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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
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Filed by a Party other than the Registrant
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Check the appropriate box:
Preliminary Proxy Statement
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Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
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X Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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WISCONSIN ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement,if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
X No fee required
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
- ---
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (Set forth the amount on which
the filing fee is calculated and state how it was determined.)
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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Fee paid previously with preliminary materials.
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--- Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Wisconsin Energy Corporation
231 West Michigan
P.O. Box 2949
Milwaukee, WI 53201
March 14, 1997
Dear Wisconsin Energy Corporation Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders on
Wednesday, April 30, 1997, at 9:30 a.m. at the Grand Milwaukee Hotel, 4747
South Howell Avenue, in Milwaukee, WI. The hotel is located across the street
from General Mitchell International Airport. Free parking will be available.
The meeting gives us an opportunity to vote on the proposals described in the
accompanying Notice and Proxy Statement. A report on the business and affairs
of Wisconsin Energy and our expectations for the future, including our
progress toward the merger with Northern States Power Company, will also be
discussed.
The proxy card attached below lists all the matters that require your vote.
Please sign and promptly return this card in the postage-paid envelope
provided so that it will be received by April 15, 1997. You may cancel your
proxy before the meeting and vote in person if you wish. The proxy card also
provides a separate box for you to indicate if you plan to attend the Annual
Meeting. Place a mark in this box ONLY if you plan on attending the meeting.
We have taken a new approach to the distribution of the Summary Annual Report
this year. In the past we have received complaints from individual
stockholders who get multiple copies of the Summary Annual Report, or who
question the cost of sending it out to all stockholders. This year we decided
to give you the choice. If you would like to receive a copy of the Summary
Annual Report, simply check the appropriate box found below. We will mail out
your copy, via 3rd class mail, in late spring. Because of the importance of
the "Letter from the Chairman," which provides an overview of our business
operations, we have included a copy of the letter in this package. Full
financial statements are included in the appendix to the enclosed proxy
statement.
If you have more than one proxy card and are making a request for the Summary
Annual Report or for an admission ticket for the Annual Meeting, please mark
your request on only one card to avoid duplicate mailings.
I appreciate your continued interest in Wisconsin Energy and hope to see you
at the meeting. If you have any questions about the Annual Meeting or any
other matter, please call our toll-free Stockholder Hotline at 1-800-558-9663.
Sincerely,
Ann Marie Brady
Corporate Secretary
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PLEASE DETACH PROXY CARD HERE
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Please mark your
[X] votes as in this
example.
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The Board of Directors recommends a vote FOR Proposals 1 and 2.
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1. Elect John F. Bergstrom
and Geneva B.
Johnson as
Directors:
FOR WITHHELD
ALL FROM ALL
[ ] [ ]
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For, except vote withheld from the above nominee:
2. Approve Appointment of Auditors
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
WHERE NO VOTING INSTRUCTIONS ARE GIVEN, THE SHARES REPRESENTED
BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
Please sign exactly as name(s) appears hereon. Joint owners
should each sign personally. When signing as executor,
administrator, corporation officer, attorney, agent, trustee,
guardian or in other representative capacity, please state
your full title as such.
Signature:________________________________________ Date: _________________
Signature:________________________________________ Date:__________________
(If Held Jointly)
I PLAN TO ATTEND MEETING
If you check this box to the right
an admission card will be sent to you. [ ]
I would like to receive a
Summary Annual Report [ ]
I have made comments on this card
or an attachment [ ]
Your comments are welcome:
...............................................
...............................................
...............................................
...............................................
...............................................
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WISCONSIN ENERGY CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
April 30, 1997
- ------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE
ANNUAL MEETING OF STOCKHOLDERS ON April 30, 1997. Your shares of stock
will be voted as you specify below. IF NO CHOICE IS SPECIFIED, YOUR
PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2. P
R
By signing this PROXY, you revoke all prior proxies and appoint O
Richard A. Abdoo and Ann Marie Brady, or either of them, as proxies, with X
the power to appoint substitutes, to vote your shares on the matters Y
shown below and on any other matters which may come before the Annual
Meeting of Stockholders and all adjournments of the Meeting.
1. Elect John F. Bergstrom and Geneva B. Johnson as Directors;
2. Ratify appointment of PRICE WATERHOUSE LLP as Independent
Public Accountant;
all as described in the Notice and Proxy Statement relating to the
Annual Meeting, receipt of which is hereby acknowledged.
If you hold shares in Wisconsin Energy Corporation's Stock Plus Investment
Plan or Wisconsin Electric Power Company's Management or Represented Employee
Savings Plans, this Proxy constitutes voting instructions for any shares so
held by the undersigned.
SEE REVERSE SIDE. IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD
OF DIRECTORS' RECOMMENDATIONS, JUST SIGN AND DATE ON THE REVERSE
SIDE; YOU NEED NOT MARK ANY VOTING BOXES.
SEE REVERSE
SIDE
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TABLE OF CONTENTS
Page
Notice of Annual Meeting
Proxy Statement
Proposal 1: Election of Directors 1
Proposal 2: Approval of Appointment of
Independent Public Accountant 2
Other Matters 3
Voting of Shares 3
Corporate Governance 4
Corporate Governance Guidelines 4
Evaluation of the Chief Executive Officer 7
Self-Evaluation of the Board 8
Committees of the Board of Directors 8
Meetings of the Board and its Committees 9
Compensation of the Board of Directors 9
Overview of Executive Officers' Compensation 10
Compensation Committee Report on Executive Compensation 10
Executive Officers' Compensation 14
Retirement Plans 17
Stock Ownership of Directors, Nominees and Executive Officers 19
Performance Graph 20
1998 Annual Meeting 21
Availability of Form 10-K 22
Appendix A: Annual Financial Statements and Review of Operations
Selected Financial and Operating Data A-1
Management's Discussion and Analysis of Financial Condition and
Results of Operations A-2
Financial Statements
Consolidated Income Statement A-29
Consolidated Balance Sheet A-30
Consolidated Statement of Cash Flows A-32
Consolidated Capitalization Statement A-33
Consolidated Common Stock Equity Statement A-34
Notes to Financial Statements A-35
Report of Independent Accountants A-54
Market For Common Equity and Related Stockholder Matters A-55
Business of the Company A-56
Directors and Officers A-57
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NOTICE
OF
ANNUAL MEETING OF STOCKHOLDERS
March 14, 1997
To the Stockholders of Wisconsin Energy Corporation:
This year, the Wisconsin Energy Corporation Annual Meeting of Stockholders
will be held in the morning at a new location as follows:
Wednesday, April 30, 1997
9:30 a.m., Central Time
Grand Milwaukee Hotel
4747 South Howell Avenue
Milwaukee, Wisconsin 53207
In view of the early start of the meeting, instead of our usual fare and
entertainment after the meeting, light refreshments will be served before the
meeting.
At the meeting, stockholders will be asked to:
* elect two directors for terms expiring at the 2000 Annual Meeting of
Stockholders,
* approve the appointment of Price Waterhouse LLP as independent public
accountant for 1997, and
* consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on February 26, 1997 will be
entitled to vote at the meeting.
By Order of the Board of Directors
/s/Ann Marie Brady
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Ann Marie Brady
Corporate Secretary
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PROXY STATEMENT
This proxy statement is being furnished to stockholders beginning on or about
March 14, 1997 in connection with the solicitation of proxies by the Wisconsin
Energy Corporation ("WEC", "Corporation" or "Company") Board of Directors to
be used at the Annual Meeting of Stockholders on April 30, 1997 at the Grand
Milwaukee Hotel, 4747 South Howell Avenue, Milwaukee, Wisconsin, and at all
adjournments of the meeting, for the purposes listed in the preceding Notice
of Annual Meeting of Stockholders.
PROPOSAL 1: ELECTION OF DIRECTORS
The WEC Bylaws provide that the directors be divided into three classes, as
nearly equal in size as possible. The term of one class expires each year.
The terms of Directors John F. Bergstrom and Geneva B. Johnson expire at the
1997 Annual Meeting.
JOHN F. BERGSTROM and GENEVA B. JOHNSON have been nominated by the Board to
serve for terms expiring at the 2000 Annual Meeting of Stockholders or until
they are reelected or until their successors are duly elected and qualified.
Each nominee has consented to being nominated and to serve if elected. If any
nominee becomes unable to serve for any reason, which event is not
anticipated, the proxies will be voted for a substitute nominee as may be
selected by the WEC Board upon the recommendation of the Nominating and Board
Affairs Committee.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR DIRECTOR NOMINEES JOHN F.
BERGSTROM AND GENEVA B. JOHNSON.
Biographical data regarding each nominee and director is shown below. Ages
are as of December 31, 1996.
NOMINEES FOR TERMS EXPIRING IN YEAR 2000
JOHN F. BERGSTROM. Age 50. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997; President and Chief Executive Officer of
Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and
operates numerous automobile dealerships, three hotels and an automotive
leasing company. Director of WEC since 1987. Director of Wisconsin Electric
Power Company ("Wisconsin Electric" or "WE"), WEC's principal subsidiary,
since 1985. Director of Bergstrom Corporation, First National Bank-Fox
Valley, Kimberly-Clark Corporation, Midwest Express Holdings, Inc., Universal
Foods Corporation, Driver's Mart Worldwide, Inc. and The Green Bay Packers,
Inc.
GENEVA B. JOHNSON. Age 67. Corporate Director. Former President and Chief
Executive Officer of Family Service America, an organization representing
private agencies in the United States and Canada that provide human service
programs, from 1983 to 1994. Director of WEC and Wisconsin Electric since
1988. Director of Firstar Bank Milwaukee, N.A.
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DIRECTORS CONTINUING IN OFFICE -- TERMS EXPIRING IN YEAR 1998
ROBERT A. CORNOG. Age 56. Chairman of the Board, President and Chief
Executive Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is
a developer, manufacturer and distributor of professional hand and power
tools, diagnostic and shop equipment, and tool storage products. Director of
WEC since 1993. Director of Wisconsin Electric since 1994. Director of Snap-
on Incorporated and Johnson Controls, Inc.
RICHARD R. GRIGG. Age 48. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since January 1995; Chief Nuclear
Officer of Wisconsin Electric since December 1996. President and Chief
Operating Officer of Wisconsin Natural Gas Company ("Wisconsin Natural" or
"WN") during 1995. Wisconsin Natural was WEC's gas utility subsidiary; WN
merged into Wisconsin Electric effective January 1, 1996. Group Executive and
Vice President of Wisconsin Electric from June to December 1994. Vice
President of Wisconsin Electric from 1990 to 1994. Director of WEC since
1995. Director of Wisconsin Electric since 1994. Director of Wisconsin
Natural during 1995.
FREDERICK P. STRATTON, JR. Age 57. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines, since
1986. Director of WEC since 1987. Director of Wisconsin Electric since 1986.
Director of Briggs & Stratton Corporation, Banc One Corporation, Midwest
Express Holdings, Inc. and Weyco Group, Inc.
DIRECTORS CONTINUING IN OFFICE -- TERMS EXPIRING IN YEAR 1999
RICHARD A. ABDOO. Age 52. Chairman of the Board, President and Chief
Executive Officer of WEC since 1991. Chairman of the Board and Chief
Executive Officer of Wisconsin Electric since 1990. Director of WEC since
1988. Director of Wisconsin Electric since 1989. Chairman of the Board and
Chief Executive Officer of Wisconsin Natural from 1990 to 1995. Director of
Wisconsin Natural from 1989 to 1995. Director of Marshall & Ilsley
Corporation, Sundstrand Corporation and United Wisconsin Services, Inc.
JOHN F. AHEARNE. Age 62. Director of the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that provides grants to graduate
students and conducts national meetings on major scientific issues, since
1989. Adjunct Scholar of Resources for the Future, an economic research, non-
profit institute, since 1993. Lecturer, Duke University, since 1995. Vice
President and Senior Fellow of Resources for the Future from 1984 to 1993.
Commissioner of the United States Nuclear Regulatory Commission from 1978 to
1983, serving as its Chairman from 1979 to 1981. Member, National Academy of
Engineering. Director of WEC and Wisconsin Electric since 1994.
PROPOSAL 2: APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors has appointed the firm of PRICE WATERHOUSE LLP ("PW")
as independent public accountant to audit the books, records and accounts of
WEC and its subsidiaries with respect to their operations for the year 1997
and recommends that the stockholders approve such appointment.
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PW has acted as independent public accountant for WEC or its predecessors
continuously since 1932. Representatives of the firm will attend the Annual
Meeting to make any statement they may consider appropriate and to respond to
questions that may be directed to them.
If (i) the foregoing proposal is not approved by the stockholders, or (ii) PW
shall become incapable of accepting or continuing the appointment, or (iii)
the employment of PW is otherwise discontinued, the Audit Committee will
recommend and the Board of Directors will appoint another independent public
accountant.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS INDEPENDENT PUBLIC ACCOUNTANT.
OTHER MATTERS
The Board of Directors is not aware of any other matters that may properly
come before the meeting. The WEC Bylaws set forth the requirements that must
be followed should a stockholder wish to propose any floor nominations for
director or floor proposals at annual or special meetings of stockholders. In
the case of annual meetings, the Bylaws state, among other things, that notice
and certain other documentation must be provided to WEC at least 70 days and
not more than 100 days before the scheduled date of the annual meeting. If
any other matters do properly come before the meeting, it is the intention of
the persons named as the proxies in the accompanying form of proxy to vote the
proxy in accordance with their best judgment on such matters.
VOTING OF SHARES
STOCKHOLDERS OF RECORD. Common stockholders of record at the close of
business on February 26, 1997 are entitled to vote on matters to be presented
at the Annual Meeting. On that date, there were 111,905,008 shares of WEC
common stock outstanding. Each outstanding share is entitled to one vote upon
each matter presented. A majority of the votes entitled to be cast by the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum. A list of stockholders of record entitled to vote at the meeting will
be available for inspection by stockholders at WEC's principal business office
at 231 West Michigan Street, Milwaukee, Wisconsin, prior to the meeting. The
list will also be available on the day of the meeting at the Grand Milwaukee
Hotel.
Stockholders whose shares are held in the name of a broker, bank or other
holder of record are invited to attend the meeting, but may not vote at the
meeting unless they have first obtained a proxy, executed in the stockholder's
favor, from the holder of record.
Form of Proxy. Stockholders may vote in person or by properly executed proxy.
By completing and returning the form of proxy, the stockholder authorizes
Richard A. Abdoo and Ann Marie Brady to vote all of the stockholder's shares
on the stockholder's behalf. All completed proxy forms returned will be voted
as the stockholders direct. If no direction is given, the proxies will be
voted FOR director nominees John F. Bergstrom and Geneva B. Johnson and FOR
the proposal to approve the appointment of Price Waterhouse LLP as WEC's
independent public accountant. A proxy may be revoked by voting in person at
the meeting, by written notice to WEC's Corporate Secretary, or by delivery of
a later-dated proxy, in each case prior to the closing of the polls for voting
at the Annual Meeting. Attendance at the meeting will not in itself
constitute revocation of a proxy.
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If a stockholder is a participant in WEC's Stock Plus Investment Plan ("Stock
Plus") or owns shares through investments in the WEC Common Stock Fund of
Wisconsin Electric Power Company's Employee Savings Plan ("ESP"), the proxy
will serve as voting instructions for the participant's shares held in those
plans, as well as a proxy for shares registered in the participant's name.
Shares of plan participants will be voted by the administrator for Stock Plus
and the trustee for the ESP as directed by such participants in their
proxies/voting instructions. If a proxy is not returned for shares held in
Stock Plus, such shares will not be voted by the administrator. If a proxy is
not returned for shares held in the WEC Common Stock Fund of the ESP, the
trustee for such plan will vote those shares in the same proportion that all
shares in the plan funds are voted.
SOLICITATION OF PROXIES. WEC will bear the cost of the solicitation of
proxies. Proxies may be solicited by employees of WEC or its subsidiaries by
mail, by telephone, personally or by other communications, without
compensation apart from their normal salaries. It is not anticipated that any
other persons will be engaged to solicit proxies or that compensation will be
paid for that purpose. However, WEC may seek the services of an outside proxy
solicitor in the event such services become necessary.
VOTING REQUIREMENTS AND PROCEDURES. The voting requirements and procedures
described below are based upon the provisions of the Wisconsin Business
Corporation Law, WEC's charter documents and any other requirements applicable
to the matters to be voted upon.
Directors will be elected by a plurality of the votes cast by the shares
entitled to vote at the Annual Meeting, as long as a quorum is present.
"Plurality" means that the individuals who receive the largest number of votes
are elected as directors up to the maximum number of directors to be chosen in
the election. Therefore, any shares not voted, whether by withheld authority,
broker non-vote or otherwise, have no effect in the election of directors.
With respect to appointment of the independent public accountant, if a quorum
is present, the affirmative vote of a majority of the votes cast will be
required. Abstentions and shares which are the subject of broker non-votes
will count toward establishing a quorum. Abstentions and broker non-votes
will have no effect on the outcome of the voting.
The voted proxies will be tabulated by Boston EquiServe, which will also serve
as inspector of election.
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE GUIDELINES. The Board periodically reviews trends in
corporate governance to ensure that it is providing effective governance over
the affairs of the Corporation. In 1996, the Board directed its Nominating
and Board Affairs Committee to review best practices in corporate governance.
The committee benchmarked seven companies from various industries, chosen for
their complexity, financial performance, governance procedures and practices,
and reputation. Board members also completed a survey designed to determine
their opinions about and how to address specific governance issues. These
exercises provided the Board with an opportunity to identify and examine its
goals and responsibilities and, if necessary, adopt new policies and practices
consistent with these responsibilities. The result was the development of
Wisconsin Energy's formal Corporate Governance Guidelines--a framework from
which the Board conducts its business. The Guidelines are intended to be a
living document that will change from time to time as business conditions
dictate. In support of the Board's goal of open communication, the Guidelines
are provided below in their entirety.
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1. ROLE OF THE BOARD. The primary responsibility of the Board is to provide
effective governance over the affairs of the Corporation for the benefit of
its stockholders and other constituencies. In addition, the Board selects the
Corporation's Chief Executive Officer, acts as an advisor and counselor and
evaluates the Chief Executive Officer's performance.
2. INDEPENDENCE OF THE BOARD. To be independent, the Board should consist of
a significant majority of outside, independent directors, with a minimum of
two and a maximum of three inside, employee directors. The Board's standard
of independence is defined as the standard used by the New York Stock Exchange
in determining independence of directors on Audit Committees.
3. SIZE OF THE BOARD. The appropriate size of the Board is seven to twelve
members. This range may be exceeded from time to time, if appropriate, to
accommodate the addition of an outstanding director candidate.
4. SELECTION OF DIRECTORS. The Board recommends to stockholders qualified
individuals who have the skills to successfully perform the role of a Company
director. The Nominating and Board Affairs Committee, with input from the
Chairman of the Board and the Chief Executive Officer, screens director
candidates, including those recommended by stockholders. The criteria for
reviewing candidates include characteristics such as: proven integrity, mature
and independent judgment, vision and imagination, ability to objectively
appraise problems, ability to evaluate strategic options and risks, sound
business experience and acumen, relevant technological, political, economic or
social/cultural expertise, social consciousness, achievement of prominence in
career, familiarity with national and international issues affecting the
Company's businesses, absence of conflicts of interest, ability to work well
with others and contribution to the Board's desired diversity and balance.
5. DIRECTOR ORIENTATION. New directors will participate in an orientation
program, including visits to Company facilities and discussions with key
executives.
6. BOARD LEADERSHIP. The Board retains the right to exercise its discretion
in combining or separating the offices of Chairman of the Board and Chief
Executive Officer. This determination is made depending on what is best for
the Company in light of all circumstances. The Board does not believe there
is a need to formally designate a "lead" director as such leadership evolves
naturally and may vary depending on the issue under consideration.
7. DIRECTORS' RETIREMENT AND TENURE POLICY. The Board believes that it is in
the best interest of the Company that (a) independent directors resign after
the annual meeting in the year in which the director attains the age of 70,
(b) no employee director serve as a director after ceasing to be an employee,
unless requested to do so by the Nominating and Board Affairs Committee and
(c) directors who change employment or major responsibilities submit their
resignation from the Board for consideration by the Nominating and Board
Affairs Committee. The Nominating and Board Affairs Committee has discretion
as to whether such offer will be accepted.
8. TERM LIMITS. The Board does not believe it appropriate or necessary to
limit the number of terms a director may serve. However, the Nominating and
Board Affairs Committee will apply its director candidate selection criteria,
including a director's past contributions to the Board, prior to recommending
a director for reelection to another term.
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9. DIRECTOR COMPENSATION. To link directors' compensation to performance and
to more effectively align the Board's interests with the interests of
stockholders, the Board believes between 50 percent and 100 percent of the
directors' annual retainer should be payable in some form of Company stock.
The current practice of the Board is payment of one-half of the annual
retainer in Company common stock.
10. SHARE OWNERSHIP OF DIRECTORS. The Board believes that directors should
be stockholders and have a financial stake in the Company. While the Board
does not believe it appropriate to specify the level of share ownership an
individual director should hold, it is anticipated that each director will
develop a meaningful ownership position in the Company over time, depending
upon individual circumstances.
11. AFFILIATIONS OF DIRECTORS. It is the responsibility of each director to
advise the Corporate Secretary of any affiliation with public or privately
held commercial enterprises that may create a potential conflict of interest,
potential embarrassment to the Company or possible inconsistency with Company
policies or values.
12. NUMBER OF BOARD MEETINGS. The number of scheduled Board meetings will
vary with circumstances; however, a minimum of four meetings are held
annually. Special meetings are called as necessary. It is the responsibility
of the directors to attend the meetings.
13. BOARD AGENDAS. Board agendas are set by the Chairman of the Board and
the Chief Executive Officer, with input from directors.
14. CONDUCT OF MEETINGS. The Board believes it appropriate that its meetings
be conducted in a manner that ensures open communication, objective and
constructive participation and timely resolution of issues.
15. EXECUTIVE SESSIONS. The independent directors meet at least once a year
in executive session to discuss the Chief Executive Officer's compensation and
evaluate the CEO's performance as well as other related matters. The
independent directors also meet in executive session with the Chairman of the
Board on an as needed basis.
16. LOCATION OF MEETINGS. To provide directors with first-hand knowledge to
make strategic decisions and for their continuing education about the
environment in which the Company operates and competes, meetings are
occasionally held at locations other than the corporate headquarters.
17. COMMUNICATIONS. The Board encourages open communication with
stockholders and other constituencies.
18. EVALUATION OF THE CHIEF EXECUTIVE OFFICER. The Compensation Committee
annually evaluates the performance of the Chief Executive Officer. As part of
this evaluation, the independent directors complete a written evaluation of
the Chief Executive Officer's performance. Results of this evaluation are
communicated to the Chief Executive Officer by the chair of the Compensation
Committee.
19. ANNUAL ASSESSMENT OF BOARD PERFORMANCE. The Nominating and Board Affairs
Committee conducts an annual assessment of the Board's effectiveness as a
whole.
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20. BOARD COMMITTEES. The Board is organized so that a significant portion
of its business is conducted by its committees. The present committee
structure consists of Audit, Compensation, Executive, Nominating and Board
Affairs and Nuclear Oversight committees. In general, committees of the Board
are utilized to focus on issues that may require more in-depth scrutiny. All
significant findings of a committee are presented to the full Board for
discussion and review.
21. COMMITTEE CHARTERS. The Board approves a charter for each committee.
The duties of each committee are annually reviewed by each committee and any
recommended changes are presented to the full Board for consideration.
Committees are empowered to act on behalf of the full Board for those areas
which the Board has prescribed.
22. COMMITTEE COMPOSITION. Except for the Executive Committee, committees
are comprised of independent directors. Committees may also include one or
more non-directors who serve as members due to their considerable expertise in
a particular field.
23. ROTATION OF COMMITTEE CHAIR AND MEMBERSHIP. Consideration is given to
periodic rotation of committee membership and leadership by taking into
account continuity, expertise and tenure.
24. COMMITTEE AGENDAS. Committee chairs, in consultation with committee
members and appropriate members of management, determine committee agendas.
