----
Electric
Megawatt-hours sold 29,475,163 27,671,946 27,560,428 27,283,869 26,911,363
Customers (End of year) 988,929 978,835 968,735 955,616 944,855
Gas
Therms delivered (Thousands) 922,836 983,676 936,894 886,729 811,219
Customers (End of year) 388,478 376,732 367,275 357,030 347,080
Steam
Pounds sold (Millions) 2,773 3,161 2,705 2,532 2,395
Customers (End of year) 454 474 465 473 471
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
(Thousands of Dollars)
---------------------------------------------------
March June
--------------------- --------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $510,681 $510,383 $461,771 $403,214
Operating income 67,411 65,637 54,623 31,716
Earnings available for
common stockholder 49,995 43,386 31,071 (6,353)
<CAPTION>
September December
--------------------- --------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $496,603 $400,614 $488,702 $475,391
Operating income 82,839 46,441 68,823 55,665
Earnings available for
common stockholder 57,956 22,321 43,949 10,058
</TABLE>
Quarterly results of operations are not directly comparable because of seasonal
and other factors. See Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Earnings and dividends per share are not provided as all of Wisconsin Electric
Power Company's common stock is held by Wisconsin Energy Corporation.
(a) Includes May 1997 nonrecurring $22 million charge ($13 million net of tax)
to write-off deferred merger costs related to the terminated merger
agreement with Northern States Power Company and December 1997 $30 million
write-down ($18 million net of tax) of equipment purchased for the Kimberly
Cogeneration Project.
(b) Includes 1994 nonrecurring $74 million charge ($45 million net of tax) for
Wisconsin Electric Power Company's restructuring program.
A-3
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation is a holding company whose principal
subsidiary is Wisconsin Electric Power Company ("Wisconsin Electric"), an
electric, gas and steam utility. Unless qualified by the context used in
this document, the terms "Wisconsin Energy" or the "Company" refer to the
holding company and all of its subsidiaries. As of December 31, 1998,
approximately 89% of the Company's consolidated total assets were
attributable to Wisconsin Electric. The following discussion and analysis
of financial condition and results of operations includes both Wisconsin
Energy and Wisconsin Electric unless otherwise stated.
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy
acquired ESELCO, Inc. ("ESELCO"), a holding company whose principal
subsidiary was Edison Sault Electric Company ("Edison Sault"), in a tax
free reorganization accounted for as a pooling of interests. Due to the
immaterial nature of the transaction, Wisconsin Energy has not restated any
historical financial or statistical information. Wisconsin Energy is
operating Wisconsin Electric and Edison Sault, an electric utility, as
separate subsidiaries within their historical service territories. The
discussion that follows below includes Edison Sault's activity since
June 1, 1998. Wisconsin Electric and Edison Sault continue to be
separately regulated by their respective states. For additional
information, see "Factors Affecting Results of Operations - Mergers" below.
CAUTIONARY FACTORS: A number of forward-looking statements are included
in this document. When used, the terms "anticipate", "believe",
"estimate", "expect", "objective", "plan", "possible", "potential",
"project" and similar expressions are intended to identify such forward-
looking statements. Forward-looking statements are subject to certain
risks, uncertainties and assumptions which could cause actual results to
differ materially from those that are described, including the factors
described below under "Factors Affecting Results of Operations" and under
"Cautionary Factors."
RESULTS OF OPERATIONS
See "Note K - Segment Reporting" in the Notes To Financial Statements for
additional information related to Wisconsin Energy's and Wisconsin
Electric's results of operations.
EARNINGS
1998 COMPARED TO 1997: During 1998, Wisconsin Energy's consolidated net
income and earnings per share of common stock were $188 million and $1.65,
respectively, compared to $61 million and $0.54 per share during 1997.
Between the comparative periods, Wisconsin Electric's earnings increased
from $69 million during 1997 to $183 million during 1998. As described in
further detail below, 1998 earnings increased primarily because increased
revenues from interim and final 1998 retail rate increases for Wisconsin
Electric's customers in the State of Wisconsin and from an increase in
total 1998 electric kilowatt-hour sales more than offset the effects of
reduced natural gas therm deliveries as well as the effects of increased
operating expenses during 1998. Strengthened performance at Wisconsin
Electric's Point Beach Nuclear Plant ("Point Beach") also contributed to
increased comparative earnings during 1998. Comparative earnings during
1997 were negatively impacted by (1) a one-time charge of $31 million at
Wisconsin Energy ($19 million net of tax or 17 cents per share) for the
write-off of deferred costs related to Wisconsin Energy's terminated merger
agreement with Northern States Power Company, a Minnesota corporation
("NSP"), (2) a one-time $30 million impairment charge at Wisconsin Electric
($18 million net of tax or 16 cents per share) for its Kimberly
Cogeneration Equipment, and (3) increased costs beyond those included in
electric rates associated with buying replacement power for both generating
units at Point Beach, which were out of service during a large part of
1997.
1997 COMPARED TO 1996: Compared to consolidated net income of
$218 million and earnings per share of $1.97 during 1996, Wisconsin Energy's
consolidated net income and earnings per share were $61 million and $0.54
per share, respectively, during 1997. Wisconsin Electric's earnings
decreased from $210 million in 1996 to $69 million in 1997. As described
further below, 1997 earnings decreased primarily due to (1) significantly
higher fuel and purchased power expenses, (2) increased other operation and
maintenance expenses, (3) higher depreciation expense, (4) the one-time
write-off in the second quarter of 1997 of deferred costs related to
Wisconsin Energy's
A-4
<PAGE> 21
terminated merger agreement with NSP, (5) the one-time impairment charge in the
fourth quarter of 1997 for the write-down to fair value of Wisconsin Electric's
Kimberly Cogeneration Equipment, and (6) retail electric and gas rate decreases
that became effective in February 1997.
ELECTRIC REVENUES, GROSS MARGINS AND SALES
The following table summarizes Wisconsin Energy's and Wisconsin Electric's
electric revenues, gross margins, sales and customers for each of the three
years ended December 31.
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Electric Operations 1998 1997 to 1998 1996 to 1997
------------------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
WISCONSIN ENERGY:
Electric Gross Margin ($000's)
Total Operating Revenues $1,663,632 $1,412,115 17.8% $1,393,270 1.4%
Total Fuel & Purchased Power 461,365 444,655 3.8% 331,867 34.0%
---------- ---------- ----------
Gross Margin $1,202,267 $ 967,460 24.3% $1,061,403 (8.9%)
========== ========== ==========
Total Electric Sales (Mwh) 29,940,384 27,671,946 8.2% 27,560,428 0.4%
Total Average Customers 1,009,223 972,593 3.8% 962,020 1.1%
WISCONSIN ELECTRIC:
Electric Gross Margin ($000's)
Operating Revenues
Residential $ 571,378 $ 487,219 17.3% $ 494,142 (1.4%)
Small Commercial/Industrial 487,549 430,193 13.3% 421,511 2.1%
Large Commercial/Industrial 450,138 402,684 11.8% 383,047 5.1%
Other-Retail/Municipal 51,211 55,246 (7.3%) 56,318 (1.9%)
Resale-Utilities 60,927 24,538 148.3% 26,372 (7.0%)
Other Operating Revenues 20,200 12,235 65.1% 11,880 3.0%
---------- ---------- ----------
Total Operating Revenues 1,641,403 1,412,115 16.2% 1,393,270 1.4%
Fuel & Purchased Power
Fuel 308,374 311,966 (1.2%) 295,651 5.5%
Purchased Power 141,619 132,689 6.7% 36,216 266.4%
---------- ---------- ----------
Total Fuel & Purchased Power 449,993 444,655 1.2% 331,867 34.0%
---------- ---------- ----------
Gross Margin $1,191,410 $ 967,460 23.2% $1,061,403 (8.9%)
========== ========== ==========
Sales (Mwh)
Residential 7,327,024 6,863,569 6.8% 6,998,769 (1.9%)
Small Commercial/Industrial 7,612,397 7,433,087 2.4% 7,204,694 3.2%
Large Commercial/Industrial 11,391,979 11,021,476 3.4% 10,785,505 2.2%
Other-Retail/Municipal 1,287,162 1,412,623 (8.9%) 1,476,999 (4.4%)
Resale-Utilities 1,856,601 941,191 97.3% 1,094,461 (14.0%)
---------- ---------- ----------
Total Electric Sales 29,475,163 27,671,946 6.5% 27,560,428 0.4%
========== ========== ==========
Average Customers
Residential 886,635 876,776 1.1% 867,917 1.0%
Small Commercial/Industrial 94,675 93,259 1.5% 91,565 1.9%
Large Commercial/Industrial 720 714 0.8% 706 1.1%
Other-Retail/Municipal 1,804 1,811 (0.4%) 1,812 0.0%
Resale-Utilities 51 33 54.5% 20 65.0%
---------- ---------- ----------
Total Average Customers 983,885 972,593 1.2% 962,020 1.1%
========== ========== ==========
</TABLE>
A-5
<PAGE> 22
1998 COMPARED TO 1997: Primarily due to retail electric rate increases
during 1998 for Wisconsin Electric's customers in the State of Wisconsin
and to an increase in total 1998 electric kilowatt-hour sales, total
electric operating revenues increased by $252 million or 17.8% during 1998
compared to 1997. Between the comparative periods, the gross margin on
electric operating revenues (total electric operating revenues less fuel
and purchased power expenses) increased by $235 million or 24.3%. The
discussion that follows reflects Wisconsin Electric's contribution to
Wisconsin Energy's 1998 electric revenues, gross margin and sales.
Wisconsin Electric's total electric operating revenues increased by
$229 million or 16.2% during 1998 compared to 1997 and the gross margin on
electric operating revenues increased by $224 million or 23.2%. Wisconsin
Electric attributes these increases to (1) an interim Wisconsin retail
electric rate increase, effective from January 1, 1998 through April 30,
1998, of $135 million on an annualized basis, (2) a final Wisconsin retail
electric rate increase, effective May 1, 1998, of $160 million or 12.7% on
an annualized basis, and (3) increased total electric kilowatt-hour sales
during 1998. The increase in gross margin can also be partly attributed to
a smaller rate of increase in total fuel and purchased power costs during
1998 compared to the rate of increase in total electric sales and electric
operating revenues.
Total fuel and purchased power expenses at Wisconsin Electric increased by
$5 million or 1.2% compared to 1997. Increased availability of lower cost
per kilowatt-hour generating capacity at Point Beach during 1998 allowed
Wisconsin Electric to generate 11.3% more electricity while enjoying a 1.2%
decrease in fuel costs compared to 1997. However, despite a 17.7% decrease
in megawatt-hour power purchases between the comparative periods, purchased
power expense increased 6.7%, resulting in the net increase in total fuel
and purchased power expenses. Contributing to the increased purchased
power expenses, Wisconsin Electric arranged for the purchase of more
reliable firm supplies of energy and incurred a full twelve months of
demand charges for the first time under a long-term power purchase contract
with LSP-Whitewater Limited Partnership ("LS Power") during 1998, resulting
in higher fixed contract and power transportation costs. In addition, the
per unit cost of wholesale electric energy fluctuated more during 1998
compared to 1997, increasing the cost of certain spot market purchases.
Total electric kilowatt-hour sales increased 6.5% during 1998 compared to
1997. Increased use per customer by residential and large
commercial/industrial customers, combined with growth in the number of
residential and small commercial/industrial customers, contributed to the
increase in total electric kilowatt-hour sales. Warmer weather during the
cooling load months of 1998 also contributed to the increase in 1998 sales,
especially to residential and small commercial/industrial customers who
tend to be more weather sensitive. Electric energy sales to the Empire and
Tilden ore mines, Wisconsin Electric's two largest electric retail
customers, increased 7.4% between the comparative periods primarily due to
a temporary shutdown of the Tilden mine during July and August 1997.
Excluding the Empire and Tilden ore mines, total 1998 electric sales at
Wisconsin Electric increased 6.4% and sales to the remaining large
commercial/industrial customers increased 2.3%. During 1998, sales in the
other-retail/municipal customer class decreased 8.9% primarily due to
reduced contractual requirements nominations, effective May 1997, by
Wisconsin Public Power Inc., Wisconsin Electric's largest municipal
wholesale customer. This customer had been reducing its purchases from
Wisconsin Electric over the past several years subsequent to acquiring
generating capacity and expanding use of its existing generation
facilities. Mostly due to higher opportunity sales, sales for resale to
other utilities, the resale-utilities customer class, increased 97.3% in
1998 compared to 1997.
1997 COMPARED TO 1996: Primarily due to a fuel surcharge in Wisconsin
Electric's electric retail jurisdiction in the State of Wisconsin,
effective May 24, 1997, total electric operating revenues increased by
$19 million or 1.4% during 1997 compared to 1996. Revenues from the fuel
surcharge offset the impact on electric operating revenues of a retail
electric rate decrease in the State of Wisconsin, effective February 18,
1997, of $7 million or 0.6% on an annualized basis.
The gross margin on electric operating revenues decreased by $94 million or
8.9% primarily due to significantly higher fuel and purchased power
expenses. Compared to 1996, fuel and purchased power expenses increased by
$113 million or 34.0% during 1997 as a result of (1) extended outages at
Point Beach, (2) an extended maintenance outage at Oak Creek Power Plant
that was concluded in June 1997, (3) delayed commercial operation of
contractual generating capacity from LS Power, and (4) higher costs per
megawatt-hour of power purchases due to regional generation outages.
During 1997, Wisconsin Electric replaced its lost generating capacity with
higher cost
A-6
<PAGE> 23
generation and with a 218% increase in megawatt-hours of power purchases.
Partially offsetting the increased 1997 fuel and purchased power expenses,
Wisconsin Electric recorded $24 million of revenues during 1997 as a result of
the fuel surcharge. For further information concerning the 1997 fuel surcharge
and the extended outages at Point Beach, see "Rates and Regulatory Matters" and
"Nuclear Matters", respectively, below under "Factors Affecting Results of
Operations."
Total electric sales increased by 0.4% during 1997 compared to 1996.
Increased 1997 sales to small commercial/industrial and to large
commercial/industrial customers were almost completely offset by decreased
sales to customers in the residential, the other-retail/municipal and
resale-utilities customer classes.
Total 1997 electric sales were positively impacted by growth in the number
of customers in the residential, the small commercial/industrial and
especially in the large commercial/industrial customer classes and by
increased use per customer by small and by large commercial/industrial
customers. Cooler weather during the summer of 1997 compared to the summer
1996, however, primarily contributed to lower use per residential customer
and to the decrease in 1997 residential electric sales. Compared to 1996,
electric energy sales to the Empire and Tilden ore mines decreased by 5.4%
in 1997 due to the temporary shutdown in 1997 of the Tilden ore mine noted
above. Excluding the Empire and Tilden ore mines, total electric sales
increased 1.0% and sales to the remaining large commercial/industrial
customers increased 4.3% between the comparative periods.
1997 sales in the other-retail/municipal customer class decreased 4.4%
compared to 1996 primarily due to the continued phase out in 1997 of firm
requirements contracts totaling 12.5 megawatts with two wholesale customers
and a reduction of 30 megawatts in contractual requirements nominations
during 1997 by Wisconsin Public Power Inc.. Sales for resale to other
utilities, the resale-utilities customer class, decreased 14.0% primarily
as a result of reduced opportunity sales caused by the Point Beach and Oak
Creek Power Plant outages mentioned above.
GAS REVENUES, GROSS MARGINS AND THERM DELIVERIES
The following table summarizes Wisconsin Electric's gas operating revenues,
gross margins, therm deliveries and average customers for each of the three
years ended December 31.
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Gas Operations 1998 1997 to 1998 1996 to 1997
-------------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Gas Gross Margin ($000's)
Operating Revenues
Residential $176,499 $221,968 (20.5%) $218,811 1.4%
Commercial/Industrial 87,899 113,609 (22.6%) 108,100 5.1%
Interruptible 7,003 8,970 (21.9%) 11,531 (22.2%)
Interdepartmental 138 3,096 (95.5%) 3,050 1.5%
-------- -------- --------
Total Gas Sales 271,539 347,643 (21.9%) 341,492 1.8%
Transported Customer Owned Gas 12,014 11,295 6.4% 11,006 2.6%
Transported - Interdepartmental 2,462 2,105 17.0% 725 190.3%
Other Operating Revenues 9,833 (5,871) 267.5% 11,652 (150.4%)
-------- -------- --------
Total Operating Revenues 295,848 355,172 (16.7%) 364,875 (2.7%)
Cost of Gas Sold 175,475 233,877 (25.0%) 234,254 (0.2%)
-------- -------- --------
Gross Margin $120,373 $121,295 (0.8%) $130,621 (7.1%)
======== ======== ========
</TABLE>
A-7
<PAGE> 24
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Gas Operations - (cont'd) 1998 1997 to 1998 1996 to 1997
------------------------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Therms Delivered (000's)
Residential 289,509 347,859 (16.8%) 371,990 (6.5%)
Commercial/Industrial 182,033 211,453 (13.9%) 225,169 (6.1%)
Interruptible 22,872 24,532 (6.8%) 35,869 (31.6%)
Interdepartmental 398 9,696 (95.9%) 11,280 (14.0%)
-------- -------- --------
Total Gas Sales 494,812 593,540 (16.6%) 644,308 (7.9%)
Transported Customer Owned Gas 349,443 313,466 11.5% 268,163 16.9%
Transported - Interdepartmental 78,581 76,670 2.5% 24,423 213.9%
-------- -------- --------
Total Gas Delivered 922,836 983,676 (6.2%) 936,894 5.0%
======== ======== ========
Average Customers
Residential 347,747 339,002 2.6% 330,153 2.7%
Commercial/Industrial 31,586 30,594 3.2% 29,936 2.2%
Interruptible 146 170 (14.1%) 190 (10.5%)
Interdepartmental -- 2 (100.0%) 4 (50.0%)
-------- -------- --------
Total Sales Customers 379,479 369,768 2.6% 360,283 2.6%
Transportation 271 254 6.7% 230 10.4%
Transportation - Interdepartmental 6 5 20.0% 4 25.0%
-------- -------- --------
Total Average Customers 379,756 370,027 2.6% 360,517 2.6%
======== ======== ========
</TABLE>
1998 COMPARED TO 1997: Despite an interim retail gas rate increase,
effective from January 1, 1998 through April 30, 1998, of $19 million on an
annualized basis and despite a final retail gas rate increase, effective
May 1, 1998, of $19 million or 5.4% on an annualized basis, total gas
operating revenues decreased by $59 million or 16.7% and the gross margin
on gas operating revenues (gas operating revenues less cost of gas sold)
decreased by $1 million or 0.8% during 1998 compared to 1997. Between the
comparative periods, the cost of gas sold decreased by $58 million or 25.0%
due to decreased gas sales and to a lower cost per unit of purchased gas.
Changes in the cost of natural gas purchased at market prices are included
in customer rates through the purchased gas adjustment mechanism, reducing
1998 operating revenues but not gross margin. See "Rates and Regulatory
Matters" below in "Factors Affecting Results of Operations" for additional
information concerning the purchased gas adjustment mechanism. Total gas
operating revenues and gross margin both declined in 1998 due to a decrease
in therm deliveries, especially to residential and commercial/industrial
customers who contribute higher margins to earnings than other customers.
