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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
---
Filed by a Party other than the Registrant
---
Check the appropriate box:
Preliminary Proxy Statement
- - ---
Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
- - ---
X Definitive Proxy Statement
- - ---
Definitive Additional Materials
- - ---
Soliciting Material Pursuant to s.240.14a-11(c) or s.240.14a-12
- - ---
WISCONSIN ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement,if other than
Registrant)
Payment of Filing Fee (Check the appropriate box):
X $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
- - --- Item 22(a)(2) of Schedule 14A.
$500 per each party to the controversy pursuant to
- - --- Exchange Act Rule 14a-6(i)(3).
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
- - ---
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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:
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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:
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Wisconsin Energy Corporation Richard A. Abdoo
231 West Michigan Chairman of the Board,
P.O. Box 2949 President and
Milwaukee, WI 53201 Chief Executive Officer
April 3, 1996
Dear Wisconsin Energy Corporation Stockholder:
You are cordially invited to attend the 1996 Annual Meeting of Stockholders on
WEDNESDAY, MAY 22, 1996, at 1:30 P.M., at the BRADLEY CENTER, 1001 North
Fourth Street, in downtown Milwaukee, Wisconsin. Free parking will be
available.
The meeting gives us an opportunity to celebrate Wisconsin Electric's
centennial--100 years of service to our customers and to you, our
stockholders. We will also vote on the proposals described in the
accompanying Notice and Proxy Statement and report on the business and affairs
of WEC and our expectations for the future.
The proxy card attached below lists all the matters that need your vote.
PLEASE SIGN AND PROMPTLY RETURN THIS CARD IN THE POSTAGE-PAID ENVELOPE
PROVIDED SO THAT IT WILL BE RECEIVED BY MAY 15, 1996. You may cancel your
proxy before the meeting and vote in person if you wish. The proxy card also
provides a separate box for you to indicate if you plan to attend the Annual
Meeting. Place a mark in this box ONLY if you plan on attending the meeting.
The proxy statement is a bit different this year. In an effort to conserve
costs while still providing you with accurate and timely information about
your company, detailed financial information that normally appeared in the
Annual Report is presented to you in the form of an appendix to the proxy
statement. For your convenience, the enclosed Summary Annual Report contains
condensed financial information. The proxy statement also focuses on the
Board's corporate governance practices.
I appreciate your continued interest in WEC and hope to see you at the
meeting. If you have any questions about the Annual Meeting, please call our
toll-free Stockholder Hotline at 1-800-558-9663.
Sincerely,
/s/Richard A. Abdoo
- - -------------------
Richard A. Abdoo
<PAGE> 4
PLEASE DETACH PROXY CARD HERE
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Please mark your
[X] votes as in this
example.
---------------------------------------------------------------
The Board of Directors recommends a vote FOR Proposals 1 and 2.
---------------------------------------------------------------
1. Elect Richard A. Abdoo
and John F. Ahearne
as Directors:
FOR WITHHELD
ALL FROM ALL
[ ] [ ]
--------------------------------------------------------
For, except vote withheld from the above nominee(s):
2. Ratify appointment of Auditors
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
WHERE NO VOTING INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED
BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
Please sign exactly as name(s) appears hereon. Joint owners
should each sign personally. When signing as executor,
administrator, corporation officer, attorney, agent, trustee,
guardian or in other representative capacity, please state
your full title as such.
SEE REVERSE
SIDE
Signature:________________________________________ Date: _________________
Signature:________________________________________ Date:__________________
(If Held Jointly)
I PLAN TO ATTEND MEETING
If you check this box to the right
an admission card will be sent to you. [ ]
<PAGE> 5
WISCONSIN ENERGY CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
May 22, 1996
- - ------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 22, 1996. Your shares of stock
will be voted as you specify below. IF NO CHOICE IS SPECIFIED, YOUR
PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2. P
R
By signing this PROXY, you revoke all prior proxies and appoint O
Richard A. Abdoo and Ann Marie Brady, or any of them, as proxies, with X
the power to appoint substitutes, to vote your shares on the matters Y
shown below and on any other matters which may come before the Annual
Meeting of Stockholders and all adjournments of the Meeting.
1. Elect Richard A. Abdoo and John F. Ahearne as Directors;
2. Ratify appointment of PRICE WATERHOUSE LLP as Independent
Public Accountant;
all as described in the Notice and Proxy Statement relating to the
Annual Meeting, receipt of which is hereby acknowledged.
If you hold shares in Wisconsin Energy Corporation's Stock Plus
Investment Plan or Wisconsin Electric Power Company's Management
Employee Savings Plan or Represented Employee Savings Plan, this
Proxy constitutes voting instructions for any shares so held by
the undersigned.
SEE REVERSE SIDE. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD
OF DIRECTORS' RECOMMENDATIONS, JUST SIGN AND DATE ON THE REVERSE
SIDE; YOU NEED NOT MARK ANY VOTING BOXES.
SEE REVERSE
SIDE
<PAGE> 6
TABLE OF CONTENTS
Page
Notice of Annual Meeting
Proxy Statement
Proposal 1: Election of Directors 1
Proposal 2: Approval of Appointment of
Independent Public Accountant 1
Other Matters 2
Voting of Shares 2
The Board of Directors and Corporate Governance 3
Overview of Corporate Governance 3
Current Corporate Governance Practices 3
Changes in Corporate Governance Practices During 1995 4
Composition of the Board of Directors 5
Committees of the Board of Directors 7
Meetings of the Board and its Committees 7
Compensation of the Board of Directors 8
Overview of Executive Officers' Compensation 8
Compensation Committee Report on Executive Compensation 8
Executive Officers' Compensation 13
Retirement Plans 16
Stock Ownership of Directors, Nominees and Executive Officers 18
Performance Graphs 19
1997 Annual Meeting 20
Availability of Form 10-K 21
Appendix A: Annual Financial Statements and Review of Operations
Selected Financial and Operating Data A-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations A-3
Financial Statements
Consolidated Income Statement A-24
Consolidated Statement of Cash Flows A-25
Consolidated Balance Sheet A-26
Consolidated Capitalization Statement A-28
Consolidated Common Stock Equity Statement A-29
Notes to Financial Statements A-30
Report of Independent Accountants A-47
Market For Common Equity and Related Stockholder Matters A-48
[LOGO]
This document is printed on recycled paper.
<PAGE> 7
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 3, 1996
To the Stockholders of Wisconsin Energy Corporation:
The Annual Meeting of Stockholders of Wisconsin Energy Corporation will be
held at the Bradley Center, 1001 North Fourth Street, Milwaukee, Wisconsin, on
Wednesday, May 22, 1996 at 1:30 p.m., for the following purposes:
1. To elect two directors for terms expiring at the 1999 Annual Meeting of
Stockholders,
2. To approve the appointment of Price Waterhouse LLP as independent public
accountant for 1996, and
3. To consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on March 21, 1996 will be
entitled to vote at the meeting.
By Order of the Board of Directors
/s/ Ann Marie Brady
- - -------------------
Ann Marie Brady
Secretary
<PAGE> 8
PROXY STATEMENT
THIS PROXY STATEMENT IS BEING FURNISHED TO STOCKHOLDERS BEGINNING ON OR ABOUT
APRIL 3, 1996 IN CONNECTION WITH THE SOLICITATION OF PROXIES BY THE WISCONSIN
ENERGY CORPORATION ("WEC") BOARD OF DIRECTORS TO BE USED AT THE ANNUAL MEETING
OF STOCKHOLDERS ON MAY 22, 1996 AT THE BRADLEY CENTER, 1001 NORTH FOURTH
STREET, MILWAUKEE, WISCONSIN, AND AT ALL ADJOURNMENTS OF THE MEETING, FOR THE
PURPOSES LISTED IN THE PRECEDING NOTICE OF ANNUAL MEETING OF STOCKHOLDERS.
PROPOSAL 1: ELECTION OF DIRECTORS
The WEC Bylaws provide that the directors be divided into three classes, as
nearly equal in size as possible. The term of one class expires each year.
The terms of Directors Jon G. Udell and John F. Ahearne expire at the 1996
Annual Meeting. Director Udell has indicated his intention to retire as a
director at the end of his term and the Board has approved a reduction in the
size of the Board to seven members effective with this retirement. To
preserve the balance of the Board's classified structure, two nominees to
serve terms ending at the 1999 Annual Meeting are required to be elected.
RICHARD A. ABDOO and JOHN F. AHEARNE have been nominated by the Board to serve
for terms expiring at the 1999 Annual Meeting of Stockholders or until they
are reelected or until their successors are duly elected and qualified. Each
nominee has consented to being nominated and to serve if elected. To preserve
the balance between the size of the three classes, Mr. Abdoo, who was elected
by stockholders to a term expiring at the 1997 Annual Meeting, volunteered to
stand for re-election early. Should Mr. Abdoo not be elected by stockholders
at the meeting, he will continue to serve his present term through the 1997
Annual Meeting. If any nominee becomes unable to serve for any reason, which
event is not anticipated, the proxies will be voted for a substitute nominee
as may be selected by the WEC Board upon the recommendation of the Nominating
Committee.
Biographical information regarding each nominee is set forth on the following
pages.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR DIRECTOR NOMINEES RICHARD
A. ABDOO AND JOHN F. AHEARNE.
PROPOSAL 2: APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors has appointed the firm of PRICE WATERHOUSE LLP ("PW")
as independent public accountant to audit the books, records and accounts of
WEC and its subsidiaries with respect to their operations for the year 1996
and recommends that the stockholders approve such appointment.
PW has acted as independent public accountant for WEC or its predecessors
continuously since 1932. Representatives of the firm will attend the Annual
Meeting to make any statement they may consider appropriate and to respond to
questions that may be directed to them.
If (i) the foregoing proposal is not approved by the stockholders, or (ii) PW
shall become incapable of accepting or continuing the appointment, or (iii)
the employment of PW is otherwise discontinued, the Audit Committee will
recommend and the Board of Directors will appoint another independent public
accountant.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS INDEPENDENT PUBLIC ACCOUNTANT.
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OTHER MATTERS
The Board of Directors is not aware of any other matters which may properly
come before the meeting. The WEC 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 Bylaws state, among other things, that notice
and certain other documentation must be provided to WEC 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 WEC. If any other matters do properly come
before the meeting, it is the intention of the persons named as the proxies in
the accompanying form of proxy to vote the proxy in accordance with their best
judgment on such matters.
VOTING OF SHARES
STOCKHOLDERS OF RECORD. Common stockholders of record at the close of
business on March 21, 1996 are entitled to vote on matters to be presented at
the Annual Meeting. On that date, there were 110,819,337 shares of WEC common
stock outstanding. Each outstanding share is entitled to one vote upon each
matter presented. A majority of the votes entitled to be cast by the shares
entitled to vote, represented in person or by proxy, shall constitute a
quorum. A list of stockholders of record entitled to vote at the meeting will
be available for inspection by stockholders at WEC's principal business office
at 231 West Michigan Street, Milwaukee, Wisconsin, prior to the meeting. The
list will also be available on the day of the meeting at the Bradley Center.
Stockholders whose shares are held in the name of a broker, bank or other
holder of record are invited to attend the meeting, but may not vote at the
meeting unless they have first obtained a proxy, executed in the stockholder's
favor, from the holder of record.
FORM OF PROXY. Stockholders may vote in person or by properly executed proxy.
By completing and returning the form of proxy, the stockholder authorizes
Richard A. Abdoo and Ann Marie Brady to vote all of the stockholder's shares
on his/her behalf. All completed proxy forms returned will be voted as the
stockholders direct. If no direction is given, the proxies will be voted FOR
director nominees Richard A. Abdoo and John F. Ahearne and FOR the proposal to
approve the appointment of Price Waterhouse LLP as WEC's independent public
accountant. A proxy may be revoked by voting in person at the meeting, by
written notice to WEC's Corporate Secretary, or by delivery of a later-dated
proxy, in each case prior to the closing of the polls for voting at the Annual
Meeting. Attendance at the meeting will not in itself constitute revocation
of a proxy.
If a stockholder is a participant in WEC's Stock Plus Investment Plan ("Stock
Plus") or owns shares through investments in the WEC Common Stock Fund of
Wisconsin Electric Power Company's ("Wisconsin Electric" or "WE") Management
Employee Savings Plan ("MESP") or its Represented Employee Savings Plan
("RESP"), the proxy will serve as voting instructions for the participant's
shares held in those plans, as well as a proxy for shares registered in the
participant's name. Shares of plan participants will be voted by the
administrator for Stock Plus and the trustee for MESP and RESP as directed by
such participants in their proxies/voting instructions. If a proxy is not
returned for shares held in Stock Plus, such shares will not be voted by the
administrator. If a proxy is not returned for shares held in the WEC Common
Stock Fund of MESP or RESP, the trustee for such plans will vote those shares
in the same proportion that all shares in the respective plan funds are voted.
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SOLICITATION OF PROXIES. WEC will bear the cost of the solicitation of
proxies. Proxies may be solicited by certain officers and employees of WEC or
its subsidiaries by mail, by telephone, personally or by other communications,
without compensation apart from their normal salaries. It is not anticipated
that any other persons will be engaged to solicit proxies or that compensation
will be paid for that purpose. However, WEC may seek the services of an
outside proxy solicitor in the event such services become necessary.
VOTING REQUIREMENTS AND PROCEDURES. The voting requirements and procedures
described below are based upon the provisions of the Wisconsin Business
Corporation Law, WEC's charter documents and any other requirements applicable
to the matters to be voted upon.
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.
With respect to approval of the independent public accountant, if a quorum is
present, the affirmative vote of a majority of the votes cast will be
required. Abstentions and shares which are the subject of broker non-votes
will count toward establishing a quorum. Abstentions and broker non-votes
will have no effect on the outcome of the voting.
The voted proxies will be tabulated by Boston EquiServe, which will also serve
as inspector of election.
THE BOARD OF DIRECTORS AND CORPORATE GOVERNANCE
OVERVIEW OF CORPORATE GOVERNANCE. The Board of Directors is elected by
stockholders to be responsible for overseeing WEC's business operations, for
evaluating the performance of the CEO and the corporation, and for
strategically guiding the corporation. The Board has established a number of
principles that govern the way in which it fulfills its fiduciary
responsibilities to stockholders. These principles, commonly known as
corporate governance guidelines, include such things as independence of the
Board, director candidate selection criteria, board committee composition and
responsibilities, frequency of Board and committee meetings, director and
officer compensation philosophy, CEO performance evaluation procedures,
retirement policies and level of WEC stock ownership by directors and key
employees. The corporate governance practices are periodically reviewed by
the Board to ensure they maximize the ability of the Board to serve the
stockholders in meeting WEC's short and long-term goals. Several of these
policies are highlighted throughout this proxy statement.
CURRENT CORPORATE GOVERNANCE PRACTICES. For many years, the Board has been
operating under the guidance of several policies, practices and conventions.
Among other things, these guidelines provide that:
* The Board shall consist of a significant majority of outside, independent
directors.
* No person shall serve as a nonemployee director after the annual meeting in
the year in which the director attains the age of 70.
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* The Chairman of the Board and the Chief Executive Officer set the agenda
for Board meetings. Any member of the Board may request that an item be
included on the agenda.
* In general, time at Board meetings should focus on strategic opportunities
and major business issues rather than on routine operational and reporting
matters.
* Board meetings are to be conducted in a manner which ensures open
communication, meaningful participation and timely resolution of issues.
* Certain items are of such importance that the Board shall consider them no
less than annually. These items include: formal evaluation of the
performance of the Chief Executive Officer, management succession planning,
director candidate selection criteria, officer compensation and benefit
issues, nuclear power operations, environmental stewardship, approval of
the corporate budget, long-term strategic and financial planning and
corporate financial performance. Agenda items that fall within the scope
of responsibilities of a Board committee shall be reviewed with the chair
of that committee.
* The Chairman and the Chief Executive Officer shall timely inform the Board
of significant events affecting the corporation which may have occurred
between regularly scheduled Board meetings.
* The Board encourages presentations to be made on specific subjects by
members of management who can provide additional insight into the items
being discussed. These presentations also provide the Board with a first-
hand opportunity to evaluate management personnel.
* Committees shall be utilized by the Board to more effectively perform its
fiduciary responsibility. Committees are empowered to act on behalf of the
full Board for those areas in which the Board has prescribed. It is
expected that all significant findings of a committee be presented to the
full Board for review.
* Except for the Executive Committee, committees are generally to be
comprised of only nonemployee directors. Consideration shall be given to
periodic rotation of committee membership and leadership taking into
account considerations such as continuity, expertise and tenure, but such
rotation is not mandated as a policy since there may be reasons at a given
point in time to maintain an individual director's committee membership.
* The Board encourages open communication with stockholders and other
stakeholders.
CHANGES IN CORPORATE GOVERNANCE PRACTICES DURING 1995. During 1995, the Board
modified several of its corporate governance policies in order to more
effectively serve stockholders, customers and employees.
* The Board revised its practices relating to its EVALUATION OF THE
PERFORMANCE OF THE CHAIRMAN AND CEO. Outside directors now provide a
written evaluation of the CEO's performance. The Board's independent
directors evaluate the CEO on such factors as: effective operation of the
Board, degree to which the Board is kept informed on the conditions of WEC
and its businesses, leadership, vision, development of long-term
strategies, establishment of annual and long-term financial objectives,
development of an effective top management team, effective communication
with stakeholders and effective representation of WEC in community and
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industry affairs. Information from this new process is then used as part
of the Compensation Committee's determinations as to appropriate levels of
compensation for the CEO. Feedback is also provided to the CEO in terms of
what is working well and what might be improved.
* In 1995, the Board approved a CHANGE IN DIRECTORS' FEES so that, effective
January 1, 1996, one-half of the annual retainer fee will be paid in WEC
common stock. The Board believes this change will more closely link
directors' pay to performance and more effectively align the Board's
interests with stockholders.
* It has been the practice of the Board to establish committees to focus on
issues that may require more in-depth scrutiny. This practice provides the
Board with more time to focus on strategic issues. In 1995, the Board
FORMED A NUCLEAR OVERSIGHT COMMITTEE to advise and assist the Board
regarding its responsibilities on matters relating to the continued safe
and efficient operation of WEC's nuclear power operations. The board of
WEC's subsidiary, Wisconsin Electric, also formed a Finance Committee to
effect financing plans approved by the WE board, thus enabling the
organization to act quickly when market conditions warrant. Further
information pertaining to the WE board's Finance Committee is contained in
the information statement being provided to holders of WE's preferred
stock. The chair of each committee keeps the Board informed of the
committees actions and recommendations by making periodic reports to the
Board. Specific roles of each committee of the Board are included
elsewhere in this proxy statement.
COMPOSITION OF THE BOARD OF DIRECTORS. Foremost of the Board's
responsibilities is to identify and recommend to stockholders qualified
individuals who have the skills to successfully perform the role of a WEC
director. The Board seeks to maintain a diverse group of individuals whose
life experiences are conducive to positively contributing to the Board's
deliberations. The Board also believes that a significant majority of the
Board be comprised of outside, independent directors. Biographical data
regarding each nominee and director is shown below. Ages are as of
December 31, 1995.
Nominees for Terms Expiring in 1999
RICHARD A. ABDOO. Age 51. Chairman of the Board, President and Chief
Executive Officer of WEC since 1991. Chairman of the Board and Chief
Executive Officer of Wisconsin Electric, WEC's principal subsidiary, since
1990. Executive Vice President of WEC from January 1990 to May 1991.
Director of WEC since 1988. Director of Wisconsin Electric since 1989.
Chairman of the Board and Chief Executive Officer of Wisconsin Natural Gas
Company ("Wisconsin Natural" or "WN"), WEC's gas utility subsidiary which was
merged into Wisconsin Electric effective January 1, 1996, from 1990 to 1995.
Director of Wisconsin Natural from 1989 to 1995. Director of Marshall &
Ilsley Corporation and United Wisconsin Services, Inc.
JOHN F. AHEARNE. Age 61. Director of the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that provides grants to graduate
students and conducts national meetings on major scientific issues, since
1989. Adjunct Scholar of Resources for the Future, an economic research, non-
profit institute, since 1993. Lecturer, Duke University, since 1995. Vice
President and Senior Fellow of Resources for the Future from 1984 to 1993.
