UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission Registrant; State of Incorporation IRS Employer
File Number Address; and Telephone Number Identification No.
----------- ---------------------------------- ------------------
001-01245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that each Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest
practicable date (October 31, 2000):
Common Stock, $10 Par Value 33,289,327 shares outstanding.
Wisconsin Energy Corporation is the sole holder of Wisconsin
Electric Power Company Common Stock.
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<S> <C>
Item Page
---- ----
Introduction...............................................................
Part I - Financial Information
------------------------------
1. Financial Statements
Condensed Income Statement...............................................
Condensed Balance Sheet..................................................
Condensed Statement of Cash Flows........................................
Notes to Financial Statement.............................................
2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations...........................
3. Quantitative and Qualitative Disclosures About Market Risk.................
Part II - Other Information
---------------------------
1. Legal Proceedings..........................................................
6. Exhibits and Reports on Form 8-K...........................................
Signatures.................................................................
</TABLE>
INTRODUCTION
Wisconsin Electric Power Company ("Wisconsin Electric" or "the
Company"), a wholly-owned subsidiary of Wisconsin Energy
Corporation ("Wisconsin Energy"), is an electric, gas and steam
utility with operations in the states of Wisconsin and Michigan.
The unaudited interim financial statements presented in this
Form 10-Q have been prepared by Wisconsin Electric pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The financial
statements should be read in conjunction with the financial
statements and notes thereto included in Wisconsin Electric's
1999 Annual Report on Form 10-K.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues $532.7 $513.9 $1,570.4 $1,511.6
Operating Expenses
Fuel and purchased power 138.4 133.2 360.3 344.3
Cost of gas sold 30.0 22.5 138.6 119.1
Other operation and maintenance 156.9 158.6 483.5 495.2
Depreciation, decommissioning
and amortization 67.9 59.3 201.4 174.0
Property and revenue taxes 16.9 16.8 51.2 50.4
------ ------ -------- --------
Total Operating Expenses 410.1 390.4 1,235.0 1,183.0
------ ------ -------- --------
Operating Income 122.6 123.5 335.4 328.6
Other Income and Deductions
Interest income 2.5 1.7 4.9 5.4
Allowance for other funds
used during construction 0.5 0.7 2.4 3.1
Other 0.1 (0.3) (0.2) 5.0
------ ------ -------- --------
Total Other Income & Deductions 3.1 2.1 7.1 13.5
Financing Costs
Interest expense 29.6 28.7 87.7 85.5
Allowance for borrowed funds
used during construction (0.3) (0.3) (1.2) (1.5)
------ ------ -------- --------
Total Financing Costs 29.3 28.4 86.5 84.0
------ ------ -------- --------
Income Before Income Taxes 96.4 97.2 256.0 258.1
Income Taxes 39.5 34.9 100.1 91.4
------ ------ -------- --------
Net Income 56.9 62.3 155.9 166.7
Preferred Stock Dividend Requirement 0.3 0.3 0.9 0.9
------ ------ -------- --------
Earnings Available for Common
Stockholder $56.6 $62.0 $155.0 $165.8
====== ====== ======== ========
<FN>
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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
September 30, 2000 December 31, 1999
------------------ -----------------
(Millions of Dollars)
<S> <C> <C>
Assets
------
Property, Plant and Equipment
Electric utility $5,270.9 $5,070.2
Gas utility 570.8 552.4
Steam utility 64.1 63.5
Common utility 398.7 391.8
Other property 7.2 7.6
Accumulated provision for depreciation (3,349.9) (3,189.9)
-------- --------
2,961.8 2,895.6
Construction work in progress 85.9 99.0
Leased facilities - net 123.1 127.3
Nuclear fuel - net 87.9 83.4
-------- --------
Net Property, Plant and Equipment 3,258.7 3,205.3
Investments 675.6 663.8
Current Assets
Cash and cash equivalents 21.0 49.9
Accounts receivable 177.3 166.6
Accrued utility revenues 89.5 133.4
Materials, supplies and fossil fuel 212.9 197.2
Prepayments and other assets 52.3 98.8
-------- --------
Total Current Assets 553.0 645.9
Deferred Charges and Other Assets
Accumulated deferred income taxes 195.0 188.2
Other 365.1 349.4
-------- --------
Total Deferred Charges and Other Assets 560.1 537.6
-------- --------
Total Assets $5,047.4 $5,052.6
======== ========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock equity $1,901.2 $1,880.9
Preferred stock 30.4 30.4
Long-term debt 1,667.1 1,677.6
-------- --------
Total Capitalization 3,598.7 3,588.9
Current Liabilities
Long-term debt due currently 24.9 30.8
Short-term debt 183.7 264.7
Accounts payable 147.1 127.1
Accrued liabilities 146.2 86.1
Other 31.7 39.7
-------- --------
Total Current Liabilities 533.6 548.4
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 611.3 610.0
Other 303.8 305.3
-------- --------
Total Deferred Credits and Other Liabilities 915.1 915.3
-------- --------
Total Capitalization and Liabilities $5,047.4 $5,052.6
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
------------------------------
2000 1999
---------- ----------
(Millions of Dollars)
<S> <C> <C>
Operating Activities
Net income $155.9 $166.7
Reconciliation to cash
Depreciation, decommissioning
and amortization 207.4 192.9
Nuclear fuel expense - amortization 22.5 20.3
Deferred income taxes - net (6.0) (8.7)
Investment tax credit - net (3.4) (3.4)
Allowance for other funds
used during construction (2.4) (3.1)
Change in - Accounts receivable (10.7) (1.1)
Inventories (15.7) (2.5)
Other current assets 90.4 61.7
Accounts payable 20.0 (33.3)
Other current liabilities 52.1 28.8
Other 26.2 14.7
------ ------
Cash Provided by Operating Activities 536.3 433.0
Investing Activities
Capital expenditures (252.4) (263.7)
Allowance for borrowed funds
used during construction (1.2) (1.5)
Nuclear fuel (31.4) (16.0)
Nuclear decommissioning trust (44.5) (30.7)
Other (2.8) (6.1)
------ ------
Cash Used in Investing Activities (332.3) (318.0)
Financing Activities
Issuance of long-term debt 2.8 30.7
Retirement of long-term debt (22.7) (70.6)
Change in short-term debt (81.0) 58.1
Dividends paid on - Common stock (131.1) (134.6)
Preferred stock (0.9) (0.9)
------ ------
Cash Used in Financing Activities (232.9) (117.3)
------ ------
Change in Cash and Cash Equivalents (28.9) (2.3)
Cash and Cash Equivalents at Beginning of Period 49.9 14.2
------ ------
Cash and Cash Equivalents at End of Period $21.0 $11.9
====== ======
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $93.9 $91.0
Income taxes 31.3 98.4
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
GENERAL INFORMATION
1. The accompanying unaudited financial statements for Wisconsin
Electric Power Company should be read in conjunction with Item 8.