25. INTERACTION WITH SUBSIDIARY BOARDS. The Board is informed of significant
developments affecting the Company's subsidiaries. The Chief Executive
Officer, with the assistance of subsidiary management, is charged with the
task of presenting material information to the Board in this regard.
26. CORPORATE SUPPORT. The Corporate Secretary serves as secretary to the
Board and its committees and, at the request of the Chairman and Chief
Executive Officer or the committee chairs, as appropriate, arranges meetings,
suggests meeting agendas and facilitates the materials presented to the Board
and its committees.
27. PERIODIC REVIEW OF THESE GUIDELINES. The operation of the Board of
Directors is a dynamic and evolving process. As such, these Guidelines are
reviewed annually by the Nominating and Board Affairs Committee. No policy
can cover each and every issue that may surface, but these Guidelines set the
proper tone for the operation of the Wisconsin Energy Corporation Board of
Directors and assist the Board in fulfilling its obligations to stockholders
and other constituencies.
EVALUATION OF THE CHIEF EXECUTIVE OFFICER (CEO). As part of the Board's
corporate governance requirements to annually evaluate the performance of the
Chief Executive Officer, the Compensation Committee annually requests that
independent directors provide written feedback to the Compensation Committee
chair. Feedback is requested on the CEO's performance relating to: leadership
and vision, financial stewardship, strategy development, management
development, effective communication to constituencies, effective
representation of the Corporation in community and industry affairs, as well
as other areas. The Compensation Committee chair shares the feedback with the
CEO to review his performance for the year. The feedback is also used by the
committee to determine appropriate compensation for the CEO. This annual
procedure allows the Board to consistently evaluate the CEO and to more
effectively communicate the Board's expectations to him. The evaluation also
provides the CEO with information to enable him to more effectively focus on
key business initiatives.
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SELF-EVALUATION OF THE BOARD. In 1996, the Board directed the Nominating and
Board Affairs Committee to develop a formal process to annually evaluate the
collective performance of the Board. Assessments of the performance of
individual directors are already conducted by the committee in its process to
recommend director nominees to stockholders. In order to evaluate the Board's
collective performance, the committee developed a written questionnaire
designed to enable the Board to determine what activities, policies and
procedures are working and what may need to be improved. Directors are asked
to rate the performance of the Board on such things as: providing appropriate
oversight over key affairs of the Corporation (including its long-range goals,
financial performance and strategic plans), providing necessary and timely
advice and counsel to the CEO, communicating the Board's expectations and
concerns to the CEO, having in place effective processes to aid in its
deliberations, monitoring of the issues and trends affecting the Corporation;
and operating in a manner that ensures open communication, objective and
constructive participation and timely resolution of issues.
The Nominating and Board Affairs Committee uses the results of this process as
part of its annual review of the
Corporate Governance Guidelines and to foster continuous improvement of the
Board's activities.
COMMITTEES OF THE BOARD OF DIRECTORS. Committees play a significant role in
the corporate governance practices of the Board. Members and principal duties
and responsibilities of the Board's standing committees are shown below.
Except for the Executive and Nuclear Oversight Committees, the committees of
the Board are comprised solely of outside, independent directors. Committees
may also include one or more non-directors who serve as members due to their
considerable expertise in a particular field.
Members of the AUDIT COMMITTEE are Mr. Stratton (chair), Mr. Bergstrom and
Mrs. Johnson. The committee oversees the financial reporting and internal
controls of WEC; evaluates, reviews and approves the services of the
independent public accountant; recommends to the Board the independent public
accountant to be selected; and recommends and reviews special audits or
studies the committee considers necessary or desirable. Both the independent
public accountant and the internal auditor may meet alone with the committee
and are expected to contact it on matters requiring its attention.
Members of the COMPENSATION COMMITTEE are Mr. Cornog (chair), Dr. Ahearne and
Mr. Bergstrom. The committee identifies through succession planning potential
executive officers of WEC and provides a competitive, performance-based
executive compensation program that enables WEC to attract and retain key
individuals and to motivate them to achieve WEC's short and long-term goals.
The committee also provides a competitive director compensation program based
on many of the same criteria.
Members of the EXECUTIVE COMMITTEE are Mr. Abdoo (chair), Mr. Grigg and the
chairs of the other standing committees. The committee may exercise all of
the powers vested in the Board except action regarding dividends or other
distributions to stockholders, the filling of vacancies on the Board and other
powers which by law may not be delegated to a committee.
Members of the NOMINATING AND BOARD AFFAIRS COMMITTEE are Mrs. Johnson
(chair), Mr. Cornog and Mr. Stratton. The committee (i) establishes and
reviews WEC's corporate governance guidelines to ensure the Board is
effectively performing its fiduciary responsibilities to stockholders and (ii)
recommends candidates to be named as nominees of the Board for election as
directors. Stockholders may propose director candidates for consideration by
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<PAGE> 16
the Nominating and Board Affairs Committee. The committee was formerly known
as the Nominating Committee. In 1996, the committee was renamed to better
reflect its role with corporate governance initiatives.
Members of the NUCLEAR OVERSIGHT COMMITTEE are Dr. Ahearne (chair), Mr. Cornog
and Mr. Grigg. Ad hoc members of the committee include three consultants who
have expertise in nuclear power plant operations: Dr. Thomas E. Murley,
former director of the Nuclear Regulatory Commission's Office of Nuclear
Reactor Regulation; Dr. C. Frederick Sears, formerly responsible for
overseeing Northeast Utilities' nuclear and environmental functions; and Mr.
Hal B. Tucker, formerly responsible for overseeing Duke Power Company's
nuclear operations. The committee advises and assists the Board in its
responsibilities relating to overseeing the nuclear operations of WEC and its
subsidiaries. The Nuclear Oversight Committee may be requested by the Board
to investigate any nuclear related activity of WEC and its subsidiaries.
MEETINGS OF THE BOARD AND ITS COMMITTEES. The Board held 8 meetings during
1996. The number of committee meetings held during 1996 were: Audit, 3;
Compensation, 2; Executive, 0; Nominating and Board Affairs, 2; Nuclear
Oversight, 4. Each director attended 100% of the total number of meetings of
the Board and the committees on which they served.
COMPENSATION OF THE BOARD OF DIRECTORS. In order to more closely link
directors' pay to performance and to further align the Board's interests with
stockholders, effective January 1, 1996 the Board determined that a portion of
directors' fees will be paid in WEC common stock. Directors can elect to
receive the fee in common stock or defer the fee in the WEC phantom common
stock account under the Directors' Deferred Compensation Plan.
During 1996, each nonemployee director received an annual retainer fee of
$18,000 (one-half in WEC common stock and the other half in cash) plus an
attendance fee of $1,250 for each Board or committee meeting attended. In
addition, a per diem fee of $1,000 for travel on Company business is paid for
each day on which a Board or committee meeting is not also held. Nonemployee
directors are also paid $300 for each signed, written unanimous consent in
lieu of a meeting. Nonemployee chairs of the committees of the Board received
a quarterly committee chair retainer of $1,250. Employee directors receive no
directors' fees.
Although certain WEC directors also serve on Wisconsin Electric's board and
compensation committee, only single fees are paid for meetings held by both
boards or committees on the same day. In these cases, fees are allocated
between WEC and Wisconsin Electric based on services rendered.
Nonemployee directors may defer fees as long as they serve on the Board of WEC
and/or its subsidiaries pursuant to the Directors' Deferred Compensation Plan.
Under the plan, fees may be deferred into an account which accrues interest
semiannually at the prime rate or into a WEC phantom common stock account, the
value of which will appreciate or depreciate based on the market performance
of WEC stock, as well as through the accumulation of any reinvested dividends.
Deferral amounts are credited to accounts in the name of each participating
director on the books of WEC, are unsecured and are payable only in cash
following termination of the director's service to WEC and its subsidiaries.
The deferred amounts will be paid out of the general corporate assets or the
trust described under "Retirement Plans" in this proxy statement.
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<PAGE> 17
OVERVIEW OF EXECUTIVE OFFICERS' COMPENSATION. The Board believes that one of
its most important functions is attracting, motivating and retaining qualified
individuals in the positions that most influence WEC's ability to achieve its
goals and to succeed in today's competitive utility environment. To this end,
the Board has directed its Compensation Committee to provide a compensation
and benefit package that will achieve this goal. The Compensation Committee
report and tables that follow detail the committee's philosophy and
compensation determinations for 1996.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES. The Compensation Committee, which is
comprised entirely of independent non-employee directors, is responsible for
making decisions regarding succession planning and executive compensation.
The committee seeks to provide a competitive, performance-based executive
compensation program that enables WEC to attract and retain key individuals
and motivate them to achieve WEC's short and long-term goals. The committee
regularly re-examines its compensation philosophy to determine if the
executive compensation package is effective in helping WEC achieve its
corporate objectives.
The committee believes that a substantial portion of overall executive
compensation should be at risk, dependent on achievement of individual and
corporate goals that are aligned with the interests of WEC's stockholders and
customers. As a result, compensation for executives will vary from year to
year, based upon the level of achievement of operating, financial, safety,
environmental stewardship, customer satisfaction and other performance goals.
Superior performance will be rewarded with above-average compensation;
performance below expectations will yield below-average compensation.
The committee employs a nationally recognized compensation consultant, Towers
Perrin, to advise it on matters relating to the administration and design of
WEC's executive compensation program. The consultant provides the committee
with information regarding competitive compensation levels, practices and
trends within WEC's peer group and the industry. In addition, information on
general corporate compensation practices is provided.
In determining competitive compensation for WEC's officer positions, the
committee relies primarily on an analysis of compensation practices for the
companies included in the industry peer group used to compare investment
performance in this proxy statement ("Peer Group"). The committee relies
secondarily on a broader analysis of compensation data from a survey of
approximately 100 utilities conducted by the Edison Electric Institute
("EEI"), a consortium of utilities, and on a survey of compensation practices
in general industry. The committee reviews both peer group specific and
broader industry and general industry pay practices to be fully informed of
compensation levels. The committee does not mathematically average the data
from these analyses but, rather, considers them as three separate views of the
external market.
ELEMENTS OF COMPENSATION. The 1996 compensation of WEC's executives primarily
consisted of three elements: base salary, annual incentive compensation and
long-term incentive compensation. The committee's basis for determining
appropriate levels of executive compensation for 1996 for each of these
elements is described below. Specific values of 1996 compensation for the
Chief Executive Officer and the five other most highly-compensated officers in
the WEC organization are included in the Summary Compensation Table provided
in this proxy statement.
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<PAGE> 18
BASE SALARY. In determining appropriate executive base salaries, the
committee considered factors such as individual experience, performance and
potential, changes in duties and responsibilities, economic conditions in the
utility service areas, the reputation of WEC's utility operations,
competitiveness of utility service rates and impact of cost-control
achievements. In addition, the committee reviewed executive compensation
practices for comparable positions at companies within the Peer Group, as well
as the broader group of utilities in the EEI database and practices in general
industry. As noted above, the committee does not mathematically average the
data from these analyses but, rather, considers them as three separate views
of the external market. In general, base salaries are targeted at or near the
50th percentile of the average of these three groups.
ANNUAL INCENTIVE COMPENSATION. The committee administers WEC's Short-Term
Performance Plan ("STPP") which provides annual cash incentive opportunities
to executive officers and other key employees. The STPP is designed to
promote the achievement of shareholder and customer-focused objectives of WEC
and its subsidiaries while recognizing individual and team performance of
participants.
Annual incentive compensation awards are targeted at approximately the 75th
percentile of industry pay practices. In 1996, target incentive awards were
set for participants that ranged from 15% to 55% of base salary. Each
participant is eligible to receive an award if pre-established corporate
performance goals are met. Awards may be increased by up to 100% of targeted
amounts or reduced to zero based on individual and team performance.
Except for WEC Chief Executive Officer Abdoo and Mr. Grigg, who serves as WEC
Vice President and WE President, Chief Operating Officer and Chief Nuclear
Officer, performance goals for 1996 were 50% financial and 40% operational.
The remaining 10% related to improving the Corporation's relationship with its
customers as measured by its Customer Value Added (CVA) score. Financial
goals focused on achievement of target earnings per share. Operational goals
were specific to the Corporation's business processes and, among other things,
related to energy marketing efforts, development of new energy services,
customer satisfaction, employee training and development, environmental
stewardship, safety of operations, corporate strategic planning and corporate
governance initiatives. Mr. Abdoo's goals were 80% financial, 10% operational
and 10% CVA; Mr. Grigg's goals were 60% financial, 30% operational and 10%
CVA.
For 1996, the Corporation did very well in achieving a number of performance
goals. Along with these accomplishments, however, Wisconsin Electric received
penalties from regulatory agencies. A civil penalty was levied by the Nuclear
Regulatory Commission related to operations at WE's Point Beach Nuclear Plant.
A notice of violation of air emissions requirements at WE's Port Washington
Power Plant was referred to the Wisconsin Department of Justice. This matter
was resolved through payment of a forfeiture. In order that stockholders not
assume responsibility for these penalties, the committee agreed that incentive
awards for 1996 be reduced to cover the costs of these penalties. As a
result, all STPP awards, including the award for Mr. Abdoo, were reduced by
12.2%. In addition, awards for participants who are employed in WE's Nuclear
Business Unit were further reduced by 50% to more appropriately reflect
nuclear performance results. Mr. Grigg, who began serving as WE's Chief
Nuclear Officer in December 1996, also had his award reduced. Based on these
adjustments, awards to WEC and WE executive officers under the STPP for 1996
ranged from 0% to 54.7% of base salary.
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<PAGE> 19
LONG-TERM INCENTIVE COMPENSATION. The committee administers WEC's 1993
Omnibus Stock Incentive Plan ("OSIP"), a long-term incentive plan designed to
link the interests of executives and other key employees to long-term
shareholder value. The OSIP allows WEC to grant stock options, stock
appreciation rights, stock awards and performance units to participants.
Equity interests in WEC common stock enable participants to share in the
appreciation of the value of WEC common stock and provide an incentive for
managing the continued performance and value of the Company. Long-term
incentive awards are targeted at the 90th percentile of the industry grant
practices.
For 1996, awards in the form of stock options and performance dividend units
were granted to each of several groups of OSIP participants. Stock option and
performance dividend unit grants to executive officers who received grants
ranged from 3,800 to 38,000 shares and related performance dividend units.
The grant level was dependent on each participant's role in influencing the
achievement of long-term performance goals.
The committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the OSIP, the committee has implemented stock
ownership guidelines for participants. Guidelines for executive officers
range from 100% to 300% of base salary.
CHIEF EXECUTIVE OFFICER COMPENSATION. Performance and compensation of the
Chief Executive Officer are of particular importance to the committee. Mr.
Abdoo's performance was evaluated by the committee and compensation was
determined in accordance with the executive compensation policies described
above.
As part of WEC's corporate governance initiatives, the Compensation Committee
chair requested that non-employee directors provide a written evaluation of
the CEO's performance. The directors' written feedback was discussed by
committee members as part of its compensation determinations and has been
shared with the CEO.
With respect to base salary, in recognition of the leadership provided by the
Chief Executive Officer in shaping and guiding a financially strong
organization that is able to provide quality services to its customers at
competitive prices, as well as his role in guiding the reengineering of
several business processes and related cost-control achievements of the
companies, the outstanding reputation of Wisconsin Energy's utility operations
in the utility industry and in consideration of competitive salary data, the
committee set Mr. Abdoo's base salary at $560,000 for 1996. Mr. Abdoo's base
salary approximates the 50th percentile of the data reviewed by the committee.
With respect to annual incentive compensation for fiscal year 1996, the
Compensation Committee awarded Mr. Abdoo the annual incentive award set forth
in the "Bonus" column of the Summary Compensation Table. In this regard, the
committee established his 1996 STPP target award level at 55% of base salary.
The committee's evaluation of Mr. Abdoo's 1996 performance resulted in an
award under the STPP of $306,472 or 54.7% of base salary. The award was based
upon Mr. Abdoo's actual performance versus specific company-wide financial and
operational performance goals. As noted above, Mr. Abdoo's goals were weighted
80% financial, 10% operational and 10% CVA. Mr. Abdoo's financial goals
focused on achievement of target earnings per share. Operational goals were
specific to achieving a high level of nuclear safety, generating new revenue
from energy and non-energy related sources, staying within a prescribed budget
and safety of operations. His CVA goals related to improving the
Corporation's relationship with its customers.
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<PAGE> 20
In determining Mr. Abdoo's 1996 STPP award, the committee specifically noted
several accomplishments by the CEO during 1996, including (i) his leadership
toward promoting continued close control of operating expenditures which has
resulted in significant reductions in costs since 1993, (ii) exceeding WEC's
earnings targets, in part through earnings growth from WEC's non-utility
subsidiaries and strong support from WE's gas operations, (iii) continued
growth of the organization's customer base, (iv) completion of the purchase of
the Milwaukee County Power Plant, (v) successful start-up of a state-of-the
art Customer Call Center, (vi) implementation of a new, integrated financial
system, (vii) his consistent support of equal opportunity, diversity, cross-
cultural sensitivity and strong labor-management relationships within WEC,
(viii) his leadership role and continued visionary efforts to restructure the
electric utility industry and (ix) his effectiveness in guiding employees to
implement productivity improvements that will enable WEC to become the low-
cost energy provider in the upper midwest region and in ensuring that the
organization and its employees are prepared for the merger of WEC and Northern
States Power Company ("NSP"). As noted above, the committee reduced Mr.
Abdoo's award by 12.2% in recognition of the penalties levied by the Nuclear
Regulatory Commission and the Wisconsin Department of Justice against
Wisconsin Electric.
With respect to the OSIP, in keeping with the Compensation Committee's
philosophy as stated above, Mr. Abdoo was awarded stock options and related
dividend performance units in 1996 as set forth in the "Long-Term Compensation
Awards" column of the Summary Compensation Table to specifically link a
portion of his compensation to the achievement of WEC's longer term goals.
The award of dividend performance units will be paid if total shareholder
return (appreciation in the value of WEC common stock plus reinvested
dividends) over a four-year period ending November 26, 2000 equals or exceeds
the median return earned by the Peer Group, except that there will be no
payout if WEC's total shareholder return is negative over the course of such
period.
The committee also applied subjective judgment in evaluating the relative
importance of the factors which were the basis for determining each element of
Mr. Abdoo's compensation to precisely determine his salary and awards.
COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION. Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
chief executive officer and the other proxy-named executive officers.
Qualifying performance-based compensation will not be subject to the deduction
limit if certain requirements are met. The committee will continue to review
these tax regulations as they apply to WEC's executive compensation program.
It is the committee's intent to preserve the deductibility of executive
compensation to the extent reasonably practicable and to the extent consistent
with its other compensation objectives.
Respectfully submitted to WEC's stockholders by the Compensation Committee of
the Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
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<PAGE> 21
EXECUTIVE OFFICERS' COMPENSATION
The following table summarizes certain information concerning compensation
awarded to, earned by or paid to WEC's Chief Executive Officer and each of
WEC's or WE's other five most highly-compensated executive officers for
services in all capacities to WEC and its subsidiaries for the last three
fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
Annual Compensation ------------
-------------------------------- Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
($) ($) ($) (#) (1) ($) (2)
- ----------------------------------- ---- ------- ------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
RICHARD A. ABDOO
Chairman of the Board, President 1996 560,000 306,472 8,953 38,000 113,297
and Chief Executive Officer 1995 496,000 232,000 8,321 38,000 83,858
1994 450,000 222,396 0 25,000 15,970
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
RICHARD R. GRIGG
Vice President of WEC; President, 1996 295,000 62,835 5,206 19,000 43,412
Chief Operating Officer and Chief 1995 237,500 63,788 3,084 19,000 42,125
Nuclear Officer of WE 1994 168,333 46,667 0 6,500 11,000
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
FRANCIS BRZEZINSKI
Vice President of WEC; Vice 1996 225,000 108,513(3) 5,933 9,500 19,247
President-Business Development 1995 225,000 25,515 80,532(4) 7,600 17,051
of WE 1994 212,000 26,037 0 6,500 7,478
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
Kristine M. Krause 1996 190,000 68,750 0 9,500 23,239
Vice President-Fossil Operations 1995 160,000 48,904 0 9,500 16,532
of WE 1994 112,500 24,013 0 6,500 3,368
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
DAVID K. PORTER
Senior Vice President of WE 1996 190,000 63,449 0 7,600 23,994
1995 190,000 46,170 0 7,600 21,766
1994 190,000 58,333 0 3,000 6,695
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
CALVIN H. BAKER
Treasurer and Chief Financial 1996 170,000 70,298 1,420 9,500 21,996
Officer of WEC; Vice President- 1995 145,000 35,235 1,286 7,600 16,249
Finance and Chief Financial 1994 132,000 34,737 0 3,000 4,331
Officer of WE
- ------------------------------------ ---- ------- ------- ------------ ------------ -------------
</TABLE>
(1) Grants of options were in combination with contingent dividend
awards, as described in the table entitled "Long-Term Incentive Plans--
Awards in Last Fiscal Year". No stock appreciation rights ("SARs") were
awarded during any of the fiscal years indicated.
(2) All Other Compensation for 1996 for Messrs. Abdoo, Grigg, Brzezinski,
Ms. Krause, Messrs. Porter and Baker, respectively, includes: (i) employer
matching of contributions by each named executive into the Employee
Savings Plan (ESP) in the amount of $4,750 for each named executive
officer, (ii) "make whole" payments under the Executive Deferred
Compensation Plan with respect to matching in the ESP on deferred salary
or salary received but not otherwise eligible for matching in the amounts
of $13,450, $4,512, $2,529, $3,325, $1,425 and $775, respectively, and
(iii) the full dollar value of life insurance premiums paid by the Company
in the amounts of $95,097, $34,150, $11,968, $15,164, $17,819 and $16,471,
respectively, under a split-dollar life insurance program.
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<PAGE> 22
(3) Mr. Brzezinski's 1996 award is higher than in previous years because
of accomplishments by WEC's non-utility subsidiaries; the award includes
$17,238 relating to performance in connection with development of land
known as the Westridge project.
(4) Includes $41,893 for club memberships; the balance is for related tax
gross-up payments.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
| Grant Date
Individual Grants (1) | Value
--------------------------------------------------|-------------
Percent of
Number of Total
Securities Options/SARs Exercise
Underlying Granted to or Base Grant Date
Options/SARs Employees in Price Expiration Present
Name Granted(#) Fiscal Year ($/Sh) Date Value($)(2)
- ------------------ ------------ ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Richard A. Abdoo 38,000 18.0% 26.81 11/26/2006 119,407
Richard R. Grigg 19,000 9.0% 26.81 11/26/2006 59,704
Francis Brzezinski 9,500 4.5% 26.81 11/26/2006 29,852
Kristine M. Krause 9,500 4.5% 26.81 11/26/2006 29,852
David K. Porter 7,600 3.6% 26.81 11/26/2006 23,881
Calvin H. Baker 9,500 4.5% 26.81 11/26/2006 29,852
</TABLE>
(1) Consists of incentive and non-qualified stock options to purchase
shares of WEC common stock granted pursuant to the OSIP on November 27,
1996. These options were granted with an equal number of contingent
dividend awards (as described in the table entitled "Long-Term Incentive
Plans--Awards in Last Fiscal Year"), have exercise prices equal to the
fair market value of the WEC shares on the date of grant and first become
exercisable on November 27, 2000, at which time they become fully
exercisable. Upon a "change in control" of WEC, as defined in the OSIP,
or upon retirement, permanent total disability or death of the option
holder, these options shall become immediately exercisable. The proposed
merger with NSP will not be considered a change in control of WEC for
purposes of the OSIP. These options were granted for a term of ten
years, subject to earlier termination in certain events related to
termination of employment. In the discretion of the Compensation
Committee, the exercise price may be paid by delivery of already-owned
shares and tax withholding obligations related to exercise may be
satisfied by withholding shares otherwise deliverable upon exercise,
subject to certain conditions. Subject to the limitations of the OSIP,
the Compensation Committee has the power with the participant's consent
to modify or waive the restrictions on vesting of these options, to amend
these options and to grant extensions or to accelerate these options.