Other operating revenues reflect adjustments for over and under collection
of gas costs included in operating revenues from gas sales.
Compared to the same period in 1997, total natural gas therm deliveries
decreased 6.2% during 1998 primarily due to significantly lower therm use
per residential and commercial/industrial customer. While the number of
residential and commercial/industrial customers increased between the
comparative periods, residential and commercial/industrial therm deliveries
decreased 16.8% and 13.9%, respectfully, due in large part to warmer
weather during the heating months of 1998. During 1998, therm deliveries
to the Whitewater Cogeneration Facility, owned by LS Power, an unaffiliated
independent power producer, primarily contributed to an 11.5% increase in
transported customer owned gas deliveries. The Whitewater Cogeneration
Facility, a gas-fired electric cogeneration plant in Wisconsin Electric's
gas service territory, went into commercial operation in September 1997.
Wisconsin Electric purchases the majority of the electricity generated by
the Whitewater Cogeneration Facility under a long-term power purchase
contract. During 1998, natural gas therm deliveries to the
interdepartmental customer classes decreased 8.6% primarily due to
increased availability of Point Beach, allowing Wisconsin Electric to
reduce generation at its Concord and Paris Power Plants, natural gas-fired
peaking facilities. Therm deliveries to the Concord and Paris Power Plants
are at rates approved by the Public Service Commission of Wisconsin
("PSCW").
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<PAGE> 25
Excluding deliveries to Wisconsin Electric's facilities, total therm deliveries
during 1998 decreased 6.0% compared to 1997.
1997 COMPARED TO 1996: Total gas operating revenues decreased by
$10 million or 2.7% during 1997 compared to 1996, and the gross margin on
gas operating revenues decreased by $9 million or 7.1%. Total gas
operating revenues and gross margin declined primarily due to an annualized
gas retail rate decrease, effective February 18, 1997, of $6 million or
2.0% on an annualized basis and to a weather-related decrease in therm
deliveries to residential and commercial/industrial customers. As noted
above, other operating revenues reflect adjustments for over and under
collection of gas costs included in operating revenues from gas sales.
Cost of gas sold was unchanged between the comparative periods. An 8.4%
increase in 1997 in the per unit cost of purchased gas was offset by a 7.9%
decrease in total gas purchases during 1997. Wisconsin Electric arranges
for its own gas supply contracts with terms of various lengths. As noted
above, changes in the cost of natural gas purchased affect operating
revenues due to the purchased gas adjustment mechanism but do not affect
gross margin.
Total natural gas therm deliveries increased by 5.0% in 1997 compared to
1996. Decreased deliveries to the residential, the commercial/industrial
and the interruptible customer classes during 1997 were more than offset by
increased interdepartmental deliveries to Wisconsin Electric-owned gas-
fired generating facilities and increased deliveries of transported -
customer owned gas. Despite an increase in the average number of
residential and commercial/industrial customers during 1997 compared to
1996, deliveries to these two customer classes decreased between the
comparative periods primarily due to warmer weather during the 1997 heating
seasons. These customers are more sensitive to weather variations as a
result of heating requirements and contribute higher margins to earnings
than other customer classes. Therm deliveries to interruptible customers
decreased during 1997 compared to 1996 due to a decrease in the average
number of interruptible customers and the average therm use per
Interruptible customer.
Deliveries of transported - customer owned gas increased by 16.9% during
1997 compared to 1996 due to an increase in the average number of transport
customers and to an increase in the average therm use per transport
customer. During 1997, a number of sales customers switched to become
transportation customers. Also, increased deliveries of transported -
customer owned gas in 1997 reflect start-up in September 1997 of commercial
operations of LS Power's Whitewater Cogeneration Facility.
Due to the Point Beach and Oak Creek plant outages noted above, Wisconsin
Electric increased generation at its natural gas-fired Concord and Paris
Power Plants, resulting in a 142% increase in total 1997 interdepartmental
deliveries compared to 1996. Excluding interdepartmental deliveries, total
1997 therm deliveries decreased 0.8% compared to 1996.
For further information concerning Wisconsin Electric's 1996, 1997 and 1998
Rate Orders, see "Rates and Regulatory Matters" below under "Factors
Affecting Results of Operations."
OPERATING EXPENSES
1998 COMPARED TO 1997: During 1998, Wisconsin Energy's other operation
and maintenance expenses increased by $107 million or 19.7% compared to
1997, including a $49 million increase in Wisconsin Electric's nuclear non-
fuel expenses, a $40 million increase in Wisconsin Electric's
administrative and general expenses, an $11 million increase in Wisconsin
Electric's electric distribution expenses and a $10 million increase in
Wisconsin Electric's non-nuclear, non-fuel power generation expenses.
Nuclear non-fuel expenses increased during 1998 primarily due to efforts by
Wisconsin Electric to continue to improve the overall performance at Point
Beach. Also influencing the 1998 increase in nuclear non-fuel expenses,
Wisconsin Electric deferred $18 million of nuclear non-fuel operation
expenses during 1997 and began amortizing these deferred costs to expense
in 1998 on a five-year straight line basis. See "Nuclear Matters" below in
"Factors Affecting Results of Operations" for additional information
concerning Wisconsin Electric's Point Beach Nuclear Plant. Administrative
and general expenses increased during 1998 primarily due to efforts to
resolve Year 2000 technology issues, to various other corporate technology
improvement efforts and to increased staffing and higher employee pension
and benefit expenses. For further information, see "Year 2000 Technology
Issues" below in "Factors Affecting Results of Operations." Electric
distribution expenses
A-9
<PAGE> 26
increased in large part as a result of damage from an unusually high number of
violent storms that struck Wisconsin Electric's service territory during 1998
and as a result of increased tree trimming/forestry efforts intended to improve
reliability of the electric distribution system. Non-nuclear, non-fuel power
generation expenses increased primarily due to a scheduled maintenance outage at
Wisconsin Electric's Oak Creek Power Plant during the second quarter of 1998 and
to other reliability improvement efforts.
The increase in depreciation expense during 1998 is the net result of
several factors at Wisconsin Electric. Depreciation expense increased as a
result of increased (1) depreciable plant during 1998, (2) amortizable
software during 1998, and (3) decommissioning expenses during 1998 compared
to 1997. This was offset to a large extent by a change in the regulatory
accounting treatment of pre-1991 contribution in aid of construction
balances, which had the effect of reducing current year depreciation
expense. For further information, see "Note C - Depreciation" in the Notes
to Financial Statements. Total operating income taxes increased as a
result of higher taxable income.
1997 COMPARED TO 1996: During 1997, Wisconsin Energy's other operation
and maintenance expenses increased by $48 million or 9.6% compared to 1996,
including a $33 million increase in non-fuel nuclear expenses, an
$11 million increase in administrative and general expenses and an
$8 million increase in transmission system expenses. Non-fuel nuclear
expenses increased during 1997 due to extended and unscheduled generating
unit outages at Point Beach and due to efforts by Wisconsin Electric's
nuclear operations to strengthen plant performance. During 1997,
administrative and general expenses increased primarily due to higher
salaries and outside services employed, and transmission expenses increased
due to significantly higher 1997 power purchases. An $11 million decrease
in customer service expenses during 1997, primarily due to reduced
conservation expenses, partially offset the higher 1997 other operation and
maintenance expenses.
Depreciation expense increased between the comparative periods primarily
due to higher depreciable plant balances in 1997 and to higher depreciation
rates included in the PSCW's 1997 Rate Order. Total operating income taxes
decreased as a result of lower taxable income.
During 1997, Wisconsin Electric deferred $18 million of nuclear non-fuel
operation and maintenance costs under authority granted by the PSCW in July
1997. For further information concerning Wisconsin Electric's deferred
nuclear non-fuel operation and maintenance costs, see "Note F - Nuclear
Operations" in the Notes to Financial Statements.
OTHER ITEMS
1998 COMPARED TO 1997: During the second quarter of 1997, Wisconsin
Energy recorded a one-time $31 million charge to write off deferred merger
costs related to the terminated merger agreement with NSP of which
$22 million was attributable to Wisconsin Electric. Also during 1997,
Wisconsin Energy recorded $1 million of merger expenses related to the
acquisition of ESELCO. For further information concerning the terminated
merger with NSP and the acquisition of ESELCO, see "Mergers" below under
"Factors Affecting Results of Operations."
Miscellaneous net other income and deductions increased by $47 million or
99.5% at Wisconsin Energy and by $37 million or 98.2% at Wisconsin Electric
during 1998 compared to 1997. Significantly contributing to these
increases, Wisconsin Electric recorded a one-time $30 million impairment
charge in December 1997 for its Kimberly Cogeneration Equipment based upon
the results of a discounted cash flow analysis. For further information
concerning the Kimberly Cogeneration Equipment, see "Note L - Commitments
and Contingencies" in the Notes to Financial Statements. In addition,
miscellaneous net other income and deductions increased during 1998 due to
(1) a $9 million increase in net pretax miscellaneous income at WITECH
Corporation, (2) a $5 million increase in net pretax miscellaneous income
at WISPARK Corporation, and (3) a $4 million reduction during 1998 in
charitable donations by Wisconsin Electric. WITECH Corporation and WISPARK
Corporation are non-utility subsidiaries of Wisconsin Energy.
Primarily due to increased short-term borrowing levels between the
comparative periods, other interest expense increased by $10 million or
102.4% at Wisconsin Energy and by $3 million or 34.7% at Wisconsin
Electric.
A-10
<PAGE> 27
1997 COMPARED TO 1996: As noted above, Wisconsin Energy recorded a one-
time $31 million charge in 1997 to write off deferred merger costs related
to the terminated merger agreement with NSP of which $22 million was
attributable to Wisconsin Electric. During 1997, Wisconsin Energy also
recorded $1 million of merger expenses related to the acquisition of ESELCO
by Wisconsin Energy.
Compared to 1996, Wisconsin Energy's miscellaneous net other income and
deductions decreased by $45 million during 1997 of which $34 million was
attributable to Wisconsin Electric. As noted above, Wisconsin Electric
recorded a one-time $30 million impairment charge in December 1997 for the
Kimberly Cogeneration Equipment. During 1997, miscellaneous net other
income and deductions also decreased due to increased 1997 charitable
donations by Wisconsin Electric and due to fair market valuation
adjustments of non-utility investments.
Interest income increased by $6 million or 34.8% during 1997 compared to
1996 primarily due to increased earnings on Wisconsin Electric's
decommissioning trust fund. Interest charges on long-term debt increased
between the comparative periods as a result of increased average
outstanding long-term debt during 1997, primarily at Wisconsin Electric.
FACTORS AFFECTING RESULTS OF OPERATIONS
MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors
of Wisconsin Energy and NSP agreed to terminate the Agreement and Plan of
Merger which provided for a business combination of Wisconsin Energy and
NSP to form Primergy Corporation. As a result, Wisconsin Energy recorded a
$31 million charge in the second quarter of 1997 ($19 million net of tax or
approximately 17 cents per share) to write off the deferred transaction
costs and costs to achieve the merger. Approximately $22 million of merger
write-off costs were attributable to Wisconsin Electric.
ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired ESELCO in
a tax free reorganization accounted for as a pooling of interests. In
connection with the acquisition, Wisconsin Energy issued 2,407,275 shares
of common stock, with fractional interests paid in cash, based upon an
exchange ratio of 1.5114 shares of Wisconsin Energy common stock for each
outstanding share of ESELCO common stock.
Due to the immaterial nature of the transaction, Wisconsin Energy has not
restated any historical financial or statistical information. Instead,
Wisconsin Energy combined ESELCO's May 31, 1998 balance sheet with
Wisconsin Energy's, including a $1.2 million credit to retained earnings of
which $0.9 million represents ESELCO's consolidated net income during the
first five months of 1998.
ESELCO was the parent company of Edison Sault, an electric utility which
serves approximately 21,000 residential, commercial and industrial
customers in the State of Michigan's eastern Upper Peninsula. Where
appropriate, discussions as well as financial or statistical information of
Wisconsin Energy include Edison Sault's operations since June 1, 1998.
Wisconsin Energy is operating Wisconsin Electric and Edison Sault as
separate utility subsidiaries within their historical service territories.
Wisconsin Electric and Edison Sault continue to be separately regulated by
their respective states.
NUCLEAR MATTERS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach Nuclear
Plant in Two Rivers, Wisconsin. During 1998, 1997 and 1996, Point Beach
provided 18%, 6% and 24% of Wisconsin Electric's net electric energy
supply, respectively. The United States Nuclear Regulatory Commission
("NRC") operating licenses for Point Beach expire in October 2010 for
Unit 1 and in March 2013 for Unit 2.
From late 1996 through early 1999, Point Beach experienced extended
generating unit outages. During a scheduled outage of Unit 2 that began in
October 1996 and was completed in August 1997, Wisconsin Electric replaced
the unit's steam generators. For additional information concerning the
Unit 2 steam generator replacement, see
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<PAGE> 28
"Investing Activities" below in "Liquidity and Capital Resources". In February
1997, Unit 1 was taken out of service for equipment repairs. Wisconsin Electric
decided to keep Unit 1 out of service to allow Point Beach staff to focus their
attention on the work necessary to bring Unit 2 back to service. During the Unit
1 outage, Wisconsin Electric replaced two low pressure turbines which increased
Unit 1's maximum dependable generating capability from 500 to approximately 510
megawatts. Wisconsin Electric returned Unit 1 to service from December 1997
through mid-February 1998, when it began a scheduled refueling outage that was
completed in late June 1998. With completion of this outage, Wisconsin Electric
initiated its first extended fuel cycle which should allow for the operation of
Unit 1 until its next refueling and maintenance outage scheduled for the fall of
1999. In early March 1999, Wisconsin Electric returned Unit 2 to service
following a scheduled refueling and maintenance outage that began in early
December 1998. During this outage, Wisconsin Electric replaced the unit's low
pressure turbine rotors, which is expected to increase the maximum dependable
generating capability of Unit 2 from 500 to approximately 510 megawatts. As a
result of the low pressure turbine work recently performed on Units 1 and 2,
Wisconsin Electric expects to reduce future maintenance costs at Point Beach.
During the Unit 2 outage, Wisconsin Electric initiated an extended fuel cycle,
which should allow for the operation of the unit until its next refueling and
maintenance outage scheduled for the fall of 2000. Over the last few years,
Point Beach Unit's 1 and 2 have also experienced some unplanned short-term
shutdowns or power reductions to address various equipment issues.
As a result of the outages noted above and various performance improvement
initiatives, Wisconsin Electric's total nuclear operation and maintenance
expenses, excluding fuel and benefit overheads, have increased from
$74 million in 1996 to $107 million in 1997 to $156 million in 1998. See
"Note F - Nuclear Operations" in the Notes to Financial Statements for
information concerning Wisconsin Electric's deferral during 1997 of
approximately $18 million of nuclear non-fuel operating and maintenance
costs in excess of those included in 1997 rates. Due in large part to the
need for Wisconsin Electric to replace Point Beach's low cost generating
capacity during the period 1996 through 1998 with higher cost sources of
electric energy, Wisconsin Electric's total fuel and purchased power costs
have increased from $332 million in 1996 to $445 million in 1997 to
$450 million in 1998.
Additional unplanned shutdowns or power reductions of Point Beach Units 1
or 2 may be necessary as Wisconsin Electric continues to perform reviews of
facility design and to implement other improvement initiatives. However,
availability of Point Beach increased significantly during 1998 compared to
1997, and Wisconsin Electric expects the reliability of the units to
continue to improve toward historical levels as these efforts progress. In
addition, Wisconsin Electric expects that nuclear non-fuel operating and
maintenance expenses will begin to decline in 1999.
On January 27, 1997, the NRC notified Wisconsin Electric of a declining
trend in performance at Point Beach. The NRC issues trend letters to
provide early notification of declining performance and to offer a utility
the opportunity to take early corrective actions. During 1997, Wisconsin
Electric undertook a comprehensive effort to address specific concerns and
to take advantage of industry best practices to further strengthen
performance at the plant. In January 1998, the NRC rescinded its declining
trend letter and informed Wisconsin Electric that the corrective actions
taken or being taken by Wisconsin Electric appeared to be effective in
addressing the adverse trends in performance at Point Beach.
In a March 12, 1999 inspection report to Wisconsin Electric, the NRC
requested a meeting with Wisconsin Electric to discuss Wisconsin Electric's
response to the condition of certain systems at Point Beach in late
December 1998 and early January 1999. The NRC indicated that there was an
apparent violation of its requirements based upon the status of certain
safety related equipment. An analysis indicates that the safety systems
would have performed their intended function if called upon. On March 26,
1999, representatives of Wisconsin Electric met with staff of the NRC and
provided information to assist the NRC in its evaluation of the apparent
violation. The matter is pending.
In August 1998, Wisconsin Electric announced that it was participating in
cooperative alliance teams with three other unaffiliated utilities: Alliant
Energy, NSP and Wisconsin Public Service Corporation. The purpose of these
teams was to examine opportunities to enhance safety and improve
performance and reliability at the participants' nuclear generating plants.
The participants operate seven nuclear generating units at five sites in
the States of Wisconsin, Minnesota and Iowa with a total combined
generating capacity exceeding 3,600 megawatts.
The alliance work led the participants to a conclusion that, in some areas
of technical expertise, greater benefit could be gained in a more formal,
integrated structure. In February 1999, Wisconsin Electric, NSP and
Wisconsin Public
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<PAGE> 29
Service Corporation announced the formation of Nuclear Management Company,
L.L.C. to further pursue the initial alliance objectives. At the same time,
Alliant Energy announced its intention to join the other members of the nuclear
management company but that it required prior approval of the Securities and
Exchange Commission. Services to be delivered by the nuclear management company
to the participating utilities will also be subject to additional state and
federal regulatory approvals.
Nuclear Management Company L.L.C. is in the process of establishing a
senior management team that will focus on consolidating the expertise and
talents of their nuclear employees, building on the best business practices
identified as strengths at each plant site, reducing the overhead of
commonly used services and commodities, and more effectively integrating
the resources of all seven nuclear generating units. Each utility will
continue to own its respective nuclear units, maintain exclusive rights to
the energy generated, and retain financial responsibility for safe
operation, maintenance and decommissioning.
Wisconsin Electric and Wisconsin Public Service Corporation anticipate
transfer of their NRC operating licenses for Point Beach and Kewaunee
generating stations, respectively, to Nuclear Management Company L.L.C.. A
submittal, seeking approval of the NRC for the license transfer of Point
Beach, is planned during the second quarter of 1999.
SPENT FUEL STORAGE AND DISPOSAL: Wisconsin Electric completed
construction of an Independent Spent Fuel Storage Installation ("ISFSI") in
1995 for the temporary dry storage of spent nuclear fuel at Point Beach.