Financial Statements and Supplementary Data in Wisconsin
Electric's 1999 Annual Report on Form 10-K. In the opinion of
management, all adjustments, normal and recurring in nature,
necessary to a fair statement of the results of operations, cash
flows and financial position of Wisconsin Electric, have been
included in the accompanying income statements, statements of
cash flows and balance sheets. The results of operations for the
three and nine months ended September 30, 2000 are not
necessarily indicative, however, of the results which may be
expected for the entire year 2000 because of seasonal and other
factors.
2. Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
ACCOUNTING PRONOUNCEMENTS
3. In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities
("FAS 133")," which has been amended by FAS 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FAS 133, an amendment of FAS 133,"
and by FAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of
FAS 133." FAS 133 requires that every derivative instrument
be recorded on the balance sheet as an asset or liability
measured at its fair value and that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
FAS 133, as amended, is effective for fiscal years beginning
after June 15, 2000 and must be applied to: (a) derivative
instruments; and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1998. Wisconsin
Electric is in the process of identifying all derivative
instruments, determining fair market values of derivatives,
designating and documenting hedge relationships, and
evaluating the effectiveness of those hedge relationships.
Through this process, the Company has identified a limited
number of physical commodity contracts that meet the
definition of a derivative under FAS 133 in its electric and
natural gas utility operations. These contracts are used to
manage Wisconsin Electric's exposure to commodity price
volatility. While a number of derivatives have been
identified, the inventory process is not yet complete and the
fair market values of all derivatives identified have not
been determined. Consequently, Wisconsin Electric has not
completed an assessment of the implications of adopting
FAS 133 at this time. Wisconsin Electric expects to
implement FAS 133 on January 1, 2001.
SEGMENT INFORMATION
4. Wisconsin Electric, a wholly-owned subsidiary of Wisconsin
Energy Corporation, has organized its operating segments
according to how it is currently regulated. Wisconsin Electric's
reportable operating segments include electric, natural gas and
steam utility segments. The electric utility engages in 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 natural gas utility is responsible for the
purchase, distribution and sale of natural gas to retail
customers and the transportation of customer-owned natural gas in
four service areas in southeastern, east central, western and
northern Wisconsin. The steam utility produces, distributes and
sells steam to space heating and processing customers in the
Milwaukee, Wisconsin area. The following table summarizes the
reportable operating segments of Wisconsin Electric for the three
and nine month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Wisconsin Electric
Power Company Electric Gas Steam Total
------------------ ---------- ------- --------- ---------
(Millions of Dollars)
<S> <C> <C> <C> <C>
Three Months Ended
------------------
September 30, 2000
Operating Revenues (a) $481.6 $48.6 $2.5 $532.7
Operating Income (Loss) (b) 132.8 (8.2) (2.0) 122.6
September 30, 1999
Operating Revenues (a) $468.7 $41.6 $3.6 $513.9
Operating Income (Loss) (b) 130.2 (5.9) (0.8) 123.5
Nine Months Ended
-----------------
September 30, 2000
Operating Revenues (a) $1,323.7 $231.5 $15.2 $1,570.4
Operating Income (b) 323.5 11.1 0.8 335.4
September 30, 1999
Operating Revenues (a) $1,282.8 $213.1 $15.7 $1,511.6
Operating Income (b) 307.6 19.3 1.7 328.6
<FN>
(a) Wisconsin Electric accounts for intersegment revenues at tariff rates
established by the Public Service Commission of Wisconsin. Intersegment
revenues are not material.
(b) Interest income, interest expense and operating income taxes are not
included in segment operating income.
</FN>
</TABLE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Electric Power Company, a wholly-owned subsidiary of
Wisconsin Energy Corporation, is an energy utility with electric,
natural gas and steam utility operations.
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 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 that are noted in "Factors
Affecting Results of Operations" and "Cautionary Factors."
RESULTS OF OPERATIONS - 2000 THIRD QUARTER
EARNINGS
During the third quarter of 2000, Wisconsin Electric's earnings
decreased to $56.6 million compared with $62.0 million during the
third quarter of 1999. As discussed in further detail below,
earnings decreased primarily because higher depreciation,
decommissioning and amortization expenses offset a $7.5 million
increase in electric gross margin that was limited by cooler
weather and by higher fuel and purchased power expenses during
the third quarter of 2000. The following table reconciles the
change in Wisconsin Electric's earnings between the comparative
periods.
<TABLE>
<CAPTION>
Three Months Ended September 30
----------------------------------------------
Increase
Wisconsin Electric 1999 (Decrease) 2000
------------------------ -------- ---------- --------
(Millions of Dollars)
<S> <C> <C> <C>
Gross Margin
Electric Utility $336.5 $7.5 $344.0
Gas Utility 19.1 (0.5) 18.6
Steam Utility 2.6 (0.9) 1.7
------ ----- ------
Gross Margin 358.2 6.1 364.3
Other Operating Expenses
Other Operation and Maintenance 158.6 (1.7) 156.9
Depreciation, Decommissioning
and Amortization 59.3 8.6 67.9
Property and Revenue Taxes 16.8 0.1 16.9
------ ----- ------
Operating Income 123.5 (0.9) 122.6
Other Income, Net 2.1 1.0 3.1
Financing Costs 28.4 0.9 29.3
------ ----- ------
Income Before Income Taxes 97.2 (0.8) 96.4
Income Taxes 34.9 4.6 39.5
Preferred Stock Dividend Requirement 0.3 - 0.3
------ ----- ------
Earnings Available to Common
Stockholder $62.0 ($5.4) $56.6
====== ===== ======
</TABLE>
OPERATING REVENUES AND GROSS MARGINS: For further information
concerning electric utility operations, see "Electric Utility
Revenues, Gross Margins and Sales" below. For further
information concerning gas utility operations, see "Gas Utility
Revenues, Gross Margins and Therm Deliveries" below.
OTHER OPERATION AND MAINTENANCE EXPENSES: Other operation and
maintenance expenses decreased by $1.7 million during the third
quarter of 2000 compared to the third quarter of 1999. The most
significant changes in other operation and maintenance expenses
include $2.6 million of higher non-fuel fossil generation
expenses and $3.0 million of higher electric distribution
expenses offset by a $3.4 million decline in customer service
expenses and $3.1 million of lower administrative and general
expenses.
Non-fuel fossil generation expenses increased during 2000
primarily due to differences in the scope and timing of scheduled
maintenance outages for various generating facilities at
Wisconsin Electric. Electric distribution expenses were higher
due to increased forestry and maintenance activity. Between the
comparative periods, customer service expenses were lower
primarily due to a change in the period over which conservation
expenses are being amortized. Administrative and general
expenses decreased primarily due to a decline in costs associated
with contract labor, which was used during 1999 to prepare the
Company for the Year 2000 and for other technology matters.
