<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (November 1, 1996):
Wisconsin Energy Corporation Common stock, $.01 Par Value,
111,268,677 shares outstanding.
Wisconsin Electric Power Company Common stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company common stock.
<PAGE> 2
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
ITEM PAGE
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I - FINANCIAL INFORMATION
1. Financial Statements:
Wisconsin Energy Corporation
Consolidated Condensed Income Statement . . . . . . . . . . . 3
Consolidated Condensed Balance Sheet. . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows. . . . . . . . . . . . . 5
Wisconsin Electric Power Company
Condensed Income Statement. . . . . . . . . . . . . . . . . . 6
Condensed Balance Sheet . . . . . . . . . . . . . . . . . . . 7
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements of
Wisconsin Energy Corporation and
Wisconsin Electric Power Company. . . . . . . . . . . . . . . 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Wisconsin Energy Corporation and
Wisconsin Electric Power Company. . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 19
5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 21
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 38
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
INTRODUCTION
Wisconsin Energy Corporation ("WEC") is a holding company whose principal
subsidiary is Wisconsin Electric Power Company ("WE"), an electric, gas and
steam utility. The unaudited interim financial statements presented in this
combined Form 10-Q report include the consolidated statements of WEC as well
as separate statements for WE. The unaudited statements have been prepared by
WEC and WE pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The WEC and WE financial statements should be read in
conjunction with the financial statements and notes thereto included in WEC's
and WE's respective Annual Reports on Form 10-K for the year ended
December 31, 1995. This combined Form 10-Q is separately filed by WEC and WE.
Information contained herein relating to any individual registrant is filed by
such registrant on its own behalf.
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<PAGE> 3
<TABLE>
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 359,213 $ 385,725 $ 1,044,374 $ 1,076,921
Gas 38,333 39,426 241,229 215,701
Steam 1,255 1,262 10,341 10,006
---------- ---------- ------------ ------------
Total Operating Revenues 398,801 426,413 1,295,944 1,302,628
Operating Expenses
Fuel 74,935 89,179 221,993 228,609
Purchased power 9,949 5,521 22,094 32,727
Cost of gas sold 25,388 24,476 151,179 129,815
Other operation expenses 90,374 102,953 288,625 298,572
Maintenance 20,295 23,319 71,375 82,531
Depreciation 49,505 46,745 152,706 136,893
Taxes other than income taxes 19,288 19,212 59,384 55,749
Federal income tax 24,990 30,854 77,274 83,865
State income tax 5,870 7,139 18,145 19,767
Deferred income taxes - net 2,634 (2,568) 6,310 (662)
Investment tax credit - net (1,120) (1,121) (3,361) (3,362)
---------- ---------- ------------ ------------
Total Operating Expenses 322,108 345,709 1,065,724 1,064,504
Operating Income 76,693 80,704 230,220 238,124
Other Income and Deductions
Interest income 3,495 5,168 14,285 12,935
Allowance for other funds used
during construction 869 1,020 2,001 2,674
Miscellaneous - net (1,987) (546) (6,064) 2,317
Income taxes 637 360 1,536 667
---------- ---------- ------------ ------------
Total Other Income and Deductions 3,014 6,002 11,758 18,593
Income Before Interest Charges and
Preferred Dividend 79,707 86,706 241,978 256,717
Interest Charges
Interest expense 27,505 29,316 83,362 87,046
Allowance for borrowed funds used
during construction (1,529) (1,346) (4,074) (3,796)
---------- ---------- ------------ ------------
Total Interest Charges 25,976 27,970 79,288 83,250
Preferred Dividend Requirement of Subsidiary 301 300 902 902
---------- ---------- ------------ ------------
Net Income $ 53,430 $ 58,436 $ 161,788 $ 172,565
========== ========== ============ ============
Average Common Shares Outstanding (Thousands) 110,906 110,093 110,848 109,602
Earnings Per Share of Common Stock $ 0.48 $ 0.53 $ 1.46 $ 1.57
Dividends Per Share of Common Stock $ 0.38 $ 0.3675 $ 1.1275 $ 1.0875
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
- 3 -
</TABLE>
<PAGE> 4
<TABLE>
FORM 10-Q
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 4,638,245 $ 4,531,404
Gas 493,826 489,739
Steam 40,384 40,078
Accumulated provision for depreciation (2,393,652) (2,288,080)
------------- -------------
2,778,803 2,773,141
Construction work in progress 133,235 78,153
Nuclear fuel - net 59,011 59,260
------------- -------------
Net Utility Plant 2,971,049 2,910,554
Other Property and Investments 676,901 637,958
Current Assets
Cash and cash equivalents 7,315 23,626
Accounts receivable 127,259 150,149
Accrued utility revenues 94,815 140,201
Materials, supplies and fossil fuel 184,071 153,713
Prepayments and other assets 52,015 63,830
------------- -------------
Total Current Assets 465,475 531,519
Deferred Charges and Other Assets
Accumulated deferred income taxes 139,649 140,844
Other 352,677 339,860
------------- -------------
Total Deferred Charges and Other Assets 492,326 480,704
------------- -------------
Total Assets $ 4,605,751 $ 4,560,735
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 686,470 $ 678,017
Retained earnings 1,230,087 1,193,248
------------- -------------
Total Common Stock Equity 1,916,557 1,871,265
Preferred stock 30,450 30,451
Long-term debt 1,330,600 1,367,644
------------- -------------
Total Capitalization 3,277,607 3,269,360
Current Liabilities
Long-term debt due currently 55,750 51,854
Short-term debt 170,533 156,919
Accounts payable 108,019 108,508
Accrued liabilities 70,185 68,634
Other 36,423 50,191
------------- -------------
Total Current Liabilities 440,910 436,106
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 501,262 483,410
Other 385,972 371,859
------------- -------------
Total Deferred Credits and Other Liabilities 887,234 855,269
------------- -------------
Total Capitalization and Liabilities $ 4,605,751 $ 4,560,735
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
- 4 -
</TABLE>
<PAGE> 5
<TABLE>
FORM 10-Q
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30
--------------------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 161,788 $ 172,565
Reconciliation to cash
Depreciation 152,706 136,893
Nuclear fuel expense - amortization 18,489 17,745
Conservation expense - amortization 16,874 16,114
Debt premium, discount & expense - amortization 7,702 8,923
Revitalization - net (1,438) (4,384)
Deferred income taxes - net 6,310 (662)
Investment tax credit - net (3,361) (3,362)
Allowance for other funds used during construction (2,001) (2,674)
Change in: Accounts receivable 22,890 (20,874)
Inventories (30,358) (7,654)
Accounts payable (489) (11,322)
Other current assets 57,201 44,274
Other current liabilities (12,217) 13,293
Other 17,021 4,158
---------- ----------
Cash Provided by Operating Activities 411,117 363,033
Investing Activities
Construction expenditures (252,274) (184,757)
Allowance for borrowed funds used during construction (4,074) (3,796)
Nuclear fuel (21,260) (15,097)
Nuclear decommissioning trust (20,857) (8,172)
Conservation investments - net 328 2,362
Other 7,719 (8,726)
---------- ----------
Cash Used in Investing Activities (290,418) (218,186)
Financing Activities
Sale of common stock 8,453 39,478
Retirement of preferred stock (1) -
Sale of long-term debt 12,838 108,941
Retirement of long-term debt (46,965) (127,006)
Change in short-term debt 13,614 (40,565)
Dividends on stock - common (124,949) (119,081)
---------- ----------
Cash Used in Financing Activities (137,010) (138,233)
---------- ----------
Change in Cash and Cash Equivalents $ (16,311) $ 6,614
========== ==========
Supplemental Information Disclosures
Cash Paid for
Interest (net of amount capitalized) $ 70,235 $ 78,275
Income taxes 84,771 111,638
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
- 5 -
</TABLE>
<PAGE> 6
<TABLE>
FORM 10-Q
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ------------ ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 359,213 $ 385,725 $ 1,044,374 $ 1,076,921
Gas 38,333 39,426 241,229 215,701
Steam 1,255 1,262 10,341 10,006
---------- ---------- ------------ ------------
Total Operating Revenues 398,801 426,413 1,295,944 1,302,628
Operating Expenses
Fuel 74,935 89,179 221,993 228,609
Purchased power 9,949 5,521 22,094 32,727
Cost of gas sold 25,388 24,476 151,179 129,815
Other operation expenses 90,374 102,953 288,625 298,572
Maintenance 20,295 23,319 71,375 82,531
Depreciation 49,505 46,745 152,706 136,893
Taxes other than income taxes 19,288 19,212 59,384 55,749
Federal income tax 24,990 30,854 77,274 83,865
State income tax 5,870 7,139 18,145 19,767
Deferred income taxes - net 2,634 (2,568) 6,310 (662)
Investment tax credit - net (1,120) (1,121) (3,361) (3,362)
---------- ---------- ------------ ------------
Total Operating Expenses 322,108 345,709 1,065,724 1,064,504
Operating Income 76,693 80,704 230,220 238,124
Other Income and Deductions
Interest income 2,163 4,076 10,857 9,780
Allowance for other funds used
during construction 869 1,020 2,001 2,674
Miscellaneous - net (971) 1,209 (3,356) 6,689
Income taxes (92) (620) (539) (1,785)
---------- ---------- ------------ ------------
Total Other Income and Deductions 1,969 5,685 8,963 17,358
Income Before Interest Charges 78,662 86,389 239,183 255,482
Interest Charges
Interest expense 26,446 27,986 80,387 84,041
Allowance for borrowed funds used
during construction (477) (576) (1,107) (1,510)
---------- ---------- ------------ ------------
Total Interest Charges 25,969 27,410 79,280 82,531
---------- ---------- ------------ ------------
Net Income 52,693 58,979 159,903 172,951
Preferred Stock Dividend Requirement 301 300 902 902
---------- ---------- ------------ ------------
Earnings Available for Common Stockholder $ 52,392 $ 58,679 $ 159,001 $ 172,049
========== ========== ============ ============
<FN>
Note - Earnings and dividends per share of common stock are not applicable because all of Wisconsin Electric
Power Company's common stock is owned by Wisconsin Energy Corporation.