The PSCW has authorized Wisconsin Electric to load up to twelve casks
containing a total of 288 fuel assemblies with spent fuel and transfer the
casks to the ISFSI. To date, five VSC-24 casks, designed by Sierra Nuclear
Corporation and containing a total of 120 spent fuel assemblies, have been
loaded and moved to the ISFSI. Wisconsin Electric currently plans to load
four additional casks during 1999 and the remaining three authorized casks
in 2000.
To maintain flexibility associated with the continued temporary dry storage
of spent fuel at Point Beach, Wisconsin Electric is in the process of
procuring alternative model TN-32 casks from Transnuclear Corp. TN-32 dry
storage casks have been previously approved by the NRC for specific use at
other nuclear generating facilities in the United States. Wisconsin
Electric currently plans to obtain three TN-32 casks by the spring of 2000.
In August 1998, the PSCW issued an order approving the substitution of up
to six TN-32 casks for VSC-24 casks at Point Beach in the event that this
becomes necessary. Wisconsin Electric believes that the NRC will authorize
TN-32 casks for use at Point Beach by early in the year 2000.
Wisconsin Electric estimates that, with implementation of the extended fuel
cycles noted above, with the remaining authorized casks and with the
remaining space in the spent fuel pool in its current configuration, it has
sufficient temporary spent fuel storage capacity to continue operating
Point Beach until 2004. Wisconsin Electric currently plans to apply with
the PSCW in the fall of 1999 for authority to load additional casks beyond
the twelve that are currently authorized.
Temporary spent fuel storage alternatives are necessary at Point Beach
until the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel as mandated by the Nuclear Waste Policy
Act of 1982, as amended in 1987 ("Waste Act"). The DOE has indicated that
it does not expect a permanent spent fuel repository to be available until
at least 2010.
As of January 31, 1998, the DOE has failed to meet its contractual
obligation to begin removing spent fuel from Point Beach. In February
1998, Wisconsin Electric joined other utilities in a motion to enforce a
July 1996 mandate of the United States Court of Appeals for the District of
Columbia Circuit ("Court") that the DOE had an unconditional obligation to
begin accepting spent fuel by January 31, 1998. Wisconsin Electric and the
other utilities requested an order (1) compelling the DOE to submit a
detailed program for disposing of spent fuel from utilities, (2) declaring
that the utilities are relieved of their obligation to pay fees into the
Nuclear Waste Fund for a permanent spent fuel repository and are authorized
to place such fees into escrow until the DOE commences with disposing of
spent fuel pursuant to its obligation, and (3) precluding the DOE from
using any fees paid into the Nuclear Waste Fund to reimburse utilities for
damages they have incurred as a result of the DOE's breach of its
obligations. On May 5, 1998, the Court issued a decision denying the
motion of Wisconsin Electric and the other utilities to enforce the Court's
mandate, principally on the ground that the question of whether the DOE
could properly use the Nuclear Waste Fund as a source to pay damages to
utilities was not ripe for review. The Court
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further held that the other requested remedies fell outside the scope of its
mandate, which was limited to defining the nature of the DOE's statutory
obligations and did not extend to requiring the DOE to perform under its
contracts with Wisconsin Electric and the other utilities. At this time,
Wisconsin Electric is unable to predict when the DOE will actually begin
accepting spent nuclear fuel.
During 1997 and again in 1998, the United States Senate and the United
States House of Representatives each passed versions of the Nuclear Waste
Policy Acts of 1997 and 1998, respectively. The legislation would require
the DOE to establish a temporary spent fuel repository in the State of
Nevada until the permanent repository is available and to begin taking
ownership from utilities and removing spent fuel as required by the Waste
Act. Differences between Senate and House versions of the bill were not
reconciled in 1997 nor in 1998. In early January 1999, the Nuclear Waste
Policy Act of 1999 was introduced in the House, and in mid-March 1999, a
similar bill was introduced in the Senate. President Clinton has
threatened to veto any legislation which mandates a DOE temporary spent
fuel repository in Nevada.
ELECTRIC SYSTEM RELIABILITY MATTERS
During the summer of 1998, Wisconsin Electric had adequate capacity to meet
all of its firm load obligations. While Wisconsin Electric did make public
appeals for conservation on two days during the summer; this was due to
constraints on the regional electric network in the Midwest caused by high
weather-induced demand as well as generation and transmission
unavailability. Wisconsin Electric also experienced curtailments of power
purchases from other companies on various occasions during the summer of
1998.
The regional electric energy supply was especially tight in late June,
1998, as unusually warm, humid weather coincided with storm-related outages
of major transmission lines and generating plants in nearby states. Under
such circumstances, utilities with available capacity are required to make
that capacity available to neighboring utilities who are experiencing
shortages. Wisconsin Electric has available the ability to free up
generation by interrupting and /or curtailing certain customers. Said
customers who participate, voluntarily, in these load management programs
receive rate discounts in exchange for allowing their service to be
curtailed or interrupted when power supplies become tight. Wisconsin
Electric has used such load management programs regularly since the early
1980s. During late June, 1998, Wisconsin Electric was one of the utilities
in the region which contributed its available resources, including
curtailable and interruptible capacity, to help maintain regional
reliability.
Wisconsin Electric expects to have adequate capacity during 1999 to meet
all of its firm load obligations. However, the Company anticipates that
the regional electric energy supply will remain tight during 1999. As a
result of this, or of extremely hot weather along with unexpected equipment
unavailability, Wisconsin Electric could be required to call upon its load
management procedures, as it has in the past.
Wisconsin Electric is proceeding with several long-term measures to enhance
the reliability of its own system and that of the midwestern region. The
measures described in the following sections will begin to contribute as
early as the summer of 1999.
300 MEGAWATT CONTRACT WITH SOUTHERN ENERGY: In August 1998, Wisconsin
Electric and Atlanta-based Southern Energy, Inc., a subsidiary of Southern
Company, signed a formal power purchase agreement wherein Southern Energy,
Inc. will license, construct, own and operate a 300-megawatt natural gas-
fired peaking power plant, located in Neenah, Wisconsin, and sell its
electric output to Wisconsin Electric for eight years. The agreement
satisfies Wisconsin Electric's responsibility under directives from the
PSCW and under the new reliability legislation, 1997 Wisconsin Act 204,
signed into law in April 1998 by the governor of the State of Wisconsin.
In February 1999, Southern Energy received a certificate of public
convenience and necessity for the facility from the PSCW and a construction
air permit from the Wisconsin Department of Natural Resources ("WDNR").
The facility is scheduled for commercial operation by June 2000.
COMBUSTION TURBINE INLET COOLERS: Wisconsin Electric received PSCW
approval to proceed with the installation of inlet coolers at its Concord
and Paris Power Plants in February and April 1998, respectively. PSCW
approval was granted promptly upon Wisconsin Electric's receipt of amended
air emission permits from the WDNR. Construction
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of the inlet cooling facilities at both plants is on schedule for the facilities
to be operational by the summer of 1999. The facilities will counteract the
reduction in generating capacity due to hot summer weather experienced by these
two plants. Approximately 112 megawatts of total hot weather capacity
degradation will be recovered. Wisconsin Electric estimates that the inlet
coolers for the two plants will cost a total of approximately $24 million during
the 1998-1999 biennial period. The costs of these projects are included in
anticipated construction expenditures described below in "Capital Requirements"
under "Liquidity and Capital Resources."
GERMANTOWN GENERATION PROJECTS: As a result of updated load growth
projections based upon summer of 1998 experience, Wisconsin Electric
determined that it has the need for additional generating capacity by the
summer of 2000 and selected its Germantown Power Plant for installation of
a new combustion turbine unit and other facilities. The addition of an
85 megawatt combustion turbine is planned for a June 2000 in-service date.
Further, inlet cooling facilities, similar to those at the Concord and
Paris Generating Stations, are planned to be installed on the four existing
combustion turbine units at the Germantown Power Plant as well as on the
new unit. The inlet cooling facilities will counteract the reduction in
generating capacity due to hot summer weather. A net increase in summer
capacity of approximately 133 megawatts is planned to be available by June
2000 as a result of these efforts. Natural gas facilities are also planned
to be added at the Germantown site to provide dual fuel capability for the
new as well as the existing units. As part of the dual fuel project, dry
low-nitrogen oxide burners will be installed on the existing units to
reduce air emissions. The dual fuel facilities will be installed over a
four-year period with completion in 2003. The project is subject to
approval of various state and local authorities. Applications with the
PSCW to install the new combustion turbine, inlet cooling and dual fuel
facilities were submitted in March 1999. The matter is pending. 1999
expenditures for this project are included in anticipated construction
expenditures described below in "Capital Requirements" under "Liquidity and
Capital Resources."
ELECTRIC TRANSMISSION PROJECTS: Wisconsin Electric is pursuing multiple
projects designed to increase the electric import capability into eastern
Wisconsin and to improve electric system reliability. The Northern
Interface Project involves operation of an existing 138 kilovolt
transmission line at 345 kilovolts (for which the line was originally
designed and constructed) and construction of a new 345-138 kilovolt Morgan
Substation. The project will allow an additional 80 megawatts of
generating capacity in the Upper Peninsula of Michigan to be available to
Wisconsin Electric's transmission system in the State of Wisconsin. PSCW
approval was received in June 1998, and the project is under construction
with a scheduled in-service date of June 1999. The Southern Interface
Project is the first of several projects being undertaken to improve system
reliability in southeast Wisconsin and the metropolitan Milwaukee area as
well as to eliminate constraints on the Wisconsin Electric system for
future increased transfer capability between northern Illinois and southern
Wisconsin. The Southern Interface Project will replace 138 kilovolt
substation facilities and upgrade 345 kilovolt substation facilities at
Wisconsin Electric's Oak Creek Substation. Authorization from the PSCW was
received in June 1998, and the project is scheduled to be in service by
June 1999. The Oak Creek-Arcadian 345 kilovolt Transmission Upgrade Project
will upgrade a 230 kilovolt transmission line to 345 kilovolt operation and
will also upgrade substation facilities at Wisconsin Electric's Oak Creek
and Arcadian Substations to improve system reliability. An application
with the PSCW for authorization to proceed with the project was submitted
in March 1999. Expenditures during 1999 for these projects are included in
anticipated construction expenditures described below in "Capital
Requirements" under "Liquidity and Capital Resources." Other transmission
projects to improve system reliability are in the planning stage for
submission to the PSCW later in 1999.
WISCONSIN RELIABILITY ASSESSMENT ORGANIZATION: The Wisconsin Reliability
Assessment Organization ("WRAO") was formed in early 1998 to coordinate
activities relating to generation and transmission reliability issues in
the State of Wisconsin. Wisconsin Electric is an active participant in the
WRAO, whose members include all of the state's other investor owned
utilities, members of the PSCW Staff, several municipal utilities and
coops, and utilities from surrounding states. Activities of the WRAO
include reliability policy development, performance evaluations of its
members with respect to the adequacy of their supplies, and sponsorship of
regional transmission planning studies (see "Wisconsin Interface
Reliability Enhancement Study" below). The WRAO also conducts meetings and
regional reliability symposia with external organizations with interests in
system reliability to provide forums for information and idea sharing.
WISCONSIN INTERFACE RELIABILITY ENHANCEMENT STUDY: Under WRAO direction,
the Wisconsin Interface Reliability Study group is conducting a continuing
study which examines numerous options for improving the reliability of the
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state's electric system by strengthening its connections with the interstate
transmission grid. The group includes transmission planners from WRAO members as
well as planning and regulatory staff from throughout the region. The Wisconsin
Interface Reliability Study group produced a report from the first phase of its
current study which became the basis for the PSCW's recent "Report to the
Wisconsin Legislature on the Regional Electric Transmission System."
An assessment of the strengths and weaknesses of various reliability
improvement options is expected to be completed by the end of March 1999.
The WRAO will combine this information with the results of an environmental
screening process and other relevant information to recommend a preferred
expansion plan and two alternatives to the PSCW by the end of April 1999.
Filing for the required Certificate of Public Convenience and Necessity is
planned for the third quarter of 1999.
NEW RENEWABLE ELECTRIC ENERGY: In early August 1998, Wisconsin Electric
issued a request for proposal soliciting bids for one or more contracts
totaling up to 75 megawatts of renewable electric generating capacity.
Renewable electric energy, also known as green energy, includes power
generated by wind, water, sun, biomass and other renewable resources. The
request for proposals is in response to the requirements of 1997 Wisconsin
Act 204 and supports Wisconsin Electric's "Energy for Tomorrow" renewable
energy program. The deadline for proposals was October 1, 1998. By the
October 1, 1998 deadline, Wisconsin Electric received more than 20
responses to the request for proposal. After evaluation of all the
proposals that were submitted, Wisconsin Electric developed a short list of
proposals and is currently engaged in contract negotiations. Wisconsin
Electric expects to complete these negotiations and sign purchase power
agreements in the spring of 1999.
1997 Wisconsin Act 204 calls for the investor-owned utilities in the
eastern part of the State of Wisconsin to add a combined total of
50 megawatts of renewable electric generating capacity to their energy mix
by the end of year 2000. Wisconsin Electric is responsible for
27 megawatts of this total. The August 1998 request for proposal fulfills
this obligation.
In June 1999, Wisconsin Electric will place in service two 660 kilowatt
Vestas V47 wind turbines. The wind turbines will be located in southern
Fond du Lac County in the Town of Byron. The electricity generated from
this approximately $1.8 million dollar project will be sold to "Energy for
Tomorrow" customers.
MIDWEST ISO: Wisconsin Electric is currently participating in the
formation of a regional independent electric transmission system operator
("ISO") to promote reliability in the Midwest (the "Midwest ISO"). On
January 15, 1998, Wisconsin Electric, along with eight other utilities,
filed a proposal with the Federal Energy Regulatory Commission ("FERC") to
establish the Midwest ISO, which would operate member electric transmission
systems within the region as a single system. Regional oversight is
required to maintain reliability because the system is being used
increasingly for broad, regional transactions. In addition to reliability
benefits, a regional ISO helps to ensure open and equal access to the
electric transmission system and broadens the energy market by eliminating
redundant transmission fees. As a net buyer of electric energy, Wisconsin
Electric expects the Midwest ISO to result in lower energy costs for its
customers as well as to improved regional reliability.
The PSCW completed a review of ISOs and issued an order in June 1998 that
laid out new ISO guidelines that are more consistent with guidelines of the
FERC. However, in its order, the PSCW stated that the Midwest ISO did not
entirely meet the PSCW's guidelines. While not necessarily required,
Wisconsin Electric plans to seek approval of the Midwest ISO from the PSCW.
The FERC conditionally approved the Midwest ISO proposal by order issued
September 16, 1998. By order dated December 17, 1998, the FERC granted the
Midwest ISO applicants' request for rehearing of certain portions of the
September 1998 order. Hearings on the transmission rate aspects of the
proposal are expected to commence before the FERC in June 1999. An
independent Board of Directors for the Midwest ISO was elected in December
1998.
INDUSTRY RESTRUCTURING AND COMPETITION
Driven by a combination of market forces, regulatory and legislative
initiatives, and technological changes, the electric industry continues a
trend towards restructuring and increased competition. To date,
competitive forces have
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been most prominent in the wholesale power market but are expected to continue
to develop in the electric retail markets. The State of Illinois has passed
legislation introducing retail electric choice for large customers in 1999 and
for all customers by May 2002. For information concerning restructuring in the
State of Michigan, see "MPSC Electric Restructuring" below. While the Company
cannot predict the ultimate timing or impact of a restructured electric
industry, Wisconsin Electric believes that, as a low-cost energy provider, it is
well positioned to compete in a deregulated and competitive market. Among
others, the following electric and gas industry restructuring initiatives are
underway in regulatory jurisdictions where the Company currently does business.
PSCW'S ELECTRIC UTILITY INDUSTRY INVESTIGATION: Because of electric power
shortages experienced during the summer of 1997, the PSCW expressed a
desire in October 1997 to work on infrastructure issues and to develop a
robust competitive electric wholesale market. The PSCW also stated its
belief that the question of whether to implement electric retail
competition in Wisconsin ultimately should be decided by the Wisconsin
Legislature rather than by the PSCW. The PSCW agreed to pursue the
following priority infrastructure issues as prerequisites to other
restructuring work:
- - Improvements to existing and addition of new electric transmission
lines in the State of Wisconsin.
- - Additions of new generating capacity in the State of Wisconsin.
- - Modifications to State of Wisconsin statutes to allow merchant
generating plants to be built in Wisconsin without prior PSCW determination
of need as one means of ensuring adequate generation.
- - Development of an ISO for either the electric transmission system in
the State of Wisconsin or in the region.
The Governor of the State of Wisconsin recently proposed in his current
budget that the PSCW conduct a one year study on what it would take to get
retail access in Wisconsin. This proposal will need to go through the
legislative review process before such a study would be conducted.
AFFILIATE INTEREST DOCKET (05-BU-101): The PSCW is developing policies
governing activities that can be performed by a utility or a utility
affiliate. The activities under review include providing or selling any
product or service other than core utility products. Wisconsin Electric
has taken the position that state policy should protect competition, not
individual competitors, and that customers should have the choice to use
either Wisconsin Electric or another vendor for these products and
services. Technical and public hearings were held in October and November
of 1998. The PSCW is expected to issue an order by June 1999.
PUBLIC BENEFITS: The Wisconsin Legislature has formed a Council to draft
legislation forming a Public Benefits Board. The Council is using the PSCW
order in Docket 05-BU-100 as the starting point for the draft legislation.
This PSCW order recommends plans to protect low-income utility customers,
conservation programs and the environment under a deregulated electric
industry. Wisconsin Electric has supported the development of such an
approach to public benefits to ensure that Wisconsin Electric is not
competitively disadvantaged by being required to continue to provide these
benefits. It is likely legislation creating such a Public Benefits Board
will be submitted in 1999.
MPSC ELECTRIC RESTRUCTURING: In 1998, the Michigan Public Service
Commission ("MPSC") continued to move toward implementation of direct
access for retail electric markets beginning on January 1, 2002. In
February, the MPSC issued an order clarifying restructuring issues and
directing Detroit Edison and Consumers Energy, the two largest utilities in
the State of Michigan, to file tariff sheets and draft implementation plans
for direct access. Following company submittals in late February 1998, the
MPSC staff held several public meetings to discuss the plans with
stakeholders. On June 30, 1998, the two companies filed revised
implementation plans reflecting some of issues raised during the meetings.
While the MPSC is currently reviewing other issues raised by the meetings,
a phase-in of direct access is expected to commence in late 1999 for
Michigan's two largest utilities with full access by January 1, 2002.
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During 1998, public meetings on electric restructuring were also conducted
in Michigan's Upper Peninsula to discuss direct access. Following meetings
with the MPSC staff and the opening of dockets to begin the process of
electric restructuring for smaller utilities, the smaller Michigan
utilities, including Wisconsin Electric, filed proposals with the MPSC for
implementing retail direct access on January 1, 2002 without a phase-in
program. On February 2, 1999, the MPSC issued an order closing the above
dockets, citing the progress made to date. Issues requiring further
resolution will be the subject of future dockets for the smaller companies.
The MPSC is expected to address access programs for smaller utilities after
the initial phase-in has commenced in late 1999 for the large utilities in
Michigan.