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Commissioner of the United States Nuclear Regulatory Commission from 1978 to
1983, serving as its Chairman from 1979 to 1981. Member, National Academy of
Engineers. Director of WEC and Wisconsin Electric since 1994.
DIRECTORS CONTINUING IN OFFICE-TERMS EXPIRING IN 1997 (NOT INCLUDING RICHARD
A. ABDOO, WHO IS A NOMINEE FOR A TERM EXPIRING IN 1999)
JOHN F. BERGSTROM. Age 49. President and Chief Executive Officer of
Bergstrom Corporation since 1974; Bergstrom Corporation owns and operates
numerous automobile dealerships, three hotels, a convention center and a real
estate company. Director of WEC since 1987. Director of Wisconsin Electric
since 1985. Director of First National Bank-Fox Valley, Kimberly-Clark
Corporation, Midwest Express Holdings, Inc., Universal Foods Corporation and
The Green Bay Packers, Inc.
GENEVA B. JOHNSON. Age 66. Corporate Director. Former President and Chief
Executive Officer of Family Service America, an organization representing
private agencies in the United States and Canada that provide human service
programs, from 1983 to 1994. Director of WEC and Wisconsin Electric since
1988. Director of Firstar Bank Milwaukee, N.A.
DIRECTORS CONTINUING IN OFFICE-TERMS EXPIRING IN 1998
ROBERT A. CORNOG. Age 55. Chairman of the Board, President and Chief
Executive Officer of Snap-on Incorporated, a tool manufacturer, since 1991.
President of Macwhyte Company, a maker of wire rope and a subsidiary of Amsted
Industries, from 1981 to 1991. Director of WEC since 1993. Director of
Wisconsin Electric since 1994. Director of Snap-on Incorporated and Johnson
Controls, Inc.
RICHARD R. GRIGG. Age 47. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since January 1995. 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 May
1995. Director of Wisconsin Electric since 1994. Director of Wisconsin
Natural during 1995.
FREDERICK P. STRATTON, JR. Age 56. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines, since
1986. Director of WEC since 1987. Director of Wisconsin Electric since 1986.
Director of Briggs & Stratton Corporation, Banc One Corporation, Midwest
Express Holdings, Inc. and Weyco Group, Inc.
DIRECTOR WHO WILL BE RETIRING EFFECTIVE ON THE DATE OF THE 1996 ANNUAL MEETING
JON G. UDELL. Age 60. Irwin Maier Professor of Business at the University of
Wisconsin-Madison since 1975. Co-Director of The Enterprise Center at the
University of Wisconsin-Madison, an educational organization devoted to
entrepreneurial management, since 1993. Director of WEC since 1987. Director
of Wisconsin Electric since 1977. Chairman of the Board of Directors of the
Federal Home Loan Bank of Chicago from 1982 to 1990. Director of Research
Products Corporation.
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<PAGE> 14
COMMITTEES OF THE BOARD OF DIRECTORS. Committees play a significant role in
the corporate governance practices of the Board. Members and principal duties
and responsibilities of the Board's standing committees are shown below.
Except for the Executive Committee, committees are comprised solely of
outside, independent directors.
Members of the AUDIT COMMITTEE are Mr. Stratton (chair), Mr. Bergstrom, Mrs.
Johnson and Dr. Udell. The committee oversees the financial reporting and
internal controls of WEC; evaluates, reviews and approves the services of the
independent public accountant; recommends to the Board the independent public
accountant to be selected; and recommends and reviews special audits or
studies it considers necessary or desirable. Both the independent public
accountant and the internal auditor may meet alone with the committee and are
expected to contact it on matters requiring its attention.
Members of the COMPENSATION COMMITTEE are Mr. Cornog (chair), Dr. Ahearne, Mr.
Bergstrom and Dr. Udell. The committee identifies through succession planning
potential executive officers of WEC and provides a competitive, performance-
based executive and director compensation program that enables WEC to attract
and retain key individuals and to motivate them to achieve WEC's short and
long-term goals.
Members of the EXECUTIVE COMMITTEE are Mr. Abdoo (chair), Mr. Grigg and the
chairs of the other standing committees. The committee may exercise all of
the powers vested in the Board 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.
Members of the NOMINATING COMMITTEE are Mrs. Johnson (chair), Mr. Bergstrom,
Mr. Cornog and Mr. Stratton. The committee reviews qualifications of and
recommends candidates for election to the boards of WEC and Wisconsin Electric
(stockholders may propose director candidates for consideration by the
Nominating Committee); recommends qualified candidates to fill vacancies on
WEC's and Wisconsin Electric's boards; establishes, subject to board approval,
director candidate selection criteria; recommends criteria for composition,
size and frequency of meetings of WEC's and Wisconsin Electric's boards; and
reviews the retirement policy for directors.
Members of the NUCLEAR OVERSIGHT COMMITTEE are Dr. Ahearne (chair) and Mr.
Cornog. Ad hoc members of the committee include Wisconsin Electric's Vice
President-Nuclear Power and three consultants who have expertise in nuclear
power plant operations: Thomas E. Murley, former director of the Nuclear
Regulatory Commission's Office of Nuclear Reactor Regulation; C. Frederick
Sears, formerly responsible for overseeing Northeast Utilities' nuclear and
environmental functions; and Hal B. Tucker, formerly responsible for
overseeing Duke Power Company's nuclear operations. The committee advises and
assists the Board in the proper and complete discharge of its responsibilities
relating to the nuclear operations of WEC and its subsidiaries. The Nuclear
Oversight Committee may be requested by the Board to investigate any nuclear
related activity of WEC and its subsidiaries.
MEETINGS OF THE BOARD AND ITS COMMITTEES. The Board held 14 meetings during
1995. The number of meetings is somewhat greater than in previous years due
to the time the Board spent deliberating the proposed merger with Northern
States Power Company ("NSP"). The number of committee meetings during 1995:
Audit, 4; Compensation, 5; Executive, 0; Nominating, 2; Nuclear Oversight, 3.
The average attendance of all directors for Board and committee meetings was
97%.
7
<PAGE> 15
COMPENSATION OF THE BOARD OF DIRECTORS. In order to more closely link
directors' pay to performance and to align the Board's interests with
stockholders, effective January 1, 1996, the Board determined that a portion
of directors' fees will be paid in WEC common stock. Directors can elect to
receive the fee in common stock or invest the fee in the WEC phantom common
stock account under the Directors' Deferred Compensation Plan.
During 1995, each nonemployee director received an annual retainer fee of
$18,000 (effective January 1, 1996, one-half of this fee shall be paid in WEC
common stock and the other half is to be paid in cash) plus an attendance fee
of $1,000 for each Board or committee meeting attended (effective January 1,
1996, the attendance fee was increased to $1,250 for each board or committee
meeting attended). 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 WEC directors also serve on Wisconsin Electric's board and
compensation committee, only single fees are paid for meetings held by both
boards or committees on the same day. In these cases, fees are allocated
between WEC and Wisconsin Electric based on services rendered.
Nonemployee directors may defer fees so long as they serve on the Board of WEC
and/or its subsidiaries 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 such stock, as well as through the accumulation of any reinvested
dividends. Such deferral amounts are credited to such accounts in the name of
each participating director on the books of WEC, are unsecured and are payable
only in cash following termination of the director's service to WEC and its
subsidiaries. Such amounts will be paid out of the general corporate assets
or the trust described under "Retirement Plans" in this proxy statement.
OVERVIEW OF EXECUTIVE OFFICERS' COMPENSATION. The Board believes that one of
its most important functions is attracting, motivating and retaining qualified
individuals in the positions that most influence WEC's ability to achieve its
goals and to succeed in today's competitive utility environment. To this end,
the Board has directed its Compensation Committee to provide a compensation
and benefit package that will achieve this goal. The Compensation Committee
report and tables that follow detail the committee's philosophy and
compensation determinations for 1995.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES. The Compensation Committee, which is
composed entirely of independent non-employee directors is responsible for
making decisions regarding succession planning and executive compensation.
The Committee seeks to provide a competitive, performance-based executive
compensation program that enables WEC to attract and retain key individuals
and motivate them to achieve WEC's short and long-term goals. The Committee
regularly re-examines its compensation philosophy to determine if the
executive compensation package is effective in helping WEC achieve its
corporate objectives.
8
<PAGE> 16
The Committee believes that a substantial portion of overall executive
compensation should be at risk, dependent on achievement of individual and
corporate goals that are aligned with the interests of WEC's stockholders and
customers. As a result, compensation for executives will vary from year to
year, based upon the level of achievement of operating, financial, safety,
environmental stewardship, customer satisfaction and other performance goals.
Superior performance will be rewarded with above-average compensation; below-
average performance will yield below-average compensation.
The Committee employs a nationally recognized compensation consultant, Towers
Perrin, to advise it on matters relating to the administration and design of
WEC's executive compensation program. The consultant provides the Committee
with competitive information regarding compensation levels, practices and
trends within WEC's peer group and the industry.
In determining competitive compensation for WEC's officer positions, the
Committee relies primarily on an analysis of compensation practices for the
companies included in the industry peer group used to compare investment
performance in this proxy statement ("Peer Group"). The Committee relies
secondarily on a broader analysis of compensation data from a survey of
approximately 100 utilities conducted by the Edison Electric Institute
("EEI"). The Committee reviews both peer group specific and broader industry
pay practices to be fully informed of industry compensation levels. The
Committee does not mathematically average the data from the two analyses but,
rather, considers them as separate reads of the external market.
As part of the Committee's efforts to continually re-examine its compensation
philosophy, the Committee is presently modifying the peer group for 1996
compensation determinations to include a broader group of general industrial
companies. In view of WEC's proposed merger with Northern States Power
Company ("NSP") to form Primergy Corporation, the Committee is also
considering present compensation practices for NSP executives and expected
compensation levels for executives of Primergy Corporation.
ELEMENTS OF COMPENSATION. The 1995 compensation of WEC's executives primarily
consisted of three elements: base salary, annual incentive compensation and
long-term incentive compensation. The Committee's basis for determining
appropriate levels of executive compensation for 1995 for each of these
elements is described below. Specific values of 1995 compensation for the
Chief Executive Officer and each of WEC's other four most highly compensated
officers are included in the "Summary Compensation Table" provided in this
proxy statement.
BASE SALARY. In determining appropriate executive base salaries, the
Committee considered factors such as individual experience, performance and
potential, changes in duties and responsibilities, economic conditions in the
utility service areas, financial success of WEC (measured in terms of such
factors as total shareholder return versus the Peer Group, earnings per share
on WEC common stock and continuity of WEC's dividend payment), customer
satisfaction, the outstanding reputation of WEC's utility operations,
competitiveness of utility service rates and impact of re-engineering and cost
control achievements. In addition, the Committee reviewed executive
compensation practices for comparable positions at companies within the Peer
Group, as well as the broader group of utilities in the EEI database. The
Committee weights these factors substantially equally. In general, base
salaries are targeted at or near the 50th percentile of the Peer Group.
9
<PAGE> 17
ANNUAL INCENTIVE COMPENSATION. The Committee administers WEC's Short-Term
Performance Plan ("STPP") which provides annual cash incentive opportunities
to executive officers and key employees. The STPP is designed to promote the
achievement of customer and shareholder-focused objectives of WEC and its
subsidiaries while recognizing individual and team performance of
participants.
Annual incentive compensation awards are targeted at approximately the 50th
percentile of industry pay practices. In 1995, target incentive awards were
set for participants and ranged from 15% to 45% of base salary. Each
executive is eligible to receive an award if pre-established corporate
performance goals are met. Awards may be increased by up to 25% of targeted
amounts or reduced to zero based on individual and team performance.
Performance goals for 1995 were 60% financial and 40% operational. Financial
goals focused on achievement of target net income levels. Operational goals
were related to total shareholder return versus WEC's Peer Group, safety of
nuclear operations, achievement of operating income targets, customer
satisfaction, revenue growth, and environmental stewardship.
Based on attainment of the above-named performance measures, the Committee
granted awards under the STPP for 1995 ranging from 11% to 38% of base salary.
LONG-TERM INCENTIVE COMPENSATION. The Committee administers WEC's 1993
Omnibus Stock Incentive Plan ("OSIP"), a long-term incentive plan designed to
link the interests of executives and key employees to long-term shareholder
value. The OSIP allows WEC to grant stock options, stock appreciation rights,
stock awards and performance units to participants. Equity interests in WEC
common stock enable participants to share in the appreciation of the value of
WEC common stock and provide an incentive for managing the continued
performance and value of the Company. Long-term incentive awards are targeted
at the 90th percentile of the industry grant practices.
In view of the Committee's desire to provide long-term incentive compensation
to a greater number of employees, the Committee increased the number of
participants in the OSIP compared to last year. For 1995, awards in the form
of stock options and performance dividend units were granted to each of six
groups of OSIP participants. The stock option and performance unit grants
ranged from 1,900 to 38,000 shares and related dividend performance units; the
grant level was dependent on each participant's role in influencing the
achievement of long-term performance goals.
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 OSIP, the Committee has implemented stock
ownership guidelines for participants.
CHIEF EXECUTIVE OFFICER COMPENSATION. Performance and compensation of the
Chief Executive Officer are of particular importance to the Committee. Mr.
Abdoo's performance was evaluated by the Committee and compensation was
determined in accordance with the executive compensation policies described
above.
As part of WEC's corporate governance initiatives relating to the CEO's
individual performance, a new procedure was instituted in 1995. The
Compensation Committee chairman requested that outside directors provide a
written evaluation of the CEO's performance. A summary of the directors'
feedback was discussed by Committee members as part of its compensation
determinations and has been shared with the CEO.
10
<PAGE> 18
With respect to base salary, in recognition of the leadership provided by the
Chief Executive Officer in shaping and guiding a financially strong
organization that is able to provide quality services to its customers at
competitive prices, as well as his role in positioning WEC to take advantage
of a deregulated utility environment, and in consideration of competitive
salary data, the Committee set Mr. Abdoo's base salary at $496,000. Mr.
Abdoo's base salary approximates the 50th percentile of the Peer Group.
With respect to annual incentive compensation for fiscal year 1995, the
Compensation Committee awarded Mr. Abdoo the annual incentive award set forth
in the "Bonus" column of the Summary Compensation Table. In this regard, the
Committee established his 1995 STPP target award level at 45% of base salary.
The Committee's evaluation of Mr. Abdoo's 1995 performance resulted in an
award under the STPP of $172,000 or 35% of base salary. The award was based
upon WEC's actual performance versus the specific company-wide operational and
financial performance goals cited above in the Annual Incentive Compensation
section.
In determining Mr. Abdoo's 1995 STPP award, the Committee specifically noted
several accomplishments by the CEO during 1995, including (i) WEC's continued
strong financial reputation, noting that earnings per share of WEC common
stock for 1995 were at record levels, (ii) the completion of the merger of
WEC's electric and gas utilities which resulted in significant savings through
the elimination of administrative overheads and other economies, (iii) the
achievement of record earnings related to Wisconsin Natural, (iv) his
leadership with respect to nuclear operations, noting that the exemplary
operational performance of nuclear plant personnel earned a "1" rating from
the Institute of Nuclear Power Operations for the first time in the life of
the plant, (v) his leadership role in maintaining solid relationships with
regulatory agencies, (vi) his strong support of environmental stewardship,
noting that two of WE's environmental projects, involving purchase and
protection of 14,000 acres of threatened rain forest in Belize and replacement
of outdated, heavily-polluting boilers in Decin, Czech Republic with new,
more-efficient equipment, were among only seven projects selected under the U.
S. Initiative on Joint Implementation, a federal multi-agency group working to
promote voluntary and cooperative partnerships leading to the implementation
of projects that reduce, avoid or capture carbon dioxide emissions, (vii) the
continued development of glass aggregate technology by WEC's subsidiary,
Minergy Corp., (viii) his consistent support of equal opportunity, diversity
and cross cultural sensitivity within WEC, and (ix) his leadership of
management and represented employees in guiding them to implement productivity
improvements that will enable WEC to become the low-cost energy provider in
the upper midwest region. Mr. Abdoo's award was principally determined by
achievement of the company-wide goals and was adjusted based on individual
performance. The Committee weighted the performance goals as cited above in
the Annual Incentive Compensation section.
The Committee also approved a bonus of $60,000 for Mr. Abdoo (included in the
"Bonus" column of the Summary Compensation Table) in recognition of his
successful negotiation of the proposed merger of WEC and NSP to form Primergy
Corporation, as well as the CEO's visionary efforts to restructure the
electric utility industry.
With respect to the OSIP, in keeping with the Compensation Committee's
philosophy as stated above, Mr. Abdoo was awarded stock options and related
dividend performance units in 1995 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 longer term goals.
The award of dividend performance units will be paid if total shareholder
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<PAGE> 19
return (appreciation in the value of WEC common stock plus reinvested
dividends) over a four year period ending December 19, 1999 equals or exceeds
the median return earned by the Peer Group, except that there will be no
payout if WEC's total shareholder return is negative over the course of such
period.
The Committee also applied subjective judgment in evaluating the relative
importance of the factors which were the basis for determining each element of
Mr. Abdoo's compensation to precisely determine his salary and awards.
COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION. Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
chief executive officer and the other proxy-named executive officers.
Qualifying performance-based compensation will not be subject to the deduction
limit if certain requirements are met. WEC's executive compensation program,
as presently constructed, is not likely to generate non-deductible
compensation in excess of these limits. The Committee will continue to review
these tax regulations as they apply to WEC's executive compensation program.
It is the Committee's intent to preserve the deductibility of executive
compensation to the extent reasonably practicable and to the extent consistent
with its other compensation objectives.
Respectfully submitted to WEC's stockholders by the Compensation Committee of
the Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
Jon G. Udell
12
<PAGE> 20
EXECUTIVE OFFICERS' COMPENSATION
The table below summarizes certain information concerning compensation awarded
to, earned by or paid to WEC's Chief Executive Officer and each of WEC's other
four most highly compensated executive officers for services in all capacities
to WEC and its subsidiaries for the last three fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
Annual Compensation ------------
-------------------------------- Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
($) ($) ($) (#) (1) ($) (2)
- - ----------------------------------- ---- ------- ------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
RICHARD A. ABDOO
Chairman of the Board, President 1995 496,000 232,000 8,321 38,000 83,858
and Chief Executive Officer 1994 450,000 222,396 0 25,000 15,970
1993 450,000 122,000 0 22,500 15,170
- - ------------------------------------ ---- ------- ------- ------------ ------------ -------------
RICHARD R. GRIGG
Vice President of WEC; President 1995 237,500 63,788 3,084 19,000 42,125
and Chief Operating Officer of 1994 168,333 46,667 0 6,500 11,000
WE and WN 1993 147,833 25,000 0 6,500 8,000
- - ------------------------------------ ---- ------- ------- ------------ ------------ -------------
JERRY G. REMMEL
Vice President, Treasurer and 1995 215,000 60,953 0 0 7,798
Chief Financial Officer 1994 215,000 66,009 0 0 7,481
1993 190,000 41,000 0 0 6,406
- - ------------------------------------ ---- ------- ------- ------------ ------------ -------------
FRANCIS BRZEZINSKI
Vice President of WEC; Vice 1995 225,000 25,515 80,532(3) 7,600 17,051
President-Business Development 1994 212,000 26,037 0 6,500 7,478
of WE 1993 206,167 22,500 0 6,500 7,058
- - ------------------------------------ ---- ------- ------- ------------ ------------ -------------
DAVID K. PORTER
Senior Vice President of WE 1995 190,000 46,170 0 7,600 21,766
Vice President of WN 1994 190,000 58,333 0 3,000 6,695
1993 185,000 20,000 0 6,500 6,242
- - ------------------------------------ ---- ------- ------- ------------ ------------ -------------
</TABLE>
(1) Grants of options were in combination with contingent dividend
awards, as described in the table entitled "Long-Term Incentive Plans--
Awards in Last Fiscal Year". No stock appreciation rights ("SARs") were
awarded during any of the fiscal years indicated.
(2) All Other Compensation for 1995 for Messrs. Abdoo, Grigg, Remmel,
Brzezinski and Porter, respectively, includes: (i) employer matching of
contributions by each named executive into the MESP in the amount of
$4,620 for each named executive officer, (ii) "make whole" payments under
the Executive Deferred Compensation Plan with respect to matching in the
MESP on deferred salary or salary received but not otherwise eligible for
matching in the amounts of $10,260, $2,505, $1,830, $2,130 and $1,080,
respectively, and (iii) the full dollar value of life insurance premiums
in the amounts of $68,978, $35,000, $1,348, $10,301 and $16,066,
respectively (for 1995, in order to provide the same benefit at reduced
cost to the company, a split-dollar life insurance program was
established to replace the previous term life insurance program; Mr.