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these
financial statements.
- 6 -
</TABLE>
<PAGE> 7
<TABLE>
FORM 10-Q
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 4,638,245 $ 4,531,404
Gas 493,826 489,739
Steam 40,384 40,078
Accumulated provision for depreciation (2,393,652) (2,288,080)
------------- -------------
2,778,803 2,773,141
Construction work in progress 133,235 78,153
Nuclear fuel - net 59,011 59,260
------------- -------------
Net Utility Plant 2,971,049 2,910,554
Other Property and Investments 445,690 427,627
Current Assets
Cash and cash equivalents 5,773 19,550
Accounts receivable 121,829 144,476
Accrued utility revenues 94,815 140,201
Materials, supplies and fossil fuel 184,071 153,713
Prepayments and other assets 48,590 59,784
------------- -------------
Total Current Assets 455,078 517,724
Deferred Charges and Other Assets
Accumulated deferred income taxes 135,387 136,581
Other 336,307 326,438
------------- -------------
Total Deferred Charges and Other Assets 471,694 463,019
------------- -------------
Total Assets $ 4,343,511 $ 4,318,924
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 613,582 $ 613,582
Retained earnings 1,116,573 1,082,983
------------- -------------
Total Common Stock Equity 1,730,155 1,696,565
Preferred stock 30,450 30,451
Long-term debt 1,288,600 1,325,169
------------- -------------
Total Capitalization 3,049,205 3,052,185
Current Liabilities
Long-term debt due currently 55,275 51,419
Short-term debt 158,224 150,694
Accounts payable 106,042 107,115
Accrued liabilities 66,254 66,694
Other 34,450 48,762
------------- -------------
Total Current Liabilities 420,245 424,684
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 497,523 479,828
Other 376,538 362,227
------------- -------------
Total Deferred Credits and Other Liabilities 874,061 842,055
------------- -------------
Total Capitalization and Liabilities $ 4,343,511 $ 4,318,924
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these
financial statements.
- 7 -
</TABLE>
<PAGE> 8
<TABLE>
FORM 10-Q
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30
--------------------------------------
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 159,903 $ 172,951
Reconciliation to cash
Depreciation 152,706 136,893
Nuclear fuel expense - amortization 18,489 17,745
Conservation expense - amortization 16,874 16,114
Debt premium, discount & expense - amortization 7,667 8,897
Revitalization - net (1,438) (4,384)
Deferred income taxes - net 6,310 (662)
Investment tax credit - net (3,361) (3,362)
Allowance for other funds used during construction (2,001) (2,674)
Change in: Accounts receivable 22,647 (20,250)
Inventories (30,358) (7,654)
Accounts payable (1,073) (11,024)
Other current assets 56,580 46,980
Other current liabilities (14,752) 9,873
Other 17,632 6,024
---------- ----------
Cash Provided by Operating Activities 405,825 365,467
Investing Activities
Construction expenditures (217,378) (169,486)
Allowance for borrowed funds used during construction (1,107) (1,510)
Nuclear fuel (21,260) (15,097)
Nuclear decommissioning trust (20,857) (8,172)
Conservation investments - net 328 2,362
Other (6,852) (4,967)
---------- ----------
Cash Used in Investing Activities (267,126) (196,870)
Financing Activities
Stockholder contribution - 30,000
Retirement of preferred stock (1) -
Sale of long-term debt 12,838 108,941
Retirement of long-term debt (46,530) (126,611)
Change in short-term debt 7,530 (54,725)
Dividends on stock - common (125,411) (119,120)
- preferred (902) (902)
---------- ----------
Cash Used in Financing Activities (152,476) (162,417)
---------- ----------
Change in Cash and Cash Equivalents $ (13,777) $ 6,180
========== ==========
Supplemental Information Disclosures
Cash Paid for
Interest (net of amount capitalized) $ 70,911 $ 78,236
Income taxes 89,022 113,972
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of these
financial statements.
- 8 -
</TABLE>
<PAGE> 9
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements for Wisconsin
Energy Corporation ("WEC") and unaudited financial statements for
Wisconsin Electric Power Company ("WE") should be read in conjunction with
WEC's and WE's respective 1995 Annual Reports on Form 10-K. In the
opinion of management, all adjustments, normal and recurring in nature,
necessary to a fair statement of the results of operations and financial
position of WEC and WE have been included in the accompanying income
statements and balance sheets. The results of operations for the three
months and the nine months ended September 30, 1996 are not, however,
necessarily indicative of the results which may be expected for the year
1996 because of seasonal and other factors.
2. On May 16, 1996, WE, the utility subsidiary of WEC, received a written
order from the Public Service Commission of Wisconsin ("PSCW") approving
replacement of the Unit 2 steam generators at Point Beach Nuclear Plant
("Point Beach") and reaffirming the PSCW's prior decision approving WE's
construction and operation of an Independent Spent Fuel Storage
Installation ("ISFSI") for dry cask storage of spent nuclear fuel at Point
Beach. The steam generator replacement began on October 5, 1996 during
the fall refueling outage and is scheduled to be completed in late
December 1996. WE resumed transfer of spent fuel to the ISFSI upon
receipt of the May 16, 1996 order. During welding operations on the third
cask loaded with spent fuel, hydrogen gas was ignited within the cask.
Loading has been halted until actions are implemented to prevent
reoccurrence of such an event and until the Nuclear Regulatory Commission
("NRC") has reviewed and accepted such actions. The NRC has conducted
an investigation of the event and has identified certain deficiencies
which WE expects will result in enforcement action, including possible
civil penalties. In August 1996, intervenors in the proceeding filed a
petition for judicial review of the PSCW's May 16, 1996 order, seeking
reversal of the order. WE intends to fully participate in the judicial
review proceeding and to vigorously oppose the petition. ITEM 5. OTHER
INFORMATION - "POINT BEACH UNIT 2 STEAM GENERATORS & DRY CASK STORAGE
PROJECT" in Part II of this report contains further information.
3. 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 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 of NSP and the current operating 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, the
stockholders of WEC and NSP voted to approve the Transaction.
- 9 -
<PAGE> 10
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
3. (Cont'd)
The Merger Agreement is subject to various conditions, including the
approval of various regulatory agencies. WEC and NSP are working towards
satisfaction of the various conditions to the Transaction, including
obtaining all required regulatory authorizations by early 1997 and
consummating the Transaction as soon as practicable thereafter. ITEM 5.
OTHER INFORMATION - "MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY"
in Part II of this report contains further information concerning the
Transaction including selected unaudited pro forma combined condensed
financial information.
- 10 -
<PAGE> 11
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation ("WEC" or the "Company") is a holding company
whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an
electric, gas and steam utility. As of September 30, 1996, approximately 94%
of WEC's consolidated total assets were attributable to WE. The following
discussion and analysis of financial condition and results of operations
includes both WEC and WE unless otherwise stated.
Merger - 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"). WEC and NSP are working
towards satisfaction of the various conditions to the Transaction, including
obtaining all required regulatory authorizations by early 1997 and
consummating the Transaction as soon as practicable thereafter. ITEM 5. OTHER
INFORMATION - "MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY" in Part II
of this report contains further information concerning the Transaction
including selected unaudited pro forma combined condensed financial
information.
The future operations and financial position of WEC and WE will be
significantly affected by the proposed Transaction. The following discussion
and analysis of financial condition and results of operations does not reflect
the potential effects of the Transaction on WEC nor on WE.
Cautionary Factors
The following discussion and analysis contains forward-looking statements.
When used in this document, "anticipate", "believe", "estimate", "expect",
"objective" and similar expressions are intended to identify such statements.
Forward-looking statements are subject to certain risks, uncertainties and
assumptions which could cause actual results to differ materially from those
projected, including those that are described in ITEM 5. OTHER INFORMATION -
"CAUTIONARY FACTORS" in Part II of this report.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by WEC's consolidated operating activities totaled $411 million
during the nine months ended September 30, 1996. This compares to $363
million provided during the same period in 1995. WEC's consolidated net
investing activities totaled $290 million for the nine months ended
September 30, 1996 compared to $218 million during the same period in 1995.
Investments during the first nine months of 1996 included $252 million for the
construction of new or improved facilities of which $217 million was for
utility projects and approximately $35 million was for non-utility projects.
Additional investments included $21 million for acquisition of nuclear fuel
- 11 -
<PAGE> 12
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
and approximately $21 million for the Nuclear Decommissioning Trust Fund
("Fund") for the eventual decommissioning of WE's Point Beach Nuclear Plant.
WEC's non-utility subsidiaries received net proceeds of approximately $15
million on the disposition of various investments as part of Other Investing
activities.
During the first nine months of 1996, WEC used $137 million for financing
activities compared to $138 million during the first nine months of 1995.
Financing activities during the first nine months of 1996 included the
retirement of $30 million of 4-1/2% WE first mortgage bonds, financed through
short-term borrowings.
On September 1, 1996, WEC resumed issuing new shares of common stock through
the Company's stock plans. Between January 1, 1996 and August 31, 1996, WEC
purchased shares required for the plans on the open market. In
September 1996, WEC issued 310,382 new shares of common stock through the
Company's stock plans and received proceeds of approximately $8.5 million.