DEPRECIATION, DECOMMISSIONING AND AMORTIZATION EXPENSES:
Depreciation, decommissioning and amortization expenses were
$8.6 million higher during the third quarter of 2000 compared
with the third quarter of 1999. Pursuant to a 1998 rate order
for the 1998/1999 test year, Wisconsin Electric was amortizing
pre-1991 contributions in aid of construction at a rate which
reduced annual depreciation expense by $22.8 million. This
amortization, which was completed as of December 31, 1999, had
the effect of reducing depreciation expense by $5.7 million
during the third quarter of 1999. Higher average depreciable
plant during the third quarter of 2000 also contributed to an
increase in depreciation expense.
INCOME TAXES: The effective income tax rate increased in the
third quarter of 2000 as compared with the prior year primarily
due to the end of amortization of pre-1991 contributions in aid
of construction as described above.
Electric Utility Revenues, Gross Margins and Sales
During the third quarter of 2000, Wisconsin Electric's total
electric utility operating revenues increased by $12.9 million or
2.8% compared to the third quarter of 1999. Gross margin on
electric utility operating revenues (electric utility operating
revenues less fuel and purchased power expenses) increased by
$7.5 million or 2.2%. Wisconsin Electric attributes this growth
in part to interim and final electric retail rate increases that
became effective in early April 2000 and on August 31, 2000,
respectively. For additional information concerning these rate
increases, see Item 1. Legal Proceedings - "Utility Rates and
Regulatory Matters" in Part II of this report. The third quarter
of 2000 was 30% cooler than the third quarter of 1999 which
significantly reduced higher margin residential electric sales
during the third quarter of 2000.
The change in gross margin between the comparative periods also
reflects higher fuel and purchased power costs. Wisconsin
Electric was able to limit its increase in fuel costs to
$0.7 million or 0.8% by changing its mix of generation from high
cost natural gas-fired generation to lower cost coal-fired
generation during the third quarter of 2000. However, purchased
power expenses grew by $4.7 million or 10.1% due to higher fixed
costs during the third quarter of 2000 associated with long-term
purchased power contracts.
The following table compares Wisconsin Electric's electric
utility operating revenues, gross margins and electric utility
energy sales during the third quarter of 2000 with similar
information for the third quarter of 1999.
<TABLE>
<CAPTION>
Gross Margin Megawatt-Hour Sales
Three Months Ended September 30 Three Months Ended September 30
Wisconsin Electric -------------------------------- --------------------------------
Electric Utility Operations 2000 1999 % Change 2000 1999 % Change
--------------------------- ------ ------ -------- ------ ------ --------
(Millions of Dollars) (Thousands, Except
Degree Days)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Residential $153.7 $155.5 (1.2%) 1,931.4 2,019.6 (4.4%)
Small Commercial/Industrial 143.6 136.9 4.9% 2,243.0 2,180.8 2.9%
Large Commercial/Industrial 123.5 115.6 6.8% 3,099.2 2,870.2 8.0%
Other-Retail/Municipal 16.9 15.3 10.5% 393.0 376.9 4.3%
Resale-Utilities 36.5 39.6 (7.8%) 855.0 1,017.8 (16.0%)
Other-Operating Revenues 7.4 5.8 27.6% - - -
------ ------ ------- -------
Total Operating Revenues 481.6 468.7 2.8% 8,521.6 8,465.3 0.7%
Fuel and Purchased Power ======= =======
Fuel 86.4 85.7 0.8%
Purchased Power 51.2 46.5 10.1%
------ ------
Total Fuel and Purchased Power 137.6 132.2 4.1%
------ ------
Gross Margin $344.0 $336.5 2.2%
====== ======
Weather - Degree Days (a)
Heating (153 Normal) 184 122 50.8%
Cooling (509 Normal) 395 570 (30.7%)
<FN>
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
</FN>
</TABLE>
During the third quarter of 2000, total electric energy sales
increased by 0.7% compared with the third quarter of 1999 due to
a 77.2% increase in sales to the Empire and Tilden iron ore
mines, Wisconsin Electric's two largest retail customers.
Excluding the Empire and Tilden mines, sales to the remaining
large commercial/industrial customers decreased by 2.2% and total
electric sales decreased by 2.8%. Growth in the average number
of residential, small commercial/industrial and other
retail/municipal customers between the comparative periods offset
some of the effects on total electric energy sales and operating
revenues of significantly cooler weather during the third quarter
of 2000. As measured by cooling degree days, the third quarter
of 2000 was 30.7% cooler than the third quarter of 1999 and 22.4%
cooler than normal.
Gas Utility Revenues, Gross Margins and Therm Deliveries
During the third quarter of 2000, Wisconsin Electric's total gas
utility operating revenues increased by $7.0 million while gross
margin on gas utility operating revenues (gas operating revenues
less cost of gas sold) decreased by $0.5 million. Significantly
higher per unit gas costs during the third quarter of 2000 as
well as interim and final retail gas rate increases that became
effective in early April 2000 and on August 31, 2000,
respectively, contributed to the increase in operating revenues.
However, gross margin declined primarily due to a decrease in
interdepartmental therm deliveries to Wisconsin Electric's
natural gas-fired electric generating facilities during the third
quarter of 2000. For additional information concerning the rate
increases, see Item 1. Legal Proceedings - "Utility Rates and
Regulatory Matters" in Part II of this report.
Comparative gas utility operating revenues, gross margins and gas
utility therm deliveries during the reporting periods are
summarized below. Gross margin is a better performance indicator
than revenues because changes in the cost of gas sold are flowed
through to revenue under a purchased gas adjustment mechanism
that does not impact gross margin.
<TABLE>
<CAPTION>
Gross Margin Therm Deliveries
Three Months Ended September 30 Three Months Ended September 30
Wisconsin Electric -------------------------------- --------------------------------
Gas Utility Operations 2000 1999 % Change 2000 1999 % Change
--------------------------- ------- ------ -------- ------ ------ --------
(Millions of Dollars) (Millions, Except
Degree Days)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Residential $20.5 $16.7 22.8% 24.3 24.4 (0.4%)
Commercial/Industrial 10.8 7.4 45.9% 14.6 14.7 (0.7%)
Interruptible 0.7 0.6 16.7% 1.5 1.8 (16.7%)
----- ----- ----- -----
Total Retail Gas Sales 32.0 24.7 29.6% 40.4 40.9 (1.2%)
Transported Customer-Owned Gas 3.5 3.4 2.9% 67.3 73.6 (8.6%)
Transported-Interdepartmental 0.6 0.8 (25.0%) 10.6 26.2 (59.5%)
Other-Operating Revenues 12.5 12.7 (1.6%) - - -
----- ----- ----- -----
Total Operating Revenues 48.6 41.6 16.8% 118.3 140.7 (15.9%)
Cost of Gas Sold 30.0 22.5 33.3% ===== =====
----- -----
Gross Margin $18.6 $19.1 (2.6%)
===== =====
Weather - Degree Days (a)
Heating (153 Normal) 184 122 50.8%
<FN>
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year average.