Remmel continues to participate in the term life program).
(3) Includes $41,893 for club memberships; the balance is for related tax
gross-up payments.
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<PAGE> 21
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
| Grant Date
Individual Grants (1) | Value
--------------------------------------------------|-------------
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base Grant Date
Options/SARs Employees in Price Expiration Present
Name Granted(#) Fiscal Year ($/Sh) Date Value($)(2)
- - ------------------ ------------ ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Richard A. Abdoo 38,000 20.0% 30.188 12/19/05 184,680
Richard R. Grigg 19,000 10.0 30.188 12/19/05 92,340
Jerry G. Remmel 0 N/A N/A N/A N/A
Francis Brzezinski 7,600 4.0% 30.188 12/19/05 36,936
David K. Porter 7,600 4.0% 30.188 12/19/05 36,936
N/A = Not Applicable
</TABLE>
(1) Consists of incentive and non-qualified stock options to purchase
shares of WEC common stock granted pursuant to the OSIP on December 20,
1995. These options were granted with an equal number of contingent
dividend awards (as described in the table entitled "Long-Term Incentive
Plans--Awards in Last Fiscal Year"), have exercise prices equal to the
fair market value of the WEC shares on the date of grant and first become
exercisable on December 20, 1999, at which time they become fully
exercisable. Upon a "change in control" of WEC, as defined in the OSIP,
or upon retirement, permanent total disability or death of the option
holder, these options shall become immediately exercisable. The above
executive officers who were granted stock options and contingent dividend
awards on December 20, 1995 have agreed that the proposed merger with NSP
will not be considered a change in control of WEC as to such grants.
Each of the above executive officers receiving awards under the OSIP has
also waived the applicability of the OSIP's change in control provisions
to the proposed merger with NSP for outstanding options and contingent
dividend awards granted prior to December 20, 1995. 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
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 OSIP, the 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) The Black-Scholes option pricing model was used to determine the
options' grant date present value. The assumptions used in the Black-
Scholes equation are: market price of stock: $30.188; exercise price of
option: $30.188; stock volatility: 0.12; annualized risk-free interest
rate: 7.5%; exercise at the end of 10 year option term; and dividend
yield: 5.02%. WEC's use of this model should not be construed as an
endorsement of its accuracy. Whether the model's assumptions will prove
to be accurate cannot be known at the date of grant. The ultimate value
of the options, if any, will depend upon the future value of the WEC
common stock, which cannot be forecast with reasonable accuracy, and the
optionee's investment decisions.
14
<PAGE> 22
No stock options other than those granted pursuant to the OSIP were
outstanding in the last fiscal year. The earliest date outstanding options
previously granted under the OSIP become exercisable is December 15, 1997.
Consequently, no options were exercisable in 1995. The following table sets
forth the number of options which were not exercisable and the value of such
options based upon the difference between the exercise price and the market
price of the underlying shares as of December 31, 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs Options/SARs
at Fiscal Year-End at Fiscal Year-End
(#) ($)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - ------------------ ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard A. Abdoo 0 85,500 0 185,031
Richard R. Grigg 0 32,000 0 54,206
Jerry G. Remmel N/A N/A N/A N/A
Francis Brzezinski 0 20,600 0 49,224
David K. Porter 0 17,100 0 35,882
N/A = Not Applicable
The following table further describes the long-term incentive awards made
during 1995:
</TABLE>
<TABLE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<CAPTION>
Estimated Future
Payouts Under
Performance Non-Stock
Number of or Other Price-Based Plans
Shares, Units Period Until -------------------
or Other Maturation Target
Name Rights(#)(1) or Payout ($ or #) (2)
- - ------------------ ------------- ------------- -------------------
<S> <C> <C> <C>
Richard A. Abdoo 38,000 12/19/99 $237,310
Richard R. Grigg 19,000 12/19/99 $118,655
Jerry G. Remmel 0 N/A N/A
Francis Brzezinski 7,600 12/19/99 $47,462
David K. Porter 7,600 12/19/99 $47,462
N/A = Not Applicable
(1) Consists of performance units awarded under the OSIP in combination
with stock options (as described in the table entitled "Option/SAR Grants
in Last Fiscal Year" above). These performance units, entirely in the
form of contingent dividends, will be paid if total shareholder return
(appreciation in the value of WEC common stock plus reinvested dividends)
over a four year period ending December 19, 1999 equals or exceeds the
median return earned by the companies included in the Peer Group Index in
the "Performance Graphs" section of this proxy statement, except that
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
15
<PAGE> 23
for the period of December 20, 1995 through December 19, 1999 multiplied
by the number of performance units awarded to such participant. Upon a
"change in control" of WEC, as defined in the OSIP, this benefit shall
immediately vest with all performance goals deemed fully achieved. As
described in footnote 1 to the table entitled "Option/SAR Grants in Last
Fiscal Year", WEC's proposed merger with NSP does not constitute a change
in control under the OSIP with respect to any outstanding contingent
dividends granted to the above executive officers.
(2) Assumes, for purposes of illustration only, 4% per year compound
annual dividend increase based on the current quarterly dividend rate.
SEVERANCE POLICY. Effective on April 28, 1995, the Board adopted a Senior
Executive Severance Policy ("Severance Policy") providing for severance
benefits to certain executive officers and key employees. The Severance
Policy was adopted to encourage such persons, whose expertise has been
important to WEC's success, to remain with WEC during the WEC/NSP merger
transition process. The Severance Policy provides for payment of severance to
participants whose employment is terminated under certain circumstances (e.g.,
terminations by WEC that are other than for cause, disability or retirement,
terminations resulting from certain sales of a business by WEC, and
terminations resulting from reductions in participants' salaries,
responsibilities or benefits) at any time before (i) the second anniversary of
the effective time of the merger with NSP if the transaction is consummated or
(ii) if the transaction is not consummated, April 28, 2000, unless further
extended by the Board.
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 counseling.
RETIREMENT PLANS
During 1995, WE maintained a retirement plan for management employees,
including WEC executive officers. The plan provided retirement income based
on years of credited service and final average compensation for the 36 highest
consecutive months. Retirement benefits were not subject to any deduction for
Social Security or other offset, since they were computed using a step-rate
formula which provided a Social Security integrated benefit based on
percentages of the participant's final average compensation for up to 30 years
of credited service with additional (lower) percentages of compensation in
excess of 30 years, up to a maximum of 10 years. WE amended the retirement
plan, generally effective as of January 1, 1996, to adopt a cash balance
retirement formula, which bases a participant's defined benefit pension on the
value of a hypothetical account balance. A participant's starting account
balance equals the present value of the prior step-rate formula's life annuity
benefit payable at age 65. The account balance is thereafter increased by
annual additions equal to a percentage of pay, interest credits, and a one-
time special transition credit. Those 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.
16
<PAGE> 24
The following table shows the estimated life annuity annual pension benefits
payable upon retirement to persons in various compensation and
years-of-service classifications, during 1995, based on the prior plan formula
before the change to the cash balance approach:
PENSION PLAN TABLE
Years of Service
----------------------------------------------------------
Remuneration 15 20 25 30 35 40
- - ------------ -------- -------- -------- -------- -------- --------
$ 50,000 $ 11,077 $ 14,770 $ 18,462 $ 22,154 $ 24,281 $ 26,408
100,000 24,014 32,018 40,023 48,028 52,592 57,157
150,000 36,952 49,270 61,587 73,904 80,882 87,908
200,000 49,889 66,518 83,148 99,778 109,217 118,657
250,000 62,825 83,767 104,709 125,651 137,528 149,405
300,000 75,764 101,018 126,273 151,528 165,842 180,157
400,000 101,639 135,518 169,398 203,278 222,467 241,657
500,000 127,514 170,018 212,523 255,028 279,092 303,157
600,000 153,389 204,518 255,648 306,778 335,717 364,657
700,000 179,264 239,018 298,773 358,528 392,342 426,157
800,000 205,139 273,518 341,898 410,278 448,967 487,657
900,000 231,014 308,018 385,023 462,028 505,592 549,157
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. Messrs. Abdoo, Grigg, Brzezinski and Porter currently
have 20, 25, 6 and 26 credited years of service, respectively. Mr. Remmel
retired effective March 1, 1996 with 40 years of credited service. The
Supplemental Executive Retirement Plan (described below) provides designated
participants a "make whole" benefit equal to any decrease in pension which may
have resulted when the retirement plans adopted the step-rate formula. Such
"make whole" benefit will be paid as a pension supplement out of the general
corporate assets or the grantor trust described below.
OTHER RETIREMENT BENEFITS. Designated elected officers of WEC and WE
participate in the Supplemental Executive Retirement Plan ("SERP"). The SERP
provides monthly supplemental pension benefits to participants, which will be
paid out of corporate assets or the grantor trust described below as follows:
(a) an amount equal to the difference between the actual pension benefit
payable under the management employee retirement 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, (b) 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, and (c) an
amount for certain participants equal to the difference between the actual
pension benefit payable under the management employee retirement plan and what
such pension benefit would be if calculated under the prior benefit formula in
effect on December 31, 1988. Except for a "change in control" of WEC, as
defined in the SERP, no such payments are made until after the participant's
retirement or death.
17
<PAGE> 25
WEC has entered into an agreement with Mr. Abdoo, who cannot accumulate by
normal retirement age the maximum number of years of credited service under
the management employee retirement plan. According to this 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. Mr.
Abdoo's agreement, the SERP and the Executive Deferred Compensation Plan
provide for a grantor trust to fund such agreement and plans and to 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. The WEC
Amended Non-Qualified Trust has been established and funded for this purpose.
Mr. Abdoo's agreement, the SERP, the Executive Deferred Compensation Plan, the
Directors' Deferred Compensation Plan and the Amended Non-Qualified Trust have
each been amended to provide that WEC's proposed merger with NSP will not
constitute a change in control under such agreement, plans and trust.
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table lists the beneficial ownership of WEC common stock (as
well as the phantom common stock shares) of each director, nominee, named
executive officer and all directors and executive officers as of February 29,
1996. 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 and Wisconsin Electric's MESP.
Number Number
of of
Name Shares(1) Name Shares(1)
-------------------- ------ ------------------------- ------
Richard A. Abdoo 18,636 Geneva B. Johnson 2,569
John F. Ahearne 395 David K. Porter 9,576
John F. Bergstrom 5,098 Jerry G. Remmel 6,917
Francis Brzezinski 2,730 Frederick P. Stratton, Jr. 5,718
Robert A. Cornog 2,473 Jon G. Udell (2) 6,679
Richard R. Grigg, Jr. 3,001
All directors and executive officers as a group (13 persons, including
those listed above).....81,939 (3)
(1) Share units held in the WEC phantom common stock account under
WEC's Directors' Deferred Compensation Plan or Executive Deferred
Compensation Plan are: Mr. Abdoo (3,040), Mr. Bergstrom (2,098),
Mr. Brzezinski (754), Mr. Cornog (183), Mr. Grigg (106), Mrs. Johnson
(287), Mr. Porter (186), and Mr. Stratton (418). Share units are
intended to reflect the performance of WEC common stock and are payable
in cash.
(2) Dr. Udell disclaims beneficial ownership of 2,803 of such shares.
(3) Amount is less than 1% of total WEC common stock outstanding.
18
<PAGE> 26
Each person has sole voting and investment power as to all shares listed for
such person (other than the phantom common stock share units indicated above)
except that the following persons have shared voting and/or investment power
as to the indicated number of shares so listed: Mr. Brzezinski (176), Mr.
Stratton (3,300), Dr. Udell (2,803) and all directors and executive officers
as a group (6,768).
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 proxy
statement. It is not necessarily to be construed as an admission of
beneficial ownership for other purposes.
PERFORMANCE GRAPHS
The charts below show a comparison of the cumulative total return, including
reinvested dividends, over five years and over ten years had $100 been
invested at the close of business on December 31, 1990 and December 31, 1985,
respectively, in each of WEC common stock (WE common stock prior to January 1,
1987 when WEC became the holding company for WE), the Standard & Poor's
("S&P") 500 Index and a Peer Group Index. Peer return is weighted by market
capitalization at the beginning of each period for which a return is
indicated.
Additional, more detailed information about earnings is included in the
Appendix to this proxy statement.
[FIRST PERFORMANCE GRAPH APPEARS HERE]
</TABLE>
<TABLE>
<CAPTION>
FIVE-YEAR CUMULATIVE TOTAL RETURN
Value of Investment at Year-End
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
- - ------------ -------- -------- -------- -------- -------- ---------
<C> <S> <S> <S> <S> <S> <S>
| WEC $100 $131 $139 $152 $151 $191 |
| Peer Group $100 $134 $147 $166 $154 $212 |
| S&P 500 $100 $130 $140 $155 $157 $215 |
- - -------------------------------------------------------------------------
</TABLE>
[SECOND PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
TEN-YEAR CUMULATIVE TOTAL RETURN
Value of Investment at Year-End
12/31/85 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
- - ----------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------- ---------
<C> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S> <S>
| WEC $100 $139 $126 $160 $201 $211 $276 $294 $320 $318 $396 |
| Peer Group $100 $130 $121 $138 $172 $174 $234 $255 $290 $268 $360 |
| S&P 500 $100 $119 $125 $145 $192 $186 $242 $261 $287 $291 $400 |
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 27
The Peer Group companies generally have significant electric utility
operations with comparable revenues, net income, total assets and market
capitalization to WEC. The companies in the Index are: Baltimore Gas &
Electric Company, Boston Edison Company, CINergy Corp., DPL Inc., DQE Inc.,
Florida Progress Corporation, New England Electric System, NIPSCO Industries,
Inc., Northern States Power Company, Pinnacle West Capital Corporation,
Potomac Electric Power Company, Public Service Company of Colorado, San Diego
Gas & Electric Company, SCANA Corporation, TECO Energy, Inc., Union Electric
Company, WPS Resources Corporation and WPL Holdings, Inc. Beginning with year
1994, The Cincinnati Gas & Electric Company was replaced as a member of WEC's
Peer Group Index by CINergy Corp., the company which succeeded it in 1994
through a merger with another corporation which was not part of the Peer Group
Index. WEC is not in the Peer Group Index.
1997 ANNUAL MEETING
PROPOSED WEC/NSP MERGER. Under WEC's merger agreement with NSP, which was
approved by the stockholders of both corporations on September 13, 1995, WEC
will be renamed Primergy Corporation ("Primergy"). The Primergy Board of
Directors at the effective time of the merger will consist of twelve persons,
six of whom shall be designated by WEC and six of whom shall be designated by
NSP. Subject to obtaining all requisite regulatory approvals, the merger is
presently expected to become effective by January 1, 1997. In that event, the
WEC (Primergy) Board would be restructured in accordance with the merger
agreement before the 1997 Annual Meeting of Stockholders of WEC (Primergy).
DIRECTOR CANDIDATES. Stockholders wishing to propose director candidates for
consideration and recommendation by the Nominating Committee for election at
the 1997 Annual Meeting must submit the name(s) and qualifications of any
proposed candidate(s) to WEC's Corporate Secretary not later than September
16, 1996. The Nominating Committee and WEC Board have approved director
candidate selection criteria which are designed to provide the Board with a
diversity of experience to allow it to effectively meet the many challenges
WEC faces in today's changing environment. The Bylaws state that directors
shall be stockholders of WEC.
STOCKHOLDER PROPOSALS. Stockholders wishing to submit written proposals for
inclusion in the proxy statement for the 1997 Annual Meeting must send the
proposals to WEC's Corporate Secretary so as to be received on or before
December 4, 1996.
NOMINATIONS OR PROPOSALS FROM THE FLOOR. Stockholders wishing to propose any
floor nominations for director or floor proposals at the 1997 Annual Meeting
must provide notice thereof and submit certain other documentation as required
by WEC's Bylaws to WEC's Corporate Secretary so as to be received at least 70
days and not more than 100 days prior to April 30, 1997, the scheduled date of
such annual meeting.
The address of the Corporate Secretary is 231 West Michigan Street, P. O. Box
2949, Milwaukee, Wisconsin 53201.
20
<PAGE> 28
AVAILABILITY OF FORM 10-K
A COPY (WITHOUT EXHIBITS) OF WEC'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1995 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS AVAILABLE WITHOUT CHARGE TO ANY STOCKHOLDER OF RECORD OR
BENEFICIAL OWNER OF WEC COMMON STOCK BY WRITING TO THE CORPORATE SECRETARY,
ANN MARIE BRADY, 231 WEST MICHIGAN STREET, P. O. BOX 2949, MILWAUKEE,
WISCONSIN 53201. FOR YOUR CONVENIENCE, THE WEC CONSOLIDATED FINANCIAL
STATEMENTS AND CERTAIN OTHER INFORMATION FOUND IN THE FORM 10-K IS INCLUDED IN
APPENDIX A TO THIS PROXY STATEMENT.
21
<PAGE> 29
Wisconsin Energy Corporation
APPENDIX A
ANNUAL FINANCIAL STATEMENTS
and REVIEW of OPERATIONS
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
- - -----------------------------------------------------------------------------------------------
Year Ended December 31 1995 1994 1993** 1992** 1991**
- - ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 234,034 $ 180,868* $ 190,135 $ 171,239 $ 190,125
Earnings per share of
common stock ($) 2.13 1.67* 1.80 1.66 1.85
Dividends per share
of common stock ($) 1.455 1.396 1.341 1.285 1.223
Operating revenues
Electric $1,437,480 $1,403,562 $1,347,844 $1,298,723 $1,292,809
Gas 318,262 324,349 331,301 283,699 273,803
Steam 14,742 14,281 14,090 13,093 12,986
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,770,484 $1,742,192 $1,693,235 $1,595,515 $1,579,598
========== ========== ========== ========== ==========
Total assets $4,560,735 $4,408,259 $4,270,592 $3,788,955 $3,533,745
Long-term debt and preferred stock-
redemption required $1,367,644 $1,283,686 $1,300,781 $1,289,082 $1,175,417
- - -----------------------------------------------------------------------------------------------
Sales and Customers - Utility
Electric
Megawatt-hours sold 27,283,869 26,911,363 25,685,436 24,747,581 25,016,247
Customers (End of year) 955,616 944,855 932,285 919,466 907,871
Gas
Therms delivered (Thousands) 886,729 811,219 809,348 772,036 767,071
Customers (End of year) 357,030 347,080 336,571 327,247 317,891
Steam
Pounds sold (Millions) 2,532 2,395 2,376 2,284 2,282
Customers (End of year) 473 471 459 472 468
===============================================================================================
<CAPTION>
CONSOLIDATED QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
- - -----------------------------------------------------------------------------------------------
March June
Three Months Ended 1995 1994 1995 1994
- - ------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating revenues $ 471,122 $ 509,681 $ 405,093 $ 400,340
Operating income 84,572 43,436* 72,848 63,854
Net income 62,534 22,822* 51,595 43,430
Earnings per share of common stock ($) 0.57 0.21* 0.47 0.40
- - -----------------------------------------------------------------------------------------------
<CAPTION>
- - -----------------------------------------------------------------------------------------------
September December
Three Months Ended 1995 1994 1995 1994
- - ------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating revenues $ 426,413 $ 400,512 $ 467,856 $ 431,659
Operating income 80,704 71,248 90,897 84,735
Net income 58,436 51,490 61,469 63,126
Earnings per share of common stock ($) 0.53 0.48 0.56 0.58
===============================================================================================
<FN>
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.
* Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax or $.42 per share)
related to WE's Revitalization program.
** Restated to reflect the merger of Wisconsin Southern Gas Company, Inc. ("WSG") into Wisconsin
Natural Gas Company ("WN") effective on January 1, 1994.