(2) The Black-Scholes option pricing model was used to determine the
options' present value as of the date of the grant. The assumptions used
in the Black-Scholes equation are: market price of stock: $26.81;
exercise price of option: $26.81; stock volatility: 14.41%; annualized
risk-free interest rate: 6.28%; exercise at the end of 10-year option
term; and dividend yield: 5.28%. WEC's use of this model should not be
construed as an endorsement of its accuracy. Whether the model's
assumptions will prove to be accurate cannot be known at the date of
grant. The ultimate value of the options, if any, will depend upon the
future value of the WEC common stock, which cannot be forecast with
reasonable accuracy, and the optionee's investment decisions.
15
<PAGE> 23
No stock options other than those granted pursuant to the OSIP were
outstanding in the last fiscal year. The earliest date outstanding options
previously granted under the OSIP become exercisable is December 15, 1997.
Consequently, no options were exercisable in 1996. The following table sets
forth the number of options which were not exercisable and the value of such
options based upon the difference between the exercise price and the market
price of the underlying shares as of December 31, 1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs Options/SARs
at Fiscal Year-End at Fiscal Year-End
(#) ($)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard A. Abdoo 0 123,500 0 3,906
Richard R. Grigg 0 51,000 0 1,581
Francis Brzezinski 0 30,100 0 992
Kristine M. Krause 0 26,750 0 992
David K. Porter 0 24,700 0 657
Calvin H. Baker 0 23,100 0 775
The following table further describes the long-term incentive awards made
during 1996:
</TABLE>
<TABLE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<CAPTION>
Estimated Future
Payouts Under
Performance Non-Stock
Number of or Other Price-Based Plans
Shares, Units Period Until -------------------
or Other Maturation Target
Name Rights(#)(1) or Payout ($ or #) (2)
- ------------------ ------------- ------------- -------------------
<S> <C> <C> <C>
Richard A. Abdoo 38,000 11/26/2000 $245,277
Richard R. Grigg 19,000 11/26/2000 $122,638
Francis Brzezinski 9,500 11/26/2000 $61,319
Kristine M. Krause 9,500 11/26/2000 $61,319
David K. Porter 7,600 11/26/2000 $49,055
Calvin H. Baker 9,500 11/26/2000 $61,319
(1) Consists of performance units awarded under the OSIP in combination
with stock options (as described in the table entitled "Option/SAR Grants
in Last Fiscal Year" above). These performance units, entirely in the
form of contingent dividends, will be paid if total shareholder return
(appreciation in the value of WEC common stock plus reinvested dividends)
over a four-year period ending November 26, 2000 equals or exceeds the
median return earned by the companies included in the Peer Group Index in
the "Performance Graph" section of this proxy statement, except that
there will be no payout if WEC's total shareholder return is negative
over the course of such period. If payable, each participant shall
receive an amount equal to the actual dividends paid on WEC common stock
for the period of November 27, 1996 through November 26, 2000 multiplied
by the number of performance units awarded to such participant. Upon a
16
<PAGE> 24
"change in control" of WEC, as defined in the OSIP, this benefit shall
immediately vest with all performance goals deemed fully achieved. As
described in footnote 1 to the table entitled "Option/SAR Grants in Last
Fiscal Year," WEC's proposed merger with NSP does not constitute a change
in control under the OSIP with respect to any outstanding contingent
dividends granted to the above executive officers.
(2) Assumes, for purposes of illustration only, 4% per year compound
annual dividend increase based on the current quarterly dividend rate.
SEVERANCE POLICY. In connection with the Agreement and Plan of Merger between
the Company and Northern States Power Company (approved by the Company's
stockholders on September 13, 1995) the Board adopted a Senior Executive
Severance Policy ("Severance Policy"). The Severance Policy was adopted to
encourage certain executive officers and other key employees, whose expertise
has been critical to WEC's success, to remain with WEC during the WEC/NSP
merger transition process. The Severance Policy provides for payment of
severance to participants whose employment is terminated under certain
circumstances (e.g., terminations by WEC that are other than for cause,
disability or retirement; terminations resulting from certain sales of a
business by WEC; and terminations resulting from reductions in participants'
salaries, responsibilities or benefits) at any time before (i) the second
anniversary of the effective time of the merger with NSP if the transaction is
consummated or (ii) April 28, 2000 if the transaction with NSP is not
consummated.
The severance benefits under the Severance Policy consist of: (i) three years'
salary and annual incentive compensation; (ii) payment of the actuarial
equivalent of the additional retirement benefits the participant would have
earned if he or she had remained employed for three more years; (iii)
continued medical, dental and life insurance coverage for three years; (iv)
outplacement services or the use of office space and support; and (v)
financial planning counseling.
RETIREMENT PLANS
In 1996, WE maintained a defined benefit pension plan of the cash balance type
for most employees, including WEC executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, without any deduction for Social Security or other
offset, with a Social Security integrated benefit formula based on percentages
of final average compensation for up to 30 years of credited service and
additional (lower) percentages of compensation in excess of 30 years, up to a
maximum of 10 years. In addition, individuals participating in the plan as of
December 31, 1995 received a special one-time transition credit amount equal
to a specified percentage varying with age multiplied by credited service and
1994 base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit were also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to
5% of base pay (including certain incentive payments, pre-tax deferrals and
17
<PAGE> 25
other items), plus an interest credit on all prior accruals equal to 4% plus
75% of the annual time-weighted trust investment return for the year in excess
of 4%.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form. Individuals who were
participants in the plan on December 31, 1995 are in no event to receive any
less than what would have been provided under the prior formula, had it
continued, if they terminate on or before January 1, 2011, and do not elect to
commence benefits before the earlier of age 55 and completion of 10 years'
service, or age 65.
All of the individuals listed in the Summary Compensation Table are
"grandfathered" under the prior plan benefit formula. Since their estimated
benefits under that formula are higher than under the cash balance plan
formula, utilizing current assumptions, their benefits would currently be
determined by the prior plan benefit formula. The following table shows
estimated annual benefits payable in life annuity form on normal retirement
for persons in various compensation and years of service classifications
during 1996, based on the grandfathered continuation of the prior plan formula
(including supplemental amounts providing additional benefits described below
in the "Other Retirement Benefits" section):
PENSION PLAN TABLE
Years of Service
----------------------------------------------------------
Remuneration 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- --------
$ 50,000 $ 10,960 $ 14,614 $ 18,267 $ 21,920 $ 24,028 $ 26,136
100,000 23,897 31,862 39,828 47,794 52,339 56,885
150,000 36,835 49,114 61,392 73,670 80,653 87,636
200,000 49,772 66,362 82,953 99,544 108,964 118,385
250,000 62,708 83,611 104,514 125,417 137,275 149,132
300,000 75,647 100,862 126,078 151,294 165,589 179,885
400,000 101,522 135,362 169,203 203,044 222,214 241,385
500,000 127,397 169,862 212,328 254,794 278,839 302,885
600,000 153,272 204,362 255,453 306,544 335,464 364,385
700,000 179,147 238,862 298,578 358,294 392,089 425,885
800,000 205,022 273,362 341,703 410,044 448,714 487,385
900,000 230,897 307,862 384,828 461,794 505,339 548,885
1,000,000 256,772 342,362 427,953 513,544 561,964 610,385
1,100,000 282,647 376,862 471,078 565,294 618,589 671,885
The compensation for the individuals listed in the Summary Compensation Table
in the columns labeled "Salary" and "Bonus" is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans. Messrs. Abdoo, Grigg, Brzezinski, Ms. Krause, Messrs.
Porter and Baker currently have 21, 26, 7, 18, 27 and 5 credited years of
service, respectively.
OTHER RETIREMENT BENEFITS. Designated elected officers of WEC and WE
participate in the Supplemental Executive Retirement Plan ("SERP"). The SERP
provides monthly supplemental pension benefits to participants, which will be
paid out of unsecured corporate assets, or the grantor trust described below,
as follows: (a) an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be
if calculated without regard to any limitation imposed by the Internal Revenue
18
<PAGE> 26
Code on pension benefits or covered compensation; (b) an amount calculated so
as to provide participants with a supplemental lifetime annuity, estimated to
amount to between 8% and 10% of final average compensation depending on which
pension payment option is selected; and (c) an amount for certain participants
equal to the difference between the actual pension benefit payable under the
pension retirement plan and what the pension benefit would be if calculated
under the prior benefit formula in effect on December 31, 1988. Except for a
"change in control" of WEC, as defined in the SERP, no payments are made until
after the participant's retirement or death.
WEC and WE have entered into agreements with Mr. Abdoo and Mr. Baker,
respectively, who cannot accumulate by normal retirement age the maximum
number of years of credited service under the pension plan formula in effect
immediately before the change to the cash balance formula. According to Mr.
Abdoo's agreement, Mr. Abdoo at retirement will receive supplemental
retirement payments which will make his total retirement benefits at age 58 or
older substantially the same as those payable to employees who are age 60 or
older, who are in the same compensation bracket and who became plan
participants at the age of 25. According to Mr. Baker's agreement, Mr. Baker
at retirement will receive supplemental retirement payments which will make
his total retirement benefits at age 60 or older substantially the same as
those payable to employees who are in the same compensation bracket and who
became plan participants at the age of 25.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's and
Mr. Baker's agreements. The plans and agreements provide for optional lump
sum payments and, in the instance of a change in control, mandatory lump sum
payouts without regard to whether the executive's employment has terminated.
In each case, the interest rate benchmark formula for calculating the lump sum
amount is the five-year U. S. Treasury Note yield as of the last business day
of the month prior to date of payment.
The SERP, the Executive Deferred Compensation Plan, the Directors' Deferred
Compensation Plan, the Amended Non-Qualified Trust and Mr. Abdoo's and Mr.
Baker's agreements have each been amended to provide that WEC's proposed
merger with NSP will not constitute a change in control under such plans,
trust and agreements.
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table lists the beneficial ownership of WEC common stock
(including phantom common stock) of each director, nominee and the executive
officers listed in the Summary Compensation Table as of February 11, 1997.
Included are shares owned by each individual's spouse, minor children or any
other relative sharing the same residence, as well as shares held in a
fiduciary capacity or held in WEC's Stock Plus and Wisconsin Electric's ESP.
Number Number
of of
Name Shares(1) Name Shares(1)
-------------------- ------ ------------------------- ------
Richard A. Abdoo 22,078 Richard R. Grigg, Jr. 3,605
John F. Ahearne 766 Geneva B. Johnson 3,040
Calvin H. Baker 4,309 Kristine M. Krause 4,805
John F. Bergstrom 5,522 David K. Porter 10,175
Francis Brzezinski 3,260 Frederick P. Stratton, Jr. 6,949
Robert A. Cornog 3,514
19
<PAGE> 27
All above named directors and officers and other executive officers as a
group (13 persons) 77,442 (2)
(1) Share units held in the WEC phantom common stock account under WEC's
Directors' Deferred Compensation Plan or Executive Deferred Compensation
Plan are: Mr. Abdoo (5,334), Mr. Baker (1,157), Mr. Bergstrom (2,522),
Mr. Brzezinski (1,053), Mr. Cornog (858), Mr. Grigg (263), Mrs. Johnson
(633), Ms. Krause (173), Mr. Porter (229), and Mr. Stratton (1,249).
Share units are intended to reflect the performance of WEC common stock
and are payable in cash.
(2) Amount is less than 1% of total WEC common stock outstanding.
Each person has sole voting and investment power as to all shares listed for
such person (other than phantom shares) except that the following persons have
shared voting and/or investment power as to the indicated number of shares so
listed: Mr. Baker (400), Mr. Brzezinski (108), Mr. Stratton (3,300), Ms.
Krause (1,333) and all above-named directors and officers and other executive
officers as a group (5,169).
Information on beneficially owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as required for purposes of this proxy
statement. It is not necessarily to be construed as an admission of
beneficial ownership for other purposes.
PERFORMANCE GRAPH
The following chart shows a comparison of the cumulative total return,
including reinvested dividends, over five years had $100 been invested at the
close of business on December 31, 1991 in each of WEC common stock, the
Standard & Poor's ("S&P") 500 Index and a Peer Group Index. Peer return is
weighted by market capitalization at the beginning of each period for which a
return is indicated.
The Peer Group companies generally have significant electric utility
operations with revenues, net income, total assets and market capitalization
comparable to WEC. The companies in the Index are: Baltimore Gas & Electric
Company, Boston Edison Company, CINergy Corp., DPL Inc., DQE Inc., Florida
Progress Corporation, New England Electric System, NIPSCO Industries, Inc.,
Northern States Power Company, Pinnacle West Capital Corporation, Potomac
Electric Power Company, Public Service Company of Colorado, San Diego Gas &
Electric Company, SCANA Corporation, TECO Energy, Inc., Union Electric
Company, WPS Resources Corporation and WPL Holdings, Inc. Beginning with year
1994, The Cincinnati Gas & Electric Company was replaced as a member of WEC's
Peer Group Index by CINergy Corp., the company that succeeded it in 1994
through a merger with another corporation which was not part of the Peer Group
Index. WEC is not in the Peer Group Index.
Additional, more detailed information about earnings is included in the
Appendix to this proxy statement.
20
<PAGE> 28
[PERFORMANCE GRAPH APPEARS HERE]
</TABLE>
<TABLE>
<CAPTION>
FIVE-YEAR CUMULATIVE TOTAL RETURN
Value of Investment at Year-End
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
<S> <C> <C> <C> <C> <C> <C>
- -------------- -------- -------- -------- -------- -------- ---------
| WEC $100 $106 $116 $115 $143 $133 |
| Peer Group $100 $109 $124 $115 $154 $159 |
| S&P 500 Index $100 $108 $118 $120 $165 $203 |
- -------------------------------------------------------------------------
</TABLE>
1998 ANNUAL MEETING
PROPOSED WEC/NSP MERGER. Under WEC's merger agreement with NSP, which was
approved by the stockholders of both corporations on September 13, 1995, WEC
will be renamed Primergy Corporation ("Primergy"). The Primergy Board of
Directors at the effective time of the merger will consist of twelve persons,
six of whom shall be designated by WEC and six of whom shall be designated by
NSP. Subject to obtaining all requisite regulatory approvals, the merger is
presently expected to become effective in 1997, but not prior to the 1997
Annual Meeting of Stockholders. It is anticipated, however, that the WEC
(Primergy) Board would be restructured in accordance with the merger agreement
before the 1998 Annual Meeting of Stockholders of WEC (Primergy).
DIRECTOR CANDIDATES. Stockholders wishing to propose director candidates for
consideration and recommendation by the Nominating and Board Affairs Committee
for election at the 1998 Annual Meeting must submit the name(s) and
qualifications of any proposed candidate(s) to WEC's Corporate Secretary not
later than September 16, 1997. The Nominating and Board Affairs Committee and
WEC Board have approved director candidate selection criteria which are
designed to provide the Board with a diversity of experience to allow it to
effectively meet the many challenges WEC faces in today's changing
environment. The Bylaws state that directors shall be stockholders of WEC.
STOCKHOLDER PROPOSALS. Stockholders wishing to submit written proposals for
inclusion in the proxy statement for the 1998 Annual Meeting must send the
proposals to WEC's Corporate Secretary so as to be received on or before
November 14, 1997.
NOMINATIONS OR PROPOSALS FROM THE FLOOR. Stockholders wishing to propose any
floor nominations for director or floor proposals at the 1998 Annual Meeting
must provide notice and submit certain other documentation as required by
WEC's Bylaws to WEC's Corporate Secretary to be received at least 70 days and
not more than 100 days prior to the scheduled date of the 1998 Annual Meeting.
The address of the Corporate Secretary is 231 West Michigan Street, P. O. Box
2949, Milwaukee, Wisconsin 53201.
21
<PAGE> 29
AVAILABILITY OF FORM 10-K
A COPY (WITHOUT EXHIBITS) OF WEC'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS AVAILABLE WITHOUT CHARGE TO ANY STOCKHOLDER OF RECORD OR
BENEFICIAL OWNER OF WEC COMMON STOCK BY WRITING TO THE CORPORATE SECRETARY,
ANN MARIE BRADY, 231 WEST MICHIGAN STREET, MILWAUKEE, WISCONSIN 53201. IN
LIEU OF PROVIDING ALL STOCKHOLDERS WITH AN ANNUAL REPORT, THE WEC CONSOLIDATED
FINANCIAL STATEMENTS AND CERTAIN OTHER INFORMATION FOUND IN THE FORM 10-K IS
INCLUDED IN APPENDIX A TO THIS PROXY STATEMENT.
22
<PAGE> 30
Wisconsin Energy Corporation
APPENDIX A
ANNUAL FINANCIAL STATEMENTS
and REVIEW of OPERATIONS
<PAGE> 31
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
- -----------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994 1993 1992
- ---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 218,135 $ 234,034 $ 180,868* $ 190,135 $ 171,239
Earnings per share of
common stock ($) 1.97 2.13 1.67* 1.80 1.66
Dividends per share
of common stock ($) 1.5075 1.455 1.39625 1.34125 1.285
Operating revenues
Electric $1,393,270 $1,437,480 $1,403,562 $1,347,844 $1,298,723
Gas 364,875 318,262 324,349 331,301 283,699
Steam 15,675 14,742 14,281 14,090 13,093
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,773,820 $1,770,484 $1,742,192 $1,693,235 $1,595,515
========== ========== ========== ========== ==========
Total assets $4,810,838 $4,560,735 $4,408,259 $4,270,592 $3,788,955
Long-term debt and preferred stock-
redemption required $1,416,067 $1,367,644 $1,283,686 $1,300,781 $1,289,082
- -----------------------------------------------------------------------------------------------
Sales and Customers - Utility
Electric
Megawatt-hours sold 27,560,428 27,283,869 26,911,363 25,685,436 24,747,581
Customers (End of year) 968,735 955,616 944,855 932,285 919,466
Gas
Therms delivered (Thousands) 936,894 886,729 811,219 809,348 772,036
Customers (End of year) 367,275 357,030 347,080 336,571 327,247
Steam
Pounds sold (Millions) 2,705 2,532 2,395 2,376 2,284
Customers (End of year) 465 473 471 459 472
===============================================================================================
CONSOLIDATED QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
- -----------------------------------------------------------------------------------------------
March June
Three Months Ended 1996 1995 1996 1995
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 495,457 $ 471,122 $ 401,686 $ 405,093
Operating income 85,145 84,572 68,382 72,848
Net income 62,804 62,534 45,554 51,595
Earnings per share of common stock ($) 0.57 0.57 0.41 0.47
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
September December
Three Months Ended 1996 1995 1996 1995
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 398,801 $ 426,413 $ 477,876 $ 467,856
Operating income 76,693 80,704 75,624 90,897
Net income 53,430 58,436 56,347 61,469
Earnings per share of common stock ($) 0.48 0.53 0.51 0.56
===============================================================================================
Quarterly results of operations are not directly comparable because of seasonal and other factors. See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
* Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax or $.42 per share)
related to Wisconsin Electric Power Company's Revitalization program.
A-1
</TABLE>
<PAGE> 32
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 December 31, 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.
Wisconsin Electric Revitalization
To better position the Company in a changing energy marketplace, WE
implemented a revitalization program ("Revitalization") in 1994 to increase
efficiencies and improve customer service by reengineering and restructuring
the organization. The new structure consolidated many business functions and
simplified work processes. See "Note K - Benefits Other Than Pensions" in the
NOTES TO FINANCIAL STATEMENTS for additional information.
Mergers
Wisconsin Natural Gas Company: On January 1 1996, WEC merged its natural gas
utility subsidiary, Wisconsin Natural Gas Company ("WN"), into its electric
and steam utility subsidiary, WE, to form a single combined utility
subsidiary. The merger, which was part of Revitalization, is expected to
improve customer service and reduce operating costs. The accounting treatment
for this merger was similar to that which would result from a pooling of
interests. Where applicable, references to WE include WN's gas operations
prior to the merger.
Northern States Power Company: As previously reported, WEC has entered into an
agreement with Northern States Power Company, a Minnesota corporation ("NSP"),
which provides for a strategic business combination involving the two
companies in a "merger-of-equals" transaction. The future operations and
financial position of the Company will be significantly affected by the
proposed merger. Consummation of the proposed merger is subject to a number of
conditions, including obtaining all required regulatory approvals. Additional
information concerning such agreement and proposed transaction may be found
below under "FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with
Northern States Power Company", in MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS - "DIVIDEND POLICY OF PRIMERGY" and in "Note B - Mergers"
in the NOTES TO FINANCIAL STATEMENTS (including unaudited pro forma financial
information).
Cautionary Factors
When used in this document, "anticipate", "believe", "estimate", "expect",
"objective", "project" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements are subject to certain
risks, uncertainties and assumptions which could cause actual results to
differ materially from those that are described, including the items described
below under "FACTORS AFFECTING RESULTS OF OPERATIONS" and below under
"CAUTIONARY FACTORS".
RESULTS OF OPERATIONS
The following discussion and analysis of the RESULTS OF OPERATIONS does not
consider the impact of the proposed merger with NSP. See "FACTORS AFFECTING
A-2
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company"
for information concerning the proposed merger. See "Note L - Information By
Segments of Business" in the NOTES TO FINANCIAL STATEMENTS for additional
information related to WEC's and WE's RESULTS OF OPERATIONS.
Earnings
1996 Compared to 1995: During 1996, WEC's consolidated net income and
earnings per share of common stock were $218.1 million and $1.97 per share
compared to $234.0 million and $2.13 per share during 1995. WE's Net Income
decreased to $210.1 million in 1996 from approximately $239.5 million in 1995.
As described below, WEC's and WE's earnings decreased primarily because 1996
retail electric and gas rate decreases more than offset the favorable impact
of increases in electric sales and gas deliveries and decreases in certain
Operating Expenses.
1995 Compared to 1994: Earnings per share of WEC's common stock in 1995 were
$2.13 compared with $1.67 per share in 1994, an increase of 27.5%. WEC's Net
Income increased by approximately $53.2 million and WE's Net Income increased
$58.9 million in 1995 compared to 1994. WEC's and WE's earnings during 1994
reflect a nonrecurring charge of approximately $73.9 million ($45 million net
of tax, or 42 cents per share) associated with WE's Revitalization program.
The 1994 nonrecurring charge primarily included the costs of early retirement
and severance packages which were elements of Revitalization. The Company has
recovered the 1994 nonrecurring charge in avoided labor costs that would have
been charged to Other Operations and Maintenance expense during 1994 and 1995.
Excluding the Revitalization charge, WEC's 1995 earnings and earnings per
share of common stock were 3.6% and 1.9% greater than 1994 earnings and
earnings per share, respectively. WE's 1995 earnings were 6.2% greater than
1994 earnings excluding the Revitalization charge. The increase in WEC's and
WE's 1995 earnings primarily reflects higher electric sales and gas deliveries
and a decrease in Other Operation and Maintenance expenses.
Electric Revenues, Gross Margins and Sales
The table below summarizes Electric Operating Revenues, gross margins,
megawatt-hour sales and average electric customers for each of the three years
ended December 31, 1996.
1996 Compared to 1995: Primarily as a result of annualized electric retail
rate decreases effective January 1, 1996 of approximately $33.4 million or
2.8% in Wisconsin and $1.1 million or 3.3% in Michigan, total Electric
Operating Revenues decreased by 3.1% or $44.2 million during 1996 compared to
1995. Also contributing to the 1996 decrease in Electric Operating Revenues
were the effects of renegotiated contracts with various wholesale customers
and with the Empire and Tilden iron ore mines (the "Mines"), WE's two largest
retail customers, as well as continued reductions in sales to Wisconsin Public
Power Inc. SYSTEM ("WPPI") and Upper Peninsula Power Company ("UPPCo"), WE's
largest municipal and utility customer, respectively. The renegotiated
wholesale and mine contracts contain discounts from previous rates charged to
these customers in exchange for contract extensions. A 1.0% 1996 increase in
total electric kilowatt-hour sales was not sufficient to offset the impact on
Electric Operating Revenues of the rate decreases, the renegotiated contracts
and the reduced sales to WPPI and UPPCo.