FERC OPEN ACCESS TRANSMISSION PROCEEDINGS: As a result of the Energy
Policy Act of 1992, the FERC issued Order Nos. 888 and 889 in April 1996
relating to open access transmission service, stranded costs, standards of
conduct and open access same-time information systems. The ruling was
intended to create a more competitive wholesale electric power market.
In April 1997, Wisconsin Electric submitted a revised transmission tariff
in compliance with FERC's orders on rehearing of its Order No. 888. In
connection with Wisconsin Energy's acquisition of ESELCO, the FERC approved
a joint transmission tariff covering both Wisconsin Electric and Edison
Sault by order issued June 29, 1998. On December 18, 1998, the FERC
approved Wisconsin Electric's Standards of Conduct required by Order
No. 889. Order Nos. 888 and 889 have been appealed by many parties to the
U.S. Court of Appeals for the Second Circuit.
Wisconsin Electric has long advocated open access to electric transmission
facilities as a necessary step in the competitive restructuring of the
electric utility industry. Wisconsin Electric does not believe that the
FERC rulings or judicial review of these orders will have a detrimental
effect on its liquidity, financial position or results of operations.
WHOLESALE COMPETITION: Wholesale sales of electric energy accounted for
6%, 5% and 5% of Wisconsin Electric's total electric operating revenues in
1998, 1997 and 1996, respectively. Wisconsin Electric attributes the
increase in the past year to additional sales for resale that offset
decreasing sales to municipal and rural electric wholesale customers as a
result of renegotiated power sales contracts in 1995 and 1996. The
renegotiated contracts contain discounts from previous rates charged to
these customers.
A current contract with a 75 megawatt wholesale customer includes
nominations of 90 megawatts as of May 1999 and 120 megawatts as of May
2000. A second wholesale customer with a current 50 megawatt demand may
become a partial requirements customer beginning in October 2000.
Wisconsin Electric expects to continue providing transmission services to
this customer.
PSCW NATURAL GAS UTILITY INDUSTRY INVESTIGATION: The PSCW continued a
generic investigation of the natural gas industry in the State of Wisconsin
and addressed the extent to which traditional regulation should be replaced
with a different approach. On July 1, 1997, Wisconsin Electric filed a
modified dollar for dollar gas cost recovery mechanism ("GCRM") in
accordance with a November 1996 PSCW order. This filing was updated on
June 30, 1998. Purchased gas adjustment mechanisms have been evaluated by
the PSCW as part of the PSCW's generic investigation. A GCRM will include
after the fact prudence reviews by the PSCW. The matter is pending with
anticipated implementation in the third quarter of 1999. Wisconsin
Electric does not expect that a major portion of gas costs that are
currently passed through to customers will be subject to price risk under
this GCRM.
RATES AND REGULATORY MATTERS
The table below summarizes the anticipated annualized revenue impact of
recent rate changes authorized by regulatory commissions for Wisconsin
Electric's electric, natural gas and steam utilities based upon the sales
projections utilized by those commissions in setting rates. Edison Sault
implemented a temporary price cap in 1995. The PSCW regulates retail
electric, steam and natural gas rates in the State of Wisconsin, while the
FERC regulates wholesale power, electric transmission and gas
transportation service rates. The MPSC regulates retail electric rates in
the State of Michigan.
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<TABLE>
<CAPTION>
Revenue Percent
Increase Change
Service (Decrease) in Rates Effective Date
------- ---------- -------- --------------
(Millions) (%)
<S> <C> <C> <C>
Retail electric, WI (a) $ 160.2 12.7 05/01/98
Retail gas (a) 18.5 5.4 05/01/98
Steam heating (a) 1.2 9.3 05/01/98
Retail electric, WI (a) 134.9 10.7 01/01/98
Retail gas (a) 18.5 5.5 01/01/98
Steam heating (a) 0.8 6.3 01/01/98
Retail electric, WI (b) 27.2 2.2 05/23/97
Retail electric, WI (7.4) (0.6) 02/18/97
Retail gas (6.4) (2.0) 02/18/97
Steam heating 0.1 .5 02/18/97
Retail electric, WI (33.4) (2.8) 01/01/96
Retail electric, WI (1.1) (3.3) 01/01/96
Retail gas (8.3) (2.6) 01/01/96
Steam heating (0.8) (5.1) 01/01/96
</TABLE>
(a) The January 1, 1998 order was an interim PSCW order that was effective
until the May 1, 1998 final order was received from the PSCW. The
final May 1, 1998 order superseded the January 1, 1998 interim order.
(b) Fuel surcharge which ended as of May 1, 1998. Reflecting the combined
effect of two PSCW orders, this surcharge was initially ordered on
May 23, 1997 and was amended by the PSCW on December 23, 1997.
The PSCW requires that rate cases be conducted once every two years.
Wisconsin Electric's next test year filing under the biennial cycle is
scheduled to be filed with the PSCW in 1999. Discussion of rate changes
for the 1998, 1997 and 1996 test years follow.
1998 TEST YEAR: On December 23, 1997, the PSCW issued an order
authorizing Wisconsin Electric to implement interim Wisconsin retail rate
increases effective January 1, 1998 in the amount of $154 million on an
annualized basis, including $135 million for electric operations,
$19 million for gas operations and $1 million for steam operations. The
PSCW authorized permanent annualized retail base rate increases in the
State of Wisconsin effective May 1, 1998 of $160 million for electric
operations, $19 million for gas operations and $1 million for steam
operations. The increases were based upon an authorized regulatory return
on common equity of 12.2%.
In November 1998, Wisconsin Electric filed testimony and exhibits with the
MPSC showing a $4 million annual revenue deficiency for its electric
utility operations in the State of Michigan. Wisconsin Electric proposed a
two stage increase in the filing. The first stage would increase rates
9.4% on an annualized basis effective with issuance of an order in the
case. The second stage, proposed to be effective July 1, 1999, would
increase the stage-one rates by another 4.8% on an annualized basis.
The primary factors influencing the 1998 rate changes in the State of
Wisconsin and the proposed rate changes in the State of Michigan include:
- - Increased costs related to the construction, operation and maintenance
of generation, transmission and distribution facilities to assure
reliability of electric service.
- - Increased costs associated with the need to implement technological
solutions to make computer systems "Year 2000 Ready" and to meet customer
expectations.
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- - Increased payroll and benefits due to (1) additional personnel to fill
vacant positions that occurred while Wisconsin Energy and Northern States
Power Company were pursuing the Primergy merger and (2) increased staff to
support key areas such as nuclear operations, customer service and
information services.
- - Increased fuel and purchased power costs.
- - Increased cost of capital.
- - Accelerated amortization of the remaining balance of pre-1991
contributions in aid of construction at December 31, 1997.
See "Mergers" above for additional information concerning the Wisconsin
Energy's terminated merger agreement with NSP. See "Year 2000 Technology
Issues" below for further information concerning the estimated costs to
examine and modify existing software application and operational programs
and hardware that is date sensitive and may not be "Year 2000 Ready." See
Note C - Depreciation" in the Notes to Financial Statements for information
about the accelerated amortization of certain contributions in aid of
construction.
1997 TEST YEAR: In an order dated February 13, 1997, the PSCW directed
Wisconsin Electric to implement rate decreases for retail electric and gas
customers in the State of Wisconsin of $7 million and $6 million,
respectively, on an annualized basis, and a steam rate increase of
$0.1 million on an annualized basis. The order was effective February 18,
1997 and was based upon a regulatory return on common equity of 11.8%. The
PSCW had determined that it required a special full review of Wisconsin
Electric's rates for the 1997 test year in connection with consideration of
the application for approval of the proposed merger of Wisconsin Energy and
NSP discussed above under "Mergers."
1996 TEST YEAR: In a letter order dated September 11, 1995, the PSCW
directed Wisconsin Electric to implement rate decreases for Wisconsin
retail electric, gas and steam customers of $33 million, $8 million and
$0.8 million, respectively, on an annualized basis effective January 1,
1996. Also effective January 1, 1996, the MPSC authorized Wisconsin
Electric to implement a rate decrease for Michigan non-mine retail electric
customers of $1 million or 3.3% on an annualized basis. The Empire and
Tilden ore mines are separately regulated by the MPSC.
EDISON SAULT PRICE CAP: On August 22, 1995, Edison Sault filed an
application with the MPSC for authority to implement price cap regulation
for its electric customers in the State of Michigan. In the application,
Edison Sault proposed that its base rates be capped at existing levels,
that its existing Power Supply Cost Recovery factor be rolled into base
rates and that its existing Power Supply Cost Recovery Clause be suspended.
On September 21, 1995, the MPSC approved Edison Sault's application subject
to the modification that Edison Sault give thirty days notice rather than
two weeks notice for rate decreases. Edison Sault will file an application
with the MPSC by October 1, 2000 to address the experience under the price
cap mechanism. The MPSC's order authorizing Edison Sault's price cap
represents a temporary experimental regulatory mechanism and allows Edison
Sault to file an application seeking an increase in rates under
extraordinary circumstances.
FUEL COST ADJUSTMENT PROCEDURE: Effective in 1998 under the PSCW's retail
electric fuel cost adjustment procedure in the State of Wisconsin, retail
electric rates may be adjusted, on a prospective basis, if cumulative fuel
and purchased power costs, when compared to the costs projected in the
retail electric rate proceeding, deviate from a prescribed range and are
expected to continue to be above or below the authorized annual range of 2%.
During 1997, extended outages at Point Beach, an extended maintenance
outage at Oak Creek Power Plant that was concluded in June 1997, delayed
commercial operation of LS Power's cogeneration facility, and higher than
projected purchased power costs per megawatt-hour due to regional electric
energy supply constraints resulted in increased fuel and purchased power
costs at Wisconsin Electric. Wisconsin Electric estimates that such costs
were approximately $116 million higher than those included in 1997 base
electric rates in all jurisdictions.
On December 23, 1997, the PSCW issued a combined final order on two 1997
Wisconsin Electric filings under Wisconsin's fuel cost adjustment
procedure, authorizing Wisconsin Electric to recover $27 million of
additional
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<PAGE> 37
1997 fuel and purchased power costs from Wisconsin retail electric customers
during the 1997-1998 biennial period. This temporary fuel surcharge ended as of
May 1, 1998. Wisconsin Electric estimates that of the $116 million of excess
fuel and purchased power costs incurred during 1997, it recovered a total of $27
million as a result of the PSCW's December 1997 order, leaving $89 million
unrecovered.
As part of the PSCW's 1998 Rate Order, Wisconsin Electric was required to
file by October 1, 1998 its forecast of electric fuel costs for the 1999
calendar year. Wisconsin Electric filed the forecast, which indicated no
change in fuel costs compared to the 1998 Rate Order, with the PSCW on
September 25, 1998. This matter is currently under review by the PSCW.
In December 1995, the MPSC approved the suspension of the Power Supply Cost
Recovery Clause (fuel adjustment procedure) for a five-year period for
Michigan retail electric customers.
NUCLEAR OPERATION AND MAINTENANCE COST DEFERRAL: See "Note F - Nuclear
Operations" in the Notes to Financial Statements for information regarding
approval by the PSCW during 1997 for Wisconsin Electric to defer certain
non-fuel nuclear operation and maintenance costs.
PURCHASED GAS ADJUSTMENT MECHANISM: In the case of natural gas costs,
differences between the test year estimate and the actual cost of purchased
gas are accounted for through a purchased gas adjustment clause. See
"Industry Restructuring and Competition" above for information concerning a
PSCW order changing the purchased gas adjustment mechanism in 1999.
NON-UTILITY ASSET CAP: Wisconsin Energy is subject to certain current
restrictions which may limit diversification in non-utility activities.
Under a formula included in the provisions of Wisconsin's Public Utility
Holding Company Law, the sum of the assets of all non-utility affiliates in
a holding company system generally may not exceed 25% of the assets of all
public utility affiliates. As of December 31, 1998, the assets of
Wisconsin Energy's non-utility affiliates approximated 12% of the assets of
its public utility affiliates. Following WISVEST Corporation's pending
acquisition of $272 million of generating facilities in the second quarter
of 1999, Wisconsin Energy anticipates that the percent of asset cap formula
non-utility assets will increase from approximately 12% to over 18%.
Wisconsin Energy is currently working with the other utility holding
companies in the State of Wisconsin in an effort to modify the asset cap
provisions of Wisconsin's Public Utility Holding Company Law. However,
there can be no assurance that the current asset cap restrictions will be
modified or that the restrictions will not affect Wisconsin Energy's future
non-utility diversification activities.
For additional information concerning WISVEST Corporation's pending
acquisition of generating assets in the State of Connecticut, see "Note L -
Commitments and Contingencies" in Wisconsin Energy's Notes to Financial
Statements.
YEAR 2000 TECHNOLOGY ISSUES
The Company is working to resolve the potential impact of the Year 2000 on
its ability to operate critical systems and to accurately process
information that may be date sensitive. Wisconsin Energy, including
Wisconsin Electric, Edison Sault and the non-utility subsidiaries, utilize
business application software as well as infrastructure and process control
systems across their operations. Related computer programs and hardware
may use two-character digits such as `00' to define the applicable year
rather than four-character digits such as `2000'. When these systems or
applications encounter the Year 2000, they could potentially read the year
as `1900' and either process data incorrectly or shut down altogether. If
not addressed in a timely manner, this Year 2000 problem could have a
materially adverse impact on the operations or financial condition of the
Company.
YEAR 2000 PROJECT: During 1997, the Company created Year 2000 program
teams, overseen by executives of the Company, to address its Year 2000
issues. The teams, comprising representatives with subject matter
expertise, are addressing:
- - Business applications that provide function and process to the
business units;
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<PAGE> 38
- - Infrastructure including information technology voice, video, data
systems and related structure;
- - Process control systems including the impact of embedded systems
across all operations;
- - Supplier compliance dealing with critical direct suppliers of services
and materials; and
- - Significant customers and their ability to avoid major Year 2000-
related business interruptions.
The Year 2000 teams are following a structured process of inventorying and
assessing potential Year 2000 problems, of remediating, testing, and
certifying Year 2000 readiness and of developing and implementing Year 2000
risk management contingency plans. Although additional systems or
processes may be identified as the program moves forward, the Company has
substantially completed an initial inventory of potential Year 2000
problems across all operating areas and completed its assessment of
critical areas in the fourth quarter of 1998. The remediation and testing
phases are currently in progress and extensive contacts with critical third
party suppliers are ongoing. Based upon an initial assessment of critical
supplier Year 2000 readiness that was completed in the third quarter of
1998, the Company is currently initiating additional supplier risk
mitigation actions. Wisconsin Energy expects to evaluate its significant
customers during 1999.
The Company has structured its Year 2000 program to identify, prioritize
and address critical business functions within the Company including:
- - Providing Energy Supply, which includes the safe operation and
maintenance of all nuclear, fossil and hydro generating facilities;
- - Providing a Reliable Energy Pathway, which includes the safe operation
and maintenance of the Company's electric transmission and electric, gas
and steam distribution systems;
- - Providing Customer Service, which includes the ability to respond to
customer emergencies both from a customer contact point of view and from a
restoration perspective as well as the ability to handle customer calls, to
bill customers and to process payments;
- - Supporting the Business, which includes the critical human resource,
supply chain, finance and information resource activities that support
operation of the business; and
- - Critical Facilities operations.
With the exception of those projects that are dependent upon activities
such as scheduled power plant maintenance outages later in 1999, the
Company currently expects its core, critical business functions to be
"Year 2000 Ready" by June 30, 1999. However, additional refinements and
testing may continue through the end of 1999. Based upon the Nuclear
Energy Institute's standard definition, which has been adopted by Wisconsin
Energy, "Year 2000 Ready" systems or applications will be suitable for
continued use into the Year 2000 even though the system or application may
not be fully "Year 2000 Compliant."
POTENTIAL RISKS AND CONTINGENCY PLANNING: The Company is continuing an
ongoing process of assessing potential Year 2000 risks and uncertainties.
Internal and external risks are included in the Company's assessment and
identification of mitigation strategies. Wisconsin Energy expects to
successfully mitigate its controllable internal Year 2000 problems.
For its core operation, Wisconsin Energy also relies upon third parties
such as (1) other power providers to and operators of the integrated
electric transmission and distribution grid, (2) fuel suppliers,
(3) producers of natural gas and suppliers of interstate natural gas
transportation services, and (4) providers of external infrastructure such
as telecommunications, municipal sewer and water as well as emergency
services. Failure of these critical third parties to identify and
remediate their Year 2000 problems could have a material impact on the
Company's operation and
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<PAGE> 39
financial condition. The Company's Year 2000 program is structured to identify,
assess and mitigate these third party risks where possible. At this time,
Wisconsin Energy believes that mitigation efforts will be successful.
As part of its normal business practice, the Company maintains and
periodically initiates various contingency plans to maintain and restore
its energy services during emergency circumstances, some of which could
arise from Year 2000 related problems. During 1999, Wisconsin Energy
intends to leverage this experience in the development and implementation
of Year 2000 related contingency and business continuity plans. As part of
this effort, the Company is coordinating its Year 2000 readiness program
with various trade associations and industry groups and is working with the
Mid-America Interconnected Network, Inc., ("MAIN"), the North American
Electric Reliability Council and the Wisconsin Reliability Assessment
Organization to develop and implement regional electric reliability
contingency plans. Wisconsin Electric is participating with other
utilities in MAIN to develop reasonably likely worst case scenarios for the
region. The scenarios currently identified as reasonably likely represent
situations that have been encountered under normal operating conditions.
Contingencies for these scenarios are generally addressed through normal
operating procedures. Scenarios that have been jointly identified and
assessed are:
- - Loss or unavailability of some generation;
- - Partial loss of system monitoring and control functions, including
data communication;
- - Partial loss of voice communications;
- - Loss of transmission facilities; and
- - Loss of load and/or uncharacteristic loads.
Wisconsin Electric presently agrees with MAIN's assessment that the
probability of these scenarios occurring due to Year 2000 is not
significantly in excess of normal expectations. The Company's current
operating and contingency plans are expected to adequately handle the above
scenarios. The Company is currently reviewing operating and contingency
plans to identify further enhancements or updates specifically addressing
Year 2000 issues.
FINANCIAL IMPLICATIONS: Wisconsin Energy currently estimates that it will
incur approximately $44 million of expenses during 1998 through 2000 for
its Year 2000 program. $15 million has been incurred as of December 31,
1998. In addition, the Company expects to capitalize costs of
approximately $20 million to replace certain existing infrastructure and
process control systems of which $9 million has been capitalized as of
December 31, 1998. In its May 1998 Rate Order from the PSCW, Wisconsin
Electric received approval for recovery in rates of approximately
$13 million per year of Year 2000-related expenses in the Wisconsin retail
jurisdiction during the 1998-1999 biennial period. In addition, the 1998
PSCW rate order included the associated capital expenditures related to
Wisconsin Electric's Year 2000 program.