Capital requirements for the remainder of 1996 are expected to be principally
for construction expenditures and payments to the Fund for the eventual
decommissioning of Point Beach. These cash requirements are expected to be
met through internal sources of funds from operations and short-term
borrowings. However, WE plans to issue up to $200 million of additional
intermediate-term debentures in a public offering in the fourth quarter of
1996 depending upon market conditions and other factors. Proceeds from the
sale of the debentures will be added to the general funds of WE and applied to
the repayment of short-term borrowings and for other general corporate
purposes.
RESULTS OF OPERATIONS
1996 THIRD QUARTER
Earnings
During the third quarter of 1996, WEC's consolidated net income and earnings
per share of common stock were $53.4 million and $0.48, respectively, compared
to $58.4 million and $0.53, respectively, during the third quarter of 1995.
As described below, earnings decreased primarily because lower 1996 third
quarter electric kilowatt-hour sales and 1996 retail electric and gas rate
decreases more than offset the favorable impact of decreases in certain
Operating Expenses.
Electric Revenues, Gross Margins and Sales
Primarily as a result of lower electric kilowatt-hour sales in 1996 compared
to 1995 and of annualized electric retail rate decreases effective
January 1, 1996 of approximately $33.4 million or 2.75% in Wisconsin and
- 12 -
<PAGE> 13
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 THIRD QUARTER RESULTS OF OPERATIONS (Cont'd)
$1.1 million or 3.3% in Michigan, total Electric Operating Revenues decreased
by 6.9% or $26.5 million during the three months ended September 30, 1996
compared to the three months ended September 30, 1995. Also contributing to
the 1996 decrease in Electric Operating Revenues were the effects of
renegotiated contracts effective in 1996 with various wholesale customers and
with the Empire and Tilden iron ore mines (the "Mines"), WE's two largest
retail customers, and the continued reduction in sales to Wisconsin Public
Power Inc. System ("WPPI"), WE's largest municipal power customer. The
renegotiated contracts contain discounts from previous rates charged to these
customers in exchange for contract extensions. WPPI has been reducing its
purchases from WE subsequent to acquiring generating capacity in 1990, 1993
and 1996.
==============================================================================
Three Months Ended September 30
---------------------------------------
Electric Gross Margin ($000) 1996 1995 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 359,213 $ 385,725 (6.9)
Fuel & Purchased Power 84,884 94,700 (10.4)
---------- ----------
Gross Margin $ 274,329 $ 291,025 (5.7)
==============================================================================
Between the comparative periods, the gross margin on Electric Operating
Revenues (Electric Operating Revenues less Fuel and Purchased Power expenses)
decreased by 5.7% or approximately $16.7 million. The gross margin decreased
because of the 1996 retail electric rate decrease noted above and because the
1996 decrease in electric sales were primarily to Residential customers who
are more sensitive to weather variations than other customer classes and who
contribute higher margins to earnings.
The lower 1996 Electric Operating Revenues more than offset the favorable
effect of a net decrease in 1996 Fuel and Purchased Power expenses of 10.4% or
$9.8 million. Total Fuel expenses decreased 16.0% or $14.2 million in the
third quarter of 1996 compared to the third quarter of 1995 primarily due to
lower average coal costs per ton consumed and to lower net generation in the
third quarter of 1996. Between the comparative periods, Purchased Power
expenses increased 80.2% or by $4.4 million and net generation decreased 8.0%
as a result of the lower total electric kilowatt-hour sales and as WE
substituted increased power purchases for generation.
- 13 -
<PAGE> 14
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 THIRD QUARTER RESULTS OF OPERATIONS (Cont'd)
==============================================================================
Three Months Ended September 30
---------------------------------------
Electric Sales (Megawatt-hours) 1996 1995 % Change
- ------------------------------- ---------- ---------- --------
Residential 1,747,795 1,919,726 (9.0)
Small Commercial/Industrial 1,928,793 1,883,412 2.4
Large Commercial/Industrial 2,865,994 2,872,876 (0.2)
Other 351,521 412,772 (14.8)
---------- ----------
Total Retail and Municipal 6,894,103 7,088,786 (2.7)
Resale-Utilities 297,044 320,764 (7.4)
---------- ----------
Total Sales 7,191,147 7,409,550 (2.9)
==============================================================================
The decrease in total electric sales during the third quarter of 1996 compared
to the same period in 1995 was primarily due to cooler summer weather in 1996.
As measured by cooling degree days, the third quarter of 1996 was 35.1% cooler
than the same period during 1995 and 9.8% cooler than normal. Electric energy
sales to the Mines increased approximately 1.8% or by 10,700 megawatt-hours
during the three months ended September 30, 1996 compared to the three months
ended September 30, 1995. Excluding the Mines, total electric sales decreased
approximately 3.4% and sales to the remaining Large Commercial/Industrial
customers decreased approximately 0.8%.
Gas Revenues, Gross Margins and Sales
Primarily as a result of lower total natural gas therm deliveries in the third
quarter of 1996 compared to the third quarter of 1995 and an annualized $8.3
million or 2.6% Wisconsin retail gas rate decrease effective January 1, 1996,
total Gas Operating Revenues decreased approximately 2.8% or by $1.1 million
and the gross margin on Gas Operating Revenues (Gas Operating Revenues less
Cost of Gas Sold) decreased by 13.4% or $2.0 million.
==============================================================================
Three Months Ended September 30
---------------------------------------
Gas Gross Margin ($000) 1996 1995 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 38,333 $ 39,426 (2.8)
Cost of Gas Sold 25,388 24,476 3.7
---------- ----------
Gross Margin $ 12,945 $ 14,950 (13.4)
==============================================================================
The retail gas rate decrease reduced the contribution of all 1996 retail therm
sales to gross margin. In addition, decreased 1996 therm deliveries to
Residential customers, who contribute higher margins to earnings than other
customer classes, lowered the gross margin in the third quarter of 1996
- 14 -
<PAGE> 15
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 THIRD QUARTER RESULTS OF OPERATIONS (Cont'd)
compared to the third quarter of 1995. The change in the Cost of Gas Sold,
which increased 3.7% in the third quarter of 1996 due to higher per unit cost
of purchased gas, is passed on to sales customers through the purchased gas
adjustment mechanism and does not affect gross margin.
==============================================================================
Three Months Ended September 30
---------------------------------------
Therms Delivered - Thousands 1996 1995 % Change
- ---------------------------- ---------- ---------- --------
Residential 20,680 23,955 (13.7)
Commercial/Industrial 13,007 12,506 4.0
Interruptible 4,245 2,555 66.1
---------- ----------
Total Sales 37,932 39,016 (2.8)
Transported Customer Owned Gas 53,759 51,079 5.2
Other - Interdepartmental 14,250 25,064 (43.1)
---------- ----------
Total Gas Delivered 105,941 115,159 (8.0)
==============================================================================
Natural gas therm deliveries during the third quarter of 1996 decreased 8.0%
compared to the third quarter of 1995, primarily due to lower electric
generation peaking requirements in the summer of 1996 compared to 1995.
Other-Interdepartmental therm deliveries decreased 43.1% during the third
quarter of 1996 compared to the same period in 1995 as a result of warmer 1995
summer weather. These therm deliveries to WE facilities, primarily the
natural gas fired peaking generating units at the Concord and Paris Generating
Stations, are at rates approved by the PSCW.
Operating Expenses
Other Operation Expenses decreased 12.2% or by approximately $12.6 million in
the third quarter of 1996 compared to the third quarter of 1995, primarily due
to a change in accounting for capitalized conservation expenses in 1996, lower
pension and benefit expenses and the timing of certain miscellaneous operating
expenses. Maintenance expense decreased approximately 13.0% or by
$3.0 million between the same comparative periods primarily as a result of
lower electric distribution system maintenance costs. Depreciation expense
increased 5.9% or by approximately $2.8 million in the third quarter of 1996
compared to the same period in 1995 primarily due to increased nuclear
decommissioning expenses in 1996.
1996 YEAR-TO-DATE
Earnings
During the first nine months of 1996, WEC's consolidated net income and
earnings per share of common stock were approximately $161.8 million and
$1.46, respectively, compared to approximately $172.6 million and $1.57,
- 15 -
<PAGE> 16
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 YEAR-TO-DATE RESULTS OF OPERATIONS (Cont'd)
respectively, during the first nine months of 1995. As described below,
earnings decreased primarily because 1996 retail electric and gas rate
decreases more than offset the favorable impact of increased 1996 year-to-date
gas therm deliveries and decreases in certain Operating Expenses.
Electric Revenues, Gross Margins and Sales
Primarily as a result of the electric retail rate decreases effective
January 1, 1996 noted above, total Electric Operating Revenues decreased by
3.0% or $32.5 million during the first nine months of 1996 compared to the
first nine months of 1995. Also contributing to the 1996 decrease in Electric
Operating Revenues were the effects of the renegotiated wholesale and Mine
contracts and the reduction in sales to WPPI noted above. A 1996 year-to-date
increase in total electric kilowatt-hour sales of 1.0% was not sufficient to
offset the impact on Electric Operating Revenues of the rate decreases, the
renegotiated contracts and the reduced sales to WPPI.
==============================================================================
Nine Months Ended September 30
---------------------------------------
Electric Gross Margin ($000) 1996 1995 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,044,374 $1,076,921 (3.0)
Fuel & Purchased Power 244,087 261,336 (6.6)
---------- ----------
Gross Margin $ 800,287 $ 815,585 (1.9)
==============================================================================
Between the comparative periods, the gross margin on Electric Operating
Revenues (Electric Operating Revenues less Fuel and Purchased Power expenses)
decreased approximately 1.9% or by $15.3 million. The lower 1996 Electric
Operating Revenues more than offset the favorable effect of decreased 1996 net
Fuel and Purchased Power expenses. Fuel expenses declined 2.9% in 1996
primarily due to lower average coal costs per ton consumed. Between the
comparative periods, Purchased Power expenses decreased 32.5% in 1996 as WE
substituted lower cost generation for power purchases.