A-3
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
<TABLE>
<CAPTION>
=========================================================================================================
% Change % Change
1995 1994
Electric Operations 1996 1995 to 1996 1994 to 1995
------------------------------ ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Electric Gross Margin ($000's):
Operating Revenues:
Residential $ 494,142 $ 507,416 (2.6%) $ 484,627 4.7%
Small Commercial/Industrial 421,511 423,039 (0.4%) 406,043 4.2%
Large Commercial/Industrial 383,047 401,794 (4.7%) 398,179 0.9%
Other 56,318 69,318 (18.8%) 69,258 0.1%
Resale-Utilities 26,372 24,811 6.3% 31,295 (20.7%)
Other Operating Revenues 11,880 11,102 7.0% 14,160 (21.6%)
---------- ---------- ----------
Total Operating Revenues 1,393,270 1,437,480 (3.1%) 1,403,562 2.4%
Fuel & Purchased Power 331,867 345,387 (3.9%) 328,485 5.2%
---------- ---------- ----------
Gross Margin $1,061,403 $1,092,093 (2.8%) $1,075,077 1.6%
========== ========== ==========
Sales (Megawatt-hours):
Residential 6,998,769 7,042,691 (0.6%) 6,670,081 5.6%
Small Commercial/Industrial 7,204,694 7,047,277 2.2% 6,699,073 5.2%
Large Commercial/Industrial 10,785,505 10,639,782 1.4% 10,471,869 1.6%
Other 1,476,999 1,550,937 (4.8%) 1,603,741 (3.3%)
Resale-Utilities 1,094,461 1,003,182 9.1% 1,466,599 (31.6%)
---------- ---------- ----------
Total Electric Sales 27,560,428 27,283,869 1.0% 26,911,363 1.4%
========== ========== ==========
Average Customers:
Residential 867,917 857,924 1.2% 846,745 1.3%
Small Commercial/Industrial 91,565 90,386 1.3% 88,765 1.8%
Large Commercial/Industrial 706 679 4.0% 674 0.7%
Other 1,812 1,809 0.2% 1,802 0.4%
Resale-Utilities 20 12 66.7% 9 33.3%
---------- ---------- ----------
Total Average Customers 962,020 950,810 1.2% 937,995 1.4%
========== ========== ==========
=======================================================================================================
</TABLE>
Between the comparative periods, the gross margin on Electric Operating
Revenues (Electric Operating Revenues less Fuel and Purchased Power expenses)
decreased 2.8% or by approximately $30.7 million. The lower 1996 Electric
Operating Revenues more than offset the lower net 1996 Fuel and Purchased
Power expenses. Fuel expenses declined 2.6% in 1996 primarily due to lower
average coal costs per ton consumed. Between the comparative periods,
Purchased Power expense decreased 13.4% as WE substituted lower cost
generation for power purchases.
Residential sales declined 0.6%, but Small Commercial/Industrial sales
increased 2.2% during 1996 compared to 1995. A decrease in the average
electric usage per Residential customer as a result of cooler weather during
the summer of 1996 compared to the summer of 1995 was partially offset by the
effect of a 1.2% increase in the average number of Residential customers
during 1996. Average usage per Small Commercial/Industrial customer in 1996
was flat compared to 1995. However, a 1996 increase in the average number of
Small Commercial/Industrial customers caused the increase in electric sales to
this customer class.
Electric energy sales to the Mines increased by 3.2% to approximately
2,369,000 megawatt-hours in 1996 compared to 2,296,000 megawatt-hours in 1995.
Excluding the Mines, sales to Large Commercial/Industrial customers increased
0.9% between the comparative periods.
The 4.8% decrease in 1996 sales to the Other customer class compared to 1995
is largely due to the reduction in sales to WPPI noted above. WPPI has been
A-4
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
reducing its purchases from WE subsequent to acquiring generating capacity and
expanding use of its existing generating facilities.
Sales of electric energy to other utilities (the Resale-Utilities customer
class), representing 4.0% of total 1996 electric energy sales, increased 9.1%
from 1995 to 1996. This increase is attributed in part to increased
availability during 1996 of WE's lowest cost generating units compared to 1995
and to greater native load demand as a result of the hot weather during the
summer of 1995, allowing for higher opportunity sales by WE to other utilities
in 1996. During 1996, a continued reduction in purchases of electricity by
UPPCo somewhat offset the increase in resale sales to other utilities during
1996. WE expects UPPCo to significantly reduce its purchases of electric
energy from WE when a 65 megawatt ("MW") agreement with WE expires at the end
of 1997.
1995 Compared to 1994: Despite an annualized $16.2 million or 1.3% Wisconsin
retail electric fuel adjustment rate decrease that became effective on August
4, 1994, total Electric Operating Revenues increased by 2.4% or by $33.9
million from 1994 to 1995 due to increased 1995 electric sales.
The gross margin on Electric Operating Revenues increased by 1.6% or $17.0
million in 1995 compared to 1994. The gross margin grew because the increased
electric sales were primarily to Residential and Small Commercial/Industrial
customers who contribute higher margins to earnings than other customer
classes. During 1995, Fuel expense increased 6.2% or by approximately $17.7
million in 1995 compared to 1994 as a result of higher electric sales.
Purchased Power expense declined 1.9% or by approximately $0.8 million in 1995
compared to 1994 as a result of decreased marginal generating costs in 1995 at
three of WE's fossil plants and the newly installed peaking capacity at Paris
Generating Station ("Paris"). Lower generating costs at the fossil plants
were due to decreased per unit fuel costs and the benefits of Revitalization,
allowing WE to substitute lower cost generation for power purchases. The
addition of Paris, a natural gas fired peaking unit, in 1995 allowed WE to
eliminate firm power purchase contracts that included fixed demand charges.
Unscheduled or longer than expected outages in 1995 at two of WE's most
efficient power plants, however, offset most of the decrease in Purchased
Power expense as WE purchased nonfirm replacement power on the spot market.
Total electric sales increased by 1.4% in 1995 compared to 1994. Electric
sales were positively impacted by substantially warmer summer weather
conditions during 1995, resulting in increased use of electricity for air
conditioning and other cooling purposes. As measured by cooling degree days,
the 1995 cooling season (June through August) was 27.7% warmer than the same
period in 1994. During the summer of 1995, WE experienced eight days of
electric peak demands greater than the previous record which had been set in
June 1994. The increase in electric sales also reflects colder winter weather
during the fourth quarter of 1995 and a moderate increase in economic activity
in WE's service area.
The warmer 1995 summer weather increased sales primarily to Residential and
Small Commercial/Industrial customers. These customers are more sensitive to
weather variations than other customer classes. The average number of
customers in the Residential and Small Commercial/Industrial customer classes
increased by 1.3% and 1.8%, respectively, from 1994 to 1995.
Electric energy sales to the Mines decreased by 0.5% to 2,296,000 megawatt-
hours in 1995 compared to 2,308,000 megawatt-hours in 1994. Excluding the
Mines, sales to Large Commercial/Industrial customers increased 2.2%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
The 3.3% reduction in sales to the Other customer class in 1995 compared to
1994 is largely the result of reductions in sales to WPPI discussed above.
WPPI's sales reductions during 1995 did not have a significant effect on
earnings.
Sale of electric energy to the Resale-Utilities customer class declined 31.6%
in 1995 compared to 1994. This decline can in part be attributed to unplanned
or longer than expected outages at two of WE's least cost generating
facilities during 1995 and to increased retail customer load as a result of
the warmer summer of 1995 weather, both of which reduced the opportunity to
sell electric energy to other utilities. Also, as noted above, UPPCo reduced
the amount of energy that it purchased from WE in 1995. The 1995 sales
reductions by UPPCo did not have a significant effect on 1995 earnings.
Gas Revenues, Gross Margins and Therm Deliveries
The table below summarizes Gas Operating Revenues, gross margins, therm
deliveries and average gas customers for each of the three years ended
December 31, 1996.
1996 Compared to 1995: Despite an annualized $8.3 million or 2.6% Wisconsin
retail gas rate decrease effective January 1, 1996, total Gas Operating
Revenues increased 14.6% or by $46.6 million and the gross margin on Gas
Operating Revenues (Gas Operating Revenues less Cost of Gas Sold) increased
0.9% or by $1.1 million during 1996 compared to 1995. A 5.7% increase in
total therm deliveries during 1996 more than offset the impact of the rate
decrease on Gas Operating Revenues and on gross margin.
Gross margin was higher in 1996 because the increased therm deliveries were
primarily to Residential and Commercial customers, who contribute higher
margins to earnings than other customer classes. The change in Cost of Gas
Sold increased 24.1% or by approximately $45.5 million in 1996 compared to
1995 due to a higher 1996 per unit cost of purchased gas and to a higher
volume of gas purchases in 1996. WE arranges for its own gas supply contracts
with terms of various lengths. Changes in the cost of natural gas purchased
at market prices are included in customer rates through the purchased gas
adjustment mechanism and do not affect gross margin.
Total natural gas therm deliveries increased 5.7% or by 50,165,000 therms in
1996 compared to 1995. Of this increase in therm deliveries, Residential and
Commercial/Industrial sales increased by 26,850,000 therms and 17,811,000
therms, respectively, in 1996. These increases are attributed in part to
colder weather and in part to increased customers in these two customer
classes during 1996 compared to 1995. As measured by heating degree days,
1996 was 9.3% colder than 1995 and 6.0% colder than normal. During 1996, the
average number of Residential and Commercial/Industrial customers increased by
2.7% and 2.4%, respectively, compared to 1995.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
<TABLE>
<CAPTION>
==========================================================================================================
% Change % Change
1995 1994
Gas Operations 1996 1995 to 1996 1994 to 1995
------------------------------ ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Gas Gross Margin ($000's):
Operating Revenues:
Residential $ 218,811 $ 194,226 12.7% $ 200,824 (3.3%)
Commercial/Industrial 108,100 94,482 14.4% 102,496 (7.8%)
Interruptible 11,531 7,712 49.5% 12,605 (38.8%)
Transported Customer Owned Gas 11,006 12,161 (9.5%) 11,453 6.2%
Other - Interdepartmental 3,775 5,834 (35.3%) 2,907 100.7%
Other Operating Revenues 11,652 3,847 202.9% (5,936) (164.8%)
---------- ---------- ----------
Total Operating Revenues 364,875 318,262 14.6% 324,349 (1.9%)
Cost of Gas Sold 234,254 188,764 24.1% 199,511 (5.4%)
---------- ---------- ----------
Gross Margin $ 130,621 $ 129,498 0.9% $ 124,838 3.7%
========== ========== ==========
Therms Delivered (000's):
Residential 371,990 345,140 7.8% 323,913 6.6%
Commercial/Industrial 225,169 207,358 8.6% 199,206 4.1%
Interruptible 35,869 29,397 22.0% 36,916 (20.4%)
Transported Customer Owned Gas 268,163 261,361 2.6% 235,850 10.8%
Other - Interdepartmental 35,703 43,473 (17.9%) 15,334 183.5%
---------- ---------- ----------
Total Gas Delivered 936,894 886,729 5.7% 811,219 9.3%
========== ========== ==========
Average Customers:
Residential 330,153 321,643 2.7% 311,288 3.3%
Commercial/Industrial 29,930 29,228 2.4% 28,439 2.8%
Interruptible 196 203 (3.5%) 198 2.5%
Transportation 230 209 10.1% 202 3.5%
Other - Interdepartmental 8 8 0.0% 7 14.3%
---------- ---------- ----------
Total Average Customers 360,517 351,291 2.6% 340,134 3.3%
========== ========== ==========
==========================================================================================================
</TABLE>
Other-Interdepartmental therm deliveries decreased 17.9% or by 7,770,000
therms during 1996 compared to 1995. These therm deliveries to WE electric
generating facilities, primarily the natural gas fired peaking units at the
Paris and Concord Generating Stations ("Concord"), are at rates approved by
the Public Service Commission of Wisconsin ("PSCW"). Therm deliveries to
these customers decreased in 1996 as a result of the cooler 1996 summer
weather discussed above in "Electric Revenues, Gross Margins and Sales".
1995 Compared to 1994: Despite an increase in 1995 total gas deliveries,
total Gas Operating Revenues decreased 1.9% or by approximately $6.1 million
in 1995 compared to 1994 as a result of a reduction in the cost of gas, which
is recovered in Gas Operating Revenues through the purchased gas adjustment
clause. The gross margin on Gas Operating Revenues (Gas Operating Revenues
less Cost of Gas Sold) increased 3.7% or by approximately $4.7 million in 1995
compared to 1994. The gross margin was higher because of increased therm
sales to Residential and Commercial customers who contribute higher margins to
earnings than other customer classes. A decrease in the average per unit cost
of purchased gas during 1995 more than offset the affect of the increase in
therm deliveries such that Cost of Gas Sold decreased 5.4% or by $10.7 million
compared to 1994.
Total natural gas therms delivered increased 9.3% or by 75,510,000 therms
between the comparative periods. Colder weather during the fourth quarter of
1995 compared to the fourth quarter of 1994 contributed to net increased
deliveries for 1995. As measured by heating degree days, the fourth quarter
of 1995 was 43.1% colder than the same period in 1994. The colder weather in
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
the fourth quarter of 1995 especially increased sales to Residential and
Commercial customers. These customers are more sensitive to weather
variations as a result of heating requirements than other customer classes.
Also, the average number of Residential and Commercial/Industrial customers
increased by 3.3% and 2.8%, respectively, in 1995 compared to 1994.
During 1995, Other-Interdepartmental therm deliveries increased 183.5% or by
28,139,000 therms compared to 1994. WE attributes this increase to increased
electric generation peaking requirements of Concord and Paris, especially
given the warmer weather conditions during the summer of 1995 noted above.
All of the gas fired generating units at Concord and Paris were in operation
by the end of the second quarter of 1995 while only the generating units at
Concord were in operation by the end of the second quarter of 1994.
Operating Expenses
1996 Compared to 1995: Other Operation Expenses decreased 0.9% or by $3.7
million during 1996 compared to 1995, primarily due to lower capitalized
conservation, property insurance and pension and benefit expenses, partially
offset by increased uncollectible expenses. Maintenance expense decreased 8.3%
or by approximately $9.4 million in 1996 compared to 1995, primarily as a
result of a decrease in costs associated with maintenance of WE's fossil power
plants. WE attributes the decrease in maintenance to an extended outage at
WE's Pleasant Prairie Power Plant in 1995 as well as to continued efforts to
reduce operating and maintenance costs. Depreciation expense increased 10.3%
or by $18.9 million between the same comparative periods primarily due to
increased nuclear decommissioning expenses and to a lesser extent to higher
depreciable plant balances in 1996.
During 1996, Operating Taxes Other Than Income Taxes increased 4.1% or by $3.1
million compared to 1995 due to tax adjustments related to prior periods.
Total operating income taxes decreased 10.2% or by $14.4 million in 1996
compared to 1995 as a result of lower taxable income.
1995 Compared to 1994: Excluding Depreciation expense, operating income taxes
and the nonrecurring 1994 Revitalization charge, total Operating Expenses
decreased 0.9% in 1995 compared to 1994, reflecting a reduction of 3.1% or
approximately $16 million in Other Operation and Maintenance expenses
primarily attributable to payroll-related savings and efficiencies gained
through WE's Revitalization program. Such reductions were partially offset by
higher costs related to increased generation, the availability of Paris and
unscheduled or longer than expected outages at WE power plants.
In 1995 compared to 1994, total operating income taxes increased 41.4% or by
$41 million due to lower taxable income in 1994 caused by the nonrecurring
Revitalization charge. Deferred Income Taxes-Net increased $22 million or
88.7% primarily due to tax matters related to the timing of payments made in
connection with WE's Revitalization program.
Other Items
Excluding the annual $10.9 million impact of a 1996 change in accounting for
capitalized conservation expenditures at WE, Miscellaneous - Net Other Income
and Deductions increased $14.9 million in 1996 compared to 1995. The change
in accounting more than offset a 1996 increase in non-utility Miscellaneous-
Net Other Income and Deductions of $13.4 million compared to 1995. This $13.4
million increase was primarily due to fair market valuation adjustments of
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
non-utility investments and the gain recorded on sales of non-utility property
and investments. Miscellaneous-Net Other Income and Deductions decreased $9.8
million in 1995 compared to 1994, due in part to fair market valuation
adjustments of non-utility investments.
Other Interest Charges decreased by approximately $5.0 million in 1996
compared to 1995 due to decreased average outstanding short-term debt balances
during 1996, primarily at WE. Other Interest Charges increased by $4.8
million in 1995 compared to 1994 as a result of increased average short-term
debt balances, primarily at WE, in 1995 compared to 1994.
FACTORS AFFECTING RESULTS OF OPERATIONS
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.
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. Under
the provisions of the Merger Agreement, each outstanding share of NSP common
stock will be converted into 1.626 shares of Primergy common stock and each
outstanding share of WEC common stock will remain outstanding as a share of
Primergy common stock.
The Merger Agreement is subject to various conditions, including approval of
various regulatory agencies. The goal of WEC and NSP was to complete the
Transaction by January 1, 1997. However, as discussed below, all necessary
regulatory approvals were not obtained by the end of 1996 and, as a result,
the Transaction was not completed in 1996. WEC and NSP continue to pursue
regulatory approvals, without unacceptable conditions, to facilitate
completion of the Transaction as soon as possible in 1997.
Upon consummation of the Transaction, cost savings 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. 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, is
subject to regulatory review and approval.
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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
four years in the jurisdictions in which they operate. WEC and NSP have also
proposed a four year freeze in their wholesale electric rates. In December
1995, WEC and NSP entered into a settlement agreement with certain Wisconsin
municipal intervenors that ended the latters' participation in the Federal
Energy Regulatory Commission ("FERC") and state merger proceedings. The
settlement agreement, which provides for certain rate reductions on power
sales and transmission services, was approved by the FERC in June 1996. 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.
Regulatory authorities may also require the restructuring of electric
transmission system operations or administration. As noted below, WEC and NSP
have proposed an Independent System Operator ("ISO") of their electric
transmission systems in testimony filed with the FERC and the Public Service
Commission of Wisconsin ("PSCW") during merger application hearings. WEC and
NSP currently cannot predict what, if any, restructuring of the transmission
system will be required. In addition, Wisconsin State law limits the total
assets of non-utility affiliates of Primergy, which could affect the amount of
non-regulated operations.
Securities and Exchange Commission: In April 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 SEC could require, as a condition of its
approval of the Transaction, that Primergy divest of certain of its gas
utility and/or non-regulated operations within a reasonable time after the
Transaction is consummated. In a few cases, the SEC has allowed the retention
of such properties or deferred the question of divestiture for a substantial
period of time. In those cases in which divestiture has taken place, the SEC
has usually allowed enough time to complete the divestiture so as to allow the
applicant to avoid a "fire sale" of the divested assets. WEC and NSP believe
that strong policy reasons and prior SEC decisions exist which support their
retaining their existing gas utility properties and non-utility ventures, or,
alternatively, which support deferring the question of divestiture for a
substantial period of time. Accordingly, WEC and NSP requested in their April
1996 merger application with the SEC that WEC and NSP be allowed to retain
WEC's and NSP's existing gas utility properties and non-utility ventures.
Federal Energy Regulatory Commission: The FERC held hearings on the merger
application in June 1996. Subject to WEC and NSP meeting eight conditions,
the administrative law judge ("ALJ") in the merger proceeding issued an
initial decision in August 1996 recommending approval of the Transaction. The
ALJ's initial decision included recommendations for a working 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. In October 1996, WEC and NSP filed with the FERC a
Unilateral Settlement Offer of the Primergy Merger Applicants ("Settlement
Offer") setting forth a 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".
In mid-December 1996, the FERC revised and streamlined its 30-year-old policy
for evaluating public utility mergers, with the changes designed to expedite
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
the processing of merger applications. The new policy primarily focuses on
three factors in reviewing mergers: the effect on competition, rates, and
state and federal regulation. For pending mergers, such as that between WEC
and NSP, the policy will be applied on a case-by-case basis. WEC and NSP
believe the proposed Transaction is consistent with the FERC's revised merger
policy and are hopeful that the FERC will simultaneously rule on the
Settlement Offer and the pending merger application in the first quarter of
1997.
Public Service Commission of Wisconsin: In October 1996, the PSCW commenced
hearings on the merger application, which were completed in November 1996.
In late December 1996, two Wisconsin legislators asked the PSCW to delay
decisions on all pending utility mergers until the Wisconsin Legislature had
an opportunity to consider a bill revising the state's utility merger law,
which the two legislators indicated they would introduce. In early January
1997, the PSCW voted unanimously not to delay its decision. However, later in
January 1997, a Dane County Circuit Court judge ordered the PSCW to delay its
decision on the application, pending the results of an investigation regarding
alleged prohibited conversations between one of the commissioners and WEC
officials. The judge further ordered the PSCW to investigate the allegations.
While WEC cannot predict specifically when the PSCW will resolve the
allegations and proceed with deliberations concerning the merger application,
the Company is hopeful that such investigation might be completed by the end
of the first quarter of 1997.
Minnesota Public Utilities Commission: In June 1996, the Minnesota Public
Utilities Commission ("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.
The MPUC completed evidentiary hearings on the merger application in December
1996. In January and February 1997, ALJs in the merger application
proceedings issued their findings and recommendations about the Minnesota
merger application. Among other items, they found that the projected merger-
related cost savings were reasonable, recommended a four-year rate freeze,
with very limited exceptions for rate changes and concluded that the merger
would not provide Primergy with the ability or incentive to negatively impact
competition. The MPUC will consider the ALJs' recommendations along with
other information when they deliberate and decide the case. WEC and NSP are
hopeful that the MPUC will rule on the pending merger application in the first
quarter of 1997.
Michigan Public Service Commission: In April 1996, the Michigan Public
Service Commission ("MPSC") approved the merger application through a
settlement agreement containing terms consistent with the merger application.
North Dakota Public Service Commission: In June 1996, the North Dakota Public
Service Commission approved the merger application.
Other Federal Agencies: In the fall of 1995, WEC and NSP filed applications
with the Nuclear Regulatory Commission ("NRC") for license amendments related
to the Merger Agreement. The matter is pending. In 1995, WEC and NSP
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
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. In December 1996, WEC and NSP filed required notifications with
the Federal Trade Commission and the United States Department of Justice
("U.S. DOJ") under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended. In January 1997, the U.S. DOJ served a second request for
information and documents. WEC and NSP anticipate responding to the second
request in March 1997.
Merger Conditions: Under the Merger Agreement, completion of the Transaction
is subject to several conditions, including but not limited to the prior
receipt of all necessary regulatory approvals without the imposition of
materially adverse terms. In addition, both WEC and NSP have the right to
terminate the Merger Agreement if the Transaction has not been completed by
April 30, 1997, except where on such date all necessary statutory approvals
and third party consents have not been obtained but all other conditions to
closing have been fulfilled or are capable of being fulfilled. Then the
termination date shall be extended to October 31, 1997. WEC continues to work
with NSP to complete the Transaction and believes that fulfillment of the
various conditions to the Transaction within the time frame of the Merger
Agreement is achievable.
Additional information with respect to the Merger Agreement and the proposed
Transaction, including pro forma combined condensed financial information, may
be found in "Note B - Mergers" in the NOTES TO FINANCIAL STATEMENTS.
Nuclear Matters
Point Beach Nuclear Plant: WE operates two 500 megawatt electric generating
units at Point Beach Nuclear Plant ("Point Beach"). During 1996, Point Beach
accounted for 25.4% of WE's net electric generation. The current operating
licenses for the two units at Point Beach expire in 2010 and 2013 for Units 1
and 2, respectively.
As a result of degradation of tubes within the Unit 2 steam generators at
Point Beach, WE completed replacement of the steam generators in January 1997.
The unit had been operating at 90% of its capacity during the operating cycle
prior to the Unit 2 fall refueling and steam generator replacement outage,
which began in October 1996. Subject to approval by the NRC, WE expects to
restart Unit 2 during the second quarter of 1997. Unit 1 is currently
expected to begin an extended refueling outage in early May 1997 that could
extend into September 1997. However, WE continues to evaluate generating unit
outage schedule scenarios to optimize the availability of supply resources
which may impact the schedule of the Unit 1 outage. See "FACTORS AFFECTING
RESULTS OF OPERATIONS - Rates and Regulatory Information" below for
information about a related emergency fuel rate increase filing with the PSCW
in February 1997.