The discussion above includes many forward looking statements concerning
potential schedules, plans, costs, risks and uncertainties facing Wisconsin
Energy as a result of the Year 2000 problem. Based upon its activities to
date, the Company expects to successfully implement the changes necessary
to become "Year 2000 Ready" by the end of 1999. However, the Year 2000
problem has many elements and potential consequences, some of which may not
be reasonably foreseeable, and there can be no assurances that every
Year 2000 problem will be identified and addressed or that unforeseen
consequences will not arise. Unanticipated factors while implementing the
changes necessary to mitigate Year 2000 problems, including the ongoing
availability and costs of trained personnel, the ability to locate and
correct all relevant codes in computer and embedded systems, or the failure
of critical third parties to communicate about and to mitigate their
Year 2000 problems could result in unanticipated interruptions in certain
core business activities or operations of Wisconsin Energy.
ENVIRONMENTAL MATTERS
NATIONAL AMBIENT AIR QUALITY STANDARDS: On July 18, 1997 the United
States Environmental Protection Agency ("EPA") revised the National Ambient
Air Quality Standards for ozone and particulate matter. Although
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<PAGE> 40
specific emission control requirements are not yet defined, Wisconsin Electric
believes that these revised standards will likely require significant reductions
in sulfur dioxide ("SO2") and nitrogen oxide ("NOx") emissions from coal-fired
generating facilities. Wisconsin Electric expects that reductions needed to
achieve compliance with the ozone attainment standards will be implemented in
stages from the year 2003 through the year 2012, beginning with the ozone
transport reductions described below under "Final EPA Ozone Transport
Rulemaking." Reductions associated with the new particulate matter standard will
likely be implemented in stages after the year 2010 and extending to the year
2017. Beyond the cost estimates identified below in "Final EPA Ozone Transport
Rulemaking", Wisconsin Electric is currently unable to determine the impact of
the revised air quality standards on its future liquidity, financial condition
or results of operation.
FINAL EPA OZONE TRANSPORT RULEMAKING: On October 27, 1998, the EPA
promulgated ozone transport rules to address transport of NOx and ozone
into ozone non-attainment areas in the eastern half of the United States.
The rules require electric utilities in 22 eastern states and the District
of Columbia, including the State of Wisconsin, to significantly reduce NOx
emissions by May 1, 2003. Affected states are required to submit their
respective state implementation plans to the EPA by September 1999. The
rules have been legally challenged by numerous affected states and other
stakeholders.
Wisconsin Electric is working with a variety of state and regional
stakeholders to provide input to the plan under development by the State of
Wisconsin. Wisconsin Electric is evaluating various NOx control techniques
to develop a least cost compliance plan and currently estimates total
capital costs of $250 million to $300 million and annual operation and
maintenance costs of $10 million to $25 million to comply with such a plan.
Wisconsin Electric believes that compliance with the NOx emission
reductions required by the EPA's final ozone transport rules will likely
mitigate costs to comply with the EPA's July 18, 1997 revisions to the
ozone National Ambient Air Quality Standards discussed above.
As a result of the EPA's October 1998 final ozone transport rules, the
Company also expects to incur capital costs in the range of $20 million to
$35 million prior to May 2003 at the two fossil-fueled power plants in the
State of Connecticut, which the Company expects to acquire in the second
quarter of 1999. For additional information concerning the acquisition of
these two Connecticut power plants, see "Liquidity and Capital Resources -
Capital Requirements" below as well as "Note L - Commitments and
Contingencies" in Wisconsin Energy's Notes to Financial Statements.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric is voluntarily reviewing
and addressing environmental conditions at a number of former manufactured
gas plant sites. See "Note L - Commitments and Contingencies" in the Notes
to Financial Statements for additional information.
ASH LANDFILL SITES: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion byproducts. However, ash
materials have been, and to some degree, continue to be disposed in company-
owned, licensed landfills. Some early designed and constructed landfills
may allow the release of low levels of constituents resulting in the need
for various levels of remediation. Where Wisconsin Electric has become
aware of these conditions, efforts have been performed to address these
conditions. These costs are included in the environmental operating and
maintenance costs of Wisconsin Electric.
COAL SUPPLY AND TRANSPORTATION MATTERS
During 1997, coal deliveries to certain Wisconsin Electric generating
facilities, as well as to the electric generating facilities of many other
utilities, had been impaired by massive congestion problems on the Union
Pacific Railroad. As a result of the merger of the Union Pacific Railroad
with the Southern Pacific Railroad, a backlog of coal deliveries had caused
stockpiles to decline at some of Wisconsin Electric's power plants and
forced Wisconsin Electric to seek alternative coal delivery routes. While
coal delivery performance by the Union Pacific Railroad has not fully
recovered, performance improved during 1998 and Wisconsin Electric's coal
inventories have now returned to acceptable levels.
During the fall of 1997, Wisconsin Electric completed construction of a
rail spur at the Pleasant Prairie Power Plant, which burns over 40% of
Wisconsin Electric's annual coal requirements. The new rail spur,
connecting to the rail
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<PAGE> 41
line of a competitor of the Union Pacific Railroad,
provides Wisconsin Electric with another means of delivery to the Pleasant
Prairie Power Company and significantly reduced Wisconsin Electric's risk
of future impaired coal delivery due to problems at the Union Pacific
Railroad.
As of the beginning of 1999, Wisconsin Electric had approximately a 94-day
supply of coal in inventory at its coal-fired facilities. As part of its
Year 2000-related contingency planning and implementation, Wisconsin
Electric expects to build the inventory of coal during 1999 at its coal-
fired facilities to an estimated 111-day supply by December 31, 1999.
OUTLOOK
The following forecasts are forward-looking statements subject to certain
risks, uncertainties and assumptions. Actual results may vary materially.
Factors that could cause actual results to differ materially include, but
are not limited to: business and competitive conditions in the energy
industry, in general, and in the Company's service territory; availability
of the Company's generating facilities; changes in purchased power costs;
and the economy, weather, the restructuring of the electric and gas utility
industries, and unforeseen problems associated with non-utility
diversification efforts. See "Cautionary Factors" below.
EARNINGS: The Company currently estimates that its earnings during 1999
will be in the range of $1.85 to $2.05 per share, an increase of between 12
and 24 percent over 1998 earnings.
ELECTRIC SALES: Assuming moderate growth in the economy of its service
territory and normal weather, the Company presently anticipates total
retail and municipal electric kilowatt-hour sales to grow at a compound
annual rate of 2.1% over the five-year period ending December 31, 2003.
GAS DELIVERIES: Assuming moderate growth in the economy of its service
territory and normal weather, the Company currently forecasts total therm
deliveries of natural gas to grow at a compound annual rate of
approximately 1.9 % over the five-year period ending December 31, 2003.
ADDITIONAL GAS SERVICE TERRITORY: In July 1997, the PSCW approved
Wisconsin Electric's application to expand natural gas service to more than
4,500 potential customers in northeastern Wisconsin. When completed, the
project will involve the installation of more than 350 miles of new gas
main. During 1998, about 2,400 customers were connected and the remainder
are expected to be connected during 1999. 1999 capital expenditures for
this project are included in anticipated construction expenditures shown
below under "Capital Requirements" in "Liquidity and Capital Resources."
EMPLOYEES: The Company expects to add approximately 570 full-time
equivalent employees during 1999. Of the total 570 full-time equivalent
employees, approximately 370 are attributable to Wisconsin Electric,
primarily in such key areas as distribution operations, nuclear operations,
customer service and information resources. Approximately half of the new
employees at Wisconsin Electric are expected to replace contract labor that
has been used during the past couple of years. Approximately 200 full-time
equivalent non-utility employees are expected to be added in the second
quarter of 1999 when WISVEST Corporation closes on the acquisition of two
fossil-fuel power plants from The United Illuminating Company, an
unaffiliated investor owned utility in New Haven, Connecticut. For
additional information concerning this acquisition, see "Note L -
Commitments and Contingencies" in Wisconsin Energy's Notes to Financial
Statements.
EFFECTS OF WEATHER
By the nature of its utility business segments, Wisconsin Energy's and
Wisconsin Electric's earnings are sensitive to weather variations from
period to period. Variations in winter weather affect heating load for
both the gas and electric utilities. Variations in summer weather affect
cooling load for the electric utilities as well as therm deliveries to gas-
fired electric generating customers. The table below summarizes weather as
measured by degree days at Mitchell International Airport in Milwaukee,
Wisconsin for each of the three years ended December 31.
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<PAGE> 42
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Degree Days 1998 1997 to 1998 1996 to 1997
----------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Heating (7,005 Normal) 5,848 7,101 (17.7%) 7,469 (4.9%)
Cooling (657 Normal) 800 407 96.6% 608 (33.1%)
</TABLE>
EFFECTS OF INFLATION
With expectations of low-to-moderate inflation, the Company does not
believe the impact of inflation will have a material effect on its future
results of operations.
MARKET RISKS
The Company is potentially exposed to market risk due to changes in
interest rates, the return on marketable securities and the market price of
electricity as well as to changes in fuel costs incurred to generate
electricity and in the cost of gas for its gas operations. Exposure to
interest rate changes relates to the Company's short and long-term debt as
well as its preferred equity obligations, while exposure to fluctuations in
the return on marketable securities relates to debt and equity security
investments held in various trust funds. Exposure to electricity market
price risk relates to forward activities taken to manage the supply of and
demand for electric energy, and exposure to fuel and gas cost variations
relates to the supply of and demand for coal, uranium, natural gas and fuel
oil. Currently, the Company does not utilize derivative financial
instruments. Griffin Energy Marketing L.L.C., a subsidiary of Wisvest,
began marketing energy related services and limited trading of electricity
in 1998. Griffin's activities during 1998 were financially insignificant.
The Company is evaluating to what extent it will use derivative financial
and commodity instruments in the normal course of their future business.
For additional information concerning risk factors, including market risks,
see "Cautionary Factors" below.
INTEREST RATE RISK: The Company, including its affiliates, have various
short-term borrowing arrangements to provide working capital and general
corporate funds. The level of borrowings under such arrangements vary from
period to period, depending upon, among other factors, capital investments.
Future short-term interest expense and payments will reflect both the level
of future short-term interest rates and borrowing levels.
The table that follows provides information about long-term financial
instruments that were held by the Company at December 31, 1998 and that are
sensitive to changes in interest rates. For long-term debt, the table
presents principal cash flows that exist by maturity date and the related
annualized average interest rate of the maturing long-term debt. The
annualized average interest rate on the variable rate long-term debt was
estimated based upon a weighted average interest rate at December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
-------------------------------------------------- as of
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Long-Term Debt
Wisconsin Electric $92.9 $ 1.9 $ 1.9 $ 1.9 $ 1.9 $1,193.1 $1,293.6 $1,378.7
Average Interest Rate 6.6% 7.5% 7.5% 7.5% 7.5% 7.2% 7.2%
Wisconsin Energy (a) $95.9 $31.9 $20.7 $16.9 $16.0 $1,338.3 $1,519.7 $1,605.7
Average Interest Rate 6.6% 6.4% 6.8% 6.6% 6.9% 7.2% 7.1%
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
-------------------------------------------------- as of
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Rate Long-Term Debt
Wisconsin Electric - - - - - $ 165.4 $ 165.4 $ 165.4
Average Interest Rate 4.0% 4.0%
Wisconsin Energy (a) $ 2.9 $ 8.1 $ 4.3 $ 0.2 $ 0.3 $ 167.8 $ 183.6 $ 183.6
Average Interest Rate 7.7% 6.9% 6.9% 7.6% 7.6% 4.1% 4.3%
Preferred Stock Not Subject to
Mandatory Redemption
Wisconsin Electric
and Wisconsin Energy (a) - - - - - - $ 30.4 $ 20.2
Average Dividend Rate 4.0%
<FN>
(a) Wisconsin Energy includes the holding company as well as all
subsidiaries.
</TABLE>
For additional information concerning the Company's short-term debt, long-
term debt and preferred stock, see "Note I - Notes Payable," "Note H - Long-
Term Debt" and "Note G - Preferred Stock", respectively, in the Notes to
Financial Statements.
MARKETABLE SECURITIES RETURN RISK: The Company funds its pension, other
postretirement benefit and nuclear decommissioning obligations through
various trust funds, which in turn invest in debt and equity securities.
Changes in the market price of the assets in these trust funds can affect
pension, other postretirement benefit and nuclear decommissioning expenses
in future periods. Future annuity payments to these trust funds can be
affected by changes in the market price of the trust fund assets.
Wisconsin Energy expects that the risk of expense and annuity payment
variations as a result of changes in the market price of trust fund assets
would be mitigated in part through future rate actions by the Company's
various utility regulators.
At December 31, 1998, the Company had the following total trust fund assets
at fair value, primarily consisting of available for sale debt and equity
security investments.
<TABLE>
<CAPTION>
Wisconsin Energy Wisconsin Electric
---------------- ------------------
(Thousands of Dollars)
<S> <C> <C>
Pension trust funds $839,659 $828,491
Nuclear decommissioning trust fund 518,505 518,505
Other postretirement benefit trust funds 68,913 68,913
</TABLE>
For additional information concerning the Company's pension and other
postretirement benefits, see "Note J - Benefits" in the Notes to Financial
Statements. For additional information concerning nuclear decommissioning,
see "Note F - Nuclear Operations" in the Notes to Financial Statements.
COMMODITY PRICE RISK: In the normal course of business, the Company's
utility subsidiaries utilize contracts of various duration for the forward
sale and purchase of electricity to effectively manage utilization of their
available generating capacity and energy during periods when available
power resources are expected to exceed the requirements of their native
load customers. This practice may also include forward contracts for the
purchase of
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<PAGE> 44
power during periods when the anticipated market price of electric energy is
below expected incremental power production costs. Wisconsin Electric manages
its fuel and gas supply costs through a portfolio of short and long-term
procurement contracts with various suppliers. To a certain extent, Wisconsin
Electric's retail fuel cost adjustment procedure in Wisconsin may mitigate some
of the risk of fuel cost price fluctuation. Currently, the purchased gas
adjustment mechanism in Wisconsin mitigates the risk of gas cost variations.
During 1999, this purchased gas adjustment mechanism will be replaced by a new
gas cost recovery mechanism. For additional information concerning the fuel
cost adjustment procedure and the purchased gas adjustment mechanism, see "Rates
and Regulatory Matters" above in "Factors Affecting Results of Operations." For
additional information concerning the change in the purchased gas adjustment
mechanism, see "Industry Restructuring and Competition" above in "Factors
Affecting Results of Operations."
ACCOUNTING MATTERS
NEW PRONOUNCEMENTS: See "Note A - Summary of Significant Accounting
Policies" in the Notes to Financial Statements for information concerning
new pronouncements issued by the Financial Accounting Standards Board
("FASB") during 1998.
In February 1996, the FASB released for comment an exposure draft of a
Proposed Statement of Financial Accounting Standards entitled "Accounting
for Certain Liabilities Related to Closure or Removal of Long-Lived Assets"
("Proposed FAS"). The Proposed FAS would have required the Company to
recognize as a liability the present value of the estimated future total
costs associated with closure or removal of certain long-lived assets and
to correspondingly capitalize those costs as an increase in the cost of
long-lived asset associated with the obligation. The capitalized costs
would have been depreciated to expense over the useful life of the asset.
Following redeliberations during 1997 and 1998, the FASB has decided to
continue with the project and plans to issue a second exposure draft in the
second quarter of 1999. To reflect a broadened scope from the original
project, the title of the project was changed to "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets."
The scope of the second exposure draft of the Proposed FAS would most
likely include decommissioning costs for Point Beach and may also apply to
other facilities of the Company. With respect to decommissioning costs for
Point Beach, the Proposed FAS would result in Wisconsin Electric recording
a decommissioning liability and a corresponding asset as required by the
pronouncement. Currently, nuclear decommissioning costs are accrued as
depreciation expense over the expected service lives of the two units at
Point Beach based upon an external sinking fund method. Any changes in
depreciation expense due to differing assumptions between the Proposed FAS
and those currently required by the PSCW are not expected to be material
and would most likely be deferrable and recoverable in rates. For
additional information on the costs of decommissioning Point Beach, see
"Note F - Nuclear Operations" in the Notes to Financial Statements.
REGULATORY ACCOUNTING: Wisconsin Energy's utility subsidiaries, Wisconsin
Electric and Edison Sault, operate under electric utility rates which are
subject to the approval of the PSCW, MPSC and FERC, and natural gas and
steam utility rates that are subject to the approval of the PSCW (see
"Rates and Regulatory Matters" above). Such rates are designed to recover
the cost of service and provide a reasonable return to investors.
Developing competitive pressures in the utility industry may result in
future utility rates which are based upon factors other than the
traditional original cost of investment. In such a situation, continued
deferral of certain regulatory asset and liability amounts on the
utility's' books may no longer be appropriate as allowed under Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation ("FAS 71"), and the unamortized regulatory
assets net of the regulatory liabilities would be recorded as an
extraordinary after-tax non-cash charge to earnings.
As discussed above under "Rates and Regulatory Matters", the MPSC issued a
five-year experimental price cap order for Edison Sault electric rates that
expires in the year 2000. This order allows Edison Sault to seek rate
relief for costs incurred under extraordinary circumstances.
Because of Edison Sault's price cap order and other potential changes in
the industry, the Company continually reviews the applicability of FAS 71
and has determined that it is currently appropriate to continue following
FAS 71 at Edison Sault. At this time, the Company is unable to predict
whether any adjustments to regulatory assets and
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<PAGE> 45
liabilities will occur in the future at either Wisconsin Electric or at Edison
Sault. See "Note A - Summary of Significant Accounting Policies" in the Notes to
Financial Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING ACTIVITIES
Wisconsin Energy invested a net total of $1.3 billion in its businesses
during the three years ended December 31, 1998 of which $1.0 billion was at
Wisconsin Electric. Investments during this three-year period included
$1.1 billion for construction of or investment in new or improved
facilities or projects: $909 million for the construction of new or
improved utility plant at Wisconsin Electric and $225 million for projects
at Wisconsin Energy's remaining subsidiaries. Additional investments
during this three-year period included $43 million for the acquisition of
nuclear fuel and $85 million for the eventual decommissioning of Point
Beach. The following are some of the larger construction or investment
projects in which the Company invested during the three years ended
December 31, 1998.
POINT BEACH UNIT 2 STEAM GENERATORS: In May 1996, Wisconsin Electric
received a written order from the PSCW approving replacement of the Point
Beach Unit 2 steam generators. Replacement of the Unit 2 steam generators
was completed in January 1997. Capital expenditures of $7 million and
$48 million were made during 1997 and 1996, respectively, for replacement
of the Unit 2 steam generators.
MILWAUKEE COUNTY POWER PLANT: In December 1996, Wisconsin Energy acquired
the steam and chilled water production and distribution facilities to
complete the second phase of the purchase of the Milwaukee County Power
Plant. Two outstanding contingencies were met prior to closing the
purchase. The PSCW approved the purchase of the steam facilities, and the
five largest customers signed steam and chilled water service agreements
which obligate them to purchase their present and future heating and
cooling requirements from Wisconsin Energy for a period of ten years. The
capital cost for the steam facilities was approximately $21 million.
Wisconsin Electric has integrated these facilities and the associated
customers into its steam utility operations. The capital cost for the
chilled water facilities was approximately $19 million. A separate
subsidiary of Wisconsin Energy operates the chilled water facilities as a
non-regulated business.