==============================================================================
Nine Months Ended September 30
---------------------------------------
Electric Sales (Megawatt-hours) 1996 1995 % Change
- ------------------------------- ---------- ---------- --------
Residential 5,222,537 5,218,854 0.1
Small Commercial/Industrial 5,463,373 5,300,266 3.1
Large Commercial/Industrial 8,101,893 8,060,228 0.5
Other 1,092,404 1,169,807 (6.6)
---------- ----------
Total Retail and Municipal 19,880,207 19,749,155 0.7
Resale-Utilities 844,703 762,954 10.7
---------- ----------
Total Sales 20,724,910 20,512,109 1.0
==============================================================================
- 16 -
<PAGE> 17
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 YEAR-TO-DATE RESULTS OF OPERATIONS (Cont'd)
Total electric sales increased 1.0% during the first nine months of 1996
compared to the first nine months of 1995. Compared to the same periods in
1995, the cooler weather during the third quarter of 1996 noted above offset
most of the positive impact on 1996 electric sales of substantially colder
weather conditions earlier in 1996. Electric energy sales to the Mines
increased approximately 4.0% or by 68,000 megawatt-hours during the nine
months ended September 30, 1996 compared to the nine months ended
September 30, 1995. Excluding the Mines, total electric sales increased
approximately 0.8% and sales to the remaining Large Commercial/Industrial
customers decreased 0.4%.
Gas Revenues, Gross Margins and Sales
Despite the retail gas rate decrease effective January 1, 1996 noted above,
total Gas Operating Revenues increased 11.8% or by $25.5 million during the
first nine months of 1996 compared to the first nine months of 1995. Between
the comparative periods, the gross margin on Gas Operating Revenues (Gas
Operating Revenues less Cost of Gas Sold) increased 4.8% or by approximately
$4.2 million. An 8.2% increase in total therm deliveries during the nine
months ended September 30, 1996 more than offset the impact of the rate
decrease on Gas Operating Revenues and on gross margin.
==============================================================================
Nine Months Ended September 30
---------------------------------------
Gas Gross Margin ($000) 1996 1995 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 241,229 $ 215,701 11.8
Cost of Gas Sold 151,179 129,815 16.5
---------- ----------
Gross Margin $ 90,050 $ 85,886 4.8
==============================================================================
The gross margin grew because the increased therm deliveries were primarily to
Residential and Commercial customers who are more sensitive to weather
variations and who contribute higher margins to earnings than other customer
classes. As noted above, the change in the Cost of Gas Sold, which increased
16.5% during the first nine months of 1996 compared to the same period in 1995
due to higher therm sales and higher per unit cost of purchased gas, is passed
on to sales customers through the purchased gas adjustment mechanism and does
not affect gross margin.
- 17 -
<PAGE> 18
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART I - FINANCIAL INFORMATION (Cont'd)
1996 YEAR-TO-DATE RESULTS OF OPERATIONS (Cont'd)
==============================================================================
Nine Months Ended September 30
---------------------------------------
Therms Delivered - Thousands 1996 1995 % Change
- ---------------------------- ---------- ---------- --------
Residential 248,783 219,003 13.6
Commercial/Industrial 154,985 133,484 16.1
Interruptible 25,327 18,761 35.0
---------- ----------
Total Sales 429,095 371,248 15.6
Transported Customer Owned Gas 191,189 189,637 0.8
Other - Interdepartmental 27,915 38,133 (26.8)
---------- ----------
Total Gas Delivered 648,199 599,018 8.2
==============================================================================
Year-to-date natural gas therm deliveries increased primarily due to the
impact of the substantially colder weather conditions during the winter and
spring of 1996 compared to the same period in 1995. However,
Other-Interdepartmental therm deliveries decreased 26.8% in 1996 as a result
of the cooler summer 1996 weather compared to the summer of 1995.
Operating Expenses
Other Operation Expenses decreased 3.3% or by $9.9 million in the first nine
months of 1996 compared to the first nine months of 1995, primarily due to
lower capitalized conservation expenses in 1996, lower 1996 pension and
benefit expenses and the timing of certain miscellaneous operating expenses.
Maintenance expense decreased 13.5% or by approximately $11.2 million in the
first nine months of 1996 compared to the same period in 1995 in part due to
the costs of unscheduled or longer than expected outages in 1995 at two of
WE's most efficient power plants. Depreciation expense increased
approximately 11.6% or by $15.8 million between the same comparative periods
primarily due to higher depreciable plant balances and increased
decommissioning expenses in 1996. During the first nine months of 1996,
Operating Taxes Other Than Income Taxes increased 6.5% or by $3.6 million
compared to the same period in 1995 as a result of tax adjustments related to
prior periods.
Other Items
During the first nine months of 1996, Miscellaneous - Net Other Income and
Deductions decreased by approximately $8.4 million compared to the same period
in 1995 as a result of the change in accounting for capitalized conservation
investments in 1996 described above.
For certain other information which may impact WEC and WE's future financial
condition or results of operations, see ITEM 1. LEGAL PROCEEDINGS and ITEM 5.
OTHER INFORMATION in Part II of this report.
- 18 -
<PAGE> 19
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with ITEM 1. BUSINESS -
"ENVIRONMENTAL COMPLIANCE" and ITEM 3. LEGAL PROCEEDINGS in Part I of WEC's
and WE's respective Annual Reports on Form 10-K for the year ended
December 31, 1995 and with ITEM 1. LEGAL PROCEEDINGS in PART II of WEC's and
WE's combined Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996.
RATE MATTERS
Wisconsin Retail Jurisdiction
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 based upon a regulatory return on equity
of 12.5%. 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. 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. In March 1996, WE
filed testimony and exhibits with the PSCW related to the 1997 test year. The
PSCW staff has reviewed WE's 1997 test year financial data and testimony and
has developed a preliminary recommendation for an electric rate decrease of
$31.1 million or 2.4%, a gas rate decrease of $9.2 million or 2.9% and a steam
rate decrease of $0.3 million or 1.3% based upon a regulatory return on equity
of 11.1%. Hearings on this matter were concluded in October 1996 and it is
now pending a decision and an order by the PSCW. Any changes in rates would
not take effect until January 1, 1997.
ENVIRONMENTAL COMPLIANCE
Solid Waste Landfills
ETSM Property & City of West Allis: As previously reported, iron cyanide
bearing wastes were found on property owned by WE, located in the City of West
Allis, Wisconsin, and an adjacent property owned by Giddings & Lewis and/or
Kearney & Trecker. The wastes were removed and properly disposed of, with
WE's share of the cleanup at about $0.1 million. Adjacent landowners have
alleged that WE is the source of the material.
Also as previously reported, the City of West Allis discovered iron cyanide
bearing wastes on a separate parcel of property owned by the city at 113th St.
and Greenfield Avenue. The waste is believed to be process waste from a
former manufactured gas plant. The City of West Allis alleges that WE was the
source of this material.
Giddings & Lewis and the City of West Allis sent WE a notice that they intend
to sue WE under the Resource Conservation and Recovery Act of 1976.
- 19 -
<PAGE> 20
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
ENVIRONMENTAL COMPLIANCE (Cont'd)
On July 25, 1996, Giddings & Lewis, Kearney & Trecker and the City of West
Allis filed an action for damages in the Milwaukee County Circuit Court
against WEC, WE and Wisconsin Natural Gas Company ("WN"), a former wholly
owned gas utility subsidiary of WEC which was merged into WE effective
January 1, 1996, alleging they are responsible for the deposition of the
material and liable to the plaintiffs for trespass, breach of contract,
nuisance and other theories of liability as a result of the placement and
presence of such material on the properties. WEC and WE have answered the
lawsuit.
In a related matter, an insurance company filed suit against WE in the Circuit
Court for Fond du Lac County, Wisconsin on September 10, 1996. The insurance
company represents a contractor against which Giddings & Lewis and Kearney &
Trecker have asserted a counterclaim for damages resulting from the alleged
failure of the contractor to discover the iron cyanide bearing wastes noted
above on the Giddings & Lewis and/or Kearney & Trecker property. WE has not
yet answered the lawsuit.
Maxey Flats Nuclear Disposal Site: As previously reported, WE was advised in
1986 by the United States Environmental Protection Agency that it was one of a
number of Potentially Responsible Parties for cleanup at this low-level
radioactive waste site located in Morehead, Kentucky. The amount of waste
contributed by WE was significantly less than one percent of the total. Under
the terms of a de minimis consent decree entered by the court in April 1996,
WE paid $163,000 in May 1996 as its share of the settlement fund for site
cleanup costs closing out WE's participation in activities at the site. This
settlement was to have been completed in 1995, but was held up by a lawsuit
filed by unions concerning the amount of work on the cleanup to be done by
organized labor.
OTHER LITIGATION
Uranium Enrichment Charges: On February 9, 1995, WE and ten other utilities
filed an action in the U.S. Court of Federal Claims appealing the final
decision of the U.S. Enrichment Corporation contracting officer in
November 1994 which denied claims of the utilities for damages by reason of
overcharges for uranium enrichment services provided under Utility Services
Contracts between July 1, 1993 and September 30, 1994. The damages sought by
WE totaled $3.3 million. On August 9, 1996, the U.S. Court of Federal Claims
issued a decision dismissing the complaint in a companion case involving the
same issues. On October 10, 1996, that decision was appealed to the U.S.
Court of Appeals for the Federal Circuit. The utilities have requested that
their cases be suspended pending a decision by the Court of Appeals.
In a related matter, WE and six other utilities filed an action in the U.S.
Court of Federal Claims on October 11, 1996 appealing the final decision of
the U.S. Department of Energy ("DOE") contracting officer in October 1995,
which denied claims of the utilities for damages by reason of overcharges for
uranium enrichment services provided under Utility Services Contracts between
October 1, 1992 and June 30, 1993. The damages sought by WE total
$1.3 million.