A-1
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
Electric Revenues, Kilowatt-Hour Sales and Customer Statistics
Year Ended December 31 1995 1994 1993 1992 1991
- - ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Revenues ($000)
Residential $ 507,416 $ 484,627 $ 472,903 $ 441,240 $ 444,542
Small commercial and industrial 423,039 406,043 386,736 372,213 363,906
Large commercial and industrial 401,794 398,179 380,482 381,083 372,768
Other retail 13,505 13,750 13,975 15,245 15,368
Resale - municipals 55,813 55,508 57,039 62,787 71,382
---------- ---------- ---------- ---------- ----------
Total retail and municipals 1,401,567 1,358,107 1,311,135 1,272,568 1,267,966
Resale - public utilities 24,811 31,295 25,879 18,080 18,476
---------- ---------- ---------- ---------- ----------
Total revenue from sales 1,426,378 1,389,402 1,337,014 1,290,648 1,286,442
Other operating revenue 11,102 14,160 10,830 8,075 6,367
---------- ---------- ---------- ---------- ----------
Total Operating Revenues $1,437,480 $1,403,562 $1,347,844 $1,298,723 $1,292,809
========== ========== ========== ========== ==========
Kilowatt-hour Sales (Millions)
Residential 7,043 6,670 6,551 6,230 6,567
Small commercial and industrial 7,047 6,699 6,358 6,155 6,153
Large commercial and industrial 10,640 10,472 9,771 9,702 9,462
Other retail 182 189 196 217 226
Resale - municipals 1,369 1,415 1,580 1,779 1,935
---------- ---------- ---------- ---------- ----------
Total retail and municipals 26,281 25,445 24,456 24,083 24,343
Resale - public utilities 1,003 1,466 1,229 665 673
---------- ---------- ---------- ---------- ----------
Total Sales 27,284 26,911 25,685 24,748 25,016
========== ========== ========== ========== ==========
Number of Customers - Average
Residential 857,924 846,745 835,685 824,544 814,078
Small commercial and industrial 90,386 88,765 87,351 85,990 84,540
Large commercial and industrial 679 674 675 670 664
Other 1,821 1,811 1,831 1,945 1,980
---------- ---------- ---------- ---------- ----------
Total 950,810 937,995 925,542 913,149 901,262
========== ========== ========== ========== ==========
<CAPTION>
Gas Revenues, Therms Delivered and Customer Statistics
Year Ended December 31 1995 1994 1993** 1992** 1991**
- - ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Revenues ($000)
Residential $ 194,226 $ 200,824 $ 199,509 $ 175,824 $ 170,827
Commercial and Industrial 94,482 102,496 102,425 82,853 77,031
Interruptible and other 12,763 15,338 12,858 9,406 9,959
---------- ---------- ---------- ---------- ----------
Total revenues from sales 301,471 318,658 314,792 268,083 257,817
Other operating revenue 16,791 5,691 16,509 15,616 15,986
---------- ---------- ---------- ---------- ----------
Total Operating Revenues $ 318,262 $ 324,349 $ 331,301 $ 283,699 $ 273,803
========== ========== ========== ========== ==========
Therms Delivered (Thousands)
Residential 345,140 323,913 322,444 309,968 308,980
Commercial and Industrial 207,358 199,206 202,549 183,588 176,707
Interruptible and other 50,646 47,467 34,608 24,710 26,442
---------- ---------- ---------- ---------- ----------
Total Sales 603,144 570,586 559,601 518,266 512,129
Transportation of Customer
Owned Gas 283,585 240,633 249,747 253,770 254,942
---------- ---------- ---------- ---------- ----------
Total Delivered 886,729 811,219 809,348 772,036 767,071
========== ========== ========== ========== ==========
Number of Customers - Average
Residential 321,643 311,288 302,355 293,437 284,728
Commercial and Industrial 29,287 28,506 27,871 27,291 26,536
Interruptible and other 361 340 356 376 404
---------- ---------- ---------- ---------- ----------
Total 351,291 340,134 330,582 321,104 311,668
========== ========== ========== ========== ==========
Degree Days (Milwaukee)
Heating (Normal 7,020) 6,825 6,431 6,775 6,723 6,416
Cooling (Normal 650) 953 877 651 364 1,056
** Restated to reflect the merger of WSG into WN effective on January 1, 1994.
A-2
</TABLE>
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective January 1, 1996, Wisconsin Energy Corporation ("WEC" or the
"Company") merged its natural gas utility subsidiary, Wisconsin Natural Gas
Company ("WN"), into its electric and steam utility subsidiary, Wisconsin
Electric Power Company ("WE"), to form a single combined utility subsidiary.
Where applicable, references to WE include WN prior to the merger. Additional
information concerning the merger may be found below under "RESULTS OF
OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL
STATEMENTS.
As previously reported, WEC has entered into an agreement with Northern States
Power Company, a Minnesota corporation ("NSP"), which provides for a strategic
business combination involving the two companies in a "merger-of-equals"
transaction. The future operations and financial position of the Company will
be significantly affected by the proposed merger. Consummation of the
proposed merger is subject to a number of conditions, including obtaining all
required regulatory approvals. Additional information concerning such
agreement and proposed transaction may be found below under "RESULTS OF
OPERATIONS - Mergers", in MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS - "Dividend Policy of Primergy" and in Note B - "Mergers"
in the NOTES TO FINANCIAL STATEMENTS (including unaudited pro forma financial
information).
RESULTS OF OPERATIONS
Earnings
1995 Compared to 1994: Earnings per share of WEC's common stock in 1995 were
$2.13 compared with $1.67 per share in 1994, an increase of 27.5%. Earnings
during 1994 reflect a nonrecurring charge of approximately $73.9 million ($45
million net of tax, or 42 cents per share) associated with the organizational
restructuring program at WE.
The 1994 nonrecurring charge primarily included the costs of early retirement
and severance packages which were elements of a revitalization program
("Revitalization") designed to better position the Company in a changing
energy marketplace. The Company has recovered the 1994 nonrecurring charge in
avoided labor costs that would have been charged to Other Operations and
Maintenance expense during 1994 and 1995.
Excluding the Revitalization charge, 1995 earnings per share of common stock
were 1.9% greater than 1994 earnings per share of $2.09. The increase in 1995
earnings reflects 1.4% higher electric sales, 9.3% higher gas deliveries and a
3.1% decrease in Other Operation and Maintenance expenses. Electric sales
grew primarily as a result of warmer summer weather during 1995. Gas
deliveries increased due to increased deliveries to Interruptible and
Transportation customers and to colder weather during the fourth quarter of
1995. Additional economic activity in WE's service area also contributed to
the increase in electric sales and gas deliveries. The reduction in Other
Operation and Maintenance expenses primarily reflects payroll-related savings
and efficiencies gained through WE's Revitalization program.
1993 Through 1995: Earnings per share of common stock increased at a compound
annual rate of 8.9% from $1.80 in 1993 to $2.13 in 1995. The increase in
earnings per share primarily resulted from corresponding growth in electric
sales and therm deliveries and a decline in Other Operation and Maintenance
expense.
A-3
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Wisconsin Electric Revitalization
In response to increasing competitive pressures in the markets for electricity
and natural gas, WE implemented Revitalization in 1994 to increase
efficiencies and improve customer service by reengineering and restructuring
the organization. The new structure consolidated many business functions and
simplified work processes. See Note K - "Benefits Other Than Pensions" in the
NOTES TO FINANCIAL STATEMENTS.
Mergers
Wisconsin Natural Gas Company: As part of Revitalization, WEC has merged WN
into WE. The merger, which was effective January 1, 1996, is expected to
improve customer service and reduce operating costs. The accounting treatment
for this merger was similar to that which would result from a pooling of
interests.
Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired
Wisconsin Southern Gas Company, Inc. ("WSG") through a statutory merger of WSG
into WN in which all of WSG's common stock was converted into common stock of
WEC. WSG was a gas utility engaged in the purchase, distribution,
transportation and sale of natural gas primarily in an area of southeastern
Wisconsin which was contiguous to WN's service territory. WSG was merged into
WN using the pooling of interests method of accounting. Accordingly, prior
years' financial and statistical information was restated to include WSG at
historical values.
Northern States Power Company: On April 28, 1995, WEC and NSP entered into an
Agreement and Plan of Merger, which was amended and restated as of
July 26, 1995 ("Merger Agreement"). The Merger Agreement provides for a
strategic business combination involving WEC and NSP in a "merger-of-equals"
transaction ("Transaction"). As a result, WEC will become a registered public
utility holding company under the Public Utility Holding Company Act of 1935,
as amended ("PUHCA"), and will change its name to Primergy Corporation
("Primergy"). Primergy will be the parent company of WE (which will be
renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will
reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC
and NSP. In connection with the Transaction, Northern States Power Company, a
Wisconsin corporation ("NSP-WI"), currently a utility subsidiary of NSP, will
be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into
Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility
assets. The Transaction is intended to be tax free for income tax purposes
and to be accounted for as a pooling of interests.
On September 13, 1995, stockholders of WEC and NSP voted to approve the
Transaction. Under the provisions of the Merger Agreement, each share of WEC
and NSP common stock will become 1.0 and 1.626 shares of Primergy common
stock, respectively, following the proposed Transaction.
As a result of the Transaction, the Company anticipates cost savings of
approximately $2 billion over a ten year period, net of transaction costs and
costs to achieve the savings of approximately $30 million and $122 million,
respectively. WE and NSP have proposed, in their filings with the numerous
state jurisdictions to which they are subject, a reduction of approximately
1.5% in retail electric rates beginning on or about January 1997 (assuming
that the Transaction is then consummated) and a rate freeze through the year
A-4
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Mergers - (cont'd)
2000, subject to certain exceptions regarding matters beyond WE's or NSP's
control. For the same periods and subject to the same types of exceptions, WE
and NSP-WI have proposed a $4.2 million reduction in retail gas rates on an
annualized basis in Wisconsin and Michigan and a rate freeze through the year
2000. Similarly, NSP anticipates proposing in 1996 a 1.25% rate reduction for
retail gas customers in North Dakota and four and two year rate freezes in
North Dakota and Minnesota, respectively, effective following consummation of
the Transaction. Subject to the same types of exceptions noted above, WE and
NSP have agreed to a freeze in their electric wholesale rates for a four year
period subsequent to the Transaction. In December 1995, WEC and NSP entered
into a settlement agreement with certain municipal Wisconsin intervenors that
ended the latters' participation in the FERC and state merger proceedings.
The settlement agreement, which provides for certain rate reductions on power
sales and transmission services, is pending FERC action. The state filings
include a request for deferred accounting treatment and rate recovery of costs
incurred associated with the Transaction. As of December 31, 1995, WEC has
deferred $8.1 million of costs associated with the Transaction as a component
of Deferred Charges and Other Assets-Other.
The Merger Agreement is subject to various conditions including approval by
all applicable regulatory authorities. In July 1995, WEC and NSP filed an
application and supporting testimony with the FERC seeking approval of the
Merger Agreement. In August 1995, WEC and NSP made similar filings with
regulatory agencies in the states where WEC and NSP provide utility services
and in which such filings are required. Applications for license amendments
and approvals relating to the Merger Agreement were filed with the Nuclear
Regulatory Commission ("NRC") in the fall of 1995. The FERC has put the
merger application on an accelerated schedule, ordering the administrative law
judge's initial decision by August 30, 1996 and briefs on exception by
September 30, 1996. In March 1996, the Public Service Commission of Wisconsin
("PSCW") requested that the FERC broaden the scope of the merger application
hearing to evaluate whether the proposed Transaction will impair effective
state oversight of retail rates. The matter is pending. Not all of the
regulatory agencies have established a timetable for their decision.
During 1995, WEC and NSP received a ruling from the Internal Revenue Service
indicating that the proposed successive merger transactions defined in the
Merger Agreement would not prevent the treatment of the Transaction as a tax-
free reorganization under applicable tax law if each transaction independently
so qualified. In 1996, WEC and NSP will file an application with the
Securities and Exchange Commission ("SEC") for authority to form Primergy
under the requirements of PUHCA as well as required notifications with the
Federal Trade Commission and the Department of Justice under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended. Subject to obtaining
all requisite approvals, WEC and NSP anticipate completing the Transaction by
January 1, 1997.
The SEC may require, as a condition to its approval of the Transaction, that
WEC and NSP divest their gas utility properties and possibly certain non-
utility ventures within a reasonable time after the Transaction is
consummated. In a few cases, the SEC has allowed the retention of such
properties or deferred the question of divestiture for a substantial period of
A-5
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Mergers - (cont'd)
time. In those cases in which divestiture has taken place, the SEC has
usually allowed enough time to complete the divestiture so as to allow the
applicant to avoid a "fire sale" of the divested assets. WEC and NSP believe
strong policy reasons and prior SEC decisions exist which support their
retaining their existing gas utility properties and non-utility ventures, or,
alternatively, which support deferring the question of divestiture for a
substantial period of time; accordingly, WEC and NSP will request in their
merger application with the SEC that WEC and NSP be allowed to retain, or, in
the alternative, that the question of divestiture be deferred with respect to,
WEC's and NSP's existing gas utility properties and non-utility ventures.
Regulatory authorities may also require the restructuring of transmission
system operations or administration. WEC and NSP currently cannot determine
if such restructuring will be required. In addition, Wisconsin State law
limits the total assets of non-utility affiliates of Primergy, which could
affect the amount of non-regulated operations.
Electric Revenues, Gross Margins and Sales
1995 Compared to 1994: Despite an annualized $16 million or 1.3% Wisconsin
retail electric fuel adjustment rate decrease that became effective on
August 4, 1994, total Electric Operating Revenues increased by 2.4% from
$1,404 million in 1994 to $1,437 million in 1995 due to increased 1995
electric sales. The gross margin on Electric Operating Revenues (Electric
Operating Revenues less Fuel and Purchased Power expenses) increased by 1.6%
from $1,075 million in 1994 to $1,092 million in 1995. The gross margin grew
because the increased electric sales were primarily to Residential and Small
Commercial/Industrial customers who contribute higher margins to earnings than
other customer classes.
==============================================================================
Electric Gross Margin ($000) 1995 1994 % Change
- - ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,437,480 $1,403,562 2.4
Fuel & Purchased Power 345,387 328,485 5.1
---------- ----------
Gross Margin $1,092,093 $1,075,077 1.6
==============================================================================
Total electric sales, detailed below by customer class, increased by 1.4% to
approximately 27,284,000 megawatt-hours in 1995 compared to 26,911,000
megawatt-hours in 1994. Electric sales were positively impacted by
substantially warmer summer weather conditions during 1995, resulting in
increased use of electricity for air conditioning and other cooling purposes.
As measured by cooling degree days, the 1995 cooling season (June through
August) was 27.7% warmer than the same period in 1994. During the summer of
1995, WE experienced eight days of electric peak demands greater than the
previous record which had been set in June 1994. The increase in electric
sales also reflects colder winter weather during the fourth quarter of 1995
and a moderate increase in economic activity in WE's service area.
A-6
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Electric Revenues, Gross Margins and Sales - (cont'd)
==============================================================================
Electric Sales (Megawatt-hours) 1995 1994 % Change
- - ------------------------------- ---------- ---------- --------
Residential 7,042,691 6,670,081 5.6
Small Commercial/Industrial 7,047,277 6,699,073 5.2
Large Commercial/Industrial 10,639,782 10,471,869 1.6
Other 1,550,937 1,603,741 (3.3)
---------- ----------
Total Retail and Municipal 26,280,687 25,444,764 3.3
Resale-Utilities 1,003,182 1,466,599 (31.6)
---------- ----------
Total Sales 27,283,869 26,911,363 1.4
==============================================================================
The warmer 1995 summer weather increased sales primarily to Residential and
Small Commercial/Industrial customers. These customers are more sensitive to
weather variations than other customer classes. The average number of
customers in the Residential and Small Commercial/Industrial customer classes
grew by 1.3% and 1.8% or from 846,745 and 88,765, respectively, in 1994 to
857,924 and 90,386 in 1995.
Electric energy sales to the Empire and Tilden iron ore mines, WE's two
largest customers, decreased by 0.5% to 2,296,000 megawatt-hours in 1995
compared to 2,308,000 megawatt-hours in 1994. Excluding the mines, sales to
Large Commercial/Industrial customers increased 2.2%.
The 3.3% reduction in 1995 sales to the Other customer class is largely the
result of reductions in sales to WPPI, WE's largest municipal power agency
customer. WPPI has been reducing its purchases from WE subsequent to
acquiring generating capacity in 1990, 1993 and 1996. Since that time, WPPI
has expanded the use of its existing generating facilities and has installed
additional capacity, further reducing its reliance on energy purchases from
WE. These sales reductions did not have a significant effect on earnings.
The market for electric wholesale customers (included in the Other customer
class) is increasingly competitive. WE is in the process of renegotiating or
has renegotiated long-term power sales contracts with most of its municipal
wholesale customers. While WE anticipates retaining most of these customers
over the long-term, WE expects that municipal wholesale revenues will begin to
decline starting in 1996 as a result of lower margins included in the
renegotiated contracts. WE is actively seeking to obtain new municipal
wholesale customers to increase sales in this customer class.
Resale of energy to other utilities declined 31.6% in 1995. This decline can
in part be attributed to unplanned or longer than expected outages at two of
WE's least cost generating facilities during 1995 and to increased retail
customer load as a result of the warmer summer weather, both of which reduced
the opportunity to sell electric energy to other utilities. Additionally,
Upper Peninsula Power Company has permanently reduced the amount of energy
that it is purchasing from WE for resale. These sales reductions did not have
a significant effect on earnings.
1993 Through 1995: Total Electric Operating Revenues increased at a compound
annual growth rate of 3.3% or from approximately $1,348 million in 1993 to
A-7
<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Electric Revenues, Gross Margins and Sales - (cont'd)
$1,437 million in 1995 due to increased electric sales. Total electric sales
grew from 25,685,000 megawatt-hours in 1993 to 27,284,000 megawatt-hours in
1995, a compound annual increase of 3.1%. These increases reflect, among
other things, more favorable weather conditions in 1995 and a moderate
increase in economic activity in WE's service area. The gross margin on
Electric Operating Revenues increased at a compound annual rate of 3.0% from
approximately $1,030 million in 1993 to $1,092 million in 1995. This was due
to increased electric sales to Residential and Small Commercial/Industrial
customers who contribute higher margins to earnings than other customer
classes.
From 1993 through 1995, sales to Residential and Small Commercial/Industrial
customers increased at compound annual rates of 3.7% and 5.3% or from
6,551,000 and 6,358,000 megawatt-hours, respectively, in 1993 to 7,043,000 and
7,047,000 megawatt-hours in 1995. This increase was due primarily to warm
summer weather in 1994 and 1995. The average number of Residential and Small
Commercial/Industrial customers has increased at compound annual rates of 1.3%
and 1.7%, respectively, during this period.
Large Commercial/Industrial sales increased from 9,771,000 megawatt-hours in
1993 to 10,640,000 megawatt-hours in 1995, a compound annual increase of 4.3%
attributable in part to a five-week long mine strike during the third quarter
of 1993 which reduced 1993 sales. WE's contracts with the mines require the
payment of a demand charge regardless of power usage which partially offset
the impact on 1993 revenues of lost sales. Sales to the mines represented
8.4%, 8.6% and 7.8% of total electric sales during 1995, 1994 and 1993,
respectively.
For the three year period ending with 1995, sales to the Other customer class
declined from 1,776,000 megawatt-hours in 1993 to 1,551,000 megawatt-hours in
1995, a compound annual decrease of 6.6% resulting from the decreased sales to
WPPI noted above. Sales for Resale to other utilities declined from 1,229,000
megawatt-hours in 1993 to 1,003,000 megawatt-hours in 1995, a compound annual
decrease of 9.7% resulting from the decreased opportunity sales and the
reduction in purchases by Upper Peninsula Power Company described above.
In addition to the results of higher total electric sales, the compound annual
increase in Electric Operating Revenues since 1993 includes the impacts of
rate changes which were effective during 1993 and 1994 as shown below in
"Rates and Regulatory Matters."
Gas Revenues, Gross Margins and Sales
1995 Compared to 1994: Despite an increase in 1995 total gas deliveries,
total Gas Operating Revenues decreased by 1.9% or from $324 million in 1994 to
$318 million in 1995 as a result of a reduction in the cost of gas which is
recovered through the purchased gas adjustment clause. The gross margin on
Gas Operating Revenues (Gas Operating Revenues less Cost of Gas Sold)
increased by 3.7% or from $125 million in 1994 to $129 million in 1995. The
gross margin grew because of increased therm sales to Residential and
Commercial customers who contribute higher margins to earnings than other
customer classes.