</FN>
</TABLE>
RESULTS OF OPERATIONS - 2000 YEAR-TO-DATE
EARNINGS
During the first nine months of 2000, Wisconsin Electric's
earnings decreased to $155.0 million compared with $165.8 million
during the first nine months of 1999. As described in further
detail below, earnings decreased primarily because higher
depreciation, decommissioning and amortization expenses and a
weather-related decrease in gas gross margin during the winter
months of 2000 offset a $24.6 million increase in electric gross
margin that was limited by cooler weather during the third
quarter of 2000 and limited by higher fuel and purchased power
expenses. The following table reconciles the change in Wisconsin
Electric's earnings between the comparative periods.
<TABLE>
<CAPTION>
Nine Months Ended September 30
-------------------------------------------
Increase
Wisconsin Electric 1999 (Decrease) 2000
------------------------ -------- ---------- --------
(Millions of Dollars)
<S> <C> <C> <C>
Gross Margin
Electric Utility $941.1 $24.6 $965.7
Gas Utility 94.0 (1.1) 92.9
Steam Utility 13.1 (0.2) 12.9
------- ------ -------
Gross Margin 1,048.2 23.3 1,071.5
Other Operating Expenses
Other Operation and Maintenance 495.2 (11.7) 483.5
Depreciation, Decommissioning
and Amortization 174.0 27.4 201.4
Property and Revenue Taxes 50.4 0.8 51.2
------- ------ -------
Operating Income 328.6 6.8 335.4
Other Income, Net 13.5 (6.4) 7.1
Financing Costs 84.0 2.5 86.5
------- ------ -------
Income Before Income Taxes 258.1 (2.1) 256.0
Income Taxes 91.4 8.7 100.1
Preferred Stock Dividend Requirement 0.9 - 0.9
------- ------ -------
Earnings Available to Common
Stockholder $165.8 ($10.8) $155.0
======= ====== =======
</TABLE>
OPERATING REVENUES AND GROSS MARGINS: For further information
concerning electric utility operations, see "Electric Utility
Revenues, Gross Margins and Sales" below. For further
information concerning gas utility operations, see "Gas Utility
Revenues, Gross Margins and Therm Deliveries" below.
OTHER OPERATION AND MAINTENANCE EXPENSES: Other operation and
maintenance expenses decreased by $11.7 million during the first
nine months of 2000 compared with the first nine months of 1999.
The most significant changes in other operation and maintenance
expenses between the comparative periods include a $12.2 million
decline in nuclear non-fuel expenses, a $10.5 million decline in
customer service expenses and a $2.9 million decline in
administrative and general expenses offset in part by
$8.2 million of higher non-fuel fossil generation expenses
and $6.2 million of higher electric distribution expenses.
Nuclear non-fuel expenses were lower during the first nine months
of 2000 as a result of continued progress on various performance
improvement initiatives. Between the same periods, customer
service expenses were lower primarily due to a change in the
period over which conservation expenses are being amortized.
Administrative and general expenses decreased primarily due to a
decline in costs associated with contract labor, which was used
during 1999 to prepare the Company for the Year 2000 and for
other technology matters. Non-fuel fossil generation
expenses increased during the first nine months of 2000 primarily
due to differences in the scope and timing of scheduled
maintenance outages for various generating facilities at
Wisconsin Electric. Electric distribution expenses were higher
due to increased forestry and maintenance activity.
DEPRECIATION, DECOMMISSIONING AND AMORTIZATION EXPENSES:
Depreciation, decommissioning and amortization expenses were
$27.4 million higher during the first nine months of 2000
compared with the first nine months of 1999. Pursuant to a 1998
rate order for the 1998/1999 test year, Wisconsin Electric was
amortizing pre-1991 contributions in aid of construction, which
reduced annual depreciation expense by $22.8 million. This
amortization, which was completed as of December 31, 1999, had
the effect of reducing depreciation expense by $17.1 million
during the first nine months of 1999. Higher average depreciable
plant during the first nine months of 2000 also contributed to an
increase in depreciation expense.
OTHER INCOME, NET: Net other income was $6.4 million lower
between the comparative periods primarily due to a nonrecurring
gain on the sale of certain properties at Wisconsin Electric
during the first nine months of 1999.
INCOME TAXES: The effective income tax rate increased in the
first nine months of 2000 as compared with the prior year
primarily due to the end of amortization of pre-1991
contributions in aid of construction as described above.
Electric Utility Revenues, Gross Margins and Sales
During the first nine months of 2000, Wisconsin Electric's total
electric utility operating revenues increased by $40.9 million or
3.2% compared to the same period during 1999. Gross margin on
electric utility operating revenues increased by $24.6 million or
2.6%. Wisconsin Electric attributes this growth in part to
higher total electric energy sales during 2000 and to interim and
final electric retail rate increases that became effective in
early April 2000 and on August 31, 2000, respectively. For
additional information concerning these rate increases, see
Item 1. Legal Proceedings - "Utility Rates and Regulatory
Matters" in Part II of this report. The third quarter of 2000
was 30% than the third quarter of 1999 which constrained
higher-margin residential electric sales during the first
nine months of 2000.
The change in gross margin between the comparative periods also
reflects a $16.3 million or 4.8% increase in total fuel and
purchased power expenses during the first nine months of 2000.
Fuel costs increased by 2.4% due in large part to higher
generation required to supply the growth in total electric energy
sales during 2000. However, Wisconsin Electric was able to limit
its increase in fuel costs by changing the mix of generation from
high cost natural gas-fired generation to lower cost nuclear and
coal-fired generation during the first nine months of 2000.
Purchased power expenses grew by 9.7% due to higher fixed costs
during 2000 associated with long-term purchased power contracts.
The following table compares Wisconsin Electric's electric
utility operating revenues, gross margins and electric utility
energy sales during the first nine months of 2000 with similar
information for the first nine months of 1999.