- 20 -
<PAGE> 21
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
OTHER LITIGATION (Cont'd)
Personal Injury Suit: On October 1, 1994, a jury returned a $2.85 million
verdict against WN in a case in the Circuit Court for Milwaukee County,
involving a gas pipe fire which injured the plaintiff. On December 23, 1994,
WN resolved the litigation between itself and plaintiff with a payment of
$2.55 million to plaintiff, of which $550,000 was covered by WN's general
liability insurer. The contract with the construction company that installed
the gas pipe provides for indemnification of WN. On September 8, 1995, WN
commenced an action for such indemnification in Milwaukee County Circuit
Court, against the construction company and its insurers. On October 7, 1996,
the Circuit Court for Milwaukee County granted WN's motion for summary
judgment requiring such indemnification in the amount of $2.55 million.
ITEM 5. OTHER INFORMATION
POINT BEACH UNIT 2 STEAM GENERATORS & DRY CASK STORAGE PROJECT
In May 1996, WE received a written order from the PSCW ("PSCW Order")
approving replacement of the Unit 2 steam generators and reaffirming its prior
decision approving WE's construction and operation of an Independent Spent
Fuel Storage Installation ("ISFSI") for dry cask storage of spent nuclear fuel
at Point Beach Nuclear Plant ("Point Beach"). In July 1996, the PSCW denied a
petition for rehearing filed by the intervenors in the proceeding.
Failure by the PSCW to approve the steam generator replacement and reaffirm
authorization for the ISFSI would have jeopardized the continued operation of
Point Beach. The Unit 2 replacement steam generators are necessary due to the
degradation of tubes within the steam generators and will permit operation of
Unit 2 at least until its current operating license expires in 2013. The
steam generator replacement and fall refueling outage began on October 5, 1996
and is scheduled to be completed in late December 1996. The ISFSI provides
interim dry cask storage of spent fuel from Point Beach until the DOE takes
ownership of and removes the spent fuel under an existing contract mandated by
the Nuclear Waste Policy Act. The ISFSI is necessary because the spent fuel
pool inside the plant is nearly full. Construction of the ISFSI was completed
during 1995.
Two casks have been loaded with spent fuel and transferred to the ISFSI.
During welding operations on the third cask on May 28, 1996, hydrogen gas was
ignited within the cask. Loading has been halted until actions are
implemented to prevent reoccurrence of such an event and until the Nuclear
Regulatory Commission ("NRC") has reviewed and accepted such actions. The NRC
may act on this matter in late 1996 after which WE plans to resume the
transfer of spent fuel to the ISFSI.
The NRC has conducted an investigation of the hydrogen gas ignition and has
identified certain deficiencies which WE expects will result in enforcement
action, including possible civil penalties. These deficiencies and other
potential violations of NRC requirements which the NRC has found in various
plant activities were discussed with the NRC at a predecisional enforcement
conference in September 1996. WE expects the NRC to act on this matter in
late November 1996.
- 21 -
<PAGE> 22
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
POINT BEACH UNIT 2 STEAM GENERATORS & DRY CASK STORAGE PROJECT
(Cont'd)
On August 8, 1996, a group of intervenors in the PSCW Order proceeding filed
in Dane County Circuit Court a petition for judicial review of the PSCW Order.
The petition seeks reversal of the PSCW Order and a remand to the PSCW
directing it to deny WE's request for authorization to replace the steam
generators and to construct the ISFSI, or in the alternative, to correct the
alleged errors in the PSCW Order. WE has intervened in the proceeding to
vigorously oppose the petition. The petitioners filed a motion with the
Circuit Court to stay the PSCW Order pending a decision on the merits of their
petition. The petitioners also moved the Circuit Court for a temporary stay
on the PSCW Order until the motion for a stay could be heard and decided. On
October 7, 1996, the temporary stay was denied and on November 1, 1996, the
Circuit Court denied the motion to stay the PSCW Order. A briefing schedule
on the merits has been set with the final briefs due on December 27, 1996.
In early October 1996, the NRC requested all nuclear reactor licensees in the
United States to describe the processes used to ensure the adequacy and
integrity of the licensees' design bases for their plants and to ensure the
plants continue to be operated and maintained in accordance with the design
bases. WE expects to respond to the NRC in early February 1997 with respect
to Point Beach.
Information concerning the PSCW's initial approval of WE's application to
utilize dry cask storage for spent nuclear fuel generated at Point Beach and
pending legal proceedings with respect to the PSCW's decision, and information
with respect to WE's application to the PSCW for the replacement of the Unit 2
steam generators at Point Beach, is contained in ITEM 1. BUSINESS - "SOURCES
OF GENERATION - Nuclear" of WEC's and WE's respective annual reports on Form
10-K for the year ended December 31, 1995 and in ITEM 5. OTHER INFORMATION -
"POINT BEACH UNIT 2 STEAM GENERATORS & DRY CASK STORAGE PROJECT" in Part II of
WEC's and WE's combined Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996.
DEVELOPMENT OF ISO FOR WISCONSIN'S TRANSMISSION SYSTEM
The PSCW is conducting a generic investigation into the electric utility
industry in Wisconsin. As part of that investigation, it stated that it
intended to examine whether an Independent System Operator ("ISO") that
effectively separates control and operation of the transmission system from
the ownership of generation could be developed. On September 30, 1996, the
PSCW issued an order setting forth principles for an acceptable ISO. Among
the principles are that the ISO would operate the transmission system, be
governed by a Board of Directors not subject to control by transmission owners
and be the principal transmission planner. The PSCW indicated that the
preferred method of transfer of authority to the ISO is a contract with a
minimum length of five years. WE cannot predict the timing of implementation
of the ISO. The PSCW has indicated that it will consider the principles
contained in its September 30, 1996 ISO order as hearings are held on the
- 22 -
<PAGE> 23
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
DEVELOPMENT OF ISO FOR WISCONSIN'S TRANSMISSION SYSTEM (Cont'd)
Primergy Corporation merger application. See ITEM 5. OTHER INFORMATION -
"MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY" below for discussion of
the Merger Agreement between WEC and NSP.
WE is one of 22 utilities who are participating in the formation of a Midwest
ISO which would be responsible for ensuring nondiscriminatory open
transmission service access and the planning and security of the combined bulk
transmission systems of the utilities. These utilities are all transmission
facility owners within the East Central Area Reliability Council ("ECAR") or
the Mid-America Interconnected Network ("MAIN"). In its Wisconsin statewide
ISO order, the PSCW did not specifically address how the Wisconsin ISO might
be merged into the regional Midwest ISO once it was formed. Plans for the
Midwest ISO are expected to be filed with the Federal Energy Regulatory
Commission ("FERC") in early 1997 and would be implemented in stages after
acceptance by the FERC.
MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY
On April 28, 1995, Wisconsin Energy Corporation ("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 ("PUHCA"), and will change its name to Primergy Corporation
("Primergy"). Primergy will be the parent company of WEC's utility
subsidiary, Wisconsin Electric Power Company ("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 in LaCrosse and Hudson, Wisconsin with a net historical cost at
September 30, 1996 of $22.7 million. 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, the stockholders of WEC and NSP voted to
approve the proposed Transaction.
The Merger Agreement is subject to various conditions, including approval of
various regulatory agencies listed below. WEC and NSP are working towards
satisfaction of the various conditions to the Transaction, including obtaining
all required regulatory authorizations by early 1997 and consummating the
Transaction as soon as practicable thereafter.
WEC and NSP have proposed that upon consummation of the Transaction retail
electric rates be reduced by approximately 1.5% and frozen at that level for
four years in the jurisdictions in which they operate. WEC and NSP have also
- 23 -
<PAGE> 24
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY (Cont'd)
proposed a four year freeze in their wholesale electric rates. For retail gas
customers, WE and NSP-WI have proposed that Wisconsin Energy Company implement
a $4.2 million reduction in retail gas rates on an annualized basis and a four
year rate freeze for customers in Wisconsin and Michigan. NSP has proposed a
two year gas retail rate freeze in its Minnesota jurisdiction and a modest gas
retail rate reduction and four year gas retail rate freeze in its North Dakota
jurisdiction.
Securities and Exchange Commission: On April 5, 1996, WEC and NSP submitted
the initial filing with the Securities and Exchange Commission ("SEC") to
facilitate registration of Primergy under the PUHCA. Although WEC and NSP are
working to avoid divestitures, the PUHCA could require Primergy to divest of
certain of its gas utility and/or nonregulated operations as a condition of
approval of the Transaction.
Federal Energy Regulatory Commission: In July 1995, WEC and NSP filed an
application and supporting testimony with the Federal Energy Regulatory
Commission ("FERC") seeking approval of the Transaction. On May 28, 1996, WEC
and NSP filed additional evidence with the FERC, providing a detailed analysis
of generation "market power" and more specific information about the ISO
proposal included in earlier filings. This additional information was
provided to the FERC in response to concerns raised by intervenors in the
merger proceeding and by the FERC staff. The FERC asked for an analysis of
"market power" or Primergy's potential ability to manipulate its generation or
transmission systems to cause transmission constraints and raise prices.
The FERC held hearings on the merger application in June 1996. Subject to WEC
and NSP meeting eight conditions, the administrative law judge in the merger
proceeding ("ALJ") issued an initial decision on August 29, 1996 recommending
approval of the merger application. The ALJ's initial decision included
recommendations for a working Independent System Operator ("ISO") and
specifically rejected the need for divestiture of any generation or
transmission facilities as a requirement for ensuring open and equal access to
the transmission system. Intervenors in the merger proceedings filed briefs
on exceptions to the ALJ's initial decision in September 1996, including
opposition to the Primergy merger applicants' proposed ISO. In October 1996,
in response to the FERC staff and intervenor opposition to the merger based on
the claim that Primergy would be able to exercise transmission "market power"
after the merger, WEC and NSP filed with the FERC a Unilateral Settlement
Offer of the Primergy Merger Applicants ("Settlement Offer") regarding the
proposed ISO for Primergy. The Settlement Offer contains all of the elements
appropriate to an ISO and addresses all issues and concerns related to
transmission "market power".