A-8
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Gas Revenues, Gross Margins and Sales - (cont'd)
==============================================================================
Gas Gross Margin ($000) 1995 1994 % Change
- - ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 318,262 $ 324,349 (1.9)
Cost of Gas Sold 188,764 199,511 (5.4)
---------- ----------
Gross Margin $ 129,498 $ 124,838 3.7
==============================================================================
Total natural gas therms delivered, detailed below by customer class,
increased by 9.3% or from 811,219 thousand therms in 1994 to 886,729 thousand
therms in 1995, due in part to the effects of weather. Colder weather during
the fourth quarter of 1995 contributed to net increased deliveries for the
year. As measured by heating degree days, the fourth quarter was 43.1% colder
than the same period in 1994. The increase in therms delivered also reflects
the warmer summer weather conditions noted above, which increased therm
deliveries to electric peak generating stations described below, and a
moderate increase in economic activity in WE's service area.
==============================================================================
Therms Delivered - Thousands 1995 1994 % Change
- - ---------------------------- ---------- ---------- --------
Residential 345,140 323,913 6.6
Commercial/Industrial 207,358 199,206 4.1
Interruptible 50,646 47,467 6.7
---------- ----------
Total Sales 603,144 570,586 5.7
Transported Customer Owned Gas 283,585 240,633 17.8
---------- ----------
Total Gas Delivered 886,729 811,219 9.3
==============================================================================
The colder fourth quarter of 1995 weather increased sales to Residential and
Commercial customers. These customers are more sensitive to weather
variations as a result of heating requirements than other customer classes.
The average number of Residential and Commercial/Industrial customers
increased by 3.3% and 2.7% or from 311,288 and 28,506, respectively, in 1994
to 321,643 and 29,287 in 1995.
During 1995, therm deliveries to Interruptible and Transportation customers
increased by 6.7% and 17.8%, respectively. WE attributes these increases in
part to increased electric generation peaking requirements of its Concord
("Concord") and Paris ("Paris") Generating Stations, especially given the
warmer weather during the summer of 1995. All of the gas fired generating
units at Concord and Paris were in operation by the end of the second quarter
of 1995 while only the generating units at Concord were in operation by the
end of the second quarter of 1994. Deliveries to the Concord and Paris
peaking power plants are at rates approved by the PSCW.
WE transports gas for customers who purchase gas directly from other
suppliers. Rates charged for transportation services are designed to recover
the same margin as natural gas sold directly by WE.
A-9
<PAGE> 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Gas Revenues, Gross Margins and Sales - (cont'd)
WE arranges for its own gas supply under contracts with terms of various
lengths. Changes in the cost of natural gas purchased at market prices are
passed through to customers via WE's purchased gas adjustment clause.
1993 Through 1995: While total Gas Operating Revenues decreased at a compound
annual rate of 2.0% or from $331 million in 1993 to $318 million in 1995, the
gross margin on Gas Operating Revenues increased at a compound annual rate of
5.1% or from $117 million in 1993 to $129 million in 1995. Total therms
delivered increased from 809,348 thousand therms in 1993 to 886,729 thousand
therms in 1995, or at a compound annual rate of 4.7%. Despite an annualized
$9 million or 3.3% rate increase that became effective September 2, 1993 and
the increased therm deliveries, Gas Operating Revenues declined due to a
reduction in the cost of gas which is passed through to customers via the
purchased gas adjustment clause. Gross margin grew as a result of increased
therm sales to Residential and Commercial customers who contribute higher
margins to earnings than other customer classes. Total therm deliveries
increased in part due to favorable weather conditions and moderate economic
growth in WE's service territory from 1993 through 1995.
From 1993 through 1995, therm sales to Residential and Commercial/Industrial
customers increased at compound annual rates of 3.5% and 1.2% or from 322,444
thousand and 202,549 thousand therms, respectively, in 1993 to 345,140
thousand and 207,358 thousand therms in 1995. The average number of
Residential and Commercial/Industrial customers increased at compound annual
rates of 3.1% and 2.5%, respectively, during this period. Therm deliveries to
Interruptible and to Transportation customers increased at compound annual
rates of 21.0% and 6.6% or from 34,608 thousand and 249,747 thousand therms,
respectively, in 1993 to 50,646 thousand and 283,585 thousand therms in 1995.
These gas deliveries increased in part due to the increased electric
generation peaking requirements of Paris and Concord noted above. Therms of
Transported Customer Owned Gas accounted for 32.0%, 29.7% and 30.9% of WE's
total therms delivered during 1995, 1994 and 1993, respectively.
Operating Expenses
1995 Compared to 1994: Excluding Depreciation expense, total operating income
taxes and the nonrecurring 1994 Revitalization charge, total Operating
Expenses decreased 0.9% in 1995, reflecting a reduction of approximately $16
million or 3.1% in Other Operation and Maintenance expenses attributable to
payroll-related savings and efficiencies gained through WE's Revitalization
program. Such reductions were partially offset by higher costs related to
increased generation, the availability of Paris and unscheduled or longer than
expected outages at two of WE's most efficient power plants.
Fuel expense increased by approximately $18 million or 6.2% while Purchased
Power expense declined approximately $1 million or 1.9% in 1995. Fuel expense
rose as a result of higher electric sales. Purchased Power expense fell as a
result of decreased marginal generating costs at three of WE's fossil plants
and the newly installed peaking capacity at Paris. Lower generating costs at
the fossil plants were due to decreased per unit fuel costs and the benefits
of Revitalization, allowing WE to substitute generation for power purchases.
The addition of Paris in 1995 allowed WE to eliminate firm power purchase
contracts that contained fixed demand charges. The unscheduled or
A-10
<PAGE> 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Operating Expenses - (cont'd)
longer than expected outages in 1995 noted above, however, offset most of the
decrease in Purchased Power expense as WE purchased nonfirm replacement energy
on the spot market.
Despite the increase in therm deliveries during 1995 noted above, Cost of Gas
Sold decreased by approximately $11 million or 5.4% in 1995 as a result of a
decrease in the average cost per therm sold.
From 1994 to 1995, total operating income taxes increased $41 million or 41.4%
due to lower taxable income in 1994 caused by the nonrecurring Revitalization
charge. Deferred Income Taxes - Net increased $22 million or 88.7% primarily
due to tax matters related to the timing of payments made in connection with
WE's Revitalization program.
1993 Through 1995: Since 1993, total Operating Expenses excluding
Depreciation expense, total operating income taxes and the nonrecurring 1994
Revitalization charge have decreased at a compound annual rate of 2.1% or from
$1,088 million in 1993 to $1,042 million in 1995. Other Operation and
Maintenance expenses decreased from $555 million in 1993 to approximately $508
million in 1995, a compound annual decrease of 4.4% largely due to the
Revitalization related work force reductions and efficiency gains referred to
above as well as to lower expenditures made in connection with power plant
renovation work as certain major maintenance programs were completed in 1994.
These decreases have been partially offset by expenses associated with the
implementation of Revitalization and increases in conservation-related
expenses associated with improving the efficiency of customers' energy usage.
Fuel expense increased at a compound annual rate of 7.4% or from $263 million
in 1993 to approximately $304 million in 1995, primarily due to increased
electric sales. Purchased Power expense decreased at a compound annual rate
of 12.7% or from $55 million in 1993 to approximately $42 million in 1995 due
to the decreased marginal generating costs at three of WE's fossil plants
noted above and to additional peak generating capacity placed in service at
Concord and Paris in 1994 and 1995, respectively. A 6.1% compound annual
decrease in the Cost of Gas Sold from $214 million in 1993 to approximately
$189 million in 1995 is attributable to a decrease in the average cost per
therm sold. Depreciation expense has increased at a compound annual rate of
4.9% from $167 million in 1993 to $184 million in 1995 as a result of higher
depreciable plant balances. During this period, total operating income taxes
and Deferred Income Taxes-Net have been affected by tax matters related to
Revitalization as noted above and by a prior period reclassification between
current and deferred income taxes.
Other Items
Other Interest Charges increased by $5 million between 1995 and 1994 and by $5
million between 1994 and 1993, reflecting increased average short-term debt
balances, primarily at WE.
New Pronouncements: In 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets ("FAS 121") and Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"). FAS 121 requires that long-lived assets be reviewed
A-11
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Other Items - (cont'd)
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. FAS 123 establishes
reporting standards and an optional accounting method for stock-based employee
compensation plans. The Company will adopt both standards prospectively in
1996. It is anticipated that adoption will not have a material effect on the
Company's net income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed
Statement of Financial Accounting Standards ("FAS"), Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets. The proposed
FAS, if issued, would require WE 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. The
capitalized costs would be depreciated to expense over the useful life of the
asset. The proposed statement would become effective in 1997. This proposed
FAS would apply to decommissioning costs for Point Beach Nuclear Plant ("Point
Beach") and would result in WE recording a decommissioning liability and
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 on 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.
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.
Electric Sales and Gas Deliveries Outlook
Assuming moderate growth in the economy of its service territory and normal
weather, WE presently anticipates total electric kilowatt-hour sales to grow
at a compound annual rate of approximately 1.1% over the five-year period
ending December 31, 2000. WE forecasts total therm deliveries of natural gas
to grow at a compound annual rate of approximately 2.1% over the same five-
year period. These forecasts are subject to a number of variables, including
among others the economy, weather and the restructuring of the electric and
gas utility industries, which may affect the actual growth in sales. These
estimates do not reflect the operations of NSP, which will become a part of
Primergy after consummation of the Transaction. See "RESULTS OF OPERATIONS -
Mergers" above.
Rates and Regulatory Matters
The table below summarizes the projected annual revenue impact of recent rate
changes authorized by regulatory commissions for the electric, natural gas and
steam utilities of the Company based on the sales projections utilized by
those commissions in setting rates. The PSCW regulates Wisconsin retail
electric, steam and natural gas rates, while the FERC regulates wholesale
power and electric transmission and gas transportation service rates. The
Michigan Public Service Commission ("MPSC") regulates retail electric rates in
Michigan. The PSCW has discontinued the practice of conducting annual rate
A-12
<PAGE> 42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Rates and Regulatory Matters - (cont'd)
case proceedings, replacing it with a new schedule which calls for future rate
cases to be conducted once every two years.
In support of its goal to become the lowest-cost energy provider in the region
and in light of the operating cost reductions expected from the reengineering
process discussed above, WE did not seek an increase in rates for 1994 or
1995.
==============================================================================
Revenue Percent
Increase Change in Effective
Service (Decrease) Rates Date
- - ------------------------- ------------ --------- ---------
(Thousands)
Retail electric, WI $ (33,383) (2.8) 01/01/96
Retail electric, MI (1,128) (3.3) 01/01/96
Retail gas (8,298) (2.6) 01/01/96
Steam heating (790) (5.1) 01/01/96
Fuel electric, WI (16,179)* (1.3) 08/04/94
Fuel electric, WI (8,596)** (0.9) 11/05/93
Retail gas 9,172 3.3 09/02/93
Retail electric, MI 1,366 4.3 07/09/93
Wholesale electric 6,000 10.6 06/09/93
Retail electric, WI 26,655 2.3 02/17/93
Steam heating 505 3.5 02/17/93
==============================================================================
* The 8/4/94 fuel credit was eliminated 1/1/96 by PSCW Order.
** The 11/5/93 fuel credit was eliminated 1/1/94 by PSCW Order.
Under the Wisconsin retail electric fuel cost adjustment procedure, 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 that range. WE believes that it has the ability
to maintain low fuel costs through efficient management of its power supply
system and fuel procurement practices. Therefore, WE has proposed the
elimination of the retail electric fuel cost adjustment procedure in its 1997
Test Year filing with the PSCW. On December 15, 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. 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.
1996 Test Year: In a letter order dated September 11, 1995, the PSCW directed
WE to implement rate decreases for Wisconsin retail electric, gas and steam
customers of $33.383 million or 2.75%, $8.298 million or 2.6% and $0.790
million or 5.1%, respectively, on an annualized basis effective January 1,
1996. The decrease is based on a regulatory return on common equity of 11.3%,
down from 12.3% authorized since 1993. Also effective January 1, 1996, the
MPSC authorized WE to implement a rate decrease for Michigan non-mine retail
electric customers of $1.128 million or 3.3% on an annualized basis.
A-13
<PAGE> 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Rates and Regulatory Matters - (cont'd)
1997 Test Year: On January 16, 1996, WE filed specific financial data with
the PSCW related to the 1997 test year showing an $82.2 million revenue
deficiency for its utility operations. The dollar impacts and percentage
increases requested for Wisconsin retail electric, gas and steam customers are
$77.0 million or 6.2%, $4.3 million or 1.4% and $0.9 million or 6.4%,
respectively, on an annualized basis. On March 15, 1996, WE filed testimony
and exhibits with the PSCW related to the 1997 test year. The PSCW had
determined that it required a special full review of WE's rates for the 1997
test year in connection with consideration of the application for approval of
the proposed merger of WEC and NSP.
Neither the 1996 nor 1997 Test Year changes reflect the proposed retail
electric and gas rate reductions and freezes nor the wholesale rate reductions
and freezes related to the proposed merger with NSP. See "RESULTS OF
OPERATIONS - Mergers" above for a separate discussion of rate actions related
to the proposed Transaction.
PSCW Electric Utility Industry Investigation: The PSCW has conducted an
investigation into the electric utility industry in Wisconsin, particularly
its institutional structure and regulatory regime, in order to evaluate what
changes would be beneficial for Wisconsin. The PSCW stated that this
investigation may result in profound and fundamental changes to the nature and
regulation of the electric utility industry in Wisconsin. In January 1995,
the PSCW established an advisory committee, including WE, to examine all
aspects of the electric utility industry and to suggest which functions should
be performed in a competitive market. The PSCW decided on December 12, 1995
the general direction of utility regulation in Wisconsin. This proposed
restructuring of the industry would permit all consumers to choose their
electricity provider by the year 2001 and it would establish a competitive
generation business. The transmission and distribution functions would remain
regulated. In a February 22, 1996 Report to the Wisconsin Legislature, the
PSCW identified a 32 step workplan that it would follow for Electric Utility
Restructuring in Wisconsin. In the plan, the PSCW indicated that during 1996
it will begin activities on 12 of these steps, some of which would seek
changes in applicable administrative rules under its jurisdiction, including
affiliated interest standards and quality of service standards. The PSCW
expects to present an electric utility restructuring proposal to the Wisconsin
State Legislature in 1997. In its February 22, 1996 report, the PSCW stated
that the implementation timetable for its plan is subject to change depending
on the pace of resolution of the specific restructuring steps and on external
events.
PSCW Natural Gas Utility Industry Investigation: The PSCW also continued a
generic investigation of the natural gas industry in Wisconsin and addressed
the extent to which traditional regulation should be replaced with a different
approach. In conjunction with this generic investigation, the PSCW staff is
reviewing the use of the current purchased gas adjustment ("PGA") mechanism
which is designed to pass on to gas customers increases or decreases in the
cost of natural gas purchased for resale. A separate docket has been
established to review the PGA. WE is participating in these PSCW
investigations.
In June 1995, WE filed with the PSCW a proposal to replace the current PGA
mechanism with a new market-based pricing mechanism. The proposed gas pricing
A-14
<PAGE> 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Rates and Regulatory Matters - (cont'd)
mechanism would link gas commodity prices to market indices and incorporate
all other gas supply costs such as transportation and storage, under a price
cap. The price cap would be designed to provide balanced financial incentives
and risks for WE based upon performance standards, while ensuring a reliable
gas supply for consumers. In July 1995, the PSCW decided to analyze and
review this proposal as part of the generic docket established to review the
PGA. The matter is pending.
FERC Open Access Transmission NOPR: In March 1995, the FERC issued a Notice
of Proposed Rulemaking ("NOPR") on Open Access Non-Discriminatory Transmission
Services by Public Utilities. The NOPR's goal is to create a more competitive
wholesale electric power market. In the proposed rulemaking, FERC would
require all electric utilities that own or control transmission facilities to
file non-discriminatory open access transmission tariffs available to
wholesale sellers and buyers of electric energy, to take service under the
tariffs for their own wholesale sales and purchases of electric energy and to
provide utilities the opportunity to recover legitimate and verifiable
stranded costs on the federal and state levels. WE advocates open access to
transmission facilities as a necessary step in the competitive restructuring
of the electric utility industry and does not believe that the issuance of a
final rule by FERC will have a negative material impact on the Company's
financial position or results of operations. WE expects FERC to finalize and
issue its open access transmission rules in the second quarter of 1996.
Regulatory Accounting: WEC's principal subsidiary, WE, operates 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. At this time, WEC is unable to predict whether any adjustments to
regulatory assets and liabilities will occur in the future. See Note A -
"Summary of Significant Accounting Policies" in the NOTES TO FINANCIAL
STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Investing Activities
WEC invested $1.111 billion in its businesses during the three years ended
December 31, 1995. The investments made during this three-year period include
construction expenditures for new or improved facilities totaling $932
million, purchases of nuclear fuel of $70 million, net capitalized
conservation expenditures of $54 million and payments to an external trust for
the eventual decommissioning of WE's Point Beach Nuclear Plant totaling $32
million.
A-15
<PAGE> 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Investing Activities - (cont'd)
Paris Generating Station: During 1995, WE placed in service four units, or
approximately 300 megawatts of capacity, at its Paris Generating Station.
This natural gas-fired combustion turbine facility, located near Union Grove,
Wisconsin, is designed to meet peak demand requirements. Capital expenditures
of $10 million, $54 million and $28 million were made during 1995, 1994 and
1993, respectively, for construction of this facility. The capital costs of
the Paris facility will total approximately $105 million.
Concord Generating Station: During 1994, WE placed in service the last two
units, or approximately 150 megawatts of capacity, at its Concord Generating
Station. This four unit 300 megawatt natural gas-fired combustion turbine
facility, located near Watertown, Wisconsin, is designed to meet peak demand
requirements. The first two units were completed in 1993. Capital
expenditures of $3 million, $6 million and $35 million were made during 1995,
1994 and 1993, respectively, for construction of this facility. The capital
costs of the Concord facility will total approximately $107 million.
Port Washington Power Plant Renovation: Additionally during 1994, WE
completed the $107 million renovation project at its Port Washington Power
Plant. The renovation work, which began in September 1991, included the
installation of additional emission control equipment. Expenditures totaling
$12 million and $36 million were made during 1994 and 1993, respectively.
Cash Provided by Operating and Financing Activities
During the three years ended December 31, 1995, cash provided by operating
activities totaled $1.248 billion. During this period, internal sources of
funds, after the payment of dividends, provided approximately 72% of the
Company's capital requirements.
Financing activities during the three-year period ended December 31, 1995
included the issuance of $646 million of long-term debt, principally to
refinance higher coupon debt, the addition of $164 million of common equity
from the issuance of new shares through the Company's stock plans and the
purchase or redemption of $71 million of preferred stock. No preferred stock
was issued during this period. Additionally, during the three-year period
ended December 31, 1995, the Company retired a total of $503 million of long-
term debt and increased short-term debt by $35 million. Dividends on the
Company's common stock were $160 million, $151 million, and $141 million,
during 1995, 1994 and 1993, respectively.
In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8%
Debentures due 2095. Proceeds of the issue were added to WE's general funds
and were applied to the repayment of short-term borrowings.
In August 1995, WE called for optional redemption $98.35 million aggregate
principal amount of fixed rate tax exempt bonds issued by three political
jurisdictions on WE's behalf that were secured by issues of WE's First
Mortgage Bonds with terms corresponding to the tax exempt bonds called for
redemption. During September and October 1995, the three political
jurisdictions issued $98.35 million aggregate principal amount of new tax
exempt bonds on behalf of WE, collateralized by unsecured variable rate
promissory notes issued by WE, maturing between March 1, 2006 and
A-16
<PAGE> 46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Cash Provided by Operating and Financing Activities - (cont'd)
September 1, 2030, with terms corresponding to the respective issues of the
refunding tax exempt bonds. The proceeds were used to finance the optional
redemptions. The WE First Mortgage Bonds, which collateralized the redeemed
tax exempt bonds, have been canceled.
During 1993, WE issued five new series of First Mortgage Bonds aggregating
$350 million in principal amount, the proceeds of which were used to redeem
$284.3 million principal amount of four outstanding series of First Mortgage
Bonds and 626,500 shares of WE's 6.75% Series Preferred Stock. These
refunding transactions are expected to result in significant savings over the
lives of the new debt issues. Depending on market conditions and other
factors, additional debt refundings may occur.