NON-UTILITY: Wisconsin Energy's net non-utility assets amounted to
approximately $524 million at December 31, 1998, an increase of
$293 million over the past three years. Primary additions during this
three-year period included $138 million of energy related investments by
WISVEST Corporation, $82 million of investments in land and buildings by
WISPARK Corporation, $45 million for Minergy's glass aggregate plant
described below and 19 million for WISVEST Corporation's acquisition of the
chilled water facilities at the Milwaukee County Power Plant described
above. Wisconsin Energy is reviewing additional non-utility growth
opportunities on an ongoing basis and may make further investments and/or
acquisitions from time to time. For additional information concerning
WISVEST Corporation's pending acquisition of two fossil-fueled power plants
in the State of Connecticut, see "Capital Requirements" below. Also, see
"Note K - Segment Reporting" in Wisconsin Energy's Notes to Financial
Statements.
MINERGY GLASS AGGREGATE PLANT: In 1998, Minergy Corp., a non-utility
subsidiary of Wisconsin Energy, placed into operation a $45 million
facility in Neenah, Wisconsin that recycles paper sludge from area paper
mills into two usable products: glass aggregate and steam. The glass
aggregate is being sold into existing construction and aggregate markets
and the steam is being sold to a local paper mill. The plant results in
substantial environmental and economic benefits to the area by providing an
alternative to landfilling paper sludge. Minergy commenced construction in
July 1996, with commercial operation scheduled for April 1998. Capital
expenditures of $3 million, $27 million and $15 million were made during
1998, 1997 and 1996, respectively, for this facility.
CASH PROVIDED BY OPERATING AND FINANCING ACTIVITIES
During the three years ended December 31, 1998, total cash provided by
operating activities at both Wisconsin Energy and Wisconsin Electric were
$1.3 billion. During this period, internal sources of funds, after the
payment of dividends, provided 63% of Wisconsin Energy's and 74% of
Wisconsin Electric's capital requirements.
A-29
<PAGE> 46
Financing activities during the three-year period ended December 31, 1998
included the issuance of $599 million of long-term debt by Wisconsin Energy
of which $400 million was issued by Wisconsin Electric. The proceeds of
these new debt issues were used to retire maturing debt or refinance higher
coupon debt in the amount of $324 million at Wisconsin Energy, including
$303 million at Wisconsin Electric, and for other general corporate
purposes. Wisconsin Energy and Wisconsin Electric increased their short-
term debt by $125 million and $69 million, and Wisconsin Energy added
$63 million of common equity from the issuance of new shares through the
Company's stock plans during the three years ended December 31, 1998. No
preferred stock was issued. Dividends on Wisconsin Energy's common stock
were $177 million, $173 million and $167 million during 1998, 1997 and
1996, respectively. Wisconsin Electric paid dividends to Wisconsin Energy
of $179 million, $214 million and $168 million during 1998, 1997 and 1996,
respectively, and received a total of $100 million in capital contributions
from Wisconsin Energy during this three-year period.
During 1998, WISPARK Corporation, a non-utility subsidiary of Wisconsin
Energy, secured $18 million of bank financing in the form of adjustable
rate mortgage notes due 2000-2008 to finance the construction or purchase
of various facilities.
In December 1998, Wisconsin Energy Capital Corporation, another non-utility
subsidiary of Wisconsin Energy then named Wisconsin Michigan Investment
Corporation, issued $20 million of 6.21% medium-term notes due 2008,
$30 million of 6.51% medium-term notes due 2013 and $50 million of 6.94%
medium-term notes due 2028. Proceeds of the issues were added to Wisconsin
Energy Capital Corporation's general funds and were used to finance non-
utility projects and for other general corporate purposes.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds and were used to reduce short-term borrowings and for other
general corporate purposes.
In April 1998, Wisconsin Energy Capital Corporation issued $25 million of
6.48% medium-term notes due 2008. Proceeds from the issue were added to
Wisconsin Energy Capital Corporation's general funds and were used to
financed non-utility projects and for other general corporate purposes.
In October 1997, Wisconsin Energy Capital Corporation, issued $15 million
of 6.40% medium-term notes due 2001 and $12 million of 6.33% medium-term
notes due 2002. In November 1997, Wisconsin Energy Capital Corporation
issued $20 million of 6.22% medium-term notes due 2000. Proceeds were
added to Wisconsin Energy Capital Corporation's general funds and were used
to finance various non-utility projects and for other general corporate
purposes.
In December 1996, Wisconsin Electric and WISVEST Corporation issued
promissory notes in the amount of $12 million and $11 million,
respectively, due 2006. The notes were issued as part of the transaction
to acquire the steam and chilled water facilities from Milwaukee County.
The notes have been discounted to reflect the difference between an
effective interest rate of 6.36% and a stated rate of 1.93%.
In November 1996, Wisconsin Electric issued $200 million of 6 5/8%
unsecured debentures due 2006. Proceeds were added to Wisconsin Electric's
general funds and were applied to the repayment of short-term borrowings
and for other general corporate purposes.
See "Note A - Summary of Significant Accounting Policies" in Wisconsin
Energy's Notes to Financial Statements for a discussion of various
limitations on the ability of Wisconsin Electric to transfer funds to
Wisconsin Energy.
A-30
<PAGE> 47
CAPITAL STRUCTURE
Wisconsin Energy's and Wisconsin Electric's capitalization at December 31
were:
<TABLE>
<CAPTION>
Wisconsin Energy Wisconsin Electric
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Equity 46.6% 48.6% 47.5% 48.5%
Preferred Stock 0.7% 0.8% 0.9% 0.9%
Long-Term Debt (including
current maturities) 45.7% 42.3% 45.5% 43.7%
Short-Term Debt 7.0% 8.3% 6.1% 6.9%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
Even though earnings increased during 1998 compared to 1997, the Company's
common equity ratio decreased while long-term debt increased. This was due
to the issuance of $150 million of debentures by Wisconsin Electric and
$100 million of medium term notes by Wisconsin Energy Capital Corporation,
which were added to the general funds of Wisconsin Electric and Wisconsin
Energy Capital Corporation, respectively, and used to reduce short-term
borrowings and for other general corporate purposes. Wisconsin Electric
decreased short-term debt by $23 million, while Wisconsin Energy's
consolidated short-term debt decreased by $38 million.
The Company has maintained strong bond ratings which provides necessary
access to the capital markets for growth opportunities. Wisconsin Electric
currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P") and Duff & Phelps Inc. ("D&P"), Aa2 by Moody's
Investors Service ("Moody's") and AA by Fitch Investors Service ("Fitch").
In addition, Wisconsin Electric currently has unsecured debt ratings of AA
by S&P and D&P, Aa3 by Moody's and AA- by Fitch. Wisconsin Electric's
preferred stock has ratings of AA- by S&P and Fitch, aa3 by Moody's and AA
by D&P. Moody's has assigned a rating on Wisconsin Energy Capital
Corporation's unsecured debt of A1 and S&P an AA. Wisconsin Energy
Corporation's and Wisconsin Electric's commercial paper are rated A-1+ by
S&P and P1 by Moody's. In March 1999, the Trust Preferred securities of
WEC Capital Trust I were assigned preliminary ratings of a1 by Moody's and
a+ by S&P.
At year-end 1998, Wisconsin Energy had $255 million of unused lines of bank
credit and approximately $17 million of cash and cash equivalents, and
Wisconsin Electric had $128 million of unused lines of bank credit and
$14 million of cash and cash equivalents.
CAPITAL REQUIREMENTS
CONSTRUCTION EXPENDITURES: The Company's total construction budget for
1999 is approximately $889 million, including $350 million for Wisconsin
Electric and $539 million for Wisconsin Energy's non-utility subsidiaries
as well as for Edison Sault.
Wisconsin Electric's construction expenditures during 1999 include
recurring additions to and/or improvements of generation, transmission and
distribution facilities to assure the reliability of electric service;
anticipated expenditures at fossil power plants to comply with evolving air
quality standards; the acquisition of new combustion turbines; and
technology-related expenditures for the Year 2000 and for other technology
improvement efforts.
Of Wisconsin Energy's $539 million capital budget for the non-utility
subsidiaries and for Edison Sault, $315 million is directly related to
WISVEST Corporation's anticipated acquisition of certain generating assets
discussed below. The remaining capital budget is primarily for property
additions at Wisconsin Energy's principal non-utility subsidiaries
including WISVEST Corporation, Minergy Corp., and WISPARK Corporation.
In October 1998, WISVEST Connecticut, LLC, a wholly owned subsidiary of
WISVEST Corporation, entered into an agreement to purchase two fossil-
fueled power plants for $272 million from The United Illuminating Company,
A-31
<PAGE> 48
an unaffiliated investor owned utility in New Haven, Connecticut. The
acquisition is expected to close in the second quarter of 1999. To finance the
purchase price of the facilities as well as provide working capital and letter
of credit capabilities, Wisvest anticipates a nonrecourse long-term project
financing arrangement of $245 million and a capital contribution from Wisconsin
Energy of $105 million. For additional information concerning WISVEST
Connecticut, LLC's pending acquisition, see "Note L - Commitments and
Contingencies" in Wisconsin Energy's Notes to Financial Statements.
Due to changing environmental and other regulations that impact the
Company's utility affiliates, future long-term capital requirements may
vary from recent capital requirements. For example, see "Environmental
Matters" and "Industry Restructuring and Competition" above in "Factors
Affecting Results of Operations" for a discussion of the EPA's evolving air
quality standards applicable to utilities and for the changing utility
industry, respectively. Wisconsin Electric currently expects to spend
$350 million to $400 million for new construction in each of the next five
years. Also, Wisconsin Energy is reviewing additional non-utility growth
opportunities on an ongoing basis and may make further investments and/or
acquisitions from time to time in projects or entities that are expected to
provide a satisfactory return on the investment. The specific form, amount
and timing of these investments and the related financing of these
opportunities have not yet been determined. As a result, the Company
expects that its future long-term capital requirements may vary from
historical levels.
CAPITAL RESOURCES
The Company expects internal sources of funds from operations after the
payment of dividends to provide approximately 40% and 80% of Wisconsin
Energy's and Wisconsin Electric's respective construction expenditures for
1999. The remaining cash requirements at Wisconsin Energy and Wisconsin
Electric during 1999 are expected to be met through one or more of the
following: short-term borrowings, the issuance of intermediate or long-term
debt, the issuance of trust preferred securities, and proceeds from the
sale of new issue common stock under Wisconsin Energy's stock plans.
Wisconsin Electric is planning to issue up to $150 million of debentures
during 1999. In March 1999, Wisconsin Energy filed a registration
statement for the issuance of up to $300 million of trust preferred
securities of which $200 million was issued in March 1999 in anticipation
of funding Wisconsin Energy's capital contribution to WISVEST Connecticut,
LLC for the pending power plant acquisitions from The United Illuminating
Company and to pay down short-term borrowings. A secondary offering of the
balance may occur later in 1999. Also in March 1999, Wisconsin Energy
Capital Corporation increased the availability of its medium-term note
program from $200 million to $400 million. Beyond 1999, capital
requirements will be met through internally generated funds supplemented,
when required, by debt and equity financing, including Wisvest's
nonrecourse long-term project financing arrangements described above. The
specific form, amount and timing of securities which may be issued have not
yet been determined and will depend, to a large extent, on market
conditions and other factors.
Between November 1, 1998 and December 31, 1998, Wisconsin Energy issued
334,270 new shares of common stock which were purchased by participants in
the Company's stock plans with cash investments and reinvested dividends
aggregating approximately $10 million. Prior to November 1, 1998,
Wisconsin Energy had been purchasing shares for its stock plans on the open
market.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may
contain forward-looking statements made by or on behalf of Wisconsin Energy
or Wisconsin Electric. Such statements are based upon management's current
expectations and are subject to risks and uncertainties that could cause
Wisconsin Energy's or Wisconsin Electric's actual results to differ
materially from those contemplated in the statements. Readers are
cautioned not to place undue reliance on the forward-looking statements.
When used in written documents or oral presentations, the terms
"anticipate", "believe", "estimate", "expect", "objective", "plan",
"possible", "potential", "project" and similar expressions are intended to
identify forward-looking statements. In addition to the assumptions and
other factors referred to specifically in connection with such statements,
factors that could cause Wisconsin Energy's or Wisconsin Electric's actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following:
A-32
<PAGE> 49
- - Factors affecting utility operations such as unusual weather
conditions; catastrophic weather-related damage; availability of Wisconsin
Electric's or Edison Sault's generating facilities; unscheduled generation
outages, maintenance or repairs; unanticipated changes in fossil fuel,
nuclear fuel, purchased power, gas supply or water supply costs or
availability due to higher demand, shortages, transportation problems or
other developments; nonperformance by electric energy or natural gas
suppliers under existing power purchase or gas supply contracts; nuclear or
environmental incidents; resolution of spent nuclear fuel storage and
disposal issues; electric transmission or gas pipeline system constraints;
unanticipated organizational structure or key personnel changes; collective
bargaining agreements with union employees or work stoppages; inflation
rates; or demographic and economic factors affecting utility service
territories or operating environment.
- - Regulatory factors such as unanticipated changes in rate-setting
policies or procedures; unanticipated changes in regulatory accounting
policies and practices; industry restructuring initiatives; transmission
system operation and/or administration initiatives; recovery of costs of
previous investments made under traditional regulation; required approvals
for new construction; changes in the United States Nuclear Regulatory
Commission's regulations related to Point Beach Nuclear Plant; changes in
the United States Environmental Protection Agency's as well as the
Wisconsin or Michigan Department of Natural Resources' regulations related
to emissions from fossil-fuel-fired power plants; or the siting approval
process for new generation and transmission facilities.
- - The rapidly changing and increasingly competitive electric and gas
utility environment as market-based forces replace strict industry
regulation and other competitors enter the electric and gas markets
resulting in increased wholesale and retail competition.
- - Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
- - Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of Wisconsin Electric to transfer
funds to Wisconsin Energy in the form of cash dividends, loans or advances.
- - Changes in social attitudes regarding the utility and power
industries.
- - Customer business conditions including demand for their products or
services and supply of labor and material used in creating their products
and services.
- - The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
- - Factors affecting the availability or cost of capital such as changes
in interest rates; market perceptions of the utility industry, the Company
or any of its subsidiaries; or security ratings.
- - Federal, state or local legislative factors such as changes in tax
laws or rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulation.
- - Authoritative generally accepted accounting principle or policy
changes from such standard setting bodies as the Financial Accounting
Standards Board and the Securities and Exchange Commission.
- - Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
- - Unanticipated developments while implementing the modifications
necessary to mitigate Year 2000 compliance problems, including the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes in computer and embedded
systems, the indirect impacts of third parties with whom the
A-33
<PAGE> 50
Company does business and who do not mitigate their Year 2000 compliance
problems, and similar uncertainties.
- - Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; the cyclical nature of property values that could affect real
estate investments; unanticipated changes in environmental or energy
regulations; timely regulatory approval without onerous conditions of
potential acquisitions; and risks associated with minority investments,
where there is a limited ability to control the development, management or
operation of the project.
- - Legislative or regulatory restrictions or caps on non-utility
acquisitions, investments or projects, including the State of Wisconsin's
Public Utility Holding Company Law, which could limit the Company's
diversification and growth opportunities or require the Company to divest
of certain existing non-utility assets.
- - Factors affecting foreign non-utility operations including foreign
governmental actions; foreign economic and currency risks; political
instability; and unanticipated changes in foreign environmental or energy
regulations.
- - Other business or investment considerations that may be disclosed from
time to time in Wisconsin Energy's or Wisconsin Electric's Securities and
Exchange Commission filings or in other publicly disseminated written
documents.
Wisconsin Energy and Wisconsin Electric undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
A-34
<PAGE> 51
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENT
Year Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,641,403 $1,412,115 $1,393,270
Gas 295,848 355,172 364,875
Steam 20,506 22,315 15,675
---------- ---------- ----------
Total Operating Revenues 1,957,757 1,789,602 1,773,820
Operating Expenses
Fuel (Note H) 308,374 311,966 295,651
Purchased power (Note H) 141,619 132,689 36,216
Cost of gas sold 175,475 233,877 234,254
Other operation expenses 476,279 407,114 391,520
Maintenance 168,120 135,096 103,046
Depreciation (Note C) 241,572 237,698 202,796
Taxes other than income taxes 78,652 73,914 77,866
Federal income tax (Note D) 79,198 40,221 105,656
State income tax (Note D) 18,605 10,558 24,976
Deferred income taxes - net (Note D) (438) 7,937 (1,575)
Investment tax credit - net (Note D) (3,395) (927) (2,430)
---------- ---------- ----------
Total Operating Expenses 1,684,061 1,590,143 1,467,976
Operating Income 273,696 199,459 305,844
Other Income and Deductions
Interest income 21,651 17,974 13,553
Allowance for other funds used
during construction (Note E) 2,936 3,349 3,036
Merger expenses (Note B) - (21,881) -
Miscellaneous - net (Note L) (684) (37,531) (3,642)
Federal income tax (Note D) (2,124) 19,687 (631)
State income tax (Note D) (605) 3,090 (570)
---------- ---------- ----------
Total Other Income
and Deductions 21,174 (15,312) 11,746
Income Before Interest Charges 294,870 184,147 317,590
Interest Charges
Long-term debt 100,420 106,573 100,133
Other interest 11,756 8,730 7,821
Allowance for borrowed funds used
during construction (Note E) (1,480) (1,771) (1,679)
--------- --------- ---------
Total Interest Charges 110,696 113,532 106,275
--------- --------- ---------
Net Income 184,174 70,615 211,315
Preferred Stock Dividend Requirement 1,203 1,203 1,203
--------- --------- ---------
Earnings Available for Common
Stockholder $ 182,971 $ 69,412 $ 210,112
========== ========== ==========
</TABLE>
Note: Earnings and dividends per share of common stock are not applicable
because all of Wisconsin Electric Power Company's common stock is owned
by Wisconsin Energy Corporation.
The accompanying notes are an integral part of these financial statements.