Public Service Commission of Wisconsin: On August 4, 1995, WEC and NSP filed
an application with the Public Service Commission of Wisconsin ("PSCW")
seeking approval of the Transaction. In March 1996, WEC and NSP filed
testimony and exhibits supporting the August 4, 1995 merger application. In
July 1996, the PSCW held a prehearing conference on the merger proceeding. At
the prehearing conference, the parties agreed upon an extensive issues list
and a schedule for the hearing. In early October 1996, testimony and exhibits
- 24 -
<PAGE> 25
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY (Cont'd)
related to the merger application were submitted by the PSCW staff, the merger
applicants and intervenors. The PSCW staff proposed various conditions to
approval of the Transaction including potential divestiture of certain
electric and gas assets and larger reductions in retail electric rates than
contemplated in the original merger application. The merger applicants'
testimony contained the same ISO proposal that was filed with the FERC in the
Settlement Offer noted above. Intervenor testimony alleged the Transaction
would create "market power" and sought denial of the Transaction or imposition
of various conditions. Hearings began on October 30, 1996 and are expected to
conclude in November 1996.
Minnesota Public Utilities Commission: On August 4, 1995, WEC and NSP filed
an application with the Minnesota Public Utilities Commission ("MPUC") seeking
approval of the Transaction. On January 16, 1996, the Minnesota Department of
Public Service filed comments with the MPUC recommending approval of the
merger application. In June 1996, the MPUC issued an order which established
the procedural framework for the MPUC's consideration of the merger. The
issues of merger-related savings, electric rate freeze characteristics, NSP's
pre-merger revenue requirements, Primergy's ability to control the
transmission interface between the Mid-Continent Area Power Pool and the
Wisconsin and upper Michigan area, and the impact of control of this interface
on Minnesota utilities were set for contested case hearings. In early August
1996, WEC and NSP filed testimony and exhibits related to the contested case
hearing on its merger application. On August 5, 1996, an administrative law
judge issued a Pre-Hearing Order which set the evidentiary hearing dates from
November 18 through December 6, 1996.
Michigan Public Service Commission: On August 4, 1995, WEC and NSP filed an
application with the Michigan Public Service Commission ("MPSC") seeking
approval of the Transaction. On April 10, 1996, the MPSC approved the merger
application through a settlement agreement containing terms consistent with
the merger application.
North Dakota Public Service Commission: On August 4, 1995, WEC and NSP filed
an application with the North Dakota Public Service Commission ("NDPSC")
seeking approval of the Transaction. On June 26, 1996, the NDPSC approved the
merger application.
Other Federal Agencies: In the fall of 1995, WEC and NSP filed applications
with the Nuclear Regulatory Commission for license amendments and approvals
related to the Merger Agreement. Also in 1995, WEC and NSP received a ruling
from the United States Internal Revenue Service indicating that the proposed
successive merger transactions included in the Merger Agreement would not
prevent treatment of the Transaction as a tax-free reorganization under
applicable tax law if each transaction independently so qualified. WEC and
NSP will file required notifications with the Federal Trade Commission and the
United States Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Filings with regulatory agencies in the states where WEC and NSP provide
utility services and in which such filings are required include a request for
- 25 -
<PAGE> 26
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY (Cont'd)
deferred accounting treatment and rate recovery of costs incurred associated
with the Transaction. As of September 30, 1996, WEC has deferred $10.6
million of costs associated with the Transaction as a component of Deferred
Charges and Other Assets-Other.
Detailed information with respect to the Merger Agreement and the proposed
Transaction, including pro forma combined condensed financial information, is
contained in WEC's and WE's combined Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1996 and June 30, 1996, in WEC's and WE's respective
1995 Annual Reports on Form 10-K and in the Joint Proxy Statement/Prospectus
dated August 7, 1995 (contained in WEC's Registration Statement on Form S-4,
Registration No. 33-61619) relating to the meetings of the stockholders of WEC
and NSP to vote on the Merger Agreement and related matters.
Pro Forma Combined Condensed Financial Statements
The following summarized unaudited pro forma financial information combines
historical balance sheet and income statement information of WEC and NSP and
of WE and NSP-WI to give effect to the Transaction to form Primergy and
Wisconsin Energy Company. This information should be read in conjunction with
the historical financial statements and related notes thereto of WEC, NSP, WE
and NSP-WI.
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
estimated cost savings, will be subject to regulatory review and approval.
Cost savings resulting from the Transaction are estimated to be approximately
$2 billion over a 10-year period, net of transaction costs (including fees for
financial advisors, attorneys, accountants, consultants, filings and printing)
and costs to achieve the savings of approximately $30 million and
$122 million, respectively. None of the estimated cost savings, the costs to
achieve such savings, nor transaction costs are reflected in the unaudited pro
forma income statement information. With the exception of certain non-current
deferred tax balance sheet reclassifications described below, 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 balance sheet information gives effect to the
Transaction as if it had occurred at September 30, 1996. The unaudited pro
forma income statement information gives effect to the Transaction as if it
had occurred at January 1, 1996. 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.
- 26 -
<PAGE> 27
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
MERGER AGREEMENT WITH NORTHERN STATES POWER COMPANY (Cont'd)
Primergy Corporation Information: The following summarized Primergy unaudited
pro forma financial information reflects the combination of the historical
financial statements of WEC and NSP after giving effect to the Transaction to
form Primergy. A $139.6 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 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.
- 27 -
<PAGE> 28
<TABLE>
PRIMERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(In thousands)
<CAPTION>
NSP WEC Pro Forma Pro Forma
Pro Forma Balance Sheet (As Reported) (As Reported) Adjustments Combined
------------------------------------------ ------------ ------------ ------------ ------------
Assets
<S> <C> <C> <C> <C>
Utility Plant
Electric $ 6,739,374 $ 4,767,907 $ - $ 11,507,281
Gas 735,341 497,399 - 1,232,740
Other 321,319 40,384 - 361,703
------------ ------------ ------------ ------------
Total 7,796,034 5,305,690 - 13,101,724
Accumulated provision for depreciation (3,556,491) (2,393,652) - (5,950,143)
Nuclear fuel - net 104,948 59,011 - 163,959
------------ ------------ ------------ ------------
Net Utility Plant 4,344,491 2,971,049 - 7,315,540
Current Assets
Cash and cash equivalents 79,398 7,315 - 86,713
Accounts receivable - net 326,257 127,259 - 453,516
Accrued utility revenues 80,825 94,815 - 175,640
Fossil fuel inventories 56,801 113,891 - 170,692
Material & supplies inventories 108,553 70,180 - 178,733
Prepayments and other 65,053 52,015 - 117,068
------------ ------------ ------------ ------------
Total Current Assets 716,887 465,475 - 1,182,362
Other Assets
Regulatory assets 371,628 288,653 - 660,281
External decommissioning fund 239,797 303,083 - 542,880
Investments in non-regulated projects
and other investments 335,911 100,015 - 435,926
Non-regulated property - net 180,599 152,627 - 333,226
Intangible assets and other (Note 4) 205,623 324,849 (139,649) 390,823
------------ ------------ ------------ ------------
Total Other Assets 1,333,558 1,169,227 (139,649) 2,363,136
------------ ------------ ------------ ------------
Total Assets $ 6,394,936 $ 4,605,751 $ (139,649) $ 10,861,038
============ ============ ============ ============
Liabilities and Equity
Capitalization
Common stock equity:
Common stock (Note 1) $ 172,659 $ 1,111 $ (171,536) $ 2,234
Other stockholders' equity (Note 1) 1,932,789 1,915,446 171,536 4,019,771
------------ ------------ ------------ ------------
Total Common Stock Equity 2,105,448 1,916,557 - 4,022,005
Cumulative preferred stock and premium 240,469 30,450 - 270,919
Long-term debt 1,673,145 1,330,600 - 3,003,745
------------ ------------ ------------ ------------
Total Capitalization 4,019,062 3,277,607 - 7,296,669
Current Liabilities
Current portion of long-term debt 159,840 55,750 - 215,590
Short-term debt 222,601 170,533 - 393,134
Accounts payable 187,682 108,019 - 295,701
Taxes accrued 219,331 19,865 - 239,196
Other accrued liabilities 156,575 86,743 - 243,318
------------ ------------ ------------ ------------
Total Current Liabilities 946,029 440,910 - 1,386,939
Other Liabilities
Deferred income taxes (Note 4) 834,596 501,262 (139,649) 1,196,209
Deferred investment tax credits 152,753 86,867 - 239,620
Regulatory liabilities 269,983 162,462 - 432,445
Other liabilities and deferred credits 172,513 136,643 - 309,156
------------ ------------ ------------ ------------
Total Other Liabilities 1,429,845 887,234 (139,649) 2,177,430
------------ ------------ ------------ ------------
Total Capitalization and Liabilities $ 6,394,936 $ 4,605,751 $ (139,649) $ 10,861,038
============ ============ ============ ============
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
- 28 -
</TABLE>
<PAGE> 29
<TABLE>
PRIMERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(In thousands, except per share amounts)
<CAPTION>
NSP WEC Pro Forma Pro Forma
(As Reported) (As Reported) Adjustments Combined
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Utility Operating Revenues
Electric $1,605,708 $1,044,374 $ - $2,650,082
Gas 338,518 241,229 - 579,747
Steam - 10,341 - 10,341
---------- ---------- ----------- ----------
Total Operating Revenues 1,944,226 1,295,944 - 3,240,170
Utility Operating Expenses
Electric production-fuel and purchased power 410,900 244,087 - 654,987
Cost of gas sold & transported 207,088 151,179 - 358,267
Other operation 409,871 288,625 - 698,496
Maintenance 120,804 71,375 - 192,179
Depreciation and amortization 227,644 152,706 - 380,350
Taxes other than income taxes 182,889 59,384 - 242,273
Income taxes 119,495 98,368 - 217,863
---------- ---------- ----------- ----------
Total Operating Expenses 1,678,691 1,065,724 - 2,744,415
---------- ---------- ----------- ----------
Utility Operating Income 265,535 230,220 - 495,755
Other Income (Expense)
Equity earnings of unconsolidated investees 18,388 - - 18,388
Other income and deductions - net 8,148 11,758 - 19,906
---------- ---------- ----------- ----------
Total Other Income (Expense) 26,536 11,758 - 38,294
---------- ---------- ----------- ----------
Income Before Interest Charges
and Preferred Dividends 292,071 241,978 - 534,049
Interest Charges 97,240 79,288 - 176,528
Preferred Dividends of Subsidiaries 9,184 902 - 10,086
---------- ---------- ----------- ----------
Net Income $ 185,647 $ 161,788 $ - $ 347,435
========== ========== =========== ==========
Average Common Shares Outstanding (Note 1) 68,642 110,848 42,970 222,460
Earnings Per Common Share $ 2.70 $ 1.46 $ 1.56
========== ========== ==========
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
- 29 -
</TABLE>
<PAGE> 30
PRIMERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The pro forma combined condensed financial statements reflect the
conversion of each share of NSP Common Stock ($2.50 par value) outstanding
into 1.626 shares of Primergy Common Stock ($.01 par value) and the
continuation of each share of WEC Common Stock ($.01 par value)
outstanding as one share of Primergy Common Stock, as provided in the
Merger Agreement. The pro forma combined condensed financial statements
are presented as if the companies were combined during all periods
included therein.