The Merger Agreement, entered into by WEC and NSP, provides for restrictions
on certain transactions by both the Company and NSP, including the issuance of
debt and equity securities. While WEC does not currently plan to enter into
transactions that would not comply with these restrictions, circumstances may
arise to make such transactions necessary. Under such circumstances, NSP
would need to agree to consent to any such change in the Merger Agreement.
See Note A - "Summary of Significant Accounting Policies" in the NOTES TO
FINANCIAL STATEMENTS for a discussion of various limitations on the ability of
the Company's utility subsidiary to transfer funds to WEC.
Capital Structure
The Company's capitalization at December 31 was as follows:
==============================================================================
1995 1994
------ ------
Common Equity 53.8% 52.2%
Preferred Stock 0.9 0.9
Long-Term Debt
(including current maturities) 40.8 39.4
Short-Term Debt 4.5 7.5
------ ------
100.0% 100.0%
==============================================================================
Compared to the utility industry in general, the Company has maintained a
relatively high ratio of common equity to total capitalization and low debt
and preferred stock ratios. This conservative capital structure, along with
strong bond ratings and internal cash generation has provided, and should
continue to provide, the Company with access to the capital markets when
necessary to finance the anticipated growth in the Company's utility business.
WE currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P"), Duff & Phelps Inc. and Fitch Investors Service Inc.
("Fitch") and Aa2 by Moody's Investors Service ("Moody's").
Following announcement of the Transaction, on May 1, 1995 S&P reported that it
was placing on CreditWatch with negative implications its AA+ senior secured
debt and AA+ preferred stock ratings of WE and its AA senior unsecured debt
rating of Wisconsin Michigan Investment Corporation, a non-utility subsidiary
A-17
<PAGE> 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Capital Structure - (cont'd)
of WEC. S&P stated that if the Transaction is completed, the likely credit
rating for the senior secured debt of WE is expected to be AA or AA-. As part
of its rating process, S&P intends to review the financial and operating plans
of the merged utilities. Also on May 1, 1995, citing WE's continued operation
as a separate utility subsidiary after the Transaction, its strength within
its rating category and its strong capital structure, Moody's confirmed its
Aa2 first mortgage bond rating of WE. On December 5, 1995, Fitch changed WE's
credit trend from "stable" to "declining" based upon its analysis of cash flow
trends versus its standards for an AA+ rating.
At year-end 1995, WEC had $157 million of unused lines of bank credit and $24
million of cash and cash equivalents.
Capital Requirements 1996-2000
The estimated capital requirements for the Company's utility subsidiary for
the years 1996-2000 are outlined in the table below. Compared to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, the
table below no longer reflects conservation expenditures. Effective
January 1, 1995, WE began expensing conservation expenditures currently.
Through 1995, capitalized conservation investments were amortized to Operating
Expense over a ten-year amortization period. Effective
January 1, 1996, WE began amortizing the remaining capitalized conservation
investment to operating expense over a five-year amortization period.
The capital requirements table below does not reflect the impact of the
proposed Transaction with NSP. See "RESULTS OF OPERATIONS - Mergers" above.
==============================================================================
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Millions of Dollars)
Construction $228 $189 $181 $183 $215
Bond Maturities and
Refinancings 30 166 61 93 2
Changes in Fuel
Inventories 3 13 4 (5) 11
Decommissioning Trust
Payments 31 33 35 38 40
---- ---- ---- ---- ----
Total $292 $401 $281 $309 $268
==============================================================================
LS Power Generation Facility: In 1993, a competitive bidding process
conducted by the PSCW resulted in the selection of a proposal submitted by an
unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to
construct a generation facility to meet a portion of WE's anticipated increase
in system supply needs. WE subsequently signed a long-term agreement to
purchase electricity from the proposed facility. The agreement is contingent
upon the facility being completed and placed into operation, which at this
time is planned for mid-1997.
A-18
<PAGE> 48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Capital Requirements 1996-2000 - (cont'd)
PSCW Advance Plan 7: In January 1994, a coordinated state-wide plan for
meeting future electricity needs of Wisconsin customers was filed with the
PSCW in the Advance Plan 7 Docket. In the Advance Plan process, WE, in
conjunction with the other regulated electric utilities located in Wisconsin,
files long-term forecasts of resource requirements, such as the need for
generation and transmission facilities, along with plans to meet those
requirements, including the use of energy management and conservation. The
PSCW approved WE's Advance Plan 7 filing in December 1995.
In order to reliably meet its forecasted growth in demand, WE employs a least-
cost integrated planning process which includes renovation of existing power
plants, promotion of cost-effective conservation and load management options,
development of renewable energy sources, purchases of power and construction
of new company-owned generation facilities.
Investments in demand-side management programs have reduced and delayed the
need to add new generating capacity but have not eliminated the need entirely.
Purchases of power from other utilities and transmission system upgrades will
also combine to help delay the need to install some new generating capacity in
the future.
Finally, WE's Advance Plan 7 filing indicated a need for additional peaking
capacity after the turn of the century, along with an anticipated need for
additional intermediate-load capacity during the 2000 to 2010 time period. WE
does not anticipate needing additional base load generation until after 2010.
The addition of new generating units requires approval of the PSCW following a
two-stage bidding process, which could influence whether WE would construct
such facilities or purchase the required power. The United States
Environmental Protection Agency and the Wisconsin Department of Natural
Resources ("DNR") also must approve new generating units. All generating
facilities proposed by WE will meet or exceed the applicable federal and state
environmental requirements.
Kimberly Cogeneration Facility: Prior to the 1993 selection of the LS Power
generation facility by the PSCW, WE had proposed to construct its own 220
megawatt cogeneration facility in Kimberly, Wisconsin, which was intended to
provide process steam to Repap Wisconsin, Inc. ("Repap") starting in mid-1994.
In the PSCW Order, the WE project was selected as the second place conditional
project if the LS Power project did not proceed. WE had made expenditures for
the Kimberly facility of approximately $65.8 million associated with the
procurement of three combustion turbines, one steam turbine and three heat
recovery boilers in order to achieve the in-service dates as agreed to in a
steam service contract with Repap.
The Company is currently reviewing its options regarding its Kimberly
Cogeneration Facility equipment (the "Equipment"). The Equipment is of a
technology of natural gas-fired combined cycle generation equipment that is
marketed worldwide. The Company is investigating opportunities to sell the
Equipment or to use it in another power project and is currently evaluating
potential sales opportunities and/or power projects involving the Equipment.
At this time, the Company does not believe that disposition of the Equipment
will have a material adverse effect on its financial condition. However,
there is a possibility that WE may need to recognize an impairment of the
A-19
<PAGE> 49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Capital Requirements 1996-2000 - (cont'd)
Equipment in the future should the projects noted above not occur and should
no other viable sales opportunities and/or power projects involving the
Equipment be identified.
Point Beach Unit 2 Steam Generators and Dry Cask Storage Facility: WE
operates two 500 megawatt generating units at Point Beach. During 1995, Point
Beach accounted for 26.9% of WE's net electric generation. The current
operating licenses for the two units at Point Beach expire in 2010 and 2013
for Units 1 and 2, respectively.
In October 1992, WE filed an application with the PSCW for replacement of the
Point Beach Unit 2 steam generators. As a result of degradation of some of
the tubes within the Unit 2 steam generators, the unit has been operating at
approximately 90% of its capacity since its return to service after its annual
refueling outage in the fall of 1995. In February 1995, the PSCW deferred a
decision on the replacement of the steam generators in part to gather more
information during the fall 1995 refueling outage. An evaluation of
information gathered during this outage was included in a Supplemental
Environmental Impact Statement ("SEIS") prepared by the PSCW that shows the
replacement of the Unit 2 steam generators to be the most cost-effective
option when compared to all credible alternatives. Considering the rate of
tube degradation in the steam generators, there is a likelihood that WE would
not be able to restart Unit 2 following the fall 1996 outage without
replacement of the steam generators. In its SEIS, the PSCW estimates that
failure to replace the Unit 2 steam generators would cost WE customers up to
$494 million over the next 25 years to replace lost generation when compared
to the current estimated cost of replacement of $96 million.
In a related matter, WE received a Certificate of Authority from the PSCW in
February 1995 to construct and operate an Independent Spent Fuel Storage
Installation ("ISFSI"). The ISFSI will provide interim dry cask storage of
spent fuel from Point Beach using a system that was certified by the NRC after
a four-year technical review. Construction was completed in June 1995 with
associated capital costs of $8.5 million. WE loaded the first cask with spent
fuel in December 1995. On December 22, 1995, the Dane County Circuit Court
("Court") issued a decision vacating and remanding the February 1995 order of
the PSCW on procedural grounds, stating that the Environmental Impact
Statement prepared by the PSCW for this project was inadequate in two
respects. Transfer of additional spent fuel to the ISFSI has been temporarily
suspended by WE pending the PSCW's further action.
The PSCW has issued two SEIS's which address steam generator issues and the
inadequacies found by the Court with the original Environmental Impact
Statement for the ISFSI project. The PSCW held related hearings on these
matters in February and March 1996. WE anticipates that the PSCW will issue a
combined final order on replacement of the Unit 2 steam generators and the
remanded dry cask storage matters in May 1996. Failure by the PSCW to approve
the steam generator replacement and resolve the remanded issues could
jeopardize the continued operation of Point Beach and materially affect WE's
financial position and results of operations. WE would likely seek regulatory
relief to minimize the replacement power costs resulting from lost generating
capacity.
A-20
<PAGE> 50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Capital Requirements 1996-2000 - (cont'd)
The ISFSI was necessary because the spent fuel pool inside the plant is
nearly full. The dry storage facility will be used until the United States
Department of Energy ("DOE") takes ownership of and removes the spent fuel.
While WE as well as other operators of nuclear power facilities in the United
States have a contract mandated by federal law that calls for the DOE to begin
accepting fuel in 1998, the DOE is not in a position to meet its commitment.
If this commitment is not met, WE will need to construct additional casks and
will seek PSCW approval to do so.
Milwaukee County Power Plant: In December 1995, WE signed an agreement with
Milwaukee County to purchase the Milwaukee County Power Plant located in
Wauwatosa, Wisconsin. The 11 megawatt power plant provides steam, chilled
water and electricity for the Milwaukee Regional Medical Center and several
other large customers located on the Milwaukee County grounds. WE had
previously obtained approval from the PSCW for the purchase of the electric
generation and distribution facilities and acquired them in December 1995 with
a capital expenditure of $7 million. WE will integrate the electric
facilities into its current electric utility operations. In February 1996, WE
filed an application with the PSCW for a Certificate of Authority to acquire
and place in operation the steam production and distribution facilities.
Capital costs for the steam facilities will be $20 million. WE anticipates
PSCW approval of the acquisition by mid-1996 and will integrate the steam
facilities into its current steam utility operations. WEC will acquire and
operate the chilled water facility as a non-regulated business. The chilled
water production and distribution facility will be acquired with a capital
cost of $18 million in conjunction with the steam facility acquisition
anticipated in mid-1996. Purchase of the steam and chilled water portions of
the plant is contingent upon PSCW approval to acquire the steam facilities and
upon the five major customers signing ten-year steam and chilled water service
agreements.
Capital Resources
During the five-year period ending December 31, 2000, WE expects internal
sources of funds from operations, after dividends to WEC, to provide about 87%
of the utility capital requirements. The remaining utility cash requirements
are expected to be met through short-term borrowings and the issuance of
intermediate or long-term debt. The specific form, amount and timing of debt
securities which may be issued have not yet been determined and will depend,
to a large extent, on market conditions and other factors. The anticipated
capital resources during this period do not reflect the impact of the proposed
merger with NSP. See "RESULTS OF OPERATIONS - Mergers" above.
On June 1, 1992, WEC began issuing new shares of common stock through the
Company's stock plans. Previously, WEC had purchased shares required for the
plans on the open market. Cash investments and reinvested dividends
aggregating $52.4 million were used to purchase 1,879,568 new issue shares
during 1995. Effective January 1, 1996, WEC resumed purchasing shares
required for the plans on the open market.
Environmental Issues
Clean Air Act: The 1990 Amendments to the Clean Air Act mandate significant
nation-wide reductions in SO2 and NOx emissions to address acid rain and
ground level ozone control requirements.
A-21
<PAGE> 51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Environmental Issues - (cont'd)
In 1994, WE completed the installation of continuous emission monitors at all
of its facilities and installed low NOx burners on one boiler at its Oak Creek
Power Plant and two boilers at its Valley Power Plant. These actions, along
with the burning of low sulfur coal and the installation of low NOx burners on
other boilers at Oak Creek and Valley Power Plants in early 1995, meet the
requirements that became effective January 1, 1995. To date, approximately
$45.3 million has been spent on compliance with the 1990 amendments to the
Clean Air Act.
WE elected to voluntarily bring the Valley and Port Washington Power Plants
under jurisdiction of the NOx and SO2 requirements of the Clean Air Act
amendments of 1990, five years earlier than mandated. This was possible
because these units meet the more stringent phase II emissions standards
today.
WE projects a surplus of SO2 emission allowances and is seeking additional
allowances available as a result of energy conservation programs. As an
integral component of its least-cost plan, WE is active in SO2 allowance
trading. Revenue from the sale of allowances is being used to offset future
potential rate increases.
Additional fuel switching and the installation of NOx controls at various
power plants will be required to meet the second phase of reduction
requirements that become effective January 1, 2000. These costs, along with
additional operating expenses, are not expected to exceed $40.3 million based
on today's costs.
Manufactured Gas Plant Sites: WE's natural gas business unit is investigating
the remediation of a number of former manufactured gas plant ("MGP") sites.
Operations at these MGP sites ceased over 40 years ago. Limited remediation
activities occurred at a number of these sites during the 1980's, with removal
of waste materials known to be present at that time. In 1995, WE presented a
plan to investigate and further remediate sites to the DNR. During 1995, WE
conducted site investigations at four sites and partial remediation activities
were conducted at one site. Approximately $1.6 million has been spent through
December 31, 1995 for such activities. Remediation costs to be incurred
through the year 2000 have been estimated to be $12 million, but the total
costs are uncertain pending the results of further site specific
investigations and the selection of site specific remedial actions. In its
September 11, 1995 letter order, the PSCW allowed WE to defer MGP site
remediation costs with final rate treatment of such costs to be determined in
future rate cases. As of December 31, 1995, WE has recorded an accrued
liability of $1.6 million for MGP site remediation and a related deferred
regulatory asset of $3.2 million. WE expects to accrue additional MGP site
remediation liabilities during 1996 as site specific investigations are
completed and site specific remedial actions are identified. WE will seek
rate recovery for these costs and does not anticipate that there will be a
material adverse effect on its net income or financial position.
Ash Landfill Sites: WE aggressively seeks environmentally acceptable,
beneficial uses of 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
A-22
<PAGE> 52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Environmental Issues - (cont'd)
of remediation. Where WE has become aware of these conditions, efforts have
been expended to define the nature and extent of any release, and work has
been performed to address these conditions. These costs are included in the
environmental operating and maintenance costs of WE.
Non-Utility Investments
WEC's non-utility assets amounted to approximately $242 million at December
31, 1995. WEC currently anticipates making additional non-utility investments
from time to time. For additional information, see Note L - "Information by
Segments of Business" in the NOTES TO FINANCIAL STATEMENTS.
Minergy Glass Aggregate Plant: Minergy Corp. ("Minergy"), a non-regulated WEC
subsidiary, plans to place into operation in 1997 a $45 million facility in
Neenah, Wisconsin that would recycle paper sludge from area paper mills into
two usable products: glass aggregate and steam. The glass aggregate will be
sold into existing construction and aggregate markets and the steam will be
sold to a local paper mill. The plant will result in substantial
environmental and economic benefits to the area by providing an alternative to
landfilling paper sludge. Minergy has received the necessary approvals from
the City of Neenah for construction of the facility and is awaiting the
issuance of necessary permits by the DNR. The project is expected to be
financed during construction through short-term borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Consolidated Quarterly Financial Data" in SELECTED FINANCIAL DATA is
incorporated herein by reference.
A-23
<PAGE> 53
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd)
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,437,480 $1,403,562 $1,347,844
Gas 318,262 324,349 331,301
Steam 14,742 14,281 14,090
---------- ---------- ----------
Total Operating Revenues 1,770,484 1,742,192 1,693,235
Operating Expenses
Fuel (Note F) 303,553 285,862 263,385
Purchased power 41,834 42,623 54,880
Cost of gas sold 188,764 199,511 214,132
Other operation expenses 395,242 399,011 399,135
Maintenance 112,400 124,602 156,085
Revitalization (Note K) - 73,900 -
Depreciation (Note C) 183,876 177,614 167,066
Taxes other than income taxes 74,765 76,035 74,653
Federal income tax (Note D) 119,939 104,725 74,463
State income tax (Note D) 28,405 24,756 15,530
Deferred income taxes - net (Note D) (2,833) (25,095) 13,096
Investment tax credit - net (Note D) (4,482) (4,625) (4,626)
---------- ---------- ----------
Total Operating Expenses 1,441,463 1,478,919 1,427,799
Operating Income 329,021 263,273 265,436
Other Income and Deductions
Interest income 17,143 17,484 18,809
Allowance for other funds used during
construction (Note E) 3,650 4,985 8,457
Miscellaneous - net (6,497) 3,318 4,564
Federal income tax (Note D) 2,882 2,118 994
State income tax (Note D) (357) (940) (751)
---------- ---------- ----------
Total Other Income and Deductions 16,821 26,965 32,073
Income Before Interest Charges
and Preferred Dividend 345,842 290,238 297,509
Interest Charges
Long-term debt 101,806 103,897 104,859
Other interest 14,002 9,206 4,356
Allowance for borrowed funds used
during construction (Note E) (5,203) (5,084) (6,218)
---------- ---------- ----------
Total Interest Charges 110,605 108,019 102,997
Preferred Dividend Requirement
of Subsidiary 1,203 1,351 4,377
---------- ---------- ----------
Net Income $ 234,034 $ 180,868 $ 190,135
========== ========== ==========
Average Number of Shares of
Common Stock Outstanding (Thousands) 109,850 108,025 105,878
========== ========== ==========
Earnings Per Share of Common Stock $2.13 $1.67 $1.80
========== ========== ==========
<FN>
The notes are an integral part of the financial statements.
A-24
</TABLE>
<PAGE> 54
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
<CAPTION>
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $234,034 $180,868 $190,135
Reconciliation to cash
Depreciation 183,876 177,614 167,066
Nuclear fuel expense - amortization 22,324 21,437 21,366
Conservation expense - amortization 21,870 20,910 15,254
Debt premium, discount & expense - amortization 12,690 14,405 13,647
Revitalization - net (5,404) 43,860 -
Deferred income taxes - net (2,833) (25,095) 13,096
Investment tax credit - net (4,482) (4,625) (4,626)
Allowance for other funds used
during construction (3,650) (4,985) (8,457)
Change in - Accounts receivable (35,492) 11,912 (22,691)
Inventories 5,233 11,455 (11,186)
Accounts payable 16,713 (21,343) 9,543
Other current assets (7,652) (9,897) 985
Other current liabilities 20,769 9,509 19,184
Other (31,104) (9,715) 1,970
-------- -------- --------
Cash Provided by Operating Activities 426,892 416,310 405,286
Investing Activities
Construction expenditures (271,688) (295,769) (364,810)
Allowance for borrowed funds used
during construction (5,203) (5,084) (6,218)
Nuclear fuel (23,454) (26,351) (20,016)
Nuclear decommissioning trust (10,861) (10,138) (11,371)
Conservation investments - net 2,130 (20,823) (35,252)
Other (581) (6,519) 865
-------- -------- --------
Cash Used in Investing Activities (309,657) (364,684) (436,802)
Financing Activities
Sale of - Common stock 52,353 50,494 61,460
Long-term debt 234,453 32,474 378,649
Retirement of - Preferred stock - (5,250) (65,504)
Long-term debt (134,567) (35,434) (333,192)
Change in short-term debt (95,136) 44,769 85,079
Dividends on stock - common (159,688) (150,708) (140,876)
-------- -------- --------
Cash Used in Financing Activities (102,585) (63,655) (14,384)
-------- -------- --------
Change in Cash and Cash Equivalents $ 14,650 $(12,029) $(45,900)
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $ 99,924 $ 94,324 $ 85,717
Income taxes 146,979 145,883 99,437
<FN>
The notes are an integral part of the financial statements.