<TABLE>
<CAPTION>
Gross Margin Megawatt-Hour Sales
Nine Months Ended September 30 Nine Months Ended September 30
Wisconsin Electric ------------------------------- -------------------------------
Electric Utility Operations 2000 1999 % Change 2000 1999 % Change
--------------------------- ------ ------ -------- ------ ------ --------
(Millions of Dollars) (Thousands, Except
Degree Days)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Residential $436.1 $431.1 1.2% 5,495.2 5,528.6 (0.6%)
Small Commercial/Industrial 400.8 385.6 3.9% 6,249.2 6,086.7 2.7%
Large Commercial/Industrial 353.6 341.5 3.5% 8,871.5 8,576.4 3.4%
Other-Retail/Municipal 43.8 39.4 11.2% 1,124.1 999.8 12.4%
Resale-Utilities 68.4 68.7 (0.4%) 2,008.5 2,137.8 (6.0%)
Other-Operating Revenues 21.0 16.5 27.3% - - -
------- ------- -------- --------
Total Operating Revenues 1,323.7 1,282.8 3.2% 23,748.5 23,329.3 1.8%
Fuel and Purchased Power ======== ========
Fuel 235.6 230.1 2.4%
Purchased Power 122.4 111.6 9.7%
------- -------
Total Fuel and Purchased Power 358.0 341.7 4.8%
------- -------
Gross Margin $965.7 $941.1 2.6%
======= =======
Weather - Degree Days (a)
Heating (4,485 Normal) 4,067 4,232 (3.9%)
Cooling (676 Normal) 556 752 (26.1%)
<FN>
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
</FN>
</TABLE>
During the first nine months of 2000, total electric energy sales
increased by 1.8% compared to the first nine months of 1999 due
in large part to a 16.2% increase in sales to the Empire and
Tilden iron ore mines, Wisconsin Electric's two largest retail
customers and, to a lesser extent, to growth in the average
number of residential, small commercial/industrial and other
retail/municipal customers. Excluding the Empire and Tilden
mines, sales to the remaining large commercial/industrial
customers increased by 0.3% and total electric sales increased by
0.7% between the comparative periods. Growth in the average
number of customers noted above partially offset the effects on
total electric energy sales and operating revenues of cooler
weather during the 2000 cooling season. As measured by cooling
degree days, the first nine months of 2000 were 26.1% cooler than
the first nine months of 1999 and 17.8% cooler than normal.
Gas Utility Revenues, Gross Margins and Therm Deliveries
During the first nine months of 2000, Wisconsin Energy's total
gas utility operating revenues increased by $18.4 million while
gross margin on gas utility operating revenues decreased by
$1.1 million. Significantly higher per unit gas costs during the
first nine months of 2000 as well as interim and final retail gas
rate increases that became effective in early April 2000 and on
August 31, 2000, respectively, primarily drove the increase in
operating revenues. For additional information concerning these
rate increases, see Item 1. Legal Proceedings - "Utility Rates
and Regulatory Matters" in Part II of this report. A weather-
related decrease in higher margin residential and
commercial/industrial retail gas sales during the winter months
of 2000 offset the impact of the rate increases on operating
revenues and gross margin. A decrease in interdepartmental therm
deliveries to Wisconsin Electric's natural gas-fired electric
generating facilities during the third quarter of 2000 also
offset the impact of the rate increases on gross margin.
Gas utility operating revenues, gross margins and gas utility
therm deliveries during the comparative periods are summarized
below. Gross margin is a better performance indicator than
revenues because changes in the cost of gas sold are flowed
through to revenue under a purchased gas adjustments mechanism
that does not impact gross margin.
<TABLE>
<CAPTION>
Gross Margin Therm Deliveries
Nine Months Ended September 30 Nine Months Ended September 30
Wisconsin Electric ------------------------------- -------------------------------
Gas Utility Operations 2000 1999 % Change 2000 1999 % Change
--------------------------- ------- ------ -------- ------- ------ --------
(Millions of Dollars) (Millions, Except
Degree Days)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues
Residential $130.8 $130.9 (0.1%) 207.1 219.8 (5.8%)
Commercial/Industrial 70.8 64.6 9.6% 130.6 135.5 (3.6%)
Interruptible 3.1 4.1 (24.4%) 8.2 12.6 (34.9%)
------ ------ ----- -----
Total Retail Gas Sales 204.7 199.6 2.6% 345.9 367.9 (6.0%)
Transported Customer-Owned Gas 12.8 9.9 29.3% 253.7 257.4 (1.4%)
Transported-Interdepartmental 1.5 1.5 - 33.3 47.9 (30.5%)
Other-Operating Revenues 12.5 2.1 495.2% - - -
------ ------ ----- -----
Total Operating Revenues 231.5 213.1 8.6% 632.9 673.2 (6.0%)
Cost of Gas Sold 138.6 119.1 16.4% ===== =====
------ ------
Gross Margin $92.9 $94.0 (1.2%)
====== ======
Weather - Degree Days (a)
Heating (4,485 Normal) 4,067 4,232 (3.9%)
<FN>
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
</FN>
</TABLE>
FACTORS AFFECTING RESULTS OF OPERATIONS
"POWER THE FUTURE" GROWTH STRATEGY
On September 11, 2000, Wisconsin Energy Corporation, Wisconsin
Electric's parent company, announced a 10-year, $6 billion growth
strategy to improve the supply and reliability of electricity in
Wisconsin. Demand for electricity in the state of Wisconsin is
currently growing at approximately a 3% annual rate and is
expected to outstrip supply by 4,000 megawatts by 2010.
Wisconsin Energy anticipates that the announced growth strategy
will help address Wisconsin's growing electric energy supply
needs and improve financial results. Key components of the
"Power The Future growth strategy include:
* Construction of at least three new generating units at a cost
of approximately $2 billion over the next 10 years with total new
generating capacity of 1,700 megawatts:
* Construction of one 500 megawatt combined cycle natural gas-
fired unit would begin in 2003 and would be completed in 2005;
* Construction of two 600 megawatt coal fired units would begin
in 2004 to be operational in 2007 and 2009, respectively; and
* Construction of additional generating units after 2010 would
be contemplated.
* Investment of $1.3 billion over the next 10 years in existing
electric generating assets.
* Investment of $2.7 billion over the next 10 years in new and
existing electric utility distribution system assets.
* Restructuring of Wisconsin Energy's current utility business
by creating a new non-utility subsidiary that would own and
operate the new generating capacity noted above as well as
existing non-nuclear electric generating capacity currently owned
by Wisconsin Electric. Electricity generated by the new
subsidiary would be offered to Wisconsin Electric and to other
Wisconsin utilities through long-term purchase power agreements
approved by the Public Service Commission of Wisconsin.
* Increasing available capital of Wisconsin Energy for
investment in core competencies of electric generation, utility
distribution and pump manufacturing through a board approved
reduction in the quarterly common stock dividend, effective
December 1, 2000, from $0.39 per share (or $1.56 on an annualized
basis) to $0.20 per share (or $0.80 on an annualized basis).
* Increasing from $200 million to $400 million a board approved
open market common stock purchase plan during the next 24 months.