2. The allocation between NSP and WEC and their customers of the estimated
cost savings resulting from the Transaction, net of the costs incurred to
achieve such savings, will be subject to regulatory review and approval.
Cost savings resulting from the Transaction are estimated to be
approximately $2 billion over a 10-year period, net of transaction costs
(including fees for financial advisors, attorneys, accountants,
consultants, filings and printing) and costs to achieve the savings of
approximately $30 million and $122 million, respectively. None of these
estimated cost savings, the costs to achieve such savings, or the
transaction costs have been reflected in the pro forma combined condensed
financial statements.
3. Intercompany transactions (including purchased and exchanged power
transactions) between NSP and WEC during the periods presented were
not material and, accordingly, no pro forma adjustments were made to
eliminate such transactions.
4. A pro forma adjustment has been made to conform the presentation of
noncurrent deferred income taxes in the pro forma combined condensed
balance sheet into one net amount. All other financial statement
presentation and accounting policy differences are immaterial and have
not been adjusted in the pro forma combined condensed financial
statements.
Pro Forma Combined Condensed Financial Statements (Cont'd)
Wisconsin Energy Company Information: The following summarized Wisconsin
Energy Company unaudited pro forma financial information combines historical
balance sheet and income statement information of WE and NSP-WI to give effect
to the Transaction, including the transfer of certain gas assets from NSP-WI
to New NSP. The unaudited pro forma income statement information does not
reflect adjustments for 1996 year to date revenues of $24.2 million and
related expenses associated with the transfer of certain gas assets from NSP-
WI to New NSP. A $135.4 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. A
net $22.7 million pro forma adjustment has also been made in the summarized
unaudited pro forma combined balance sheet information to reflect the transfer
of certain gas assets from NSP-WI to New NSP. Earnings per share of common
stock are not applicable because all of the Wisconsin Energy Company common
stock will be owned by Primergy.
- 30 -
<PAGE> 31
<TABLE>
WISCONSIN ENERGY COMPANY *
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(In thousands)
<CAPTION>
Adjusted
WE NSP-WI Pro Forma Pro Forma
Pro Forma Balance Sheet As Reported As Adjusted Adjustments Combined
------------------------------------------ ------------ ------------ ------------ ------------
(See Page 32) (Note 3)
<S> <C> <C> <C> <C>
Assets
Utility Plant
Electric $ 4,767,907 $ 886,837 $ - $ 5,654,744
Gas 497,399 63,919 - 561,318
Other 40,384 67,139 - 107,523
------------ ------------ ------------ ------------
Total 5,305,690 1,017,895 - 6,323,585
Accumulated provision for depreciation (2,393,652) (374,015) - (2,767,667)
Nuclear fuel - net 59,011 - - 59,011
------------ ------------ ------------ ------------
Net Utility Plant 2,971,049 643,880 - 3,614,929
Current Assets 455,078 88,252 - 543,330
Other Assets 917,384 50,093 (135,387) 832,090
------------ ------------ ------------ ------------
Total Assets $ 4,343,511 $ 782,225 $ (135,387) $ 4,990,349
============ ============ ============ ============
Liabilities and Equity
Capitalization
Common stock equity $ 1,730,155 $ 324,261 $ - $ 2,054,416
Cumulative preferred stock and premium 30,450 - - 30,450
Long-term debt 1,288,600 211,571 - 1,500,171
------------ ------------ ------------ ------------
Total Capitalization 3,049,205 535,832 - 3,585,037
Current Liabilities
Current portion of long-term debt 55,275 - - 55,275
Short-term debt 158,224 49,800 - 208,024
Other 206,746 44,335 - 251,081
------------ ------------ ------------ ------------
Total Current Liabilities 420,245 94,135 - 514,380
Other Liabilities 874,061 152,258 (135,387) 890,932
------------ ------------ ------------ ------------
Total Capitalization and Liabilities $ 4,343,511 $ 782,225 $ (135,387) $ 4,990,349
============ ============ ============ ============
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
* In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company.
- 31 -
</TABLE>
<PAGE> 32
<TABLE>
NORTHERN STATES POWER COMPANY - WISCONSIN
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(In thousands)
<CAPTION>
NSP-WI Pro Forma NSP-WI
Pro Forma Balance Sheet As Reported Adjustments As Adjusted
------------------------------------------ ------------ ------------ ------------
(Note 2)
<S> <C> <C> <C>
Assets
Utility Plant
Electric $ 886,837 $ - $ 886,837
Gas 98,525 (34,606) 63,919
Other 67,139 - 67,139
------------ ------------ ------------
Total 1,052,501 (34,606) 1,017,895
Accumulated provision for depreciation (388,896) 14,881 (374,015)
Nuclear fuel - net - - -
------------ ------------ ------------
Net Utility Plant 663,605 (19,725) 643,880
Current Assets 70,290 17,962 88,252
Other Assets 51,190 (1,097) 50,093
------------ ------------ ------------
Total Assets $ 785,085 $ (2,860) $ 782,225
============ ============ ============
Liabilities and Equity
Capitalization
Common stock equity $ 324,261 $ - $ 324,261
Cumulative preferred stock and premium - - -
Long-term debt 211,571 - 211,571
------------ ------------ ------------
Total Capitalization 535,832 - 535,832
Current Liabilities
Current portion of long-term debt - - -
Short-term debt 49,800 - 49,800
Other 44,335 - 44,335
------------ ------------ ------------
Total Current Liabilities 94,135 - 94,135
Other Liabilities 155,118 (2,860) 152,258
------------ ------------ ------------
Total Capitalization and Liabilities $ 785,085 $ (2,860) $ 782,225
============ ============ ============
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
- 32 -
</TABLE>
<PAGE> 33
<TABLE>
WISCONSIN ENERGY COMPANY *
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(In thousands)
<CAPTION>
WE NSP-WI Pro Forma Pro Forma
As Reported As Reported Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Utility Operating Revenues
Electric $ 1,044,374 $ 279,960 $ - $ 1,324,334
Gas 241,229 60,814 - 302,043
Steam 10,341 - - 10,341
----------- ----------- ----------- -----------
Total Operating Revenues 1,295,944 340,774 - 1,636,718
Utility Operating Expenses
Electric production - fuel
and purchased power 244,087 136,880 - 380,967
Cost of gas sold
and transported 151,179 39,758 - 190,937
Other operation 288,625 57,831 - 346,456
Maintenance 71,375 14,434 - 85,809
Depreciation and amortization 152,706 26,547 - 179,253
Taxes other than income taxes 59,384 10,798 - 70,182
Income taxes 98,368 15,903 - 114,271
----------- ----------- ----------- -----------
Total Operating Expenses 1,065,724 302,151 - 1,367,875
----------- ----------- ----------- -----------
Utility Operating Income 230,220 38,623 - 268,843
Other Income (Expense) 8,963 590 - 9,553
----------- ----------- ----------- -----------
Income Before Interest Charges
and Preferred Dividends 239,183 39,213 - 278,396
Interest Charges 79,280 14,063 - 93,343
----------- ----------- ----------- -----------
Net Income 159,903 25,150 - 185,053
Preferred Dividend
Stock Requirement 902 - - 902
----------- ----------- ----------- -----------
Earnings Available
for Common Stockholder $ 159,001 $ 25,150 $ - $ 184,151
=========== =========== =========== ===========
<FN>
See accompanying notes to unaudited pro forma combined condensed financial statements.
* In connection with the Merger Agreement, WE will be renamed Wisconsin Energy Company.
Note: Earnings per share of common stock are not applicable because all of the Wisconsin Energy Company
common stock will be owned by Primergy.