A-35
<PAGE> 52
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,820,239 $4,690,347
Gas 523,187 492,271
Steam 62,832 61,921
Common 420,750 330,761
---------- ----------
5,827,008 5,575,300
Accumulated provision for depreciation (2,973,007) (2,700,839)
---------- ----------
2,854,001 2,874,461
Construction work in progress 109,412 81,612
Leased facilities - net (Note H) 133,007 138,687
Nuclear fuel - net (Note H) 87,660 90,219
---------- ----------
Net Utility Plant 3,184,080 3,184,979
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 518,505 404,240
Other 60,123 84,223
---------- ----------
Total Other Property and Investments 578,628 488,463
Current Assets
Cash and cash equivalents 14,183 10,100
Accounts receivable, net of allowance for
doubtful accounts - $16,621 and $15,641 166,648 140,111
Accrued utility revenues 129,463 141,273
Fossil fuel (at average cost) 123,616 124,045
Materials and supplies (at average cost) 74,399 73,159
Prepayments 59,046 56,192
Other 767 6,035
---------- ----------
Total Current Assets 568,122 550,915
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 190,114 169,306
Deferred regulatory assets (Note A) 222,951 215,200
Other 25,047 58,977
---------- ----------
Total Deferred Charges and Other Assets 438,112 443,483
---------- ----------
Total Assets $4,768,942 $4,667,840
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-36
<PAGE> 53
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,698,478 $1,694,508
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,512,531 1,448,558
---------- ----------
Total Capitalization 3,241,459 3,173,516
Current Liabilities
Long-term debt due currently (Note H) 112,454 81,389
Notes payable (Note I) 219,289 242,633
Accounts payable 169,503 142,797
Payroll and vacation accrued 29,569 25,392
Taxes accrued - income and other 31,475 38,475
Interest accrued 19,864 20,012
Other 46,574 57,871
---------- ----------
Total Current Liabilities 628,728 608,569
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 559,574 521,429
Accumulated deferred investment tax credits 83,476 86,871
Deferred regulatory liabilities (Note A) 157,951 173,688
Other 97,754 103,767
---------- ----------
Total Deferred Credits and Other Liabilities 898,755 885,755
Commitments and Contingencies (Note L)
---------- ----------
Total Capitalization and Liabilities $4,768,942 $4,667,840
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-37
<PAGE> 54
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
Year Ended December 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $184,174 $ 70,615 $211,315
Reconciliation to cash
Depreciation 241,572 237,698 202,796
Nuclear fuel expense - amortization 18,922 5,426 21,887
Conservation expense - amortization 22,498 22,498 22,498
Debt premium, discount &
expense - amortization 3,794 7,561 9,762
Deferred income taxes - net (438) 7,937 (1,575)
Investment tax credit - net (3,395) (927) (2,430)
Allowance for other funds used
during construction (2,936) (3,349) (3,036)
Write-off of merger costs - 21,881 -
Write-down of equipment - 30,000 -
Change in - Accounts receivable (26,537) 145 4,220
Inventories (811) (12,788) (30,703)
Accounts payable 26,706 (3,097) 38,779
Other current assets 14,224 10,782 (14,297)
Other current liabilities (14,268) 29,074 (2,780)
Other 26,868 (52,759) 4,874
------- -------- -------
Cash Provided by Operating Activities 490,373 370,697 461,310
Investing Activities
Construction expenditures (328,482) (260,649) (319,832)
Allowance for borrowed funds used
during construction (1,480) (1,771) (1,679)
Nuclear fuel (10,183) (6,352) (26,053)
Nuclear decommissioning trust (31,379) (27,248) (26,309)
Other (1,873) 22,359 (7,892)
-------- -------- -------
Cash Used in Investing Activities (373,397) (273,661) (381,765)
Financing Activities
Retirement of preferred stock - - (1)
Sale of long-term debt 169,434 - 230,094
Retirement of long-term debt (78,779) (171,155) (52,921)
Change in short-term debt (23,344) 197,243 (105,304)
Stockholder capital contribution - 100,000 -
Dividends on - Common stock (179,001) (213,692) (167,889)
Preferred stock (1,203) (1,203) (1,203)
-------- -------- -------
Cash Used in Financing Activities (112,893) (88,807) (97,224)
-------- -------- --------
Change in Cash and Cash Equivalents $ 4,083 $ 8,229 $(17,679)
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $125,344 $112,682 $ 94,845
Income taxes 106,550 45,210 107,682
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-38
<PAGE> 55
WISCONSIN ELECTRIC POWER COMPANY
CAPITALIZATION STATEMENT
December 31
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $10 par value; authorized 65,000,000 shares;
outstanding - 33,289,327 shares $ 332,893 $ 332,893
Other paid in capital 380,689 380,689
Retained earnings 984,896 980,926
---------- ----------
Total Common Stock Equity 1,698,478 1,694,508
Preferred Stock - Cumulative
Six Per Cent. Preferred Stock - $100 par value; authorized
45,000 shares; outstanding - 44,498 shares 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds - 5-1/8% to 7-1/4% due 1998-2004 231,000 291,000
6.85% to 7-3/4% due 2016-2023 209,000 209,000
7.05% to 9-1/8% due 2024-2027 363,443 363,443
Debentures (unsecured) - 6-1/2% to 9.47% due 2006-2095 480,600 331,300
Notes (unsecured) - Variable rate due 2006-2030 165,350 165,350
6.36% effective rate due 2006 9,642 10,847
Obligations under capital leases 189,980 182,450
Unamortized discount - net (24,030) (23,443)
Long-term debt due currently (112,454) (81,389)
---------- ----------
Total Long-Term Debt (Note H) 1,512,531 1,448,558
---------- ----------
Total Capitalization $3,241,459 $3,173,516
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-39
<PAGE> 56
WISCONSIN ELECTRIC POWER COMPANY
COMMON STOCK EQUITY STATEMENT
<TABLE>
<CAPTION>
Common Stock
-------------------
$10 Par Other Paid Retained
Shares Value In Capital Earnings Total
------ ------- ---------- -------- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 33,289,327 $332,893 $280,689 $1,082,983 $1,696,565
Net income 211,315 211,315
Cash dividends
Common stock (167,889) (167,889)
Preferred stock (1,203) (1,203)
---------- -------- -------- ---------- ----------
Balance - December 31, 1996 33,289,327 332,893 280,689 1,125,206 1,738,788
Net income 70,615 70,615
Cash dividends
Common stock (213,692) (213,692)
Preferred stock (1,203) (1,203)
Stockholder capital contribution 100,000 100,000
---------- -------- -------- ---------- ----------
Balance - December 31, 1997 33,289,327 332,893 380,689 980,926 1,694,508
Net income 184,174 184,174
Cash dividends
Common stock (179,001) (179,001)
Preferred stock (1,203) (1,203)
---------- -------- -------- ---------- ----------
Balance - December 31, 1998 33,289,327 $332,893 $380,689 $ 984,896 $1,698,478
========== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-40
<PAGE> 57
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The accounting records of Wisconsin Electric Power Company
("Wisconsin Electric") are maintained as prescribed by the Federal Energy
Regulatory Commission, modified for requirements of the Public Service
Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUES: Utility revenues are recognized on the accrual basis and
include estimated amounts for service rendered but not billed.
FUEL: The cost of fuel is expensed in the period consumed.
PROPERTY: Property is recorded at cost. Additions to and significant
replacements of utility property are charged to utility plant at cost;
minor items are charged to maintenance expense. Cost includes material,
labor and allowance for funds used during construction (see Note E). The
cost of depreciable utility property, together with removal cost less
salvage, is charged to accumulated provision for depreciation when property
is retired.
In 1998, Wisconsin Electric began classifying certain utility plant as
common. Common plant is allocated to electric, gas and steam utility plant
in rate proceedings. All periods presented have been reclassified for
comparative purposes.
REGULATORY MATTERS: Pursuant to Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation, Wisconsin Electric capitalizes, as regulatory assets, incurred
costs which are expected to be recovered in future utility rates.
Wisconsin Electric also records, as regulatory liabilities, the current
recovery in utility rates of costs which are expected to be paid in the
future.
The following deferred regulatory assets and liabilities are reflected in
the Balance Sheet at December 31.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Deferred Regulatory Assets
Deferred income taxes $160,752 $151,157
Department of Energy assessments 24,841 28,575
Deferred nuclear costs 15,324 17,681
Purchase power commitment 13,379 5,050
Other 8,655 12,737
-------- --------
Total Deferred Regulatory Assets $222,951 $215,200
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $141,356 $148,292
Tax and interest refunds 8,667 13,943
Other 7,928 11,453
-------- --------
Total Deferred Regulatory Liabilities $157,951 $173,688
======== ========
</TABLE>
A-41
<PAGE> 58
Wisconsin Electric directs a variety of demand-side management programs to
help foster energy conservation by its customers. As authorized by the
PSCW, Wisconsin Electric capitalized certain conservation program costs
prior to 1995. Utility rates approved by the PSCW provide for a current
return on these conservation investments. As of December 31, 1998, there
were $46.4 million of conservation investments on the Balance Sheet in
other property and investments which will be amortized on a straight line
basis to income over the next two years as well as $69.5 million of
conservation investments as of December 31, 1997.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable
debt securities acquired three months or less from maturity. During 1997,
Wisconsin Electric recorded a $140 million non-cash capital lease
transaction for a long-term power purchase contract (see Note H).
NEW PRONOUNCEMENTS: On June 15, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective January 1, 2000 for Wisconsin Electric. FAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or in other comprehensive income depending
upon how the derivative is designated. Based upon the current limited use
of derivative instruments at Wisconsin Electric, the adoption of FAS 133
would not have a significant effect on its results of operations or
financial position.
B - MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors
of Wisconsin Energy and Northern States Power Company, a Minnesota
corporation, agreed to terminate by mutual written consent an Agreement and
Plan of Merger which provided for a business combination of Wisconsin
Energy, parent company of Wisconsin Electric, and Northern States Power
Company to form Primergy Corporation. Primergy Corporation would have
become the parent company of Wisconsin Electric under the proposed business
combination. As a result, Wisconsin Energy recorded a $30.7 million charge
in the second quarter of 1997 ($18.8 million net of tax or approximately
17 cents per share) to write off deferred transaction costs and costs to
achieve the merger, of which approximately $21.9 million was attributable
to Wisconsin Electric.
C - DEPRECIATION
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the PSCW and
include estimates for salvage and removal costs. Depreciation as a percent
of average depreciable utility plant was 4.4% in 1998, 4.5% in 1997 and
4.1% in 1996. Nuclear plant decommissioning is accrued as depreciation
expense (see Note F). For contributions in aid of construction remaining
on the Balance Sheet that were collected prior to 1991, Wisconsin Electric
had been amortizing approximately $3 million per year as a credit to
depreciation expense. In its 1998 Rate Order, the PSCW authorized
Wisconsin Electric to amortize the remaining $45.7 million balance of pre-
1991 contributions in aid of construction at December 31, 1997 on a
straight line basis over the 1998-1999 biennial period. As a result,
credits to depreciation expense for pre-1991 contributions were
$22.9 million in 1998, $3.5 million in 1997 and $3.4 million in 1996.
D - INCOME TAXES
Wisconsin Electric follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and
liabilities be recorded based on the difference between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes.
The following table is a summary of income tax expense and a reconciliation
of total income tax expense with the tax expected at the federal statutory
rate.
A-42
<PAGE> 59
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Current tax expense $100,532 $ 28,002 $131,833
Deferred income taxes - net (438) 7,937 (1,575)
Investment tax credit - net (3,395) (927) (2,430)
-------- -------- --------
Total Tax Expense $ 96,699 $ 35,012 $127,828
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $280,873 $105,627 $339,143
======== ======== ========
Expected tax at federal statutory rate $ 98,306 $ 36,969 $118,700
State income tax net of federal
tax benefit 13,461 6,125 17,624
Flowback of prior contributions
in aid of construction (8,039) (1,157) (1,157)
Investment tax credit restored (4,690) (4,487) (4,509)
Other (no item over 5% of expected tax) (2,339) (2,438) (2,830)
-------- -------- --------
Total Tax Expense $ 96,699 $ 35,012 $127,828
======== ======== ========
</TABLE>
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and
liabilities to recognize the expected future tax consequences of events
that have been reflected in Wisconsin Electric's financial statements or
tax returns and the adjustment of deferred tax balances to reflect tax rate
changes. Following is a summary of deferred income taxes under FAS 109 at
December 31.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Deferred Income Tax Assets
Decommissioning trust $ 48,812 $ 43,405
Construction advances 54,820 49,202
Other 86,482 76,699
-------- --------
Total Deferred Income Tax Assets $190,114 $169,306
======== ========
Deferred Income Tax Liabilities
Property related $542,898 $510,621
Other 16,676 10,808
-------- --------
Total Deferred Income Tax Liabilities $559,574 $521,429
======== ========
</TABLE>
Wisconsin Electric has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues (see Note A).
E - ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction ("AFUDC") is included in
utility plant accounts and represents the cost of borrowed funds used
during plant construction and a return on stockholders' capital used for
construction purposes. On the Income Statement, the cost of borrowed funds
(before income taxes) is a reduction of interest expense and the return on
stockholders' capital is an item of non-cash other income.
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<PAGE> 60
As approved by the PSCW, AFUDC was capitalized during the following periods
on 50% of construction work in progress at the following rates:
- - June 1, 1998 - December 31, 1998 10.21%
- - February 18, 1997 - May 31, 1998 10.29%
- - January 1, 1996 - February 17, 1997 10.17%
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach Nuclear
Plant ("Point Beach") in Two Rivers, Wisconsin. During 1998, 1997 and
1996, Point Beach provided 18%, 6% and 24%, respectively, of Wisconsin
Electric's net electric energy supply. The United States Nuclear
Regulatory Commission operating licenses for Point Beach expire in October
2010 for Unit 1 and in March 2013 for Unit 2.
In 1997, the PSCW authorized Wisconsin Electric to defer certain nuclear
non-fuel operation and maintenance costs in excess of those included in
1997 rates. As a result, Wisconsin Electric deferred $18 million during
1997. During 1998, the PSCW authorized a five year recovery in the
electric retail jurisdiction in the State of Wisconsin of the excess 1997
nuclear non-fuel operation and maintenance costs, and Wisconsin Electric
began amortizing the $18 million of deferred costs on a straight line basis
over the five year recovery period. As of December 31, 1998, $15 million
of deferred costs remain on the Balance Sheet in Deferred Charges and Other
Assets - Deferred Regulatory Assets (see Note A).
NUCLEAR INSURANCE: The Price-Anderson Act as amended and extended to
August 1, 2002, currently limits the total public liability for damages
arising from a nuclear incident at a nuclear power plant to approximately
$9.8 billion, of which $200 million is covered by liability insurance
purchased from private sources, and $9.6 billion is covered by an industry
retrospective loss sharing plan whereby in the event of a nuclear incident
resulting in damages exceeding the private insurance coverage, each owner
of a nuclear plant would be assessed a deferred premium of up to
$88.1 million per reactor (Wisconsin Electric owns two) with a limit of
$10 million per reactor within one calendar year. As the owner of Point
Beach, Wisconsin Electric would be obligated to pay its proportionate share
of any such assessment.
Wisconsin Electric participated in an industry-wide insurance program, with
an aggregate limit of $200 million which covered radiation injury claims of
nuclear workers first employed after 1987. This program was replaced with
a new program (which has no retrospective assessment provisions) at the end
of 1997. However, the discovery period for claims covered under the former
program remains open until the end of 2007 for those few former insureds
who no longer need to participate in the new, replacement program. If
claims in excess of the funds available under the old program develop,
Wisconsin Electric would be assessed up to a maximum of approximately
$3.1 million per reactor.
Wisconsin Electric, through its membership in Nuclear Electric Insurance
Limited ("NEIL"), carries decontamination, property damage and
decommissioning shortfall insurance covering losses of up to $1.5 billion
(subject to a $1 million deductible for each loss) at Point Beach. Under
policies issued by NEIL, the insured member is liable for a retrospective
premium adjustment in the event of catastrophic losses exceeding the full
financial resources of NEIL. Wisconsin Electric's maximum retrospective
liability under its policies is $10.1 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage (in
excess of 23 weeks) at Point Beach, where such outage is caused by
accidental property damage from radioactive contamination or other risks of
direct physical loss. Wisconsin Electric's maximum retrospective liability
under this policy is $5.1 million.
A-44
<PAGE> 61
It should not be assumed that, in the event of a major nuclear incident,
any insurance or statutory limitation of liability would protect Wisconsin
Electric from material adverse impact.
NUCLEAR DECOMMISSIONING: Wisconsin Electric expects to operate the two
units at Point Beach to the expiration of their current operating licenses.
The estimated cost to decommission the plant in 1998 dollars is
$489 million based upon a site specific decommissioning cost study
completed in 1998. Assuming plant shutdown at the expiration of the
current operating licenses, prompt dismantlement and annual escalation of
costs at specific inflation factors established by the PSCW, it is
projected that approximately $1.8 billion will be spent over a thirty-three
year period, beginning in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund
will provide sufficient funds at the time of decommissioning. Wisconsin
Electric believes it is probable that any shortfall in funding would be
recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, Wisconsin
Electric's debt and equity security investments in the Fund are classified
as available for sale. Gains and losses on the Fund were determined on the
basis of specific identification; net unrealized holding gains on the Fund
were recorded as part of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31. The Fund balance is stated at fair value.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Decommissioning costs $ 15,461 $ 11,402 $15,418
Earnings 15,918 15,846 10,891
-------- -------- -------
Depreciation Expense $ 31,379 $ 27,248 $26,309
======== ======== =======
Total costs accrued to date $320,356 $288,977
Unrealized gain 198,149 115,263
-------- --------
Accumulated Provision for Depreciation $518,505 $404,240
======== ========
</TABLE>
DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992
establishes a Uranium Enrichment Decontamination and Decommissioning Fund
("D&D Fund") for the United States Department of Energy's nuclear fuel
enrichment facilities. Deposits to the D&D Fund are derived in part from
special assessments on utilities using enrichment services. As of
December 31, 1998, Wisconsin Electric has recorded its remaining estimated
liability equal to the projected special assessments of $21.4 million. A
corresponding deferred regulatory asset is detailed in Note A. The
deferred regulatory asset will be amortized to nuclear fuel expense and
included in utility rates over the next nine years. In the 1998 Rate
Order, the PSCW approved recovery over the 1998-1999 biennial period of
D&D Fund costs disallowed in 1997.
G - PREFERRED STOCK
Serial preferred stock authorized but unissued is cumulative, $25 par
value, 5,000,000 shares.
In the event of default in the payment of preferred dividends, no dividends
or other distributions may be paid on Wisconsin Electric's common stock.
A-45
<PAGE> 62
The 3.60% series preferred stock is redeemable in whole or in part at the
option of Wisconsin Electric at $101 per share plus any accrued dividends.
The fair value of Wisconsin Electric's preferred stock was $20.2 million
and $17.8 million at December 31, 1998 and 1997, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking
fund requirements through 2003 for the aggregate amount of long-term debt
outstanding (excluding obligations under capital lease) at December 31,
1998 are shown below.
(Thousands of Dollars)
1999 $92,905
2000 1,905
2001 1,905
2002 1,905
2003 1,905
Sinking fund requirements for the years 1999 through 2003, included in the
table above, are $9.5 million. Substantially all utility plant is subject
to the mortgage.
Long-term debt premium or discount and expense of issuance are amortized by
the straight line method over the lives of the debt issues and included as
interest expense. Unamortized amounts pertaining to reacquired debt are
written off currently, when acquired for sinking fund purposes, or
amortized in accordance with PSCW orders, when acquired for early
retirement.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds and were used to reduce short-term borrowings and for other
general corporate purposes.
Following is Wisconsin Electric's long-term debt outstanding at
December 31.