A number of state and federal regulatory approvals will be
required for Wisconsin Energy to execute the investment and
restructuring components of the "Power The Future" growth plan.
Several laws will also require amendment by the state legislature
including Wisconsin's Public Utility Holding Company Act and
Wisconsin's 1997 electric reliability Act 204. Wisconsin Energy
expects to file an application with the Public Service Commission
of Wisconsin during the fourth quarter of 2000 on the threshold
question of whether the new non-utility subsidiary may own and
operate electric generating facilities called non-utility
merchant power plants and will seek a response from the Public
Service Commission of Wisconsin in early 2001. Depending upon
the response of the Public Service Commission of Wisconsin,
Wisconsin Energy anticipates filing detailed plans later in 2001.
Wisconsin Energy will also need to obtain the capital from
outside sources necessary to finance and execute the growth
strategy.
ACQUISITION OF WICOR, INC.
On April 26, 2000, Wisconsin Energy Corporation acquired WICOR,
Inc., a diversified holding company with two principal business
groups: energy services and pump manufacturing. Wisconsin Energy
currently intends to continue the primary business operations of
WICOR and to continue to use the physical assets of such primary
business operations for that purpose, while integrating such
operations with other Wisconsin Energy operations. Wisconsin
Energy is undertaking a thorough review of WICOR's operations and
studying the manner in which the operations of the two companies
can best be optimized. Wisconsin Energy and Wisconsin Electric
anticipate recording a restructuring charge related to the WICOR
merger during the fourth quarter of 2000. Wisconsin Energy
expects to take such actions as a result of this review as may be
deemed appropriate under the circumstances including the
combination of the gas utility operations of Wisconsin Electric
with WICOR's wholly-owned natural gas distribution utility
subsidiary, Wisconsin Gas Company.
Gas Utility Operations Combination
On November 1, 2000, Wisconsin Electric and Wisconsin Gas Company
filed a joint application with the Public Service Commission of
Wisconsin to transfer the physical gas utility assets of
Wisconsin Electric together with certain liabilities associated
with such assets, with a net book value of approximately
$319 million at December 31, 1999, to Wisconsin Gas in return for
stock in Wisconsin Gas in a tax free transaction. Wisconsin
Energy expects that the combined gas operation will result in
improved customer service and greater synergy savings as a result
of the WICOR acquisition. The combined gas operations would
retain the name Wisconsin Gas Company and become the 11th largest
gas distribution company in the United States. Assuming that the
Public Service Commission of Wisconsin approves the transaction
described above, Wisconsin Electric and Wisconsin Gas expect to
make a second filing in 2001 seeking authorization to combine
tariffs and rates.
INDUSTRY RESTRUCTURING AND COMPETITION
ELECTRIC UTILITY INDUSTRY RESTRUCTURING IN MICHIGAN: On June 3,
2000, the Governor of the state of Michigan signed the "Customer
Choice and Electric Reliability Act" into law empowering the
Michigan Public Service Commission to enforce implementation of
prior electric retail access plans. In effect, the new law
provides that all Michigan retail customers of investor-owned
utilities will have the ability to choose their electric power
producer as of January 1, 2002. As directed by the Michigan
Public Service Commission, Wisconsin Electric and its electric
utility affiliate, Edison Sault Electric Company, jointly
submitted a customer choice implementation plan on October 2,
2000. Such plan envisions certain additional filings in June
2001 including proposed unbundled rates. Revenue in the state of
Michigan during 1999 from electric retail customers of Wisconsin
Electric were approximately $107 million, representing 5.3% of
Wisconsin Electric's total utility operating revenues and 6.3% of
Wisconsin Electric's total electric utility operating revenues.
Wisconsin Electric believes that its power supply costs are and
will be competitive when the customer choice program commences in
January of 2002. In addition, other suppliers will use Wisconsin
Electric's unbundled electric distribution system under effective
rates.
NUCLEAR MATTERS
NUCLEAR MANAGEMENT COMPANY: As previously reported, all
participants in the Nuclear Management Company, including
Wisconsin Electric, filed applications with the Nuclear
Regulatory Commission to transfer applicable nuclear generating
unit operating authority under their operating licenses to the
Nuclear Management Company. This application was approved on
May 15, 2000. The Nuclear Management Company assumed operating
responsibility for Point Beach Nuclear Plant with the transfer of
operating authority under the operating licenses on August 7,
2000. Wisconsin Electric continues to own Point Beach and
retains exclusive rights to the energy generated as well as
financial responsibility for the plant's safe operation,
maintenance and decommissioning. On September 7, 2000, the
Nuclear Management Company announced the combination of the
operation of Point Beach and Kewaunee Nuclear Power Plant, owned
by another participant in the Nuclear Management Company, into a
"virtual 3-unit site." Kewaunee Nuclear Power Plant is located
about five miles from Point Beach. Management of support
functions including training, engineering, assessment, business
and site services have also been combined under this new
management structure.
UTILITY RATES AND REGULATORY MATTERS
See Item 1. Legal Proceedings - "Utility Rates and Regulatory
Matters" in Part II of this report for information concerning
utility rate-related activities in the Wisconsin and Michigan
retail jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash provided by operating activities
increased to $536.3 million during the first nine months of 2000
compared with $433.0 million during the same period in 1999,
reflecting increased non-cash charges for depreciation and
amortizations as well as reduced tax payments during 2000.
INVESTING ACTIVITIES: Net cash used in investing activities
totaled $332.3 million during the first nine months of 2000
compared with $318.0 million during the same period in 1999.
Wisconsin Electric's investing activities during 2000 included
$252.4 million for the acquisition or construction of new or
improved facilities. During the nine months ended September 30,
2000, Wisconsin Electric recorded $31.4 million for the
acquisition of nuclear fuel and $44.5 million of payments to and
reinvested earnings of the Nuclear Decommissioning Trust Fund for
the eventual decommissioning of Point Beach Nuclear Plant.
FINANCING ACTIVITIES: During the first nine months of 2000,
Wisconsin Electric used $232.9 million of net cash in its
financing activities compared to using a net of $117.3 million
during the first nine months of 1999. During the nine months
ended September 30, 2000, Wisconsin Electric reduced its short-
term debt by $81.0 million and paid $131.1 million of dividends
to Wisconsin Energy.
CAPITAL REQUIREMENTS AND RESOURCES: Capital requirements during
the remainder of 2000 are expected to be principally for
construction expenditures and for other investments, for long and
short-term debt maturity and sinking fund requirements and for
payments to the Nuclear Decommissioning Trust Fund for the
eventual decommissioning of Point Beach Nuclear Plant. Wisconsin
Electric's total construction and other investment budget for the
remainder of 2000 is approximately $120 million.