A-25
</TABLE>
<PAGE> 55
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,531,404 $4,304,925
Gas 489,739 467,732
Steam 40,078 40,103
---------- ----------
5,061,221 4,812,760
Accumulated provision for depreciation (2,288,080) (2,134,469)
---------- ----------
2,773,141 2,678,291
Construction work in progress 78,153 205,835
Nuclear fuel - net (Note F) 59,260 56,606
---------- ----------
Net Utility Plant 2,910,554 2,940,732
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 275,125 226,805
Conservation investments 115,523 138,489
Non-utility property - net 115,392 94,799
Other 131,918 136,626
---------- ----------
Total Other Property and Investments 637,958 596,719
Current Assets
Cash and cash equivalents 23,626 8,976
Accounts receivable, net of allowance for
doubtful accounts - $13,400 and $12,078 150,149 114,657
Accrued utility revenues 140,201 128,107
Fossil fuel (at average cost) 83,366 88,587
Materials and supplies (at average cost) 70,347 70,359
Prepayments 58,739 61,232
Other 5,091 7,040
---------- ----------
Total Current Assets 531,519 478,958
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 140,844 139,927
Deferred regulatory assets (Note A) 193,757 197,103
Other 146,103 54,820
---------- ----------
Total Deferred Charges and Other Assets 480,704 391,850
---------- ----------
Total Assets $4,560,735 $4,408,259
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-26
</TABLE>
<PAGE> 56
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,871,265 $1,744,566
Preferred stock 30,451 30,451
Long-term debt (Note H) 1,367,644 1,283,686
---------- ----------
Total Capitalization 3,269,360 3,058,703
Current Liabilities
Long-term debt due currently (Note H) 51,854 32,531
Notes payable (Note I) 156,919 252,055
Accounts payable 108,508 91,795
Payroll and vacation accrued 26,699 26,507
Taxes accrued - income and other 20,072 18,250
Interest accrued 21,863 23,477
Other 50,191 29,822
---------- ----------
Total Current Liabilities 436,106 474,437
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 483,410 475,541
Accumulated deferred investment tax credits 89,672 94,154
Deferred regulatory liabilities (Note A) 167,483 171,599
Other 114,704 133,825
---------- ----------
Total Deferred Credits and Other
Liabilities 855,269 875,119
Commitments and Contingencies (Note M)
---------- ----------
Total Capitalization and Liabilities $4,560,735 $4,408,259
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-27
</TABLE>
<PAGE> 57
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
<CAPTION>
1995 1994
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $.01 par value; authorized 750,000,000 and 325,000,000 shares;
outstanding - 110,819,337 and 108,939,769 shares $ 1,108 $ 1,089
Other paid in capital 676,909 624,568
Retained earnings 1,193,248 1,118,909
---------- ----------
Total Common Stock Equity 1,871,265 1,744,566
Preferred Stock - Wisconsin Electric Power Company, Cumulative
Six Per Cent. Preferred Stock - $100 par value;
authorized 45,000 shares; outstanding - 44,508 shares 4,451 4,451
Serial preferred stock - $100 par value; authorized 2,286,500 and 2,360,000 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,451 30,451
Long-Term Debt
First mortgage bonds
Series Due 1995 1994 Series Due 1995 1994
------ --- -------- ------- ------ --- ------- -------
Wisconsin Electric Power Company 7-1/4% 2004 140,000 140,000
5-5/8% 1995 $ - $ 10,000 6.45 % 2006 - 4,000
4-1/2% 1996 30,000 30,000 6.50 % 2007-2009 - 10,000
5-7/8% 1997 130,000 130,000 9-3/4% 2015 - 46,350
6-5/8% 1997 10,000 10,000 7-1/8% 2016 100,000 100,000
5-1/8% 1998 60,000 60,000 6.85 % 2021 9,000 9,000
6.10 % 1999-2008 - 25,000 7-3/4% 2023 100,000 100,000
6.25 % 1999-2008 - 1,000 7.05 % 2024 60,000 60,000
6-1/2% 1999 40,000 40,000 9-1/8% 2024 3,443 3,443
6-5/8% 1999 51,000 51,000 8-3/8% 2026 100,000 100,000
6.45 % 2004 - 12,000 7.70 % 2027 200,000 200,000
1,033,443 1,141,793
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/8% Series due 1997 25,000 25,000
10-1/4% Series due 1998 - 2,290
9.47% Series due 2006 7,000 7,000
8-1/4% Series due 2022 25,000 25,000
6-7/8% Series due 2095 100,000 -
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006 1,000 -
Variable rate due 2015 17,350 -
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 -
Wisconsin Michigan Investment Corporation - 6.83% due 1997 5,000 5,000
5.80% due 1998 7,000 7,000
6.49% due 2000 7,000 -
6.66% due 2003 10,600 10,600
6.85% due 2005 10,000 -
WMF Corp. - 9.1% due 2001 3,310 3,705
Obligations under capital lease - Wisconsin Electric Power Company (Note F) 43,924 43,696
Unamortized discount - net (23,129) (21,867)
Long-term debt due currently (51,854) (32,531)
---------- ----------
Total Long-Term Debt (Note H) 1,367,644 1,283,686
---------- ----------
Total Capitalization $3,269,360 $3,058,703
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-28
</TABLE>
<PAGE> 58
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
<CAPTION>
- - -------------------------------------------------- ----------------------------------------------------------
Common Stock Common Stock Other Paid Retained
Shares $.01 Par Value In Capital Earnings Total
- - -------------------------------------------------- ----------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1992 104,730,525 $1,047 $515,376 $1,039,624 $1,556,047
Net income 190,135 190,135
Common stock cash dividends
$1.341 per share (140,876) (140,876)
Sale of common stock 2,227,642 22 61,555 (117) 61,460
Purchase of preferred stock (Note G) (2,854) (2,854)
- - -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1993 106,958,167 1,069 574,077 1,088,766 1,663,912
Net income 180,868 180,868
Common stock cash dividends
$1.396 per share (150,708) (150,708)
Sale of common stock 1,981,602 20 50,491 (17) 50,494
- - -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1994 108,939,769 1,089 624,568 1,118,909 1,744,566
Net Income 234,034 234,034
Common stock cash dividends
$1.455 per share (159,688) (159,688)
Sale of common stock 1,879,568 19 52,341 (7) 52,353
- - -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1995 110,819,337 $1,108 $676,909 $1,193,248 $1,871,265
================================================== ==========================================================
<FN>
The notes are an integral part of the financial statements.
A-29
</TABLE>
<PAGE> 59
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A - Summary of Significant Accounting Policies
General: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("WEC" or the "Company"), its utility subsidiary,
Wisconsin Electric Power Company ("WE"), and its non-utility subsidiaries,
Wisconsin Michigan Investment Corporation, Badger Service Company, Wispark
Corporation, Wisvest Corporation, Witech Corporation and other non-utility
companies.
The accounting records of the Company's utility subsidiary are kept as
prescribed by the Federal Energy Regulatory Commission ("FERC"), 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.
Deferred Regulatory Assets and Liabilities: Pursuant to Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of Certain
Types of Regulation, WE capitalizes, as deferred regulatory assets, incurred
costs which are expected to be recovered in future utility rates. WE also
records, as deferred regulatory liabilities, the current recovery in utility
rates of costs which are expected to be paid in the future. A significant
portion of WE's deferred regulatory assets and liabilities relate to the
amounts recorded due to the adoption of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("FAS 109"). (See Note D.)
Statement of Cash Flows: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity.
Conservation Investments: WE directs a variety of demand-side management
programs to help foster energy conservation by its customers. As authorized
by the PSCW, WE capitalized certain conservation program costs prior to 1995.
Utility rates approved by the PSCW provide for a current return on these
conservation investments. Through 1995, conservation investments were charged
to operating expense over a ten-year amortization period. Beginning in 1996,
the capitalized conservation balance will be charged to operating expense on a
straight line basis over a five-year amortization period.
A-30
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS - (cont'd)
A - Summary of Significant Accounting Policies - (cont'd)
Restrictions: Various financing arrangements and regulatory requirements
impose certain restrictions on the ability of WEC's utility subsidiary to
transfer funds to WEC in the form of cash dividends, loans or advances. Under
Wisconsin law, WE is prohibited from loaning funds, either directly or
indirectly, to WEC. The Company does not believe that such restrictions will
affect its operations.
New Pronouncements: In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets ("FAS 121") and Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"). FAS 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. FAS 123 established reporting standards
and an optional accounting method for stock-based employee compensation plans.
The Company will adopt both standards prospectively in 1996. It is
anticipated that adoption will not have a material effect on net income or
financial position.
B - Mergers
Wisconsin Natural Gas Company: Effective January 1, 1996, the Company merged
its natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN") into
WE. The accounting treatment for this merger was similar to that which would
result from a pooling of interests. Where applicable, references herein to WE
include WN prior to their merger.
Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired
all of the outstanding common stock of Wisconsin Southern Gas Company, Inc.
("WSG") through a statutory merger of WSG into WN in which all of WSG's common
stock was converted into common stock of WEC. WSG was a gas utility engaged
in the purchase, distribution, transportation and sale of natural gas
primarily in a section of southeastern Wisconsin which was contiguous to WN's
service territory. WSG was merged into WN using the pooling of interests
method of accounting. Accordingly, prior years' financial and statistical
information was restated to include WSG at historical values.
Northern States Power Company: On April 28, 1995, WEC and Northern States
Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and
Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger
Agreement"). The Merger Agreement provides for a strategic business
combination involving WEC and NSP in a "merger-of-equals" transaction
("Transaction"). As a result, WEC will become a registered public utility
holding company under the Public Utility Holding Company Act of 1935, as
amended, and will change its name to Primergy Corporation ("Primergy").
Primergy will be the parent company of WE (which will be renamed Wisconsin
Energy Company), of NSP (which, for regulatory reasons, will reincorporate in
Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. The
Transaction is intended to be tax-free for income tax purposes and to be
accounted for as a pooling of interests. On September 13, 1995, stockholders
of WEC and NSP voted to approve the Transaction. The Merger Agreement is
subject to various conditions, including the approval of various regulatory
agencies. Subject to obtaining all requisite approvals, WEC and NSP
anticipate completing the Transaction by January 1, 1997.
A-31
<PAGE> 61
NOTES TO FINANCIAL STATEMENTS - (cont'd)
B - Mergers - (cont'd)
In connection with the Transaction, Northern States Power Company, a Wisconsin
corporation ("NSP-WI"), currently a subsidiary of NSP, will be merged into
Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy
Company, New NSP will acquire from NSP-WI certain gas utility assets in
LaCrosse and Hudson, Wisconsin.
The following summarized Primergy unaudited pro forma financial information
combines historical balance sheet and income statement information of WEC and
NSP to give effect to the Transaction and should be read in conjunction with
the historical consolidated financial statements and related notes thereto of
WEC and NSP. A $141 million pro forma adjustment has been made to conform the
presentation of noncurrent deferred income taxes in the summarized unaudited
pro forma combined balance sheet information as a net liability. The
allocation between WEC and NSP and their customers of the estimated cost
savings resulting from the Transaction, net of costs incurred to achieve such
savings, will be subject to regulatory review and approval. None of the
estimated cost savings, the costs to achieve such savings, nor transaction
costs are reflected in the unaudited pro forma financial information. All
other financial statement presentation and accounting policy differences are
immaterial and have not been adjusted in the unaudited pro forma financial
information. The unaudited pro forma combined earnings per common share
reflect pro forma adjustments to average NSP common shares outstanding in
accordance with the provisions of the Merger Agreement, whereby each
outstanding share of NSP common stock will be converted into 1.626 shares of
Primergy common stock. In the Transaction, each outstanding share of WEC
common stock will remain outstanding as a share of Primergy common stock.
The unaudited pro forma balance sheet information gives effect to the
Transaction as if it had occurred at December 31, 1995. The unaudited pro
forma income statement information gives effect to the Transaction as if it
had occurred at January 1, 1995. The following information is not necessarily
indicative of the financial position or operating results that would have
occurred had the Transaction been consummated on the date or at the beginning
of the period for which the Transaction is being given effect nor is it
necessarily indicative of future operating results or financial position.
A-32
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS - (cont'd)
B - Mergers - (cont'd)
==============================================================================
Primergy Corporation: Unaudited
WEC NSP Pro Forma
(As Reported) (As Reported) Combined
------------- ------------- -------------
(Millions, except per share amounts)
As of December 31, 1995:
Utility plant-net $ 2,911 $ 4,310 $ 7,221
Current assets 531 705 1,236
Other assets * 1,119 1,214 2,192
----------- ----------- -----------
Total Assets $ 4,561 $ 6,229 $ 10,649
=========== =========== ===========
Common stockholder's equity $ 1,871 $ 2,028 $ 3,899
Preferred stock and premium 30 240 270
Long-term debt 1,368 1,542 2,910
----------- ----------- -----------
Total Capitalization 3,269 3,810 7,079
Current liabilities 436 992 1,428
Other liabilities * 856 1,427 2,142
----------- ----------- -----------
Total Equity & Liabilities $ 4,561 $ 6,229 $ 10,649
=========== =========== ===========
For the Year Ended
December 31, 1995:
Utility Operating Revenues $ 1,770 $ 2,569 $ 4,339
Utility Operating Income $ 329 $ 346 $ 675
Net Income, after Preferred
Dividend Requirements $ 234 $ 263 $ 497
Earnings per Common Share:
As Reported $ 2.13 $ 3.91 -
Primergy Shares - - $ 2.27
==============================================================================
* Includes a $141 million pro forma adjustment to conform the presentation of
noncurrent deferred taxes as a net liability.
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 3.8% in 1995 and 3.9% in 1994 and 1993. Nuclear
plant decommissioning is accrued as depreciation expense (see Note F).
D - Income Taxes
Comprehensive interperiod income tax allocation is used for federal and state
temporary differences. The federal investment tax credit is accounted for on
the deferred basis and is reflected in income ratably over the life of the
related property.
A-33
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS - (cont'd)
D - Income Taxes - (cont'd)
Following is a summary of income tax expense and a reconciliation of total
income tax expense with the tax expected at the federal statutory rate:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Current tax expense $145,819 $128,303 $ 89,750
Investment tax credit-net (4,482) (4,625) (4,626)
Deferred tax expense (2,833) (25,095) 13,096
-------- -------- --------
Total Tax Expense $138,504 $ 98,583 $ 98,220
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $373,741 $280,802 $292,732
======== ======== ========
Expected tax at federal
statutory rate $130,809 $ 98,281 $102,456
State income tax net of
federal tax reduction 18,934 14,382 12,024
Investment tax credit
restored (4,482) (4,625) (5,241)
Other (no item over
5% of expected tax) (6,757) (9,455) (11,019)
-------- -------- --------
Total Tax Expense $138,504 $ 98,583 $ 98,220
======== ======== ========
==============================================================================
FAS 109 requires the recording of deferred assets and liabilities to recognize
the expected future tax consequences of events that have been reflected in the
Company'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:
==============================================================================
December 31
1995 1994
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 43,759 $ 42,685
Construction advances 43,052 40,839
Other 54,033 56,403
-------- --------
Total Deferred Income Tax Assets $140,844 $139,927
======== ========
Deferred Income Tax Liabilities
Property related $449,244 $430,740
Conservation investments 25,775 27,564
Other 8,391 17,237
-------- --------
Total Deferred Income Tax Liabilities $483,410 $475,541
======== ========
==============================================================================
A-34
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS - (cont'd)
D - Income Taxes - (cont'd)
WE also has recorded the following deferred regulatory assets and liabilities
representing the future expected impact of deferred taxes on utility revenues:
==============================================================================
December 31
1995 1994
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets $155,944 $158,912
Deferred Regulatory Liabilities 163,676 171,599
==============================================================================
E - Allowance for Funds Used During Construction ("AFUDC")
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. Allowance for borrowed funds also
includes interest capitalized on qualifying assets of non-utility
subsidiaries. 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 noncash other income.
Utility rates approved by the PSCW provide for a current return on investment
for selected long-term projects included in construction work in progress
("CWIP"). AFUDC was capitalized on the remaining CWIP at a rate of 10.83% in
1995, 1994 and 1993, as approved by the PSCW.
F - Nuclear Operations
Point Beach Nuclear Plant: WE operates two 500 megawatt generating units at
its Point Beach Nuclear Plant ("Point Beach"). During 1995, Point Beach
accounted for 26.9% of WE's net electric generation. The current operating
licenses for the two units at Point Beach expire in 2010 and 2013 for Units 1
and 2, respectively.
WE has filed an application with the PSCW for replacement of the Point Beach
Unit 2 steam generators. As a result of degradation of some of the tubes
within the Unit 2 steam generators, the unit has been operating at
approximately 90% of its capacity since its return to service after its annual
refueling outage in the fall of 1995. Considering the rate of tube
degradation in the steam generators, there is a likelihood that WE would not
be able to restart Unit 2 following the fall 1996 outage without replacement
of the steam generators.
A-35
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
In a related matter, WE completed construction of an Independent Spent Fuel
Storage Installation ("ISFSI") in June 1995. The ISFSI will provide interim
dry cask storage of spent fuel from Point Beach, which is necessary because
the spent fuel pool inside the plant is nearly full. WE loaded the first cask
with spent fuel in December 1995. On December 22, 1995, the Dane County
Circuit Court ("Court") issued a decision vacating and remanding the February
1995 PSCW approval of the ISFSI on procedural grounds, stating that the
Environmental Impact Statement prepared by the PSCW for this project was
inadequate in two respects. Transfer of additional spent fuel to the ISFSI
has been temporarily suspended by WE pending the PSCW's further action.
The PSCW has issued two Supplemental Environmental Impact Statements which
address steam generator issues and the inadequacies found by the Court with
the original Environmental Impact Statement for the ISFSI project. The PSCW
held related hearings on these matters in February and March 1996. WE
anticipates that the PSCW will issue a combined final order on the replacement
of the Unit 2 steam generators and the remanded dry cask storage matters in
May 1996. Failure by the PSCW to approve steam generator replacement and
resolve the remanded issues could jeopardize the continued operation of Point
Beach and materially affect WE's financial position and results of operations.
WE would likely seek regulatory relief to minimize the replacement power costs
resulting from lost generating capacity.
Nuclear Fuel: WE has a nuclear fuel leasing arrangement with Wisconsin
Electric Fuel Trust ("Trust"), which is treated as a capital lease. The
nuclear fuel is leased 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 a management fee. In the event WE or
the Trust terminates the lease, the Trust would recover its unamortized cost
of nuclear fuel from WE. Under the lease terms, WE is in effect the ultimate
guarantor of the Trust's commercial paper and line of credit borrowings
financing the investment in nuclear fuel.
Provided below is a summary of nuclear fuel investment at December 31 and
interest expense for the respective years on the nuclear fuel lease:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 89,840 $ 89,705
Accumulated provision for amortization (50,532) (50,983)
In process/stock 19,952 17,884
-------- --------
Total Nuclear Fuel $ 59,260 $ 56,606
======== ========
Interest Expense on Nuclear Fuel Lease $ 2,401 $ 1,896 $ 1,697
==============================================================================
The future minimum lease payments under the capital lease and the present
value of the net minimum lease payments as of December 31, 1995 are as
follows:
A-36
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
============================================================================
(Thousands of Dollars)
1996 $ 22,446
1997 14,747
1998 6,960
1999 2,443
2000 490
--------
Total Minimum Lease Payments 47,086
Less: Interest (3,162)
--------
Present Value of Net Minimum Lease Payments $ 43,924
========
==============================================================================
The estimated cost of disposal of spent fuel based on a contract with the U.S.
Department of Energy ("DOE") is included in nuclear fuel expense. The Energy
Policy Act of 1992 establishes a Uranium Enrichment Decontamination and
Decommissioning Fund ("D&D Fund") for the DOE's nuclear fuel enrichment
facilities. Deposits to the D&D Fund are derived in part from special
assessments to utilities. As of December 31, 1995, WE has on its books a
remaining estimated liability equal to the projected special assessments of
$29.5 million. A corresponding deferred regulatory asset will be amortized to
nuclear fuel expense and included in utility rates over the next 12 years.
Nuclear Insurance: The Price-Anderson Act ("Act") provides an aggregate
limitation of $8.9 billion on public liability claims arising out of a nuclear
incident. WE has $200 million of liability insurance from commercial sources.