- 33 -
</TABLE>
<PAGE> 34
WISCONSIN ENERGY COMPANY *
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements reflect
the previously planned merger by WEC of WN into WE to form a single
combined utility subsidiary. Completion of the planned merger occurred on
January 1, 1996. WE's financial information has been restated to include
WN.
As previously reported, on April 28, 1995, WEC, WE's parent company, and
NSP entered into a Merger Agreement, which was amended and restated as of
July 26, 1995. The Merger Agreement provides for a strategic business
combination involving WEC and NSP in a "merger-of-equals" 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 NSP, WE (which will be renamed Wisconsin Energy
Company) and the other subsidiaries of WEC and NSP. The business
combination is intended to be tax-free for income tax purposes and to be
accounted for as a "pooling of interests". Subject to obtaining all
requisite approvals, WEC and NSP anticipate completing this business
combination as soon as practicable in 1997.
As part of this proposed merger, the unaudited pro forma combined
condensed financial statements reflect the merger of NSP-WI, currently a
wholly owned subsidiary of NSP, into Wisconsin Energy Company. Prior to
the merger of NSP-WI into Wisconsin Energy Company, New NSP will acquire
certain gas utility assets in LaCrosse and Hudson, Wisconsin from NSP-WI.
2. A pro forma adjustment has been made in the NSP-WI Unaudited Pro Forma
Condensed Balance Sheet at September 30, 1996 to reflect the sale at net
book value of the gas utility assets and liabilities of NSP-WI divisions
in LaCrosse and Hudson, Wisconsin to New NSP.
3. A pro forma adjustment has been made in the Wisconsin Energy Company
Unaudited Pro Forma Combined Condensed Balance Sheet at September 30, 1996
to conform the presentation of noncurrent deferred income taxes into one
net amount. All other financial statement presentation and accounting
policy differences are immaterial and have not been adjusted in the
unaudited pro forma combined condensed financial statements.
4. Unaudited pro forma income statement amounts for Wisconsin Energy Company
do not reflect the transfer of the LaCrosse and Hudson divisions by NSP-WI
to New NSP. The revenues related to those divisions for the nine months
ended September 30, 1996 were $24.2 million. The amount of related
expenses has not been quantified.
* In connection with the Merger Agreement, WE will be renamed Wisconsin Energy
Company.
- 34 -
<PAGE> 35
WISCONSIN ENERGY COMPANY *
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (Cont'd)
5. Intercompany transactions (including purchased power and exchanged power
transactions) between WE and NSP-WI during the period presented were not
material and, accordingly, no pro forma adjustments were made to eliminate
such transactions.
6. The allocation between NSP and WEC and their customers of the estimated
cost savings resulting from the transactions contemplated by the Merger
Agreement, net of the costs incurred to achieve such savings, will be
subject to regulatory review and approval. Cost savings resulting from
the proposed merger are estimated to be approximately $2 billion over a
10-year period, net of transaction costs (including fees for financial
advisors, attorneys, accountants, consultants, filings and printing) and
costs to achieve the savings of approximately $30 million and $122
million, respectively. None of these estimated cost savings, the costs to
achieve such savings, or transaction costs have been reflected in the
unaudited pro forma combined condensed financial statements.
* In connection with the Merger Agreement, WE will be renamed Wisconsin Energy
Company.
- 35 -
<PAGE> 36
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of WEC or WE. Such statements
are based upon management's current expectations and are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in the statements. When used in written documents or oral
presentations, the words "anticipate", "believe", "estimate", "expect",
"objective" and similar expressions are intended to identify forward-looking
statements. In addition to the assumptions and other factors referred to
specifically in connection with such statements, factors that could cause
WEC's or WE's actual results to differ materially from those contemplated in
any forward-looking statements include, among others, the following:
Operating, Financial and Industry Factors
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; unscheduled generation outages,
maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel
or gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; nuclear or environmental
incidents; resolution of spent nuclear fuel storage and disposal and steam
generator replacement issues; electric transmission or gas pipeline system
constraints; unanticipated organizational structure or key personnel
changes; collective bargaining agreements with union employees or work
stoppages; inflation rates; or demographic and economic factors affecting
utility service territories or operating environment.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; Nuclear Regulatory Commission operating regulation changes
related to Point Beach Nuclear Plant; or the siting approval process for
new generating and transmission facilities.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
- 36 -
<PAGE> 37
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
CAUTIONARY FACTORS (Cont'd)
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of WE to transfer funds to WEC in
the form of cash dividends, loans or advances.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission ("SEC").
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Changes in social attitudes regarding the utility and power industries.
* Possible risks associated with nonutility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; or environmental and energy regulations.
* Other business or investment considerations that may be disclosed from time
to time in WEC's or WE's SEC filings or in other publicly disseminated
written documents.
Business Combination Factors
* Consummation of the Transaction with NSP to form Primergy and Wisconsin
Energy Company, which will have a significant effect on the future
operations and financial position of WEC and WE, respectively. Specific
factors include:
* The ability to consummate the Transaction on substantially the basis
contemplated.
* The ability to obtain the requisite approvals by all applicable
regulatory authorities without the imposition of materially adverse
terms.
* The ability to generate the cost savings to Primergy that WEC and NSP
believe will be generated by the synergies resulting from the
Transaction. This depends upon the degree to which the assumptions upon
which the analyses employed to develop estimates of potential cost
savings as a result of the Transaction will approximate actual
experience. Such assumptions involve judgements with respect to, among
other things, future national and regional economic conditions, national
and regional competitive conditions, inflation rates, regulatory
treatment, weather conditions, financial market conditions, business
- 37 -
<PAGE> 38
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
CAUTIONARY FACTORS (Cont'd)
decisions and other uncertainties. All of these factors are difficult
to predict and many are beyond the control of WEC and NSP. While it is
believed that such assumptions are reasonable, there can be no assurance
that they will approximate actual experience or that the estimated cost
savings will be realized.
* The allocation of the benefits of cost savings between shareholders and
customers, which will depend, among other things, upon the results of
regulatory proceedings in various jurisdictions.
* The rate structure of Primergy's utility subsidiaries.
* Additional regulation to which Primergy will be subject as a registered
public utility holding company under PUHCA, in contrast to the more limited
impact of PUHCA upon WEC and NSP as exempt holding companies, and other
different or additional federal and state regulatory requirements or
restrictions to which Primergy and its subsidiaries may be subject as a
result of the Transaction (including conditions which may be imposed in
connection with obtaining the regulatory approvals necessary to consummate
the Transaction such as the possible requirement to divest gas utility
properties and possibly certain nonutility ventures).
* Factors affecting the dividend policy of Primergy including results of
operations and financial condition of Primergy and its subsidiaries and
such other business considerations as the Primergy Board of Directors
considers relevant.
WEC and WE undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed with the applicable Form 10-Q report:
Exhibit No.
WEC Exhibits
(27)-1 Wisconsin Energy Corporation ("WEC") Financial Data Schedule
for the nine months ended September 30, 1996.
- 38 -
<PAGE> 39
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
PART II - OTHER INFORMATION (Cont'd)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (Cont'd)
WE Exhibits
(12)-1 Wisconsin Electric Power Company ("WE") Statement of
Computation of Ratios of Earnings to Fixed Charges for the
twelve months ended September 30, 1996.
(27)-2 WE Financial Data Schedule for the nine months ended
September 30, 1996.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by WEC during the quarter ended
September 30, 1996.
No reports on Form 8-K were filed by WE during the quarter ended
September 30, 1996.
- 39 -
<PAGE> 40
FORM 10-Q
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
--------------------------------------
(Registrant)
/s/ C. H. Baker
--------------------------------------
Date: November 12, 1996 C. H. Baker, Treasurer, Chief Financial
Officer and duly authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------------
(Registrant)
/s/ C. H. Baker
--------------------------------------
Date: November 12, 1996 C. H. Baker, Vice President - Finance,
Chief Financial Officer and duly
authorized officer
- 40 -
<PAGE> 41
FORM 10-Q
WISCONSIN ENERGY CORPORATION
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1996
EXHIBIT INDEX
Exhibit No.
- -----------
The following Exhibits are filed with this report:
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the
nine months ended September 30, 1996.
- 41 -
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS OF WISCONSIN ENERGY
CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,971,049
<OTHER-PROPERTY-AND-INVEST> 676,901
<TOTAL-CURRENT-ASSETS> 465,475
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 492,326
<TOTAL-ASSETS> 4,605,751
<COMMON> 1,111
<CAPITAL-SURPLUS-PAID-IN> 685,359
<RETAINED-EARNINGS> 1,230,087
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,916,557
0
30,450
<LONG-TERM-DEBT-NET> 1,103,293
<SHORT-TERM-NOTES> 62,804
<LONG-TERM-NOTES-PAYABLE> 207,350
<COMMERCIAL-PAPER-OBLIGATIONS> 107,729
<LONG-TERM-DEBT-CURRENT-PORT> 35,475
0
<CAPITAL-LEASE-OBLIGATIONS> 19,957
<LEASES-CURRENT> 20,275
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,101,861
<TOT-CAPITALIZATION-AND-LIAB> 4,605,751
<GROSS-OPERATING-REVENUE> 1,295,944
<INCOME-TAX-EXPENSE> 98,368
<OTHER-OPERATING-EXPENSES> 967,356
<TOTAL-OPERATING-EXPENSES> 1,065,724
<OPERATING-INCOME-LOSS> 230,220
<OTHER-INCOME-NET> 11,758
<INCOME-BEFORE-INTEREST-EXPEN> 241,978
<TOTAL-INTEREST-EXPENSE> 79,288
<NET-INCOME> 162,690
902
<EARNINGS-AVAILABLE-FOR-COMM> 161,788
<COMMON-STOCK-DIVIDENDS> 124,949
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 411,117
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.46
<FN>
See financial statements and footnotes in accompanying 10-Q.
</TABLE>