These cash requirements are expected to be met through a
combination of the following possible resources: internal sources
of funds from operations, short-term borrowings and the issuance
of intermediate or long-term debt. The amount and timing of any
capital market financing has not been determined and will depend
on market conditions and other factors.
The following table shows Wisconsin Electric's capitalization
structure at September 30, 2000.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------
(Millions of Dollars)
<S> <C> <C>
Common Equity $1,901.2 50.0%
Preferred Stock 30.4 0.8%
Long-Term Debt (including
current maturities) 1,692.0 44.4%
Short-Term Debt 183.7 4.8%
-------- ------
$3,807.3 100.0%
======== ======
</TABLE>
As previously reported, Wisconsin Electric has agreed to join the
American Transmission Company LLC by contributing electric
utility transmission assets in exchange for equity interests in
the new company. Transfer of these electric transmission system
assets, with a net book value of approximately $224 million, is
expected to occur by January 1, 2001. Shortly following transfer
of the assets, the American Transmission Company LLC is expected
to issue debt and distribute cash back to Wisconsin Electric in
an amount equal to approximately 50% of the net book value of the
assets transferred.
In September 2000, following Wisconsin Energy's announcement of
the "Power The Future" growth strategy plan, Standard & Poors
Corporation ("S&P") reaffirmed its ratings of the securities of
the subsidiaries of Wisconsin Energy including Wisconsin
Electric.
The following table summarizes the current ratings of securities
of Wisconsin Electric by Standard & Poors Corporation, Moody's
Investors Service ("Moody's") and Fitch Investors Service
("Fitch").
<TABLE>
<CAPTION>
Wisconsin Electric Power Company S&P Moody's Fitch
-------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Commercial Paper A-1+ P-1 F1+
Senior Secured Debt AA- Aa2 AA
Unsecured Debt A+ Aa3 AA-
Preferred Stock A aa3 AA-
</TABLE>
At September 30, 2000, Wisconsin Electric had approximately
$130 million of unused lines of bank credit. Wisconsin Electric
has historically used these lines primarily to support its
outstanding commercial paper and other short-term borrowings.
*****
For certain other information which may impact Wisconsin
Electric's future financial condition or results of operations,
see Item 1. Financial Statements - "Notes to Financial
Statements" in Part I of this report as well as Item 1. Legal
Proceedings in Part II of this report.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or
may contain forward-looking statements made by or on behalf of
Wisconsin Electric. Such statements are based upon management's
current expectations and are subject to risks and uncertainties
that could cause 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 Electric's actual results to
differ materially from those contemplated in any forward-looking
statements include, among others, the following.
OPERATING, FINANCIAL AND INDUSTRY FACTORS
* Factors affecting utility operations such as unusual weather
conditions; catastrophic weather-related damage; availability of
electric generating facilities; unscheduled generation outages,
or unplanned 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 used 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 regulations as well as regulations from the
Wisconsin or Michigan Departments of Natural Resources; 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.
* 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, investigations and claims, and changes
in those matters including the final outcome of the Giddings &
Lewis, Inc./City of West Allis lawsuit against Wisconsin
Electric.
* Factors affecting the availability or cost of capital such as
changes in interest rates; the Company's capitalization
structure; market perceptions of the utility industry; 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
regulations.
* 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.
* Factors which impede execution of Wisconsin Energy's "Power
The Future" growth strategy announced in September 2000,
including receipt of necessary state and federal regulatory
approvals and amendment of applicable laws in the state of
Wisconsin, and obtaining the investment capital from outside
sources necessary to implement the growth strategy.
* Other business or investment considerations that may be
disclosed from time to time in Wisconsin Energy's Securities and
Exchange Commission filings or in other publicly disseminated
written documents.
BUSINESS COMBINATION FACTORS
* Unanticipated costs or difficulties related to the integration
of the businesses of Wisconsin Energy and WICOR.
* Unexpected difficulties or delays in realizing anticipated net
cost savings or unanticipated effects of the qualified five-year
electric and gas rate freeze ordered by the Public Service
Commission of Wisconsin as a condition of approval of the merger.
Wisconsin Electric undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For information concerning Wisconsin Electric's market risk
exposures, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Market Risks" in Part II of
Wisconsin Electric's 1999 Annual Report on Form 10-K.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 3. Legal
Proceedings in Part I of Wisconsin Electric's 1999 Annual Report
on Form 10-K and Item 1. Legal Proceedings in Part II of
Wisconsin Electric's Quarterly Report on Form 10-Q for the
periods ended March 31, 2000 and June 30, 2000.
ENVIRONMENTAL MATTERS
GIDDINGS & LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: In July
1996, Giddings & Lewis, Inc., Kearney & Trecker Corporation, now
a part of Giddings & Lewis, Inc., and the City of West Allis
brought an action in the Milwaukee County Circuit Court alleging
that in 1959 Wisconsin Electric had deposited cyanide
contaminated wood chips at two sites in West Allis, Wisconsin,
owned by the plaintiffs. Environmental remediation at both sites
was completed several years ago, with the current owners paying
for disposal of materials found on their respective portions of
the sites. Internal investigations led Wisconsin Electric to
believe that it was not the source of this waste.
In July 1999, a jury issued a verdict against Wisconsin Electric
awarding the plaintiffs $4.5 million in compensatory damages for
clean-up costs and loss of property value and $100 million in
punitive damages. In October 1999, the Circuit Court denied
Wisconsin Electric's post trial motions and directed that
judgment on the verdict be entered. Wisconsin Electric has filed
a notice of appeal of the judgment to the Wisconsin Court of
Appeals.
In December 1999, in order to stop the post-judgment accrual of
interest at 12% per annum during the pendency of the appeal,
Wisconsin Electric tendered a contested liability payment of
$110 million, which is part of "Deferred Charges and Other
Assets - Other" on the condensed balance sheet, to the Clerk of
Circuit Court for Milwaukee County representing the amount of the
verdict and accrued interest. Under Wisconsin law, the
plaintiffs are liable to Wisconsin Electric upon reversal or
reduction of the judgment for the applicable amount of the funds
tendered with interest.
In further post-trial proceedings, the plaintiffs filed with the
Circuit Court a motion for sanctions based upon representations
made by Wisconsin Electric during trial that it had no insurance
coverage for the punitive damage award. The Circuit Court held
hearings on the sanctions issue in February 2000. On April 27,
2000, the Circuit Court Judge issued a ruling on the sanctions
matter, imposing the following sanctions against Wisconsin
Electric: (i) "judgment in the alternative" as a sanction,
thereby finding an alternative basis upon which to sustain the
$104.5 million verdict returned by the jury; (ii) a bar against
Wisconsin Electric pursuing insurance coverage for the punitive
damage portion of the verdict; and (iii) a requirement that
Wisconsin Electric pay the plaintiffs' costs relating to the
sanctions matter. In addition to its appeal of the judgment
entered on the jury's verdict, Wisconsin Electric is appealing
the Judge's ruling on the sanctions matter.