WE completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for dry storage of spent fuel from Point Beach. The ISFSI
was necessary because the spent fuel pool inside the plant is nearly full. Two
storage casks have been loaded with spent fuel and transferred to the ISFSI.
As a result of a hydrogen gas ignition during loading of a third cask in May
1996, cask loading has been halted until actions are implemented to prevent
recurrence of such an event and until the NRC has reviewed and accepted these
actions. WE hopes to resume loading of the casks in April 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
In December 1996, WE paid the NRC $325,000 in civil penalties for performance
deficiencies and violations of NRC requirements in various plant activities.
In January 1997, the NRC informed WE of additional potential violations
observed during a special inspection that could result in further civil
penalties. Also, the NRC sent a letter on January 27, 1997 notifying WE of a
declining trend in performance at Point Beach based upon these inspections and
other ongoing regulatory interactions. The NRC issues trend letters to
provide early notification of declining performance and to allow a utility,
under the watchfulness of the NRC, to take early corrective actions. The NRC
acknowledged in the letter that WE has made improvements in the identification
and resolution of specific problems.
See "Note F - Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS for
further information related to Point Beach, the Unit 2 steam generator
replacement, the ISFSI and NRC matters. See "LIQUIDITY AND CAPITAL
RESOURCES - Investing Activities" below for additional information about the
Unit 2 steam generator replacement project.
Spent Fuel Storage and Disposal: As noted in the preceding section, WE
constructed the ISFSI because its spent fuel pool within Point Beach is nearly
full. Without NRC agreement that WE may resume loading of storage casks, the
pool for spent fuel will be full by 1998. With NRC agreement to resume
loading spent fuel, WE will load up to a total of 12 casks, providing
sufficient storage capacity for spent fuel until the year 2000. WE plans to
file an application with the PSCW later in 1997 for approval to load by the
year 2000 further storage casks in addition to the 12 that were previously
approved.
The temporary dry storage facilities at Point Beach are being used until the
United States Department of Energy ("DOE") takes ownership of and permanently
removes the spent fuel under a contract mandated by the Nuclear Waste Policy
Act of 1982 ("Waste Act"). In July 1996, the United States Court of Appeals
for the District of Columbia circuit ruled that the DOE has an unconditional
obligation under the Waste Act to begin accepting spent fuel by January 31,
1998. However, in December 1996, the DOE notified owners of commercial
nuclear plants that it will not be able to meet its statutory obligation. The
DOE has indicated that it does not expect a permanent spent fuel repository to
be available until at least 2010. On January 31, 1997, numerous electric
utilities filed a petition in the Court of Appeals for review of the DOE's
failure to meet its statutory obligation and requested, among other things,
authority to withhold payments to the DOE for the permanent disposal program
until it begins accepting their spent fuel. While WE was not a party to the
petition, the PSCW has joined other public utility commissions and states in a
similar petition filed on the same day. At this time, WE is unable to predict
when the DOE will actually begin accepting spent fuel. Until such time, WE
expects to continue to rely on temporary dry storage of its spent nuclear
fuel. As another potential temporary storage option, WE is participating with
a consortium of electric utilities to establish a private facility for interim
storage of spent nuclear fuel. However, the availability of this private
facility is uncertain at this time.
Industry Restructuring and Competition
The electric industry continues a trend towards restructuring and increased
competition, driven by a combination of market forces, regulatory and
legislative initiatives and technological changes. To date, competitive
pressures have been most prominent in the wholesale power market, but are
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<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
expected to continue to develop in the electric retail markets. Currently
proposed federal legislation targets electric retail customer choice by the
years 2000 through 2003. Present regulatory restructuring initiatives in
various midwestern states target electric retail customer choice by the years
2000 through 2005. While the Company cannot predict the ultimate timing or
impact of a restructured electric industry, WE has been advocating
restructuring of the electric utility industry and believes that as a low-cost
energy provider, it is well positioned to benefit from such changes. Among
others, the following electric and gas industry restructuring initiatives are
underway in regulatory jurisdictions where WE currently does business.
PSCW Electric Utility Industry Investigation: The PSCW has conducted an
investigation into the electric utility industry in Wisconsin, particularly
its institutional structure and regulatory regime, in order to evaluate what
changes would be beneficial for Wisconsin. In December 1995, the PSCW decided
the general direction of utility regulation in Wisconsin. This proposed
restructuring of the industry would permit all consumers to choose their
electricity provider by the year 2001 and it would establish a competitive
generation business. The transmission and distribution functions would remain
regulated. In a February 1996 report to the Wisconsin Legislature, the
PSCW identified a 32 step workplan that it would follow for electric utility
restructuring in Wisconsin. During 1996, the PSCW began activities on twelve
of these steps including:
* Required utilities to file plans to functionally segment the business into
generation, transmission, distribution and customer service operations.
Comments were filed on the plans and a technical conference will be held
in early 1997.
* Requested utilities and other interested parties to file comments on the
adoption of affiliated interest standards to prevent unfair competition
and cross-subsidization between affiliated businesses. The PSCW staff
will prepare an initial proposal for comment in early 1997 to be followed
by hearings and rulemaking proceedings.
* Evaluated whether a public benefits policy advisory board should be
created to carry out policies to continue programs, such as conservation
and low-income energy assistance which are best handled by a government
agency as competition is introduced into the industry. Meetings were held
throughout 1996 to discuss recommendations for action. These
recommendations formed a report that will serve as the basis for public
meetings in early 1997. The PSCW is expected to make decisions in March
1997 which will most likely require significant legislation.
* Evaluated what quality of service standards and mechanisms for measuring
and monitoring service quality should be established. Utilities and other
interested parties were requested to comment on ways to generally improve
service rules before moving to a restructured industry. A rulemaking
hearing is planned for early 1997. The PSCW is expected to issue an order
on service quality for legislative review after the hearings.
* Examined the introduction of an ISO in the state of Wisconsin that
effectively separates control and operation of the transmission system
from the ownership of generation. At the request of the PSCW, WE, along
with four other utilities (including NSP) submitted a joint proposal in
May 1996 for an ISO that would have the responsibility for ensuring
transmission service in the state will be conducted fairly and equitably
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
for all parties. Three other proposals were also filed. In September
1996, the PSCW issued an order setting forth principles for an acceptable
ISO ("ISO Order"). 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.
The PSCW has indicated that it will consider the principles contained in
its ISO Order as deliberations are held on the Primergy merger
application. As part of the PSCW merger proceeding, WEC and NSP proposed
an ISO consistent with the ISO proposal filed with the FERC in the
Settlement Offer discussed above. See "FACTORS AFFECTING RESULTS OF
OPERATIONS - Merger Agreement with Northern States Power Company" above
for further information about the proposed merger.
MPSC Electric Utility Industry Investigation: In December 1996, the staff of
the MPSC issued a proposal to restructure that state's electric utility
industry. If adopted, the plan would allow all consumers to be able to choose
their electric supplier by the year 2004. The proposal supports development
of a lower Michigan ISO using FERC principles to ensure non-discriminatory
access and continued reliability. The Michigan ISO could later be involved
with a regional ISO if determined to provide substantive benefit to Michigan
customers. Based upon comments received in January 1997, the MPSC has
requested further input on several implementation issues and will hold
additional public hearings in March and April 1997.
Midwest ISO: WE is one of 24 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 FERC in late 1997 and
would be implemented in stages after acceptance by the FERC.
FERC Open Access Transmission Ruling: As a result of the Energy Policy Act of
1992, the FERC issued in April 1996 two orders relating to open access
transmission service, stranded costs, standards of conduct and open access
same-time information systems. The ruling is intended to create a more
competitive wholesale electric power market.
The first order, Order No. 888, requires public utilities owning, controlling
or operating transmission lines to file non-discriminatory open access tariffs
that offer others the same transmission service provided to themselves and
requires the use of the tariffs for their own wholesale energy sales and
purchases. Order No. 888 also provides for the full recovery of "stranded
costs" that were prudently incurred to serve power customers and that could go
unrecovered if wholesale customers use open access to move to another electric
energy supplier. In July 1996, WE submitted to the FERC a transmission tariff
in connection with Order No. 888. WE's filing includes terms and conditions of
network transmission service and point-to-point transmission service,
including ancillary services. The rate related aspects of the tariff were
accepted by the FERC in a June 1996 settlement agreement regarding WE's
preexisting transmission service tariffs. All other aspects of the tariff
followed the FERC pro-forma tariff and were accepted by the FERC.
A-15
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
The second order, Order No. 889, works to ensure that transmission owners and
their affiliates do not have an unfair competitive advantage in using
transmission to sell power. Order No. 889 establishes standards of conduct
and requires that a public utility's merchant function rely on the same
electronic information network that its transmission customers rely on to
obtain information about its transmission system when buying or selling power.
WE has advocated open access to transmission facilities as a necessary step in
the competitive restructuring of the electric utility industry and does not
believe that the ruling by the FERC will have a detrimental effect on its
financial position or results of operations. The open access transmission
orders became effective in mid-1996.
In its open access transmission ruling, the FERC encouraged utilities to
consider ISOs such as the Wisconsin statewide and Midwest ISOs noted above as
a tool to meet the demands of a competitive market for electric energy.
Wholesale Competition: Wholesale sales of electric energy accounted for 5.0%,
5.6% and 6.2% of WE's total Electric Operating Revenues in 1996, 1995 and
1994, respectively. WE attributes the decrease over this three year period in
part to the increasingly competitive market for electric wholesale customers.
In response to competition, WE renegotiated long-term power sales contracts
with all of its municipal and rural electric cooperative wholesale customers
during 1995 and 1996. The renegotiated contracts contain discounts from
previous rates charged to these customers in exchange for contract extensions.
Two wholesale customers, representing 24 MW, chose to obtain their power
supplies from other suppliers, with their contracts phasing out between 1997
and 1998. As a result of the renegotiated and lost contracts, WE anticipates
that electric wholesale revenues will continue to decrease slightly in 1997
and 1998. WE expects to continue to provide transmission service to the
customers who did not renew their contracts.
PSCW Natural Gas Utility Industry Investigation: The PSCW continued a generic
investigation of the natural gas industry in Wisconsin and addressed the
extent to which traditional regulation should be replaced with a different
approach. In response to a November 1996 PSCW order, WE will file a revised
gas cost recovery mechanism ("GCRM") by July 1, 1997. In accordance with that
order, GCRMs must either be an incentive type or modified dollar-for-dollar
type, both of which will include after-the-fact prudence reviews by the PSCW.
After WE files and receives PSCW approval for the new GCRM, WE will be able to
assess the level of risk. The Company does not expect that a major portion of
gas costs that are currently passed through to customers will be subject to
risk under any GCRM that will be filed later this year.
The PSCW has also issued Standards of Conduct applicable to opportunity sales.
Opportunity sales are described as the sales of underutilized capacity and
supply entitlements that become periodically available because of the variable
daily and seasonal needs of customers. These Standards of Conduct are
intended to ensure that all interested market participants have an opportunity
to purchase released capacity and supply and that the releasing utility
receives the highest price for the sale, given the specific circumstances.
Additional restrictions become applicable if a gas utility has a marketing
affiliate.
A-16
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Electric Sales and Gas Deliveries Outlook
Assuming moderate growth in the economy of its service territory and normal
weather, WE presently anticipates total electric kilowatt-hour sales to grow
at a compound annual rate of approximately 2.1% over the five-year period
ending December 31, 2001. WE forecasts total therm deliveries of natural gas
to grow at a compound annual rate of approximately 1.9% over the same five-
year period. These forecasts are subject to a number of variables, including
among others the economy, weather and the restructuring of the electric and
gas utility industries, which may affect the actual growth in sales. These
estimates do not reflect the operations of NSP, which will become a part of
Primergy after consummation of the Transaction. See "FACTORS AFFECTING
RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company"
above.
New Gas Service Proposal: On February 14, 1997, WE filed revised plans with
the PSCW to expand natural gas service to more than 4,800 potential customers
in northeastern Wisconsin. The project will involve the installation of more
than 350 miles of new gas main and is one of the largest proposed new
franchise territory expansion efforts in recent Wisconsin history. Wisconsin
Public Service Corporation ("WPS"), an unaffiliated investor-owned utility in
Green Bay, Wisconsin, filed a competing application to serve a portion of the
area for which WE originally filed. WE and WPS have reached an agreement that
resolves which company will serve in areas that both companies initially filed
to serve. A number of approvals must be granted before the project can
continue, including receiving approval from the PSCW. The Wisconsin Propane
Gas Association has intervened in the case and has requested that the PSCW
hold a hearing. The hearing is scheduled for April 1997. Once all approvals
are received, WE expects to begin contacting potential customers in the second
half of 1997.
Effects of Inflation
With expectations of low-to-moderate inflation, the Company does not believe
the impact of inflation will have a material effect on its future results of
operations.
Effects of Weather
By the nature of its utility business segments, WEC's and WE's earnings are
sensitive to weather variations from period to period. Variations in winter
weather affect heating load for both the gas and electric utility. Variations
in summer weather affect cooling load for the electric utility as well as
therm-deliveries to gas fired electric generating customers. The table below
summarizes weather in WE's service territory as measured by degree days for
each of the three years ended December 31, 1996.
============================================================================
% Change % Change
1995 1994
Degree Days 1996 1995 to 1996 1994 to 1995
---------------------- ------ ------ -------- ------ --------
Heating (7,049 Normal) 7,469 6,833 9.3% 6,431 6.3%
Cooling (668 Normal) 608 952 (36.1%) 877 8.6%
============================================================================
A-17
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Rates and Regulatory Matters
The table below summarizes the projected annual revenue impact of recent rate
changes authorized by regulatory commissions for the electric, natural gas and
steam utilities of the Company based on the sales projections utilized by
those commissions in setting rates. The PSCW regulates Wisconsin retail
electric, steam and natural gas rates, while the FERC regulates wholesale
power and electric transmission and gas transportation service rates. The
MPSC regulates retail electric rates in Michigan.
The PSCW has discontinued the practice of conducting annual rate case
proceedings, replacing it with a new schedule which calls for future rate
cases to be conducted once every two years. In support of its goal to become
the lowest-cost energy provider in the region and in light of the operating
cost reductions expected from Revitalization discussed above, WE did not seek
an increase in rates for 1994 or 1995. Discussion of rate changes for the
1997 and 1996 test years follow the table.
==============================================================================
Revenue Percent
Increase Change in Effective
Service (Decrease) Rates Date
- ------------------------- ------------ --------- ---------
(Millions) (%)
Retail electric, WI $ (7.4) (0.6) 02/18/97
Retail gas (6.4) (2.0) 02/18/97
Steam heating 0.1 .5 02/18/97
Retail electric, WI (33.4) (2.8) 01/01/96
Retail electric, MI (1.1) (3.3) 01/01/96
Retail gas (8.3) (2.6) 01/01/96
Steam heating (0.8) (5.1) 01/01/96
Fuel electric, WI (16.2)* (1.3) 08/04/94
==============================================================================
* The 8/4/94 fuel credit was eliminated 1/1/96 by PSCW Order.
Under the Wisconsin retail electric fuel cost adjustment procedure, retail
electric rates may be adjusted, on a prospective basis, if cumulative fuel and
purchased power costs, when compared to the costs projected in the retail
electric rate proceeding, deviate from a prescribed range and are expected to
continue to be above or below that range. In February 1997, WE filed with the
PSCW for an emergency rate increase requesting recovery of $29 million of the
$37 million of projected 1997 fuel increases above the 1997 annual base fuel
cost authorized by the PSCW. In December 1995, the MPSC approved the
suspension of the Power Supply Cost Recovery Clause (fuel adjustment
procedure) for a five-year period for Michigan retail electric customers. In
the case of natural gas costs, differences between the test year estimate and
the actual cost of purchased gas are accounted for through a purchased gas
adjustment clause.
1997 Test Year: In an order dated February 13, 1997, the PSCW directed WE to
implement rate decreases for Wisconsin retail electric and gas customers of
$7.4 million or 0.6% and $6.4 million or 2.0%, respectively, on an annualized
basis, and a steam rate increase of $0.1 million or 0.5% on an annualized
basis. The order is effective February 18, 1997 and is based on a regulatory
return on common equity of 11.8%, up from 11.3% authorized since January 1,
A-18
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
1996. 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.
1996 Test Year: In a letter order dated September 11, 1995, the PSCW directed
WE to implement rate decreases for Wisconsin retail electric, gas and steam
customers of $33.4 million or 2.8%, $8.3 million or 2.6% and $0.8 million or
5.1%, respectively, on an annualized basis effective January 1, 1996. The
order is based on a regulatory return on common equity of 11.3%, down from
12.3% authorized since 1993. Also effective January 1, 1996, the MPSC
authorized WE to implement a rate decrease for Michigan non-mine retail
electric customers of $1.1 million or 3.3% on an annualized basis.
Neither the 1997 nor 1996 Test Year changes reflect the proposed retail
electric and gas rate reductions and freezes nor the wholesale rate reductions
and freezes related to the proposed merger with NSP. See "FACTORS AFFECTING
RESULTS OF OPERATIONS - Merger Agreement with Northern States Power Company"
above for a separate discussion of rate actions related to the proposed
Transaction.
Regulatory Accounting: WEC's principal subsidiary, WE, operates under
electric utility rates which are subject to the approval of the PSCW, MPSC and
FERC, and natural gas and steam utility rates that are subject to the approval
of the PSCW (see "Rates and Regulatory Matters" above). Such rates are
designed to recover the cost of service and provide a reasonable return to
investors. Developing competitive pressures in the utility industry may
result in future utility rates which are based upon factors other than the
traditional original cost of investment. In such a situation, continued
deferral of certain regulatory asset and liability amounts on the utility's
books may no longer be appropriate as allowed under Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation. At this time, WEC is unable to predict whether any adjustments to
regulatory assets and liabilities will occur in the future. See "Note A -
Summary of Significant Accounting Policies" in the NOTES TO FINANCIAL
STATEMENTS for additional information.
New Accounting Pronouncements
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets ("FAS 121") and Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("FAS 123"). FAS 121 requires
that long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. FAS 123 establishes reporting standards and an optional
accounting method for stock-based employee compensation plans. The Company
adopted both standards prospectively in 1996. Adoption did not have a
material effect on the Company's net income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed
Statement of Financial Accounting Standards, Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets ("Proposed
FAS"). The Proposed FAS, if issued, would require WE to recognize as a
liability the present value of the estimated future total costs associated
with closure or removal of certain long-lived assets and to correspondingly
capitalize those costs. The capitalized costs would be depreciated to expense
over the useful life of the asset. The proposed statement would become
A-19
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
effective in 1998. This Proposed FAS would apply to decommissioning costs for
Point Beach and would result in WE recording a decommissioning liability and
corresponding asset as required by the pronouncement. Currently, nuclear
decommissioning costs are accrued as depreciation expense over the expected
service lives of the two units at Point Beach based on an external sinking
fund method. Any changes in depreciation expense due to differing assumptions
between the Proposed FAS and those currently required by the PSCW are not
expected to be material and would most likely be deferrable and recoverable in
rates. For additional information on the costs of decommissioning Point
Beach, see "Note F - Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS.
Environmental Matters
Clean Air Act: The 1990 Amendments to the Clean Air Act mandate significant
nation-wide reductions in SO2 and NOx emissions to address acid rain and
ground level ozone control requirements.
WE has completed the installation of continuous emission monitors at all of
its facilities and installed low NOx burners on all boilers at its Oak Creek
and Valley Power Plants. These actions, along with the burning of low sulfur
coal meet the requirements that became effective January 1, 1995. To date,
approximately $47.6 million has been spent on compliance with the 1990
amendments to the Clean Air Act.
WE elected to voluntarily bring the Valley and Port Washington Power Plants
under jurisdiction of the NOx requirements of the Clean Air Act amendments of
1990, five years earlier than mandated. This was possible because these units
already meet the current NOx emissions standards.
WE projects a surplus of SO2 emission allowances during Phase I and a small
shortfall during Phase II, which begins in the year 2000. WE is seeking
additional allowances available as a result of energy conservation programs.
As an integral component of its least-cost plan, WE is active in SO2 allowance
trading. Revenue from the sale of allowances is being used to offset future
potential rate increases.
Additional fuel switching and the installation of NOx controls at various
power plants will be required to meet the second phase of reduction
requirements that become effective January 1, 2000. These costs, along with
additional operating expenses, are not expected to exceed $38.0 million based
on today's costs.
Manufactured Gas Plant Sites: WE is reviewing and addressing environmental
conditions at a number of former manufactured gas plant sites. See "Note M -
Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for
additional information.
Ash Landfill Sites: WE aggressively seeks environmentally acceptable,
beneficial uses for its combustion byproducts. However, ash materials have
been, and to some degree, continue to be disposed in company-owned, licensed
landfills. Some early designed and constructed landfills may allow the
release of low levels of constituents resulting in the need for various levels
of remediation. Where WE has become aware of these conditions, efforts have
been expended to define the nature and extent of any release, and work has
been performed to address these conditions. These costs are included in the
environmental operating and maintenance costs of WE.
A-20
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
LS Power Generation Facility
In 1993, a competitive bidding process conducted by the PSCW resulted in the
selection of a proposal submitted by an unaffiliated independent power
producer, LSP-Whitewater L.P. ("LS Power"), to construct a generation facility
to meet a portion of WE's anticipated increase in system supply needs. WE
subsequently signed a long-term agreement to purchase electricity from the
proposed facility. The agreement is contingent upon the facility being
completed and placed into operation. Plant construction is currently on
schedule to meet the planned start-up date of June 1, 1997. See "Note M -
Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for
additional information about WE's long-term power purchase agreement with LS
Power.
LIQUIDITY AND CAPITAL RESOURCES
Except where specifically noted, the following discussion and analysis of
LIQUIDITY AND CAPITAL RESOURCES does not consider the impact of the proposed
merger with NSP. See "FACTORS AFFECTING RESULTS OF OPERATIONS - Merger
Agreement with Northern States Power Company" above for information about the
proposed merger.
Investing Activities
WEC invested a net total of $1.106 billion in its businesses during the three
years ended December 31, 1996. Investments during this three-year period
included approximately $957 million for construction of new or improved
facilities of which $840 million was for utility projects and approximately
$117 million was for non-utility projects. Additional investments during the
three years ended December 31, 1996 included approximately $76 million for
acquisition of nuclear fuel, $47 million for the eventual decommissioning of
WE's Point Beach Nuclear Plant and net capitalized conservation expenditures
of $18 million. WEC's non-utility subsidiaries received net proceeds of $31
million during this three-year period on the disposition of various
investments as part of Other Investing Activities.
Point Beach Unit 2 Steam Generators: In October 1992, WE filed an application
with the PSCW for replacement of the Point Beach Unit 2 steam generators,
which will allow for the unit's operation until the expiration of its
operating license in 2013. In an Interim Order in February 1995, the PSCW
deferred the decision on steam generator replacement until after the refueling
outage in September 1995. However, the PSCW directed WE to make suitable
arrangements with the fabricator of the new steam generators to allow the
fabrication, delivery and replacement to proceed promptly if authorized by the
PSCW. The reasonable costs of such arrangements to maintain a place in line
with the fabricator would be afforded rate recovery. In May 1996, WE received
a written order from the PSCW approving replacement of the steam generators at
an estimated cost of $96 million. Replacement of the Unit 2 steam generators
was completed in January 1997. Capital expenditures of $41.5 million and
$24.6 million were made in 1996 and 1995, respectively, for replacement of the
Unit 2 steam generators.