<TABLE>
<CAPTION>
Long-Term Debt 1998 1997
-------------- ---- ----
(Thousands of Dollars)
<S> <C> <C>
First Mortgage Bonds
5-1/8% Series due 1998 $ - $ 60,000
6-1/2% Series due 1999 40,000 40,000
6-5/8% Series due 1999 51,000 51,000
7-1/4% Series due 2004 140,000 140,000
7-1/8% Series due 2016 100,000 100,000
6.85% Series due 2021 9,000 9,000
7-3/4% Series due 2023 100,000 100,000
7.05% Series due 2024 60,000 60,000
9-1/8% Series due 2024 3,443 3,443
8-3/8% Series due 2026 100,000 100,000
7.70% Series due 2027 200,000 200,000
</TABLE>
A-46
<PAGE> 63
<TABLE>
<CAPTION>
Long-Term Debt - (cont'd) 1998 1997
------------------------- ---- --
(Thousands of Dollars)
<S> <C> <C>
Debentures (unsecured)
6-5/8% due 2006 200,000 200,000
9.47% due 2006 5,600 6,300
8-1/4% due 2022 25,000 25,000
6-1/2% due 2028 150,000 -
6-7/8% due 2095 100,000 100,000
Notes (unsecured)
Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
6.36% effective rate due 2006 9,642 10,847
Obligations under capital leases 189,980 182,450
Unamortized discount - net (24,030) (23,443)
Long-term debt due currently (112,454) (81,389)
---------- ----------
Total Long-Term Debt $1,512,531 $1,448,558
========== ==========
</TABLE>
At December 31, 1998, the interest rate for the $67 million variable rate
note due 2016 was 4.10% and the interest rate for the $98.35 million
variable rate notes due 2006-2030 was 3.95%.
OBLIGATIONS UNDER CAPITAL LEASE: Wisconsin Electric has a nuclear fuel
leasing arrangement with Wisconsin Electric Fuel Trust ("Trust") which is
treated as a capital lease. The nuclear fuel is leased and amortized to
fuel expense for a period of 60 months or until the removal of the fuel
from the reactor, if earlier. Lease payments include charges for the cost
of fuel burned, financing costs and management fees. In the event
Wisconsin Electric or the Trust terminates the lease, the Trust would
recover its unamortized cost of nuclear fuel from Wisconsin Electric.
Under the lease terms, Wisconsin Electric is in effect the ultimate
guarantor of the Trust's commercial paper and line of credit borrowings
financing the investment in nuclear fuel. Interest expense on the nuclear
fuel lease, included in fuel expense, was $3.1 million, $0.9 million and
$2.3 million during 1998, 1997 and 1996, respectively.
To meet a portion of its electric energy supply needs, Wisconsin Electric
entered into a long-term power purchase contract with an unaffiliated
independent power producer, LSP-Whitewater Limited Partnership ("LS
Power"). The contract, for 236 megawatts of firm capacity from LS Power's
gas-fired cogeneration facility located in Whitewater, Wisconsin, includes
no minimum energy requirements. When the contract expires in 2022,
Wisconsin Electric may, at its option and with proper notice, renew for
another ten years or purchase the generating facility at fair value or
allow the contract to expire. Wisconsin Electric treats this contract as a
capital lease. The leased facility and corresponding obligation under
capital lease were recorded at the estimated fair value of the plant's
electric generating facilities. The leased facility is being amortized on
a straight line basis over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September
1997, imputed interest costs on the purchase power obligation were
$22.9 million and $6.5 million during 1998 and 1997, respectively, and
total amortization costs of the leased facilities were $5.7 million and
$1.6 million during 1998 and 1997, respectively. The long-term power
purchase contract is treated as an operating lease for rate-making
purposes. As a result, the difference between the minimum lease payments
and the sum of the imputed interest and amortization costs are recorded as
a deferred regulatory asset (see Note A). Due to the timing of the minimum
lease payments, Wisconsin Electric expects the regulatory asset to increase
to approximately $78 million by the year 2009 and the total obligation
under capital lease to increase to $160 million by the year 2005 before
each is reduced over the remaining
A-47
<PAGE> 64
life of the contract. The minimum lease payments are classified as purchased
power expense on the Income Statement. Interest expense on the purchase power
obligation, included in purchased power expense, was $20.3 million and $5.6
million during 1998 and 1997, respectively.
Provided below is a summary of Wisconsin Electric's nuclear fuel and leased
facilities at December 31.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Nuclear Fuel
Under capital lease $100,809 $ 95,464
Accumulated provision for amortization (62,888) (59,783)
In process/stock 49,739 54,538
-------- --------
Total Nuclear Fuel $ 87,660 $ 90,219
======== ========
Leased Facilities
Long-term purchase power commitment $140,312 $140,312
Accumulated provision for amortization (7,305) (1,625)
-------- --------
Total Leased Facilities $133,007 $138,687
======== ========
</TABLE>
Future minimum lease payments under the capital leases and the present
value of the net minimum lease payments as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Purchase
Nuclear Power
Fuel Lease Commitment Total
---------- ---------- -----
(Thousands of Dollars)
<S> <C> <C> <C>
1999 $ 21,678 $ 24,123 $ 45,801
2000 13,841 25,031 38,872
2001 7,433 25,968 33,401
2002 3,664 26,961 30,625
2003 1,071 27,954 29,025
Later Years - 560,191 560,191
-------- -------- --------
Total Minimum Lease Payments 47,687 690,228 737,915
Less: Estimated Executory Costs - (139,956) (139,956)
-------- -------- --------
Net Minimum Lease Payments 47,687 550,272 597,959
Less: Interest (4,093) (403,886) (407,979)
-------- -------- --------
Present Value of Net Minimum
Lease Payments 43,594 146,386 189,980
Less: Due Currently (19,549) - (19,549)
-------- -------- --------
$ 24,045 $146,386 $170,431
======== ======== ========
</TABLE>
FAIR VALUE: The carrying amount of Wisconsin Electric's long-term debt
outstanding (excluding obligations under capital lease) was $1,459 million
and $1,371 million at December 31, 1998 and 1997, respectively, with a fair
value of $1,544 million and $1,411 million, respectively. The fair value
of the first mortgage bonds and debentures is estimated based upon the
market value of the same or similar issues. Book value approximates fair
value for Wisconsin Electric's unsecured notes.
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<PAGE> 65
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
Interest Interest
Balance Rate Balance Rate
------- ---- ------- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Banks $ 50,495 5.42% $ 50,495 5.89%
Commercial paper 168,794 5.32% 192,138 5.84%
-------- --------
$219,289 $242,633
======== ========
</TABLE>
Unused lines of credit for short-term borrowing amounted to $128 million at
December 31, 1998, all of which supports commercial paper. In support of
various informal lines of credit from banks, Wisconsin Electric has agreed
to maintain unrestricted compensating balances or to pay commitment fees;
neither the compensating balances nor the commitment fees are significant.
J - BENEFITS
Wisconsin Electric provides defined benefit pension and other
postretirement benefit plans to employees. The status of these plans,
including a reconciliation of benefit obligations, a reconciliation of plan
assets and the funded status of the plans follows. Also disclosed below is
the aggregate funded status of those pension and other postretirement
benefit plans with accumulated net benefit obligations in excess of plan
assets.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
Pension & ---------------- --------------------
Postretirement Plan Status 1998 1997 1998 1997
--------------------------- ---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at January 1 $649,256 $601,213 $ 148,181 $ 142,783
Service cost 12,408 9,216 2,654 1,911
Interest cost 46,261 45,613 11,676 10,343
Plan participants' contributions - - 5,908 4,903
Plan amendments - 1,379 3,737 (4,828)
Actuarial loss 51,512 35,985 22,283 6,359
Benefits paid (45,001) (44,150) (15,603) (13,290)
-------- -------- --------- ---------
Benefit Obligation at December 31 $714,436 $649,256 $ 178,836 $ 148,181
-------- -------- --------- ---------
Change in Plan Assets
Fair Value at January 1 $761,881 $687,482 $ 59,841 49,424
Actual return on plan assets 104,264 114,294 8,515 10,555
Employer contributions 7,347 4,255 10,252 8,249
Plan participants' contributions - - 5,908 4,903
Benefits paid (45,001) (44,150) (15,603) (13,290)
-------- -------- --------- ---------
Fair Value at December 31 $828,491 $761,881 $ 68,913 $ 59,841
-------- -------- --------- ---------
</TABLE>
A-49
<PAGE> 66
<TABLE>
<CAPTION>
Pension & Other Postretirement
Postretirement Plan Status - (cont'd) Pension Benefits Benefits
-------------------------------------- ---------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Funded Status of Plans
Funded status at December 31 $114,055 $112,625 $(109,923) $ (88,340)
Unrecognized
Net actuarial (gain) loss (119,025) (123,094) 4,587 (14,458)
Prior service cost 31,284 34,344 2,582 (938)
Net transition obligation (asset) (27,207) (31,009) 64,239 68,825
-------- -------- --------- ---------
Net Accrued Benefit Cost $ (893) $ (7,134) $ (38,515) $ (34,911)
======== ======== ========= =========
Funded Status of Plans with Net
Benefit Obligations at December 31
Fair value of plan assets $ - $ - $ 68,444 $ 59,394
Less: Benefit obligation - - (178,563) (147,919)
-------- ------- --------- ---------
Net Benefit Obligation $ - $ - $(110,119) $ (88,525)
======== ======== ========= =========
</TABLE>
The components of net periodic pension and other postretirement benefit
costs as well as the weighted-average assumptions used in accounting for
the plans include the following:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(Thousand of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Periodic Benefit Cost
Service cost $12,408 $ 9,216 $ 9,912 $ 2,654 $ 1,911 $ 2,436
Interest cost 46,261 45,613 41,454 11,677 10,343 10,456
Expected return on plan assets (56,822) (51,592) (48,494) (5,008) (4,085) (3,708)
Amortization of
Transition obligation (asset) (3,801) (3,802) (3,802) 4,586 4,586 4,887
Prior service cost 3,061 3,061 1,755 217 (100) (100)
Actuarial loss (gain) - - - (270) (235) (272)
------- ------- ------- ------- ------- -------
Net Periodic Benefit Cost $ 1,107 $ 2,496 $ 825 $13,856 $12,420 $13,699
======= ======= ======= ======= ======= =======
Weighted-Average Assumptions
at December 31 (%)
Discount rate 6.75 7.25 7.75 6.75 7.25 7.75
Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to
5.0 5.0 5.0 5.0 5.0 5.0
</TABLE>
PENSION PLANS: Pension plan assets, the majority of which are equity
securities, are held by pension trusts. Other pension plan assets include
corporate and government bonds and real estate. In the opinion of
Wisconsin Electric, current pension trust assets and amounts which are
expected to be paid to the trusts in the future will be adequate to meet
pension payment obligations to current and future retirees.
A-50
<PAGE> 67
OTHER POSTRETIREMENT BENEFIT PLANS: Wisconsin Electric uses Employees'
Benefit Trusts to fund a major portion of other postretirement benefits for
its employees. The majority of the trusts' assets are mutual funds.
The assumed health care cost trend rate at December 31, 1998 was 6.0% for
those under age 65 and 6.8% for those over age 65, decreasing gradually to
5.0% in 2004 and thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
<TABLE>
<CAPTION>
1% 1%
Increase Decrease
-------- --------
(Thousands of Dollars)
<S> <C> <C>
Effect on
Postretirement benefit obligation $17,058 ($14,957)
Total of service and interest cost components 1,650 (1,430)
</TABLE>
K - SEGMENT REPORTING
Wisconsin Electric, a public utility incorporated in the State of
Wisconsin, has organized its operating segments according to how it is
currently regulated. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly in deciding how to allocate resources or in assessing
performance. Wisconsin Electric's reportable operating segments include
electric, gas and steam utility segments.
The electric utility segment derives its revenues from the generation,
transmission, distribution and sale of electric energy in southeastern
(including metropolitan Milwaukee), east central and northern Wisconsin and
in the Upper Peninsula of Michigan. The gas utility segment derives its
revenues from the purchase, distribution and sale of natural gas to retail
customers and the transportation of customer-owned gas in four service
areas in southeastern, east central, western, and northern Wisconsin. The
steam utility segment derives its revenues from the production,
distribution and sale of steam to space heating and processing customers in
the Milwaukee area.
The following summarizes the reportable operating segments of Wisconsin
Electric for the years ended December 31.
<TABLE>
<CAPTION>
Reportable Operating Segments (a)
---------------------------------
Electric Gas Steam Total
-------- --- ----- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1998
External revenues $1,641,283 $293,250 $20,506 $1,955,039
Intersegment revenues (b) 120 2,598 - 2,718
---------- -------- ------- ----------
Total Operating Revenues $1,641,403 $295,848 $20,506 $1,957,757
========== ======== ======= ==========
Depreciation $ 215,669 $ 23,272 $ 2,631 $ 241,572
Operating Income Taxes 92,582 1,055 333 93,970
Operating Income (c) 251,582 19,180 2,934 273,696
Segment Assets (d) 4,087,413 421,951 48,358 4,557,722
Construction Expenditures 283,367 43,447 1,600 328,414
</TABLE>
A-51
<PAGE> 68
<TABLE>
<CAPTION>
Reportable Operating Segments (a)-(cont'd)
-------------------------------------------
Electric Gas Steam Total
-------- --- ----- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1997
External revenues $1,411,962 $349,971 $22,315 $1,784,248
Intersegment revenues (b) 153 5,201 - 5,354
---------- -------- ------- ----------
Total Operating Revenues $1,412,115 $355,172 $22,315 $1,789,602
========== ======== ======= ==========
Depreciation $ 213,785 $ 21,421 $ 2,492 $ 237,698
Operating Income Taxes 48,442 7,973 1,374 57,789
Operating Income (c) 170,117 25,122 4,220 199,459
Segment Assets (d) 3,900,889 392,865 45,131 4,338,885
Construction Expenditures 236,384 22,977 1,006 260,367
1996
External revenues $1,393,057 $361,101 $15,675 $1,769,833
Intersegment revenues (b) 213 3,774 - 3,987
---------- -------- ------- ----------
Total Operating Revenues $1,393,270 $364,875 $15,675 $1,773,820
========== ======== ======= ==========
Depreciation $ 183,159 $ 18,246 $ 1,391 $ 202,796
Operating Income Taxes 110,752 14,516 1,359 126,627
Operating Income (c) 269,068 33,204 3,572 305,844
Segment Assets (d) 3,646,997 400,582 46,499 4,094,078
Construction Expenditures 272,838 22,851 21,651 317,340
<FN>
(a) The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies
(see Note A).
(b) Wisconsin Electric accounts for intersegment revenues at a tariff
rate established by the PSCW.
(c) Interest income and expense are not recorded to the segments to
determine segment operating income.
(d) Common utility plant is allocated to electric, gas and steam to
determine segment assets (see Note A).
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Assets
Reportable segments $4,557,722 $4,338,885 $4,094,078
Non-utility 4,769 5,308 9,199
Other - corporate (a) 206,451 323,647 403,883
---------- ---------- ----------
Total Assets $4,768,942 $4,667,840 $4,507,160
========== ========== ==========
</TABLE>
(a) Primarily other property and investments, materials and supplies and
deferred charges.
A-52
<PAGE> 69
<TABLE>
<CAPTION>
Operating Segments Reconciliation 1998 1997 1996
- --------------------------------- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Construction Expenditures
Reportable segments $ 328,414 $ 260,367 $ 317,340
Non-utility 68 282 2,492
---------- ---------- ----------
Total Construction Expenditures $ 328,482 $ 260,649 $ 319,832
========== ========== ==========
</TABLE>
L - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a cogeneration facility in Kimberly, Wisconsin, Wisconsin
Electric purchased three combustion turbines, three heat recovery boilers
and a steam turbine (the "Equipment"). Wisconsin Electric carried the
Equipment at a cost of approximately $66.3 million, entertaining numerous
proposals and projects for which the Equipment could be used. During 1997,
Wisconsin Electric continued to review its options for use or sale of the
Equipment. In the fourth quarter of 1997, WISVEST Corporation, a non-
utility subsidiary of Wisconsin Energy, entered into the final phase of
negotiations for a joint independent power project involving the Equipment.
Under the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, Wisconsin Electric refined its cash flow
projection for the Equipment based upon this proposal. As measured by
expected gross cash flows to be earned under this project, Wisconsin
Electric determined that an impairment existed. As a result, Wisconsin
Electric recorded a $30.0 million impairment charge in the fourth quarter
of 1997 which was included in the Miscellaneous - Net Other Income and
Deductions line of the Income Statement. During the second quarter of
1998, WISVEST Corporation purchased the Equipment from Wisconsin Electric.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric continues a voluntary
program to investigate the remediation of eleven former manufactured gas
plant sites. Wisconsin Electric currently estimates that future costs for
detailed site investigation and remediation will be $25 million to
$40 million over the next ten years. Actual costs are uncertain pending
the results of further site specific investigations and the selection of
site specific remediation.
Of the eleven sites, Wisconsin Electric has begun remediation activities at
the former manufactured gas plant site in the City of Burlington,
Wisconsin. Wisconsin Electric also expects to begin remediation in 1999 at
sites in Fort Atkinson and Kenosha, Wisconsin. Wisconsin Electric's
expected remediation of these sites is anticipated to be accomplished at an
aggregate cost of between $6 million and $11 million.
In Wisconsin Electric's February 13, 1997 Rate Order, the PSCW amplified
its position on the recovery of manufactured gas plant site remediation
costs. It reiterated its position that such costs should be deferred and
amortized and recovered, without carrying costs, in future rate cases.
Since the timing and recovery of MGP remediation costs will be affected by
the biennial rate case cycle, the timing and magnitude of remediation
expenditures, and their recovery may be affected.
M - TRANSACTIONS WITH ASSOCIATED COMPANIES
Managerial, financial, accounting, legal, data processing and other
services may be rendered between associated companies and are billed in
accordance with service agreements approved by the PSCW. Wisconsin
Electric received stockholder capital contributions from Wisconsin Energy
of $100 million in 1997.
A-53
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholder of Wisconsin Electric Power Company
In our opinion, the financial statements appearing on pages A-35
through A-53 of this report present fairly, in all material respects,
the financial position of Wisconsin Electric Power Company at December 31,
1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 27, 1999
A-54
<PAGE> 71
DIRECTORS
The information under "Election of Directors" in Wisconsin Electric's
definitive Information Statement dated April 22, 1999, attached hereto, is
incorporated herein by reference.
EXECUTIVE OFFICERS
Figures in parenthesis indicate age and years of service with Wisconsin
Electric as of December 31, 1998.
Richard A. Abdoo (54;23)
Chairman of the Board
and Chief Executive Officer
Richard R. Grigg (50;28)
President and Chief Operating Officer
David K. Porter (55;29)
Senior Vice President
Michael B. Sellman (51;*)
Senior Vice President - Nuclear Power
Business Unit and Chief
Nuclear Officer
Calvin H. Baker (55;7)
Vice President - Finance
and Chief Financial Officer
Charles T. Govin, Jr. (52;20)
Vice President - Electric
and Gas Operations
Kristine M. Krause (44;20)
Vice President - Fossil Operations
Kristine A. Rappe (42;16)
Vice President - Customer Services
Anne K. Klisurich (51;26)
Controller
** Service with Wisconsin Electric began in 1998.
A-55