The Act also establishes an industry-wide retrospective rating plan under
which nuclear reactor owners could be assessed up to $79 million per reactor
(WE owns two), but not more than $10 million in any one year for each reactor,
in the event of a nuclear incident.
An industry-wide insurance program, with an aggregate limit of $200 million,
has been established to cover radiation injury claims of nuclear workers first
employed after 1987. If claims in excess of the available funds develop, WE
could be assessed a maximum of approximately $3.0 million per reactor.
WE has property damage, decontamination and decommissioning insurance totaling
$1.5 billion for loss from damage at Point Beach with Nuclear Mutual Limited
("NML") and Nuclear Electric Insurance Limited ("NEIL"). Under the NML and
NEIL policies, WE has a potential maximum retrospective premium liability per
loss of $5.6 million and $9.8 million, respectively.
WE also maintains additional insurance with NEIL covering extra expenses of
obtaining replacement power during a prolonged accidental outage (in excess of
21 weeks) at Point Beach. This insurance coverage provides weekly indemnities
of $3.5 million per unit for outages during the first year, declining to 80%
of the amounts during the second and third years. Under the policy, WE's
maximum retrospective premium liability is approximately $7.7 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect WE from material
adverse impact.
A-37
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
Nuclear Decommissioning: Subject to approval by the PSCW of the Point Beach
Unit 2 steam generator replacements and resolution of the remanded ISFSI
matters described above, WE 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 1995 dollars is $356 million based upon a site
specific decommissioning cost study completed in 1994. 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 $1.6 billion will
be spent over a twenty-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 based upon an external sinking fund
method. In 1996, WE has increased its funding levels based on a site specific
estimate as required by the PSCW. 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. WE
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 ("FAS 115"), WE'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:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 3,456 $ 3,456 $ 3,456
Earnings 7,405 6,682 7,915
-------- -------- --------
Depreciation Expense $ 10,861 $ 10,138 $ 11,371
======== ======== ========
Total costs accrued to date $235,420 $224,559
Unrealized gain 39,705 2,246
-------- --------
Accumulated Provision for Depreciation $275,125 $226,805
======== ========
==============================================================================
G - Preferred Stock
Preferred stock authorized but unissued is: WEC, $.01 par value, 15,000,000
shares and WE, cumulative, $25 par value, 5,000,000 shares.
A-38
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS - (cont'd)
G - Preferred Stock - (cont'd)
The 3.60% Series Preferred Stock is redeemable in whole or in part at the
option of WE at $101 per share plus any accrued dividends.
In 1994, WE called for redemption all of its 52,500 outstanding shares of
6.75% Series Preferred Stock at a redemption price of par. In 1993, WE called
for redemption 626,500 shares at a purchase price of $104.05 per share plus
accrued dividends to the redemption date.
H - Long-Term Debt
The maturities and sinking fund requirements through 2000 for the aggregate
amount of long-term debt outstanding (excluding obligations under capital
lease, see Note F) at December 31, 1995 are shown below:
==============================================================================
(Thousands of Dollars)
1996 $ 30,435
1997 171,175
1998 68,220
1999 92,270
2000 8,325
==============================================================================
Sinking fund requirements for the years 1996 through 2000, included in the
table above, are $5.4 million. Substantially all utility plant is subject to
the applicable 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.
The fair value of the Company's long-term debt was $1.5 billion and $1.2
billion at December 31, 1995 and 1994, respectively. The fair value of WE's
first mortgage bonds and debentures is estimated based upon the market value
of the same or similar issues. Book value approximates fair value for the
Company's unsecured notes. The fair value of WE's obligations under capital
lease is the market value of the Wisconsin Electric Fuel Trust's commercial
paper.
In September and October 1995, WE issued $98.35 million of unsecured variable
rate promissory notes maturing between March 1, 2006 and September 1, 2030.
These notes were issued as a revenue and collateral source for an equal
principal amount of tax exempt Refunding Revenue Bonds issued on WE's behalf
to refund $98.35 million of previously issued tax exempt bonds called for
optional redemption that were secured by WE's First Mortgage Bonds.
In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8%
Debentures due 2095. Proceeds of the issue were added to WE's general funds
and were applied to the repayment of short-term borrowings.
A-39
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS - (cont'd)
H - Long-Term Debt - (cont'd)
At December 31, 1995, the interest rate for the $67 million variable rate note
due 2016 was 5.00% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 5.10%.
I - Notes Payable
Short-term notes payable balances and their corresponding weighted average
interest rates consist of:
==============================================================================
December 31
1995 1994
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $107,110 5.80% $ 96,949 6.06%
Commercial paper 49,809 5.88% 155,106 6.04%
-------- --------
$156,919 $252,055
======== ========
==============================================================================
Unused lines of credit for short-term borrowing amounted to $157.4 million at
December 31, 1995. In support of various informal lines of credit from banks,
WEC subsidiaries have agreed to maintain unrestricted compensating balances or
to pay commitment fees; neither the compensating balances nor the commitment
fees are significant.
J - Pension Plans
Effective in 1993, the PSCW adopted Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions ("FAS 87"), for
ratemaking.
WE has several defined benefit noncontributory pension plans covering all
eligible employees. Pension benefits are based on years of service and the
employee's compensation. The majority of the plans' assets are equity
securities; other assets include corporate and government bonds and real
estate. The plans are funded to meet the requirements of the Employee
Retirement Income Security Act of 1974.
In the opinion of the Company, current pension trust assets and amounts which
are expected to be paid to the trusts in the future will be adequate to meet
future pension payment obligations to current and future retirees.
A-40
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS - (cont'd)
J - Pension Plans - (cont'd)
==============================================================================
Pension Cost calculated per FAS 87 1995 1994 1993
- - ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31 -
Cost of pension benefits earned by
employees $ 8,985 $ 10,933 $ 10,842
Interest cost on projected benefit
obligation 41,586 38,736 36,335
Actual (return) loss on plan assets (136,243) 7,634 (43,226)
Net amortization and deferral 88,493 (52,180) 1,067
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 2,821 $ 5,123 $ 5,018
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31 -
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $543,371 $427,847
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 12,651 9,963
-------- --------
Total obligation $556,022 $437,810
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31 -
Pension assets at fair market value $637,529 $527,182
Projected benefit obligation
at present value (584,785) (513,166)
Unrecognized transition asset (22,034) (24,628)
Unrecognized prior service cost 23,194 19,567
Unrecognized net gain (54,780) (17,569)
-------- --------
Projected status of plans $ (876) $ (8,614)
======== ========
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.25 8.25 7.5
Assumed rate of increase in
compensation levels 4.75 5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
==============================================================================
K - Benefits Other Than Pensions
Postretirement Benefits: Effective in 1993, the Company adopted prospectively
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("FAS 106") and elected the 20
year option for amortization of the previously unrecognized accumulated
postretirement benefit obligation. The PSCW has issued an order recognizing
FAS 106 for ratemaking; therefore adoption has no material impact on net
income.
A-41
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS - (cont'd)
K - Benefits Other Than Pensions - (cont'd)
WE sponsors defined benefit postretirement plans that cover both salaried and
nonsalaried employees who retire at age 55 or older with at least 10 years of
credited service. The postretirement medical plan provides coverage to
retirees and their dependents. Retirees contribute to the medical plan. The
group life insurance benefit is based on employee compensation and is reduced
upon retirement.
Employees' Benefit Trusts ("Trusts") are used to fund a major portion of
postretirement benefits. The funding policy for the Trusts is to maximize tax
deductibility. The majority of the Trusts' assets are mutual funds.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1995 1994 1993
- - ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31 -
Cost of postretirement benefits
earned by employees $ 2,276 $ 2,653 $ 3,105
Interest cost on projected
benefit obligation 10,458 10,148 10,395
Actual return on plan assets (12,598) (3,893) (2,388)
Net amortization and deferral 13,951 5,648 5,082
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 14,087 $ 14,556 $ 16,194
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31 -
Accumulated Postretirement Benefit
Obligation at December 31 -
Retirees $(92,746) $(83,670)
Fully eligible active plan participants (10,304) (7,223)
Other active plan participants (41,732) (37,255)
-------- --------
Total obligation (144,782) (128,148)
Postretirement assets at
fair market value 45,086 37,919
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (99,696) (90,229)
Unrecognized transition obligation 83,268 90,302
Unrecognized prior service cost (1,279) (1,169)
Unrecognized net gain (6,102) (16,484)
-------- --------
Accrued Postretirement Benefit Obligation $(23,809) $(17,580)
======== ========
==============================================================================
A-42
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS - (cont'd)
K - Benefits Other Than Pensions - (cont'd)
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 (cont'd) 1995 1994 1993
- - ------------------------------------------- -------- -------- --------
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.25 8.25 7.5
Assumed rate of increase in
compensation levels 4.75 5.0 5.0
Expected long-term rate of return
on postretirement assets 9.0 9.0 9.0
Health care cost trend rate 11.0 declining to
5.0 in year 2002
==============================================================================
Changes in health care cost trend rates will affect the amounts reported. For
example, a 1% increase in rates would increase the accumulated postretirement
benefit obligation as of December 31, 1995 by $9.5 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by $1 million.
Revitalization: In the first quarter of 1994, WE recorded a $73.9 million
charge related to its revitalization program. This charge included $37.5
million for Early Retirement Incentive Packages ("ERIP") and $25 million for
Severance Packages ("SP"). These plans were used to reduce employee staffing
levels. ERIP provided for a monthly income supplement ("ERIP supplement"),
medical benefits and waiver of an early retirement pension reduction. The SP
included a severance payment, medical/dental insurance, outplacement services,
personal financial planning and tuition support. Availability of these plans
to various bargaining units was based upon agreements made between WE and the
bargaining units. These plans were available to most management employees but
not to elected officers.
Under ERIP, 403 employees elected to retire in 1994. Under SP, 651 and 75
employees enrolled in 1994 and 1995, respectively. ERIP supplement costs are
paid from pension plan trusts and medical/dental benefits from employee
benefit trusts. Remaining ERIP and SP costs are paid from general corporate
funds. The ultimate timing of cash flows for ERIP supplement costs depends
upon the funding limitations of WE's pension plans. With the exception of
ERIP supplement costs, approximately $35.4 million have been paid against the
revitalization liability through December 31, 1995, and a liability of $0.9
million remains outstanding at December 31, 1995.
Omnibus Stock Incentive Plan: A stockholder approved Omnibus Stock Incentive
Plan ("Plan") enables the Company to provide a long-term incentive, through
equity interests in WEC, to selected officers and key employees. The Plan
provides for the granting of stock options, stock appreciation rights
("SARS"), stock awards and performance units over a period of no more than ten
years. Awards under the Plan may be paid in common stock, cash or a
combination thereof. Four million shares of common stock have been reserved
under the Plan. The exercise price of a stock option will not be less than
100% of the common stock's fair market value on the grant date and options may
not be exercised within six months of the grant date.
A-43
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS - (cont'd)
K - Benefits Other Than Pensions - (cont'd)
As of December 31, 1995, 1994 and 1993, options for 335,500, 145,500 and
64,250 shares, respectively, were outstanding. These options are exercisable
four years after the grant date at per share prices of between $26.813 and
$30.188. Each stock option includes performance units based on contingent
dividends for four years from the date of grant. Payment of these dividends
depends on the achievement of certain performance goals. The earliest year in
which any of the options can be exercised is 1997. No SARS or stock awards
have been granted and no performance units have been earned to date.
L - Information By Segments of Business
WEC is a holding company with subsidiaries in utility and non-utility
businesses. The Company's principal business segments include electric, gas
and steam utility operations. The electric utility generates, transmits,
distributes and sells electric energy in southeastern (including metropolitan
Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. The gas utility purchases, distributes and sells natural gas to
retail customers and transports customer-owned gas in three service areas in
southeastern, east central and western Wisconsin that are largely within the
electric service area. The steam utility produces, distributes and sells
steam to space heating and processing customers in downtown and the near south
side of Milwaukee. Principal non-utility lines of business include real
estate investment and development in the State of Wisconsin as well as venture
capital investments in Wisconsin and the Upper Peninsula of Michigan. The
following summarizes the business segments of the Company:
==============================================================================
Year ended December 31 1995 1994 1993
- - ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,437,480 $1,403,562 $1,347,844
Operating income before income taxes 419,271 329,216 329,727
Depreciation 164,789 159,414 149,646
Construction expenditures 223,723 244,718 305,467
Gas Operations
Operating revenues 318,262 324,349 331,301
Operating income before income taxes 47,022 30,993 31,025
Depreciation 17,722 16,856 16,235
Construction expenditures 24,851 25,481 24,419
Steam Operations
Operating revenues 14,742 14,281 14,090
Operating income before income taxes 3,757 2,825 3,147
Depreciation 1,365 1,344 1,185
Construction expenditures 206 1,213 4,940
Consolidated
Operating revenues 1,770,484 1,742,192 1,693,235
Operating income before income taxes 470,050 363,034 363,899
Depreciation 183,876 177,614 167,066
Construction expenditures
(including non-utility) 271,688 295,769 364,810
==============================================================================
A-44
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS - (cont'd)
L - Information By Segments of Business - (cont'd)
==============================================================================
Year ended December 31 1995 1994 1993
- - ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Other Information
Non-utility Net Income
Real estate activities $ 3,583 $ 2,768 $ 2,211
Venture capital and other (9,013) (2,303) 220
At December 31
- - --------------
Net Identifiable Assets
Electric $3,906,552 $3,800,377 $3,668,151
Gas 387,016 376,494 385,460
Steam 25,214 25,315 25,119
Non-utility
Real estate activities 175,746 148,401 134,669
Venture capital and other 66,207 57,672 57,193
---------- ---------- ----------
Total Consolidated Assets $4,560,735 $4,408,259 $4,270,592
========== ========== ==========
==============================================================================
M - Commitments and Contingencies
Kimberly Cogeneration Facility: In 1993, a competitive bidding process
conducted by the PSCW resulted in selection of a proposal submitted by an
unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to
construct a generation facility to meet a portion of WE's anticipated increase
in system supply needs. WE subsequently signed a long-term agreement to
purchase electricity from the proposed facility. The agreement is contingent
upon the facility being completed and going into operation, which at this time
is planned for mid-1997.
Prior to the 1993 selection of the LS Power generation facility by the PSCW,
WE had proposed to construct its own 220 megawatt cogeneration facility in
Kimberly, Wisconsin, which was intended to provide process steam to Repap
Wisconsin, Inc. ("Repap") starting in mid-1994. In the PSCW Order, the WE
project was selected as the second place conditional project if the LS Power
project did not proceed. WE had made expenditures for the Kimberly facility
of approximately $65.8 million associated with the procurement of three
combustion turbines, one steam turbine and three heat recovery boilers in
order to achieve the in-service dates as agreed to in a steam service contract
with Repap.
The Company is currently reviewing other options for use or sale of its
Kimberly Cogeneration Facility equipment (the "Equipment"). The Equipment is
of a technology of natural gas-fired combined cycle generation equipment that
is marketed worldwide. The Company is investigating opportunities to sell the
Equipment or to use it in another power project and is currently evaluating
potential sales opportunities and/or power projects involving the Equipment.
At this time, the Company does not believe that disposition of the Equipment
will have a material adverse effect on its financial condition. However,
A-45
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS - (cont'd)
M - Commitments and Contingencies - (cont'd)
there is a possibility that WE may need to recognize an impairment of the
Equipment in the future should the projects noted above not occur and should
no other viable sales opportunities and/or power projects involving the
Equipment be identified.
Manufactured Gas Plant Sites: WE's natural gas business unit is investigating
the remediation of a number of former manufactured gas plant ("MGP") sites.
Operations at these MGP sites ceased over 40 years ago. Limited remediation
activities occurred at a number of these sites during the 1980's, with removal
of waste materials known to be present at that time. In 1995, WE presented a
plan to investigate and remediate sites to the Wisconsin Department of Natural
Resources ("DNR"). During 1995, WE conducted site investigations at four
sites and partial remediation activities were conducted at one site.
Approximately $1.6 million has been spent through December 31, 1995 for such
activities. Remediation costs to be incurred through the year 2000 have been
estimated to be $12 million, but the total costs are uncertain pending the
results of further site specific investigations and the selection of site
specific remedial actions. In a September 11, 1995 letter order, the PSCW
allowed WE to defer MGP site remediation costs with final rate treatment of
such costs to be determined in future rate cases. As of December 31, 1995, WE
has recorded an accrued liability of $1.6 million for MGP site remediation and
a related deferred regulatory asset of $3.2 million. WE expects to accrue
additional MGP site remediation liabilities during 1996 as site specific
investigations are completed and site specific remedial actions are
identified. WE will seek rate recovery for these costs and does not
anticipate that there will be a material adverse effect on its net income or
financial position.
Plans for the construction and financing of future additions to utility plant
can be found elsewhere in this report in MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL
RESOURCES - Capital Requirements 1996-2000."
A-46
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements appearing on pages A-24
through A-46 of this report present fairly, in all material respects, the
financial position of Wisconsin Energy Corporation and its subsidiaries at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, 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/Price Waterhouse LLP
- - -----------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 31, 1996
A-47
<PAGE> 77
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1995, based on the number of Wisconsin Energy Corporation
("WEC") stockholder accounts, there were 88,481 registered stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New York Stock
Exchange. The ticker symbol is WEC. Daily trading prices and volume can be
found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WiscEn or WiscEngy.
DIVIDENDS
Dividends on WEC common stock, as declared by the Board of Directors, are
normally paid on or about the first day of March, June, September and
December.
RANGE OF WEC COMMON STOCK PRICES AND DIVIDENDS
============================================================================
1995 | 1994
------------------------------------------|---------------------------------
Quarter High Low Dividend | High Low Dividend
------------------------------------------|---------------------------------
First $28-1/4 $25-1/2 $ .3525 | $27-1/2 $24 $ .33875
Second 29 26-3/4 .3675 | 26-3/8 23-1/8 .3525
Third 28-1/2 26-1/8 .3675 | 26-3/8 23-3/8 .3525
Fourth 30-7/8 28 .3675 | 27 24-1/2 .3525
------------------------------------------|---------------------------------
Year $30-7/8 $25-1/2 $1.4550 | $27-1/2 $23-1/8 $1.39625
============================================================================
DIVIDEND POLICY OF PRIMERGY
In accordance with the provisions of the Merger Agreement between WEC and
Northern States Power Company ("NSP") to form Primergy Corporation
("Primergy"), each share of WEC common stock will become 1.0 share of Primergy
common stock and each share of NSP common stock will be converted into 1.626
shares (the "Ratio) of Primergy common stock upon consummation of the
Transaction. It is anticipated that Primergy will adopt NSP's common share
dividend payment level adjusted for the Ratio. NSP currently pays $2.70 per
share annually while WEC's annual dividend rate is currently $1.47 per share.
Based on the Ratio and NSP's current dividend rate, the pro forma dividend
rate for Primergy would be $1.66 per share at December 31, 1995. However, no
assurance can be given that such dividend rate will be in effect or will
remain unchanged, and Primergy reserves the right to increase or decrease its
dividend as may be required by law or contract or as may be determined by the
Primergy Board of Directors, in its discretion, to be advisable. Declaration
and timing of dividends on Primergy common stock will be a business decision
to be made by the Primergy Board from time to time based upon the results of
operations and financial condition of Primergy and its subsidiaries and such
other business considerations as the Primergy Board considers relevant in
accordance with applicable laws. Additional information concerning the
proposed merger of WEC and NSP may be found in MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - "RESULTS OF
OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL
STATEMENTS.
A-48
<PAGE> 78
APPENDIX B
This appendix provides a narrative description of the differences between the
electronic format document and the printed copy relating to the substantive
graphic or image material contained in the proxy statement.
1. Under the heading "The Board of Directors and Corporate Governance",
a black and white artist's sketch of each nominee and director appears
immediately to the left of the narrative of each respective nominee
and director. The artist's sketches appear on pages 4 and 5 of the
printed copy.
2. Under the heading "Performance Graphs", the tables in the electronic
format document represent datapoints for the graphs labeled "Five-Year
Cumulative Total Return" and "Ten-Year Cumulative Total Return", a paper
copy of which is being filed supplementally to the Branch Chief in the
Division of Corporation Finance. The performance graphs appear on pages
15 and 16 of the printed copy.
B-1