Milwaukee County Power Plant: The 11 MW Milwaukee County Power Plant supplies
electricity, steam and chilled water to the hospitals and other member
institutions of the Milwaukee Regional Medical Center, as well as to other
large customers located on land known as the Milwaukee County Grounds. In
A-21
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
December 1995, WE acquired the electric generation and distribution facilities
in the first phase of the acquisition. The capital cost for the electric
facilities was $7 million. These facilities and the new customers associated
with them were integrated into WE's current electric utility operations. In
December 1996, WEC acquired the steam and chilled water production and
distribution facilities to complete the second phase of the purchase. Two
outstanding contingencies were met prior to closing the purchase. The PSCW
approved the purchase of the steam facilities, and the five largest customers
signed steam and chilled water service agreements which obligate them to
purchase their present and future heating and cooling requirements from WEC
for a period of ten years. The capital cost for the steam facilities was
approximately $21 million. WE has integrated these facilities and the
associated customers into its current steam utility operations. The capital
cost for the chilled water facilities was approximately $19 million. A
separate subsidiary of WEC will operate the chilled water facilities as a non-
regulated business.
Paris Generating Station: During 1995, WE placed in service four units, or
approximately 300 megawatts of capacity, at its Paris Generating Station.
This natural gas-fired combustion turbine facility, located near Union Grove,
Wisconsin, is designed to meet peak demand requirements. Capital expenditures
of $6 million, $10 million and $54 million were made during 1996, 1995 and
1994, respectively. The capital costs of the Paris facility totalled
approximately $102 million.
Concord Generating Station: During 1994, WE placed in service the last two
units, or approximately 150 megawatts of capacity, at its Concord Generating
Station. This four unit 300 megawatt natural gas-fired combustion turbine
facility, located near Watertown, Wisconsin, is designed to meet peak demand
requirements. The first two units were completed in 1993. Capital
expenditures of $3 million and $6 million were made during 1995 and 1994,
respectively, for construction of this facility. The capital costs of the
Concord facility totalled approximately $100 million.
Port Washington Power Plant Renovation: Additionally during 1994, WE
completed the $107 million renovation project at its Port Washington Power
Plant. The renovation work, which began in September 1991, included the
installation of additional emission control equipment. Capital expenditures
totaling $12 million were made during 1994 for this project.
Kimberly Cogeneration Facility: Prior to the 1993 selection of the LS Power
generation facility by the PSCW discussed above in "FACTORS AFFECTING RESULTS
OF OPERATIONS - LS Power Generation Facility", WE had proposed to construct
its own 220 megawatt cogeneration facility in Kimberly, Wisconsin, which was
intended to provide process steam to Repap Wisconsin, Inc. ("Repap") starting
in mid-1994. In its order, the PSCW selected the WE project as the second
place conditional project if the LS Power project did not proceed. At
December 31, 1996, a net investment of approximately $65.6 million remains in
Other Deferred Charges and Other Assets for the Kimberly Cogeneration Facility
equipment (the "Equipment"). This balance represents costs associated with
the procurement of three combustion turbines, one steam turbine and three heat
recovery boilers that were acquired in order to achieve the in-service dates
as agreed to in a steam service contract with Repap. See "Note M -
Commitments and Contingencies" in the NOTES TO FINANCIAL STATEMENTS for
further information concerning disposition of the Equipment.
A-22
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Non-Utility Investments: WEC's non-utility assets amounted to approximately
$304 million at December 31, 1996. WEC currently anticipates making
additional non-utility investments from time to time. For additional
information, see "Capital Requirements 1997-2001" below and "Note L -
Information by Segments of Business" in WEC's NOTES TO FINANCIAL STATEMENTS.
Minergy Glass Aggregate Plant: Minergy Corp. ("Minergy"), a non-utility WEC
subsidiary, plans to place into operation a $45 million facility in Neenah,
Wisconsin that would recycle paper sludge from area paper mills into two
usable products: glass aggregate and steam. The glass aggregate will be sold
into existing construction and aggregate markets and the steam will be sold to
a local paper mill. The plant will result in substantial environmental and
economic benefits to the area by providing an alternative to landfilling paper
sludge. Minergy commenced construction in July 1996, with commercial operation
scheduled for April 1998. The project is expected to be financed during
construction through short-term borrowings. Capital expenditures totaling $14
million were made during 1996 for this facility.
Cash Provided by Operating and Financing Activities
During the three years ended December 31, 1996, cash provided by operating
activities totaled $1.308 billion at WEC and $1.310 billion at WE. During
this period, internal sources of funds, after the payment of dividends,
provided 75% of WEC's and 82% of WE's capital requirements.
Financing activities during the three-year period ended December 31, 1996
included the issuance of approximately $506 million of long-term debt by WEC
of which $480 million was issued by WE. The proceeds of these new debt issues
were used to retire or refinance higher coupon debt in the amount of $223
million, to reduce net short-term borrowings in the amount of $138 million and
for other general corporate purposes. WEC added $126 million of common equity
from the issuance of new shares through the Company's stock plans and
purchased or redeemed $5 million of preferred stock. No preferred stock was
issued during this period. Dividends on WEC's common stock were $167 million,
approximately $160 million and approximately $151 million during 1996, 1995
and 1994, respectively. WE paid dividends to WEC of approximately $168
million, $160 million and $151 million during 1996, 1995 and 1994,
respectively, and received a total of $60 million in capital contributions
from WEC during this three-year period.
In December 1996, WE and Wisvest Corporation issued promissory notes in the
amount of $12.05 and $10.95 million, respectively, due 2006. The notes were
issued as part of the transaction to acquire the steam and chilled water
facilities from Milwaukee County. The notes have been discounted to reflect
the difference between the effective interest rate of 6.36% and the stated
rate of 1.93%.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. In December 1995, WE issued $100 million of unsecured One Hundred Year
6 7/8% Debentures due 2095. Proceeds of both issues were added to WE's
general funds and were applied to the repayment of short-term borrowings.
In August 1995, WE called for optional redemption $98.35 million aggregate
principal amount of fixed rate tax exempt bonds issued by three political
jurisdictions on WE's behalf that were secured by issues of WE's First
Mortgage Bonds with terms corresponding to the tax exempt bonds called for
redemption. During September and October 1995, the three political
jurisdictions issued $98.35 million aggregate principal amount of new tax
A-23
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
exempt bonds on behalf of WE, collateralized by unsecured variable rate
promissory notes issued by WE, maturing between March 1, 2006 and September 1,
2030, with terms corresponding to the respective issues of the refunding tax
exempt bonds. The proceeds were used to finance the optional redemptions.
The WE First Mortgage Bonds, which collateralized the redeemed tax exempt
bonds, have been canceled.
The Merger Agreement, entered into by WEC and NSP, provides for restrictions
on certain transactions by both the Company and NSP, including the issuance of
debt and equity securities. Should circumstances arise to make such
transactions necessary, NSP would need to agree to consent to any such change
in the Merger Agreement.
See "Note A - Summary of Significant Accounting Policies" in WEC's NOTES TO
FINANCIAL STATEMENTS for a discussion of various limitations on the ability of
WE to transfer funds to WEC.
Capital Structure
WEC's and WE's capitalization at December 31 were:
==============================================================================
WEC WE
---------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
Common Equity 53.3% 53.8% 51.6% 52.1%
Preferred Stock 0.8 0.9 0.9 1.0
Long-Term Debt
(including current maturities) 44.0 40.8 46.1 42.3
Short-Term Debt 1.9 4.5 1.4 4.6
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
==============================================================================
Compared to the utility industry in general, the Company has maintained a
relatively high ratio of common equity to total capitalization and low debt
and preferred stock ratios. This conservative capital structure, along with
strong bond ratings and internal cash generation has provided, and should
continue to provide, the Company with access to the capital markets when
necessary to finance the anticipated growth in the Company's utility business.
WE currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P"), Duff & Phelps Inc. and Fitch Investors Service Inc.
("Fitch") and Aa2 by Moody's Investors Service ("Moody's"). WE currently has
unsecured debt ratings of AA by S&P and Duff & Phelps, Inc. and Aa3 by
Moody's.
Following announcement of the Transaction, in May 1995 S&P reported that it
was placing on CreditWatch with negative implications its AA+ senior secured
debt and AA+ preferred stock ratings of WE and its AA senior unsecured debt
rating of Wisconsin Michigan Investment Corporation, a non-utility subsidiary
of WEC. S&P stated that if the Transaction is completed, the likely credit
rating for the senior secured debt of WE is expected to be AA or AA-. As part
of its rating process, S&P intends to review the financial and operating plans
of the merged utilities. Also in May 1995, citing WE's continued operation as
a separate utility subsidiary after the Transaction, its strength within its
A-24
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
rating category and its strong capital structure, Moody's confirmed its Aa2
first mortgage bond rating of WE. On December 5, 1995, Fitch changed WE's
credit trend from "stable" to "declining" based upon its analysis of cash flow
trends versus its standards for an AA+ rating.
At year-end 1996, WEC had $185 million of unused lines of bank credit and
approximately $11 million of cash and cash equivalents, and WE had $99 million
of unused lines of bank credit and approximately $2 million of cash and cash
equivalents.
Capital Requirements 1997-2001
Construction Expenditures: The Company's construction expenditures for the
period 1997-2001 are estimated to be $1.2 billion. Of this amount,
approximately $992 million represents utility construction expenditures. 1997
utility construction expenditures are estimated to be $250 million, and
include, in addition to the recurring additions and improvements to WE's
distribution and transmission systems, anticipated expenditures associated
with the installation of more than 350 miles of new gas main which will expand
natural gas service to more than 4,800 potential customers, expenditures for
the construction of approximately 250 miles of new distribution system to
improve the reliability of WE's rural electric distribution system,
expenditures for upgrades to environmental equipment at several of WE's fossil
fueled power plants and expenditures related to upgrading computer systems to
improve productivity and customer service.
Retirement of Long-term Debt Securities: The Company's capital requirements
for maturing long-term debt and sinking funds total $173 million in 1997 and
$179 million for the period 1998-2001. Included in the above amounts are WE's
requirements of $167 million and $159 million, respectively. See "Note H -
Long-Term Debt" in the NOTES TO FINANCIAL STATEMENTS for additional
information.
Decommissioning Trust Payments: WE's estimated payments to the Nuclear
Decommissioning Trust Fund ("Fund") for 1997 are $33 million. For the period
1998-2001, the combined estimated payments are $154 million. Payments to the
Fund represent both the amount of annual contribution to external trust funds
and the income earned on the external trust funds. WE expects to contribute
$11 million to the Fund annually. See "Note F - Nuclear Operations" in the
NOTES TO FINANCIAL STATEMENTS for additional information.
PSCW Advance Plans: In December 1995, the PSCW approved WE's Advance Plan 7
filing originally filed in January 1994. In addition to specifying the
expectations of conservation and load management programs, the plan indicates
the need for additional peaking and intermediate load capacity during the 20-
year planning period. WE does not anticipate needing additional base load
generation until after 2010.
In the Advance Plan process, the regulated electric utilities in Wisconsin
file, for planning purposes, long-term forecasts of future resource
requirements along with plans to meet those requirements, including planned
implementation of energy management and conservation programs (demand-side
savings). As a result of the PSCW's industry restructuring initiatives
described above in "FACTORS AFFECTING RESULTS OF OPERATIONS - Industry
Restructuring and Competition", future Advance Plans will be streamlined to
focus primarily on the need and timing for new generation additions and
transmission facilities. WE is required to file Advance Plan 8 in January
1998.
A-25
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
Capital Resources
The Company expects internal sources of funds from operations to provide
approximately 73% of the capital requirements for 1997. The remaining cash
requirements for 1997 are expected to be met through short-term borrowings
and/or the issuance of intermediate or long-term debt. Beyond 1997, capital
requirements will be met principally through internally generated funds
supplemented, when required, by debt and equity financing. The specific form,
amount and timing of securities which may be issued have not yet been
determined and will depend, to a large extent, on market conditions and other
factors.
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. From September
1996 through December 1996, WEC issued 859,458 new shares of common stock
through the Company's stock plans and received proceeds of approximately $23
million.
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", "project" and similar expressions are intended to identify
forward-looking statements. In addition to the assumptions and other factors
referred to specifically in connection with such statements, factors that
could cause 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.
A-26
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
* 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; NRC operating regulatory changes related to Point Beach; 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.
* 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 FASB and the 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 non-utility 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
A-27
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (cont'd)
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 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 non-utility 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.
A-28
<PAGE> 59
FINANCIAL STATEMENTS
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,393,270 $1,437,480 $1,403,562
Gas 364,875 318,262 324,349
Steam 15,675 14,742 14,281
---------- ---------- ----------
Total Operating Revenues 1,773,820 1,770,484 1,742,192
Operating Expenses
Fuel (Note F) 295,651 303,553 285,862
Purchased power 36,216 41,834 42,623
Cost of gas sold 234,254 188,764 199,511
Other operation expenses 391,520 395,242 399,011
Maintenance 103,046 112,400 124,602
Revitalization (Note K) - - 73,900
Depreciation (Note C) 202,796 183,876 177,614
Taxes other than income taxes 77,866 74,765 76,035
Federal income tax (Note D) 105,656 119,939 104,725
State income tax (Note D) 24,976 28,405 24,756
Deferred income taxes - net (Note D) (1,575) (2,833) (25,095)
Investment tax credit - net (Note D) (2,430) (4,482) (4,625)
---------- ---------- ----------
Total Operating Expenses 1,467,976 1,441,463 1,478,919
Operating Income 305,844 329,021 263,273
Other Income and Deductions
Interest income 18,177 17,143 17,484
Allowance for other funds used during
construction (Note E) 3,036 3,650 4,985
Miscellaneous - net (2,468) (6,497) 3,318
Federal income tax (Note D) 1,939 2,882 2,118
State income tax (Note D) (642) (357) (940)
---------- ---------- ----------
Total Other Income and Deductions 20,042 16,821 26,965
Income Before Interest Charges
and Preferred Dividend 325,886 345,842 290,238
Interest Charges
Long-term debt 103,045 101,806 103,897
Other interest 9,032 14,002 9,206
Allowance for borrowed funds used
during construction (Note E) (5,529) (5,203) (5,084)
---------- ---------- ----------
Total Interest Charges 106,548 110,605 108,019
Preferred Dividend Requirement
of Subsidiary 1,203 1,203 1,351
---------- ---------- ----------
Net Income $ 218,135 $ 234,034 $ 180,868
========== ========== ==========
Average Number of Shares of
Common Stock Outstanding (Thousands) 110,983 109,850 108,025
========== ========== ==========
Earnings Per Share of Common Stock $1.97 $2.13 $1.67
========== ========== ==========
<FN>
The notes are an integral part of the financial statements.
A-29
</TABLE>
<PAGE> 60
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
<CAPTION>
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,725,832 $4,531,404
Gas 503,041 489,739
Steam 60,480 40,078
---------- ----------
5,289,353 5,061,221
Accumulated provision for depreciation (2,441,950) (2,288,080)
---------- ----------
2,847,403 2,773,141
Construction work in progress 135,040 78,153
Nuclear fuel - net (Note F) 75,476 59,260
---------- ----------
Net Utility Plant 3,057,919 2,910,554
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 322,085 275,125
Conservation investments (Note A) 92,705 115,523
Non-utility property - net 173,525 115,392
Other 127,908 131,918
---------- ----------
Total Other Property and Investments 716,223 637,958
Current Assets
Cash and cash equivalents 10,748 23,626
Accounts receivable, net of allowance for
doubtful accounts - $13,264 and $13,400 151,473 150,149
Accrued utility revenues 155,838 140,201
Fossil fuel (at average cost) 113,516 83,366
Materials and supplies (at average cost) 70,900 70,347
Prepayments 59,624 58,739
Other 3,759 5,091
---------- ----------
Total Current Assets 565,858 531,519
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 153,806 140,844
Deferred regulatory assets (Note A) 193,756 193,757
Other 123,276 146,103
---------- ----------
Total Deferred Charges and Other Assets 470,838 480,704
---------- ----------
Total Assets $4,810,838 $4,560,735
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-30
</TABLE>
<PAGE> 61
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
<CAPTION>
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,945,344 $1,871,265
Preferred stock 30,450 30,451
Long-term debt (Note H) 1,416,067 1,367,644
---------- ----------
Total Capitalization 3,391,861 3,269,360
Current Liabilities
Long-term debt due currently (Note H) 190,204 51,854
Notes payable (Note I) 69,265 156,919
Accounts payable 148,429 108,508
Payroll and vacation accrued 24,007 26,699
Taxes accrued - income and other 37,362 20,072
Interest accrued 22,828 21,863
Other 34,923 50,191
---------- ----------
Total Current Liabilities 527,018 436,106
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 511,399 483,410
Accumulated deferred investment tax credits 87,798 89,672
Deferred regulatory liabilities (Note A) 175,943 167,483
Other 116,819 114,704
---------- ----------
Total Deferred Credits and Other
Liabilities 891,959 855,269
Commitments and Contingencies (Note M)
---------- ----------
Total Capitalization and Liabilities $4,810,838 $4,560,735
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-31
</TABLE>
<PAGE> 62
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
<CAPTION>
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $218,135 $234,034 $180,868
Reconciliation to cash
Depreciation 202,796 183,876 177,614
Nuclear fuel expense - amortization 21,887 22,324 21,437
Conservation expense - amortization 22,498 21,870 20,910
Debt premium, discount & expense - amortization 9,809 12,690 14,405
Revitalization - net (942) (5,404) 43,860
Deferred income taxes - net (1,575) (2,833) (25,095)
Investment tax credit - net (2,430) (4,482) (4,625)
Allowance for other funds used
during construction (3,036) (3,650) (4,985)
Change in - Accounts receivable (1,324) (35,492) 11,912
Inventories (30,703) 5,233 11,455
Accounts payable 39,921 16,713 (21,343)
Other current assets (15,190) (7,652) (9,897)
Other current liabilities 295 20,769 9,509
Other 4,658 (31,104) (9,715)
-------- -------- --------
Cash Provided by Operating Activities 464,799 426,892 416,310
Investing Activities
Construction expenditures (389,194) (271,688) (295,769)
Allowance for borrowed funds used
during construction (5,529) (5,203) (5,084)
Nuclear fuel (26,053) (23,454) (26,351)
Nuclear decommissioning trust (26,309) (10,861) (10,138)
Conservation investments - net 319 2,130 (20,823)
Other 15,347 (581) (6,519)
-------- -------- --------
Cash Used in Investing Activities (431,419) (309,657) (364,684)
Financing Activities
Sale of - Common stock 23,180 52,353 50,494
Long-term debt 238,809 234,453 32,474
Retirement of - Preferred stock (1) - (5,250)
Long-term debt (53,356) (134,567) (35,434)
Change in short-term debt (87,654) (95,136) 44,769
Dividends on stock - common (167,236) (159,688) (150,708)
-------- -------- --------
Cash Used in Financing Activities (46,258) (102,585) (63,655)
-------- -------- --------
Change in Cash and Cash Equivalents $(12,878) $ 14,650 $(12,029)
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $ 94,964 $ 99,924 $ 94,324
Income taxes 103,916 146,979 145,883
<FN>
The notes are an integral part of the financial statements.
A-32
</TABLE>
<PAGE> 63
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
<CAPTION>
1996 1995
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
December 31
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $.01 par value; authorized 325,000,000;
outstanding - 111,678,795 and 110,819,337 shares $ 1,117 $ 1,108
Other paid in capital 700,080 676,909
Retained earnings 1,244,147 1,193,248
---------- ----------
Total Common Stock Equity 1,945,344 1,871,265
Preferred Stock - Wisconsin Electric Power Company, Cumulative
Six Per Cent. Preferred Stock - $100 par value;
authorized 45,000 shares; outstanding - 44,498 and 44,508 shares 4,450 4,451
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,451
Long-Term Debt
First mortgage bonds
Series Due 1996 1995 Series Due 1996 1995
------ ---- -------- -------- ------ ---- -------- --------
Wisconsin Electric Power Company
4-1/2% 1996 $ - $ 30,000 7-1/8% 2016 100,000 100,000
5-7/8% 1997 130,000 130,000 6.85 % 2021 9,000 9,000
6-5/8% 1997 10,000 10,000 7-3/4% 2023 100,000 100,000
5-1/8% 1998 60,000 60,000 7.05 % 2024 60,000 60,000
6-1/2% 1999 40,000 40,000 9-1/8% 2024 3,443 3,443
6-5/8% 1999 51,000 51,000 8-3/8% 2026 100,000 100,000
7-1/4% 2004 140,000 140,000 7.70 % 2027 200,000 200,000
-------- --------
1,003,443 1,033,443
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/8% Series due 1997 25,000 25,000
6-5/8% Series due 2006 200,000 -
9.47 % Series due 2006 7,000 7,000
8-1/4% Series due 2022 25,000 25,000
6-7/8% Series due 2095 100,000 100,000
Notes (secured)
Wisvest Corporation - Due 2006 (Note H) 10,948 -
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
Due 2006 (Note H) 12,052 -
Wisconsin Michigan Investment Corporation - 6.83% due 1997 5,000 5,000
5.80% due 1998 7,000 7,000
6.49% due 2000 7,000 7,000
6.66% due 2003 10,600 10,600
6.85% due 2005 10,000 10,000
WMF Corp. - 9.1% due 2001 2,875 3,310
Obligations under capital lease - Wisconsin Electric Power Company (Note F) 42,962 43,924
Unamortized discount - net (27,959) (23,129)
Long-term debt due currently (190,204) (51,854)
---------- ----------
Total Long-Term Debt (Note H) 1,416,067 1,367,644
---------- ----------
Total Capitalization $3,391,861 $3,269,360
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-33
</TABLE>
<PAGE> 64
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
<CAPTION>
- -------------------------------------------------- ----------------------------------------------------------
Common Stock Common Stock Other Paid Retained
Shares $.01 Par Value In Capital Earnings Total
- -------------------------------------------------- ----------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1993 106,958,167 $1,069 $574,077 $1,088,766 $1,663,912
Net income 180,868 180,868
Common stock cash dividends
$1.39625 per share (150,708) (150,708)
Sale of common stock 1,981,602 20 50,491 (17) 50,494
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1994 108,939,769 1,089 624,568 1,118,909 1,744,566
Net income 234,034 234,034
Common stock cash dividends
$1.455 per share (159,688) (159,688)
Sale of common stock 1,879,568 19 52,341 (7) 52,353
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1995 110,819,337 1,108 676,909 1,193,248 1,871,265
Net Income 218,135 218,135
Common stock cash dividends
$1.5075 per share (167,236) (167,236)
Sale of common stock 859,458 9 23,171 23,180
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1996 111,678,795 $1,117 $700,080 $1,244,147 $1,945,344
================================================== ==========================================================
<FN>
The notes are an integral part of the financial statements.
A-34
</TABLE>
<PAGE> 65
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A - Summary of Significant Accounting Policies
General: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("WEC" or the "Company"); its utility subsidiary,
Wisconsin Electric Power Company ("WE"); and its non-utility subsidiaries,
Wisconsin Michigan Investment Corporation; Badger Service Company; Wispark
Corporation; Wisvest Corporation; Witech Corporation; Minergy Corp.;
Custometrics, LLC; and other non-utility companies.
The accounting records of the Company's utility subsidiary are kept as
prescribed by the Federal Energy Regulatory Commission ("FERC"), modified for
requirements of the Public Service Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenues: Utility revenues are recognized on the accrual basis and include
estimated amounts for service rendered but not billed.
Fuel: The cost of fuel is expensed in the period consumed.
Property: Property is recorded at cost. Additions to and significant
replacements of utility property are charged to utility plant at cost; minor
items are charged to maintenance expense. Cost includes material, labor and
allowance for funds used during construction (see Note E). The cost of
depreciable utility property, together with removal cost less salvage, is
charged to accumulated provision for depreciation when property is retired.
Regulatory Assets and Liabilities: Pursuant to Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation, WE capitalizes, as regulatory assets, incurred costs which are
expected to be recovered in future utility rates. WE also records, as
regulatory liabilities, the current recovery in utility rates of costs which
are expected to be paid in the future.
The following deferred regulatory assets and liabilities are reflected in the
Consolidated Balance Sheet.