In the opinion of management, based in part on the advice of
legal counsel, the jury verdict was not supported by the evidence
or the law and the unprecedented award of punitive damages of
this magnitude was unwarranted and should therefore be reversed
or substantially reduced on appeal. Management also believes
that the sanctions imposed by the Judge were not supported by the
evidence or the law. As such, Wisconsin Electric has not
established a reserve for potential damages from this suit.
As a further development, Wisconsin Energy Corporation, in May
and June 2000, respectively, received letters from two separate
shareholders demanding that Wisconsin Energy bring a derivative
suit for alleged injuries to shareholders resulting from the
Giddings & Lewis/City of West Allis litigation. In accordance
with Wisconsin law, the board of directors of Wisconsin Energy
has created a special committee of independent directors, which
has retained independent counsel to assist it, to investigate the
allegations raised in the shareholder letters and determine
whether a derivative action should be brought.
On August 21, 2000, the shareholder who had served the first
demand upon Wisconsin Energy requesting the derivative suit,
filed a lawsuit individually and on behalf of Wisconsin Energy in
Milwaukee County Circuit Court. On September 29, 2000, the
shareholder who served the second demand on Wisconsin Energy to
bring a derivative suit also filed a lawsuit in Milwaukee County
Circuit Court. The first lawsuit has been stayed until
December 1, 2000 pending the results of the investigation being
conducted by the special committee of independent directors of
Wisconsin Energy Corporation. Wisconsin Energy's response to
both lawsuits will depend upon the conclusions reached by the
special committee of independent directors.
UTILITY RATES AND REGULATORY MATTERS
Wisconsin Retail Jurisdiction
2000/2001 TEST YEARS: In September 1999, Wisconsin Electric
submitted an application with the Public Service Commission of
Wisconsin requesting incremental price relief for specific
capital investments for electric and gas system reliability and
safety and for a one-time accounting adjustment. The application
further recommended the adoption of performance-based measures
and incentives. In its application, Wisconsin Electric proposed
a two-step price increase. The first requested increase, to be
effective January 1, 2000, totaled $46 million (3.1%) for
electric operations and $8 million (2.3%) for gas operations.
The second requested price increase, to be effective January 1,
2001, totaled $29 million (2.0%) for electric operations.
On December 23, 1999, Wisconsin Electric requested that interim
price relief be granted, subject to refund, as soon as possible
because it anticipated that a final order on its price request
would not be issued until the summer of 2000. Wisconsin Electric
withdrew its request to implement performance-based prices
because some elements of the proposed performance-based price
plan were not compatible with the Public Service Commission of
Wisconsin's approval of the Company's merger with WICOR. The
Public Service Commission of Wisconsin proceeded to review
Wisconsin Electric's 2000/2001 test year data as a traditional
cost of service rate request.
On March 23, 2000, the Public Service Commission of Wisconsin
approved Wisconsin Electric's request for interim price
increases, authorizing a $25.2 million (1.7%) increase for
electric operations and an $11.6 million (3.1%) increase for gas
operations. The interim increase, which was subject to potential
refund, became effective April 11, 2000. Rates in the interim
order were based upon a 12.2% return on common equity.
On August 30, 2000, the Public Service Commission of Wisconsin
issued its final order in the 2000/2001 pricing proposal. The
final order authorized a $36.5 million (2.5%) increase for
electric operations (or $11.3 million higher than authorized in
the interim order) as well as an $8 million (2.1%) increase for
gas operations (or $3.6 million lower than authorized in the
interim order). Wisconsin Electric is in the process of
refunding to gas customers overcollection of revenues as a result
of the difference in gas rates between the interim and final
orders. In its August 30, 2000 final order, the Public Service
Commission of Wisconsin authorized a second $27.5 million (1.8%)
increase for electric operations effective January 1, 2001.
Rates in the final order were based upon a 12.2% return on common
equity.
Wisconsin Electric filed a petition for a rehearing of the final
order with the Public Service Commission of Wisconsin to
reconsider their revenue increase for gas operations. On
November 9, 2000, the Public Service Commission of Wisconsin
denied Wisconsin Electric's petition. Wisconsin Electric intends
to seek judicial review.
As a condition of its approval of Wisconsin Energy's merger with
WICOR, the Public Service Commission of Wisconsin ordered a
qualified five-year rate freeze that becomes effective on
January 1, 2001 concurrent with the second step rate changes
included in the final order.
Michigan Electric Retail Jurisdiction
2001 TEST YEAR: In mid-November 2000, Wisconsin Electric
expects to submit an application with the Michigan Public Service
Commission requesting an electric retail rate increase of
$3.7 million (9.4%) on an annualized basis. Hearings on this
rate relief request are expected during the first quarter of 2001
with a final order anticipated to become effective during the
second quarter of 2001.
FUEL COST ADJUSTMENT PROCEDURE: On September 29, 2000,
Wisconsin Electric submitted applications with the Michigan
Public Service Commission requesting reinstatement of its Power
Supply Cost Recovery mechanism (a type of fuel cost adjustment
procedure) on January 1, 2001. If approved as filed, Wisconsin
Electric would expect to recover approximately $1 million in
higher projected fuel costs during 2001 in the Michigan
jurisdiction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed with or incorporated by
reference in this Form 10-Q report:
Exhibit No.
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27.1 Wisconsin Electric Power Company Financial Data
Schedule for the nine months ended September 30, 2000.
27.2 Wisconsin Electric Power Company Reclassified Financial
Data Schedule for the nine months ended September 30,
1999, which reflects the reclassification of certain
amounts to conform to Wisconsin Electric's current
financial statement presentation.
(b) REPORTS ON FORM 8-K
On September 13, 2000, Wisconsin Electric filed a Current
Report on Form 8-K dated as of September 10, 2000 disclosing
Wisconsin Energy's new 10-Year, $6 billion "Power The Future"
growth strategy plan.
No other reports on Form 8-K were filed by Wisconsin Electric
during the quarter ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
(Registrant)
/s/ Stephen P. Dickson
--------------------------------------
Date: November 14, 2000 Stephen P. Dickson, Controller, Chief
Accounting Officer and duly authorized
officer
WISCONSIN ELECTRIC POWER COMPANY
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2000
EXHIBIT INDEX
The following exhibits are in this report:
Exhibit No.
-----------
27.1 Wisconsin Electric Power Company Financial Data
Schedule for the nine months ended September 30, 2000.
27.2 Wisconsin Electric Power Company Restated Financial
Data Schedule for the nine months ended September 30,
1999, which reflects the reclassification of certain
amounts to conform to Wisconsin Electric's current
financial statement presentation.