A-35
<PAGE> 66
=================================================================
December 31
1996 1995
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $154,532 $155,944
Department of Energy
assessments 29,022 31,638
Other 10,202 6,175
-------- --------
Total Deferred
Regulatory Assets $193,756 $193,757
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $155,720 $163,676
Tax and interest refunds 14,080 -
Other 6,143 3,807
-------- --------
Total Deferred
Regulatory Liabilities $175,943 $167,483
======== ========
=================================================================
WE directs a variety of demand-side management programs to help foster energy
conservation by its customers. As authorized by the PSCW, WE capitalized
certain conservation program costs prior to 1995. Utility rates approved by
the PSCW provide for a current return on these conservation investments. As
of December 31, 1996 and 1995, there were $92.7 million and $115.5 million of
conservation investments, respectively, on the Consolidated Balance Sheet in
Other Property and Investments. Through 1995, conservation investments were
charged to operating expense over a ten-year amortization period. Beginning
in 1996, the capitalized conservation balance is charged to operating expense
on a straight line basis over a five-year amortization period.
Statement of Cash Flows: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity.
Restrictions: Various financing arrangements and regulatory requirements
impose certain restrictions on the ability of WEC's utility subsidiary to
transfer funds to WEC in the form of cash dividends, loans or advances. Under
Wisconsin law, WE is prohibited from loaning funds, either directly or
indirectly, to WEC. The Company does not believe that such restrictions will
affect its operations.
B - Mergers
Wisconsin Natural Gas Company: On January 1, 1996, the Company merged its
natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN") into WE.
The accounting treatment for this merger was similar to that which would
result from a pooling of interests. Where applicable, references herein to WE
include WN prior to their merger.
A-36
<PAGE> 67
Northern States Power Company: On April 28, 1995, WEC and Northern States
Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and
Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger
Agreement"). The Merger Agreement provides for a strategic business
combination involving WEC and NSP in a "merger-of-equals" transaction
("Transaction"). As a result, WEC will become a registered public utility
holding company under the Public Utility Holding Company Act of 1935, as
amended, and will change its name to Primergy Corporation ("Primergy").
Primergy will be the parent company of WE (which will be renamed Wisconsin
Energy Company), of NSP (which, for regulatory reasons, will reincorporate in
Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP.
In connection with the Transaction, Northern States Power Company, a Wisconsin
corporation ("NSP-WI"), currently a subsidiary of NSP, will be merged into
Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy
Company, New NSP will acquire from NSP-WI certain gas utility assets in
LaCrosse and Hudson, Wisconsin with a net historical cost at December 31, 1996
of $25.7 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, stockholders of WEC and NSP voted to approve the Transaction.
The Merger Agreement is subject to various conditions, including the approval
of various regulatory agencies. Two of four state regulatory commissions, the
Michigan Public Service Commission and the North Dakota Public Service
Commission, approved the Transaction during 1996. Also during 1996, the PSCW,
the Minnesota Public Utilities Commission ("MPUC") and the FERC concluded
hearings on the Transaction. WEC and NSP are hopeful that the PSCW, the MPUC
and the FERC will rule on the Transaction in the first quarter of 1997. The
PSCW, which was scheduled to rule on the Transaction in January 1997, has
delayed a decision pending the results of an investigation of alleged
prohibited conversations between one of the PSCW commissioners and WEC
officials. WEC is unable to predict with certainty when the PSCW will rule on
the Transaction, but is hopeful that the investigation will be completed by
the end of the first quarter of 1997. Remaining regulatory applications and
filings have either been submitted or approved. The goal of WEC and NSP was
to complete the Transaction by January 1, 1997. However, because all
necessary regulatory approvals were not obtained by the end of 1996, the
Transaction was not completed in 1996. WEC and NSP continue to pursue
regulatory approvals, without unacceptable conditions, to facilitate
completion of the Transaction as soon as possible in 1997.
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
deferred accounting treatment and rate recovery of costs incurred associated
with the Transaction. As of December 31, 1996, WEC has deferred approximately
$26.7 million related to the Transaction as a component of Deferred Charges
and Other Assets-Other, including $11.3 million of transaction costs and $15.4
million of costs to achieve the merger.
The following summarized Primergy unaudited pro forma financial information
combines historical balance sheet and income statement information of WEC and
NSP to give effect to the Transaction and should be read in conjunction with
the historical consolidated financial statements and related notes thereto of
WEC and NSP. A $154 million pro forma adjustment has been made to conform the
presentation of noncurrent deferred income taxes in the summarized unaudited
pro forma combined balance sheet information as a net liability. The
allocation between WEC and NSP and their customers of the estimated cost
savings resulting from the Transaction, net of costs incurred to achieve such
savings, will be subject to regulatory review and approval. None of the
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<PAGE> 68
estimated cost savings, the costs to achieve such savings, nor transaction
costs are reflected in the unaudited pro forma financial information. All
other financial statement presentation and accounting policy differences are
immaterial and have not been adjusted in the unaudited pro forma financial
information. The unaudited pro forma combined earnings per common share
reflect pro forma adjustments to average NSP common shares outstanding in
accordance with the provisions of the Merger Agreement, whereby each
outstanding share of NSP common stock will be converted into 1.626 shares of
Primergy common stock. In the Transaction, each outstanding share of WEC
common stock will remain outstanding as a share of Primergy common stock.
The unaudited pro forma balance sheet information gives effect to the
Transaction as if it had occurred at December 31, 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.
=============================================================================
Primergy Corporation: Unaudited
WEC NSP Pro Forma
(As Reported) (As Reported) Combined
------------- ------------- -------------
(Millions, except per share amounts)
As of December 31, 1996:
Utility plant-net $ 3,058 $ 4,338 $ 7,396
Current assets 566 797 1,363
Other assets * 1,187 1,502 2,535
----------- ----------- -----------
Total Assets $ 4,811 $ 6,637 $ 11,294
=========== =========== ===========
Common stockholder's equity $ 1,946 $ 2,136 $ 4,082
Preferred stock and premium 30 240 270
Long-term debt 1,416 1,593 3,009
----------- ----------- -----------
Total Capitalization 3,392 3,969 7,361
Current liabilities 527 1,236 1,763
Other liabilities * 892 1,432 2,170
----------- ----------- -----------
Total Equity & Liabilities $ 4,811 $ 6,637 $ 11,294
=========== =========== ===========
For the Year Ended
December 31, 1996:
Utility Operating Revenues $ 1,774 $ 2,654 $ 4,428
Utility Operating Income $ 306 $ 366 $ 672
Net Income, after Preferred
Dividend Requirements $ 218 $ 262 $ 480
Earnings per Common Share:
As Reported $ 1.97 $ 3.82 -
Primergy Shares - - $ 2.16
=============================================================================
* Includes a $154 million pro forma adjustment to conform the
presentation of noncurrent deferred taxes as a net liability.
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<PAGE> 69
C - Depreciation
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the PSCW and include
estimates for salvage and removal costs. Depreciation as a percent of average
depreciable utility plant was 4.1% in 1996, 3.8% in 1995 and 3.9% in 1994.
Nuclear plant decommissioning is accrued as depreciation expense (see Note F).
D - Income Taxes
Comprehensive interperiod income tax allocation is used for federal and state
temporary differences. The federal investment tax credit is accounted for on
the deferred basis and is reflected in income ratably over the life of the
related property.
The following table is a summary of income tax expense and a reconciliation of
total income tax expense with the tax expected at the federal statutory rate.
=============================================================================
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
Current tax expense $129,335 $145,819 $128,303
Investment tax credit-net (2,430) (4,482) (4,625)
Deferred tax expense (1,575) (2,833) (25,095)
-------- -------- --------
Total Tax Expense $125,330 $138,504 $ 98,583
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $344,668 $373,741 $280,802
======== ======== ========
Expected tax at federal
statutory rate $120,634 $130,809 $ 98,281
State income tax net of
federal tax benefit 17,671 18,934 14,382
Investment tax credit
restored (4,509) (4,482) (4,625)
Other (no item over
5% of expected tax) (8,466) (6,757) (9,455)
-------- -------- --------
Total Tax Expense $125,330 $138,504 $ 98,583
======== ======== ========
=============================================================================
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and liabilities
to recognize the expected future tax consequences of events that have been
reflected in the Company's financial statements or tax returns and the
adjustment of deferred tax balances to reflect tax rate changes. Following is
a summary of deferred income taxes under FAS 109.
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=============================================================================
December 31
1996 1995
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 41,066 $ 43,759
Construction advances 45,906 43,052
Other 66,834 54,033
-------- --------
Total Deferred Income Tax Assets $153,806 $140,844
======== ========
Deferred Income Tax Liabilities
Property related $484,199 $449,244
Conservation investments 16,827 25,775
Other 10,373 8,391
-------- --------
Total Deferred Income Tax Liabilities $511,399 $483,410
======== ========
=============================================================================
As detailed in Note A, WE has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues.
E - Allowance for Funds Used During Construction ("AFUDC")
AFUDC is included in utility plant accounts and represents the cost of
borrowed funds used during plant construction and a return on stockholders'
capital used for construction purposes. Allowance for borrowed funds also
includes interest capitalized on qualifying assets of non-utility
subsidiaries. On the income statement, the cost of borrowed funds (before
income taxes) is a reduction of interest expense and the return on
stockholders' capital is an item of noncash other income.
As approved by the PSCW, AFUDC was capitalized on 50% of construction work in
progress ("CWIP") at a rate of 10.17% during 1996. Prior to 1996, utility
rates approved by the PSCW provided for a current return on investment for
selected long-term projects included in CWIP. AFUDC was capitalized on the
remaining CWIP at a rate of 10.83% in 1995 and 1994.
F - Nuclear Operations
Point Beach Nuclear Plant: WE operates two 500 megawatt electric generating
units at its Point Beach Nuclear Plant ("Point Beach"). During 1996, Point
Beach accounted for 25.4% of WE's net electric generation. The current
operating licenses for the two units at Point Beach expire in 2010 and 2013
for Units 1 and 2, respectively.
In 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 storage of spent fuel at Point
Beach. In July 1996, the PSCW denied a petition for rehearing filed by
intervenors in the proceeding.
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<PAGE> 71
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 were 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. The steam
generator replacement was completed in January 1997. Subject to approval by
the Nuclear Regulatory Commission ("NRC"), WE expects to restart Unit 2 in the
second quarter of 1997. The ISFSI provides interim dry storage of spent fuel
from Point Beach until the Department of Energy ("DOE") takes ownership of and
removes spent fuel under an existing contract mandated by the Nuclear Waste
Policy Act of 1982. The ISFSI is necessary because the spent fuel pool inside
the plant is nearly full. Construction of the ISFSI was completed in 1995.
In August 1996, a group of intervenors in the PSCW Order proceedings 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. Final briefs have been filed in the
proceeding, and WE is awaiting a decision by the court on the petition.
Two storage casks have been loaded with spent fuel and transferred to the
ISFSI. During loading of a third cask in May 1996, hydrogen gas was ignited
within the cask. Cask loading has been halted until actions are implemented
by WE to prevent recurrence of such an event and until the NRC has reviewed
and accepted such actions. WE hopes to receive agreement from the NRC that WE
may resume loading of the casks in April 1997.
In December 1996, WE paid the NRC $325,000 in civil penalties for performance
deficiencies and violations of NRC requirements in various plant activities.
In January 1997, the NRC informed WE of additional potential violations
observed during a special inspection that could result in further civil
penalties. Also, the NRC sent a letter on January 27, 1997 notifying WE of a
declining trend in performance at Point Beach based upon these inspections and
other ongoing regulatory interactions. The NRC issues trend letters to
provide an early notification of declining performance and to allow a utility,
under the watchfulness of the NRC, to take early corrective actions. The NRC
acknowledged in the letter that WE has made improvements in the identification
and resolution of specific problems.
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 responded to the NRC in February 1997.
Nuclear Fuel: WE has a nuclear fuel leasing arrangement with Wisconsin
Electric Fuel Trust ("Trust"), which is treated as a capital lease. The
nuclear fuel is leased for a period of 60 months or until the removal of the
fuel from the reactor, if earlier. Lease payments include charges for the
cost of fuel burned, financing costs and management fees. In the event WE or
the Trust terminates the lease, the Trust would recover its unamortized cost
of nuclear fuel from WE. Under the lease terms, WE is in effect the ultimate
guarantor of the Trust's commercial paper and line of credit borrowings
financing the investment in nuclear fuel.
Provided below is a summary of nuclear fuel investment at December 31 and
interest expense for the respective years on the nuclear fuel lease.
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<PAGE> 72
=============================================================================
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $100,952 $ 89,840
Accumulated provision for amortization (61,408) (50,532)
In process/stock 35,932 19,952
-------- --------
Total Nuclear Fuel $ 75,476 $ 59,260
======== ========
Interest Expense on Nuclear Fuel Lease $ 2,332 $ 2,401 $ 1,896
=============================================================================
The future minimum lease payments under the capital lease and the present
value of the net minimum lease payments as of December 31, 1996 are as
follows:
=========================================================
(Thousands of Dollars)
1997 $19,141
1998 15,823
1999 7,011
2000 3,356
2001 418
-------
Total Minimum Lease Payments 45,749
Less: Interest (2,787)
-------
Present Value of Net Minimum
Lease Payments $42,962
=======
=========================================================
The estimated cost of disposal of spent fuel based on a contract with the DOE
is included in nuclear fuel expense.
The Energy Policy Act of 1992 establishes a Uranium Enrichment Decontamination
and Decommissioning Fund ("D&D Fund") for the DOE's nuclear fuel enrichment
facilities. Deposits to the D&D Fund are derived in part from special
assessments to utilities. As of December 31, 1996, WE has on its books a
remaining estimated liability equal to the projected special assessments of
$26.8 million. A corresponding deferred regulatory asset is detailed in Note
A.
Effective in 1997, the PSCW has disallowed the recovery of D&D Fund
assessments in Wisconsin utility retail rates as a result of a decision by the
U.S. Court of Federal Claims in "Yankee Atomic Electric Company v. The United
States" ("Yankee Atomic") in which the court ruled that the payments were
unlawful. WE has a similar contract with the DOE. The PSCW expects that the
DOE will eventually refund the D&D Fund assessments paid by the affected
utilities but has stated that it would be appropriate that WE be reimbursed if
the Yankee Atomic decision is overturned or modified. The amount of the
assessments related to the PSCW's rate jurisdiction is approximately 85% of
the assessments or $2.6 million in 1997 and will remain as a deferred
regulatory asset. Remaining allowable costs will be amortized to nuclear fuel
expense and included in utility rates over the next 11 years.
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<PAGE> 73
Nuclear Insurance: The Price-Anderson Act ("Act") provides an aggregate
limitation of $8.9 billion on public liability claims arising out of a nuclear
incident. WE has $200 million of liability insurance from commercial sources.
The Act also establishes an industry-wide retrospective rating plan under
which nuclear reactor owners could be assessed up to $79.3 million per reactor
(WE owns two), but not more than $10 million in any one year for each reactor,
in the event of a nuclear incident.
An industry-wide insurance program, with an aggregate limit of $200 million,
has been established to cover radiation injury claims of nuclear workers first
employed after 1987. If claims in excess of the available funds develop, WE
could be assessed a maximum of approximately $3.0 million per reactor.
WE has property damage, decontamination and decommissioning insurance totaling
$1.5 billion for loss from damage at Point Beach with Nuclear Mutual Limited
("NML") and Nuclear Electric Insurance Limited ("NEIL"). Under the NML and
NEIL policies, WE has a potential maximum retrospective premium liability per
loss of $5.4 million and $7.0 million, respectively.
WE also maintains additional insurance with NEIL covering extra expenses of
obtaining replacement power during a prolonged accidental outage (in excess of
21 weeks) at Point Beach. This insurance coverage provides weekly indemnities
of $3.5 million per unit for outages during the first year, declining to 80%
of the amounts during the second and third years. Under the policy, WE's
maximum retrospective premium liability is approximately $7.8 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect WE from material
adverse impact.
Nuclear Decommissioning: Subject to resolution of the Point Beach Unit 2
steam generator replacement and ISFSI matters described above, WE expects to
operate the two units at Point Beach to the expiration of their current
operating licenses. The estimated cost to decommission the plant in 1996
dollars is $379 million based upon a site specific decommissioning cost study
completed in 1994. Assuming plant shutdown at the expiration of the current
operating licenses, prompt dismantlement and annual escalation of costs at
specific inflation factors established by the PSCW, it is projected that
approximately $1.7 billion will be spent over a twenty-year period, beginning
in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units following an external sinking fund
method. In 1996, WE has increased its funding levels based on a site specific
estimate as required by the PSCW. It is expected that the annual payments to
the Nuclear Decommissioning Trust Fund ("Fund") along with the earnings on the
Fund will provide sufficient funds at the time of decommissioning. WE
believes it is probable that any shortfall in funding would be recoverable in
utility rates.
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, WE's debt and equity
security investments in the Fund are classified as available for sale. Gains
and losses on the Fund were determined on the basis of specific
identification; net unrealized holding gains on the Fund were recorded as part
of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31. The Fund balance is stated at fair value.
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<PAGE> 74
==============================================================================
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 15,418 $ 3,456 $ 3,456
Earnings 10,891 7,405 6,682
-------- -------- --------
Depreciation Expense $ 26,309 $ 10,861 $ 10,138
======== ======== ========
Total costs accrued to date $261,729 $235,420
Unrealized gain 60,356 39,705
-------- --------
Accumulated Provision for Depreciation $322,085 $275,125
======== ========
==============================================================================
G - Preferred Stock
Preferred stock authorized but unissued is: WEC, $.01 par value, 15,000,000
shares and WE, cumulative, $25 par value, 5,000,000 shares.
The 3.60% Series Preferred Stock is redeemable in whole or in part at the
option of WE at $101 per share plus any accrued dividends.
In 1994, WE called for redemption all of its 52,500 outstanding shares of
6.75% Series Preferred Stock at a redemption price of par.
H - Long-Term Debt
The maturities and sinking fund requirements through 2001 for the aggregate
amount of long-term debt outstanding (excluding obligations under capital
lease, see Note F) at December 31, 1996 are shown below.
====================================
(Thousands of Dollars)
1997 $173,475
1998 70,520
1999 94,570
2000 10,625
2001 3,685
====================================
Sinking fund requirements for the years 1997 through 2001, included in the
table above, are $17.9 million. Substantially all utility plant is subject to
the applicable mortgage.
Long-term debt premium or discount and expense of issuance are amortized by
the straight line method over the lives of the debt issues and included as
interest expense. Unamortized amounts pertaining to reacquired debt are
written off currently, when acquired for sinking fund purposes, or amortized
in accordance with PSCW orders, when acquired for early retirement.
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<PAGE> 75
The fair value of the Company's long-term debt was $1.6 billion and $1.5
billion at December 31, 1996 and 1995, respectively. The fair value of WE's
first mortgage bonds and debentures is estimated based upon the market value
of the same or similar issues. Book value approximates fair value for the
Company's unsecured notes. The fair value of WE's obligations under capital
lease is the market value of the Wisconsin Electric Fuel Trust's commercial
paper.
In September and October 1995, WE issued $98.35 million of unsecured variable
rate promissory notes maturing between March 1, 2006 and September 1, 2030.
These notes were issued as a revenue and collateral source for an equal
principal amount of tax exempt Refunding Revenue Bonds issued on WE's behalf
to refund $98.35 million of previously issued tax exempt bonds called for
optional redemption that were secured by WE's First Mortgage Bonds.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. In December 1995, WE issued $100 million of unsecured One Hundred Year 6
7/8% Debentures due 2095. Proceeds of both issues were added to WE's general
funds and were applied to the repayment of short-term borrowings.
In December 1996, WE and Wisvest Corporation issued promissory notes in the
amount of $12.05 million and $10.95 million, respectively, due 2006. The
notes were issued as part of the transaction to acquire the steam and chilled
water facilities from Milwaukee County. The notes have been discounted to
reflect the difference between the effective interest rate of 6.36% and the
stated rate of 1.93%. This discount will be amortized over the life of the
notes using the effective interest method.
At December 31, 1996, the interest rate for the $67 million variable rate note
due 2016 was 4.15% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 4.20%.
I - Notes Payable
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
1996 1995
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $ 34,370 6.30% $107,110 5.80%
Commercial paper 34,895 5.59% 49,809 5.88%
-------- -------- -------- --------
$ 69,26 $156,919
======= ========
Unused lines of credit for short-term borrowing amounted to $185.4 million at
December 31, 1996. In support of various informal lines of credit from banks,
WEC subsidiaries have agreed to maintain unrestricted compensating balances or
to pay commitment fees; neither the compensating balances nor the commitment
fees are significant.
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<PAGE> 76
J - Pension Plans
Prior to 1996, WE had several defined benefit noncontributory pension plans
covering all eligible employees. Pension benefits were based on years of
service and the employee's compensation. Effective January 1, 1996, plans
covering all employees were converted to a single defined benefit
noncontributory cash balance plan. Under the cash balance plan, pension
benefits are determined by a combination of annual plan wages, a credit based
upon the WE's annual financial performance and individual account-based
interest credits. Lump sum payout at termination of employment or retirement
is available. Each employee's opening account balance was based on accrued
pension benefits as of December 31, 1994 and converted to a lump-sum amount
determined under the prior plan's provisions. The lump-sum amount was credited
for an additional transition credit based on age and years of service. The
cash balance plan includes a grandfather clause, where employees who retire
during the 15 years following January 1, 1996 receive the greater of pension
benefits calculated under their original pension plan or under the cash
balance plan.
The majority of the plans' assets are equity securities; other assets include
corporate and government bonds and real estate. The plans are funded to meet
the requirements of the Employee Retirement Income Security Act of 1974.
In the opinion of the Company, current pension trust assets and amounts which
are expected to be paid to the trusts in the future will be adequate to meet
future pension payment obligations to current and future retirees.
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<PAGE> 77
=============================================================================
Pension Cost calculated per FAS 87* 1996 1995 1994
- ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31 -
Cost of pension benefits earned by
employees $ 9,912 $ 8,985 $ 10,933
Interest cost on projected benefit
obligation 41,454 41,586 38,736
Actual (return) loss on plan assets (85,141) (136,243) 7,634
Net amortization and deferral 34,600 88,493 (52,180)
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 825 $ 2,821 $ 5,123
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31 -
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $560,801 $543,371
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 14,741 12,651
-------- --------
Total obligation $575,542 $556,022
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31 -
Pension assets at fair market value $687,482 $637,529
Projected benefit obligation
at present value (601,213) (584,785)
Unrecognized transition asset (19,566) (22,034)
Unrecognized prior service cost 36,027 23,194
Unrecognized net gain (96,344) (54,780)
-------- --------
Projected status of plans $ 6,386 $ (876)
======== ========
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.75 7.25 8.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 5.0
5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
=============================================================================
* Statement of Financial Accounting Standards No. 87, Employers' Accounting
for Pensions ("FAS 87").
K - Benefits Other Than Pensions
Postretirement Benefits: Effective in 1993, the Company adopted prospectively
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("FAS 106") and elected the 20
A-47
<PAGE> 78
year option for amortization of the previously unrecognized accumulated
postretirement benefit obligation.
WE sponsors defined benefit postretirement plans that cover both salaried and
nonsalaried employees who retire at age 55 or older with at least 10 years of
service. The postretirement medical plan provides coverage to retirees and
their dependents. Retirees contribute to the medical plan. The group life
insurance benefit is reduced upon retirement.
Employees' Benefit Trusts ("Trusts") are used to fund a major portion of
postretirement benefits. The funding policy for the Trusts is to maximize tax
deductibility. The majority of the Trusts' assets are mutual funds.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1996 1995 1994
------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31 -
Cost of postretirement benefits
earned by employees $ 2,436 $ 2,276 $ 2,653
Interest cost on projected
benefit obligation 10,456 10,458 10,148
Actual return on plan assets (5,938) (12,598) (3,893)
Net amortization and deferral 6,745 13,951 5,648
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 13,699 $ 14,087 $ 14,556
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31 -
Accumulated Postretirement Benefit
Obligation at December 31 -
Retirees $(92,417) $(92,746)
Fully eligible active plan participants (9,938) (10,304)
Other active plan participants (40,428) (41,732)
-------- --------
Total obligation (142,783) (144,782)
Postretirement assets at
fair market value 49,424 45,086
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (93,359) (99,696)
Unrecognized transition obligation 78,239 83,268
Unrecognized prior service cost (1,038) (1,279)
Unrecognized net gain (14,583) (6,102)
-------- --------
Accrued Postretirement Benefit Obligation $(30,741) $(23,809)
======== ========
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<PAGE> 79
1996 1995 1994
------------------------------------------- -------- -------- --------
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.75 7.25 8.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 5.0
5.0
Expected long-term rate of return
on postretirement assets 9.0 9.0 9.0
Health care cost trend rat 10.0 declining to
5.0 in year 2002
==============================================================================
Changes in health care cost trend rates will affect the amounts reported. For
example, a 1% increase in rates would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by $8.4 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by approximately $1 million.
Revitalization: In the first quarter of 1994, WE recorded a $73.9 million
charge related to its revitalization program. The 1994 charge included $37.5
million for Early Retirement Incentive Packages ("ERIP") and $25 million for
Severance Packages ("SP"). These plans were used to reduce employee staffing
levels. ERIP provided for a monthly income supplement ("ERIP Supplement"),
medical benefits and waiver of an early retirement pension reduction. The SP
included a severance payment, medical/dental insurance, outplacement services,
personal financial planning and tuition support. Availability of these plans
to various bargaining units was based upon agreements made between WE and the
bargaining units. These plans were available to most management employees but
not to elected officers.
Under ERIP, 403 employees elected to retire in 1994. Under SP, 651 and 75
employees enrolled in 1994 and 1995, respectively. ERIP Supplement costs are
paid from pension plan trusts and medical/dental benefits from employee
benefit trusts. Remaining ERIP and SP costs were paid from general corporate
funds. The ultimate timing of cash flows for ERIP Supplement costs depends
upon the funding limitations of WE's pension plans. With the exception of
ERIP Supplement costs, approximately $35.8 million have been paid against the
revitalization liability through December 31, 1996 and no liability remains
outstanding at December 31, 1996.
Omnibus Stock Incentive Plan: A stockholder-approved Omnibus Stock Incentive
Plan ("Plan") enables the Company to provide a long-term incentive, through
equity interests in WEC, to selected officers and key employees. The Plan
provides for the granting of stock options, stock appreciation rights
("SARS"), stock awards and performance units over a period of no more than ten
years. Awards under the Plan may be paid in common stock, cash or a
combination thereof. Four million shares of common stock have been reserved
under the Plan. The exercise price of a stock option will not be less than
100% of the common stock's fair market value on the grant date and options may
not be exercised within six months of the grant date.
Effective for 1996, WEC has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("FAS 123"), and will continue to apply the intrinsic value
method of accounting for awards under the Plan as required by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If
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<PAGE> 80
WEC had adopted the optional FAS 123 accounting method for Plan awards as of
the beginning of 1995, the effect on net income and earnings per share for
1996 and 1995 would have been immaterial.
The following is a summary of stock options issued through December 31, 1996
under the Plan.
<TABLE>
<CAPTION>
=========================================================================================================
1996 1995 1994
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 335,500 $28.832 145,500 $27.061 64,250 $27.375
Granted 210,900 $26.813 190,000 $30.188 81,250 $26.813
Forfeited (22,500) $28.400 - - - -
--------- -------- --------- -------- --------- --------
Outstanding at December 31 523,900 $28.038 335,500 $28.832 145,500 $27.061
=========================================================================================================
</TABLE>
As of December 31, 1996, the 523,900 options outstanding under the Plan are
exercisable at per share prices of between $26.813 and $30.188 with a weighted
average remaining contractual life of 9.04 years. These options are
exercisable four years after the grant date with an exercise period of ten
years from the grant date. The earliest year in which any of the options can
be exercised is 1997.
Each stock option includes performance units based on contingent dividends for
four years from the date of grant. Payment of these dividends depends on the
achievement of certain performance goals. No SARS or stock awards have been
granted and no performance units have been earned to date.
L - Information By Segments of Business
WEC is a holding company with subsidiaries in utility and non-utility
businesses. The Company's principal business segments include electric, gas
and steam utility operations. The electric utility generates, transmits,
distributes and sells electric energy in southeastern (including metropolitan
Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. The gas utility purchases, distributes and sells natural gas to
retail customers and transports customer-owned gas in three service areas in
southeastern, east central and western Wisconsin that are largely within the
electric service area. The steam utility produces, distributes and sells steam
to space heating and processing customers in the Milwaukee area. Principal
non-utility lines of business include real estate investment and development
in the State of Wisconsin as well as venture capital investments in Wisconsin
and the Upper Peninsula of Michigan. The following summarizes the business
segments of the Company.
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<PAGE> 81
==============================================================================
Year ended December 31 1996 1995 1994
- ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,393,270 $1,437,480 $1,403,562
Operating income before income taxes 380,376 419,271 329,216
Depreciation 183,159 164,789 159,414
Construction expenditures 272,838 223,723 244,718
Gas Operations
Operating revenues 364,875 318,262 324,349
Operating income before income taxes 47,720 47,022 30,993
Depreciation 18,246 17,722 16,856
Construction expenditures 22,851 24,851 25,481
Steam Operations
Operating revenues 15,675 14,742 14,281
Operating income before income taxes 4,375 3,757 2,825
Depreciation 1,391 1,365 1,344
Construction expenditures 21,651 206 1,213
Consolidated
Operating revenues 1,773,820 1,770,484 1,742,192
Operating income before income taxes 432,471 470,050 363,034
Depreciation 202,796 183,876 177,614
Construction expenditures
(including non-utility) 389,194 271,688 295,769
Other Information
Non-utility Net Income
Real estate activities $ 8,820 $ 3,583 $ 2,768
Venture capital and other (797) (9,013) (2,303)
At December 31
- --------------
Net Identifiable Assets *
Electric $3,646,997 $3,449,822 $3,411,512
Gas 400,582 376,536 357,242
Steam 46,499 25,214 25,315
Non-utility
Real estate activities 200,603 175,746 148,401
Venture capital and other 89,358 55,661 56,215
---------- ---------- ----------
Total Identifiable Assets 4,384,039 4,082,979 3,998,685
Other Corporate Assets ** 426,799 477,756 409,574
---------- ---------- ----------
Total Consolidated Assets $4,810,838 $4,560,735 $4,408,259
========== ========== ==========
==============================================================================
* Prior years restated to reflect change in presentation.
** Primarily includes other property and investments, materials and supplies
and deferred charges and other assets.
A-51
<PAGE> 82
M - Commitments and Contingencies
Purchase Power Commitment: To meet a portion of WE's anticipated increase in
future system energy supply needs, WE has entered into a 25 year power
purchase contract with an unaffiliated independent power producer, LSP-
Whitewater L.P. ("LS Power"). The contract is contingent upon the generating
facility achieving commercial operation. Plant construction is currently on
schedule to meet the planned start-up date of June 1, 1997. The contract
includes no minimum take provisions for energy. WE's estimated discounted
unconditional obligations under the terms of the contract at December 31, 1996
are:
========================================
(Thousands of Dollars)
1997 $17,000
1998 30,000
1999 31,000
2000 32,000
2001 33,000
Later Years 815,000
--------
Total Minimum Obligations 958,000
Less: Interest (569,000)
--------
Total at Present Value $389,000
========
========================================
Kimberly Cogeneration Facility: In 1993, a competitive bidding process
conducted by the PSCW resulted in selection of a proposal submitted by LS
Power to construct the generating facility discussed in Purchase Power
Commitment above. Prior to the 1993 selection of the LS Power generating
facility by the PSCW, WE had proposed to construct its own 220 megawatt
cogeneration facility in Kimberly, Wisconsin, which was intended to provide
process steam to Repap Wisconsin, Inc. ("Repap") starting in mid-1994. In its
order, the PSCW selected the WE project as the second place conditional
project if the LS Power project did not proceed. At December 31, 1996, a net
investment of approximately $65.6 million remains in Other Deferred Charges
and Other Assets for the Kimberly Cogeneration Facility equipment (the
"Equipment"). This balance represents costs associated with the procurement
of three combustion turbines, one steam turbine and three heat recovery
boilers that were acquired in order to achieve the in-service dates as agreed
to in a steam service contract with Repap.
The Company is continuing to review other options for use or sale of the
Equipment, which is a technology of natural gas-fired combined cycle
generation equipment that is marketed worldwide. The Company is investigating
opportunities to sell the Equipment or to use it in another power project and
is currently negotiating a power project involving the Equipment. At this
time, the Company does not believe that disposition of the Equipment will have
a material adverse effect on its financial condition. However, there is a
possibility that WE may need to recognize an impairment of the Equipment in
the future should the project noted above not occur and should no other viable
sales opportunities and/or power projects involving the Equipment be
identified.
A-52
<PAGE> 83
Manufactured Gas Plant Sites: WE continues a voluntary program to investigate
the remediation of a number of former manufactured gas plant ("MGP") sites.
Approximately $1.7 million has been expended through December 31, 1996 for
such activities. Future remediation costs to be incurred through the year
2001 have been estimated to be $12 million, but the actual costs are uncertain
pending the result of further site specific investigation and the selection of
site specific remediation. In its February 13, 1997 rate order, the PSCW
amplified its position on the recovery of MGP remediation costs. It
reiterated its position that such costs should be deferred and amortized and
recovered, without carrying costs, in future rate cases. Since the timing and
recovery of MGP remediation costs will be affected by the biennial rate case
cycle and WE's proposed merger related rate freeze, the timing and magnitude
of remediation expenditures, and their recovery during the period to 2001, may
be affected.
Plans for the construction and financing of future additions to utility plant
can be found elsewhere in this report in MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "LIQUIDITY AND CAPITAL
RESOURCES - Capital Requirements 1997-2001."
A-53
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements appearing on pages A-29
through A-53 of this report present fairly, in all material respects, the
financial position of Wisconsin Energy Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 29, 1997
A-54
<PAGE> 85
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation ("WEC") common stock is listed on the New York
Stock Exchange. The ticker symbol is WEC. Daily trading prices and volume
can be found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WiscEn or WiscEngy.
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1996, based on the number of Wisconsin Energy Corporation
stockholder accounts, there were 97,215 registered stockholders.
DIVIDENDS AND COMMON STOCK PRICES
Dividend Policy of WEC
Dividends on WEC common stock, as declared by the Board of Directors, are
normally paid on or about the first day of March, June, September and
December.
RANGE OF WEC COMMON STOCK PRICES AND DIVIDENDS
============================================================================
1996 | 1995
------------------------------------------|---------------------------------
Quarter High Low Dividend | High Low Dividend
------------------------------------------|---------------------------------
First $32 $27-1/4 $ .3675 | $28-1/4 $25-1/2 $ .3525
Second 28-7/8 26 .38 | 29 26-3/4 .3675
Third 29-1/8 26-3/8 .38 | 28-1/2 26-1/8 .3675
Fourth 28-3/8 26-1/8 .38 | 30-7/8 28 .3675
------------------------------------------|---------------------------------
Year $32 $26 $1.5075 | $30-7/8 $25-1/2 $1.4550
============================================================================
WE Common Stock Dividends
The amount of cash dividends declared on Wisconsin Electric Power Company's
("WE") Common Stock during the two most recent fiscal years are set forth
below. Dividends were paid to WE's sole common stockholder, WEC.
============================================================================
Quarter Total Dividend *
----------------------------------------------------------------------------
1996 1 $ 40,455,444
2 $ 42,478,000
3 $ 42,478,000
4 $ 42,478,000
----------------------------------------------------------------------------
1995 1 $ 38,208,667
2 $ 40,455,444
3 $ 40,455,444
4 $ 40,455,444
============================================================================
* Includes dividends paid by Wisconsin Natural Gas Company in 1995.
A-55
<PAGE> 86
DIVIDEND POLICY OF PRIMERGY
In accordance with the provisions of the Merger Agreement between WEC and
Northern States Power Company ("NSP") to form Primergy Corporation
("Primergy"), each share of WEC common stock will become 1.0 share of Primergy
common stock and each share of NSP common stock will be converted into 1.626
shares (the "Ratio") of Primergy common stock upon consummation of the
Transaction. It is anticipated that Primergy will adopt NSP's common share
dividend payment level adjusted for the Ratio. NSP currently pays $2.76 per
share annually while WEC's annual dividend rate is currently $1.52 per share.
Based on the Ratio and NSP's current dividend rate, the pro forma dividend
rate for Primergy would be $1.70 per share at December 31, 1996. However, no
assurance can be given that such dividend rate will be in effect or will
remain unchanged, and Primergy reserves the right to increase or decrease its
dividend as may be required by law or contract or as may be determined by the
Primergy Board of Directors, in its discretion, to be advisable.
Declaration and timing of dividends on Primergy common stock will be a
business decision to be made by the Primergy Board from time to time based
upon the results of operations and financial condition of Primergy and its
subsidiaries and such other business considerations as the Primergy Board
considers relevant in accordance with applicable laws. Additional information
concerning the proposed merger of WEC and NSP may be found in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -
"FACTORS AFFECTING RESULTS OF OPERATIONS - Merger Agreement with Northern
States Power Company" and in Note B - "Mergers" in the NOTES TO FINANCIAL
STATEMENTS.
BUSINESS OF THE COMPANY
Wisconsin Energy Corporation is a holding company with subsidiaries in utility
and non-utility businesses. Its principal subsidiary is Wisconsin Electric
Power Company ("WE").
WE engages in the generation, transmission, distribution and sale of electric
energy in an area of about 12,000 square miles in southeastern Wisconsin, the
east central and northern portions of Wisconsin, and the Upper Peninsula of
Michigan. The total area's estimated population is approximately 2.3 million,
which includes metropolitan Milwaukee. WE also purchases natural gas,
transports gas to Wisconsin through pipeline companies and distributes and
sells it in a territory of about 2,800 square miles in the area west and
southwest of Milwaukee, the Appleton area, and the Prairie du Chien area. WE
also provides steam service for heating and manufacturing processes to about
500 customers in the Milwaukee area.
Wispark Corporation; Witech Corporation; Wisvest Corporation; Minergy Corp.;
Badger Service Company; Custometrics, LLC and Wisconsin Michigan Investment
Corporation are subsidiaries devoted primarily to stimulating economic growth
in the Wisconsin Electric service area and to capitalizing on diversified
investment opportunities for stockholders.
A-56
<PAGE> 87
DIRECTORS AND OFFICERS
DIRECTORS
The information under "Proposal 1: Election of Directors" in WEC's definitive
proxy statement dated March 14, 1997, attached hereto, is incorporated herein
by reference.
OFFICERS
(Figures in parenthesis indicate age and years of service with WEC and/or its
subsidiaries as of December 31, 1996.)
Officers of Wisconsin Energy Corporation
Richard A. Abdoo (52;21)
Chairman of the Board,
President and Chief Executive Officer
Francis Brzezinski (45;7)
Vice President
Richard R. Grigg (48;26)
Vice President
Calvin H. Baker (53;5)
Treasurer and Chief Financial Officer
Ann Marie Brady (44;8)
Corporate Secretary
Anne K. Klisurich (49;24)
Controller
Thomas H. Fehring (49;26)
Assistant Corporate Secretary
Gordon A. Willis (58;35)
Assistant Treasurer
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<PAGE> 88
Officers of Wisconsin Electric Power Company
Richard A. Abdoo (52;21)
Chairman of the Board
and Chief Executive Officer
Richard R. Grigg (48;26)
President, Chief Operating Officer
and Chief Nuclear Officer
David K. Porter (53;27)
Senior Vice President
Calvin H. Baker (53;5)
Vice President - Finance
and Chief Financial Officer
Ann Marie Brady (44;8)
Corporate Secretary
and Vice President - External Affairs
Francis Brzezinski (45;7)
Vice President -
Business Development
Charles T. Govin, Jr. (50;18)
Vice President - Electric and Gas Operations
Kristine M. Krause (42;18)
Vice President - Fossil Operations
Kristine A. Rappe (40;14)
Vice President - Customer Services
Anne K. Klisurich (49;24)
Controller
Gordon A. Willis (58;35)
Treasurer
Joyce Feaster (34;12)
Assistant Treasurer
Thomas H. Fehring (49;26)
Assistant Corporate Secretary
Scott A. Patulski (47;25)
Site Vice President -
Point Beach Nuclear Plant
A-58
<PAGE> 89
APPENDIX B
March 14, 1997
Dear Wisconsin Energy Stockholder:
At Wisconsin Energy Corporation, performing well on the basics is necessary
for success now and in the future.
What are the basics? An energy business builds success by providing low-cost
energy produced in plants that are operated and maintained in an
environmentally sound manner. Then, the energy must be delivered reliably and
with superior customer service. Our focus is, and must always be, on our
customer.
Improving each one of those fundamentals is a continuing process for any
company, but especially for companies in an industry changing as fast as the
electric industry.
A Challenging Year
With a long tradition of success, we are moving quickly and decisively to
address certain performance issues. I am committed to sharpening our focus on
areas of vital importance to our corporation -- nuclear operations,
environmental performance, customer service and stockholder value.
Wisconsin Energy set high expectations for 1996. Frankly, we did not meet
these expectations in every instance.
Earnings in 1996 were $1.97 per share, compared with a record $2.13 per share
in 1995. On April 24, 1996, the board of directors approved an increase in the
quarterly dividend, to an annualized $1.52 per share from $1.47 per share. In
1996 we increased our dividend for the 36th consecutive year and we continued
our record of exceeding the industry average in terms of dividend growth for
companies similar to ours. The 10-year average dividend growth rate for
Wisconsin Energy was 5.6 percent, compared with 2.7 percent for the utility
industry (See chart on page 4).
We continued to reduce our non-fuel operation and maintenance expense in our
electric operations. The trend of declining costs is noted in the chart on
page 3. Over the past three years, non-fuel operation and maintenance costs,
excluding accounting for conservation expenditures, have dropped about $48
million.
The Public Service Commission of Wisconsin ordered a $42.5 million rate
decrease for 1996. As a result, most of the savings in our electric operation
and maintenance expenses are providing an immediate benefit to our customers
rather than Wisconsin Energy stockholders.
At the same time, the performance of our gas operations remained strong,
boosted in part by the economies gained by merging Wisconsin Natural with
Wisconsin Electric. Operating income for gas operations grew more than $1
million in 1996.
Employees in our nuclear business unit had a challenging year. The U.S.
Nuclear Regulatory Commission cited us for violations in two ways: forfeitures
and a trending letter as notice of unacceptable performance. Though our 1996
performance was clearly not up to our standards, or that of the U.S. Nuclear
B-1
<PAGE> 90
Regulatory Commission, we are working toward operational excellence at Point
Beach. We have spent a significant amount of time evaluating and revising our
work policies. One of our strengths has been the high-quality individuals who
operate and maintain Point Beach. The knowledge, skills and abilities of our
employees allowed us to be an industry leader in the past. We have not lost
that collective intelligence or capability; we are applying our talent to
achieve operational excellence measured by the best performers in the industry
today.
Wispark, our real estate subsidiary, completed its most successful year,
becoming one of the most active industrial building developers in the Chicago
and Milwaukee areas. The facilities developed by this subsidiary are adding to
our energy revenues.
Minergy, a subsidiary established to market techniques for making products
from recycled materials, is building a plant in Neenah, Wis., where paper
sludge from several paper companies in the area will be made into a glass
aggregate product used by the construction industry. Additionally, Minergy
recently acquired an interest in an existing plant in the Netherlands which
allows us to expand our technology into international markets. For its
efforts, Minergy won an American Academy for Environmental Engineering Award
and a Governor's Waste Reduction and Recycling Award.
Investing in the Basics
During 1996, we renewed our attention to the basics of serving customers
better. Many steps we took were not easy, and not every job is complete.
However, we are optimistic that our actions will pay long-term benefits for
you as a stockholder, as well as for our customers and employees.
Part of our investment in basics is tied directly to our employees. We are
investing in our employees through expanded training to broaden their skills.
Additionally, employee benefits are being revised to better meet their needs
and enhance our ability to attract and retain a talented and diverse
workforce.
Several achievements deserve particular mention:
* Wisconsin Electric enhanced its reputation for reliable service. The number
of times per year our average customer is without service is the lowest in
the industry over the past five years. In addition, we reduced the average
amount of time an outage lasts when it does occur. To ensure continued
reliability, we rebuilt nearly 200 more miles of our electric distribution
system. In our gas operations, we are an industry leader in emergency
response time.
* For the second consecutive year, Pleasant Prairie Power Plant ranked
nationally among the top 10 fossil fuel plants for lowest cost per
megawatt-hour. Additionally, two Oak Creek Power Plant units were ranked
nationally among the top 10 for efficiency. We also acquired the Milwaukee
County Power Plant in 1996, expanding our electric and steam service.
* In a first-of-its-kind collaborative approach, we brought several state and
federal natural resource agencies together to reach agreement on the
relicensing of eight dams in Michigan's Upper Peninsula and northeastern
Wisconsin, allowing us to continue profitable operation of the
hydroelectric system and protect associated land and water resources for an
additional 40 years.
B-2
<PAGE> 91
* Our total non-fuel operation and maintenance expenses have decreased each
year from 1993's high of $550 million to $494 million in 1996. In our
fossil operations, we have reduced our non-fuel operation and maintenance
costs from about $7 per megawatt-hour to just over $4 per megawatt-hour.
* We consolidated six call centers into one new Customer Contact Center,
which is helping improve our response times and overall service. The
average call wait time dropped significantly in 1996. Our goal is to answer
80 percent of customer calls within 20 seconds.
Many of these accomplishments would not have been possible without strong
labor-management cooperation and understanding. The concept of incentive-based
pay moved beyond management with one of our labor unions joining the program
in 1996. In addition, we formed joint union-management governance structures
in each of our business units and corporate center to complement our Corporate
Joint Governance Committee. They are focusing our operations on achieving
positive results and meeting mutual interests. Joint union-management
committees recommended a new managed-care medical option for greater
flexibility and cost control, a financial planning program to help employees
make better choices, and a health management program to improve employees'
health while improving the company's bottom line. With the support of our
union business managers, our union-management relationship is closely aligning
our human resources activities with the dynamics of today's business
environment.
Opportunities in the Future
Enhancing stockholder value is the objective of every corporation. At
Wisconsin Energy, we believe that by providing the customer with superior
value, we will, in turn, provide the stockholders with superior value.
To that end, we have merged our gas and electric business to leverage
opportunities for growth. We now provide energy solutions to our customers
under the Energy Plus name, and are working closely with our customers to gain
long-term relationships that are beneficial to both our customers and our
stockholders.
We are selectively adding capability to our electric transmission grid as well
as preparing our power plants for a competitive environment. In natural gas
operations, we continue unprecedented expansion. In 1996, we proposed the
single largest natural gas territory expansion in company history, making
application to serve 6,600 customers in 11 townships in northeastern Wisconsin
by adding 450 miles of gas main. We expect the Public Service Commission of
Wisconsin to issue a decision in the first half of 1997.
Wisconsin Energy's future success will be measured against a new standard --
the competition. The successful energy company of the 21st century must be
lean, quick and focused on the basics of serving customers better than its
competitors. We are convinced that an energy marketplace where customers can
choose the company that provides their energy service is desirable and
inevitable.
To prepare, we continue our efforts to complete the merger with Northern
States Power Company. The merger will expand our customer base, provide
efficiencies to help reduce costs and give us greater access to other sources
of clean, low-cost generation. As a stockholder, you will be an owner of a
more efficient company with greater earnings potential. In addition, upon
approval of the merger, it is expected that dividends will increase
approximately $20 million, a boost of about 12 percent.
B-3
<PAGE> 92
We continue to prepare for tomorrow's electric power industry, and we are
effectively addressing the challenges that surface along the way. By paying
attention to the basics now, we are solidifying our position for the future
and working to distinguish Wisconsin Energy as a superior choice for customers
and investors.
We hope you share our commitment to basic values -- and our enthusiasm for the
future's opportunities.
Sincerely,
/s/Richard A. Abdoo
Richard A. Abdoo
B-4
<PAGE> 93
Answers to your Questions
How are the changes in the utility industry affecting the price of utility
stocks?
The return to stockholders of electric utility stocks significantly lagged
behind the returns of most other U.S. industries during 1996. Uncertainty and
a perception of greater risk are being created by competitive pressures.
Generally, the perception of increased risk is reflected by the financial
markets through lower stock prices.
How does WEC's stock performance compare with the industry average?
When looking at the cumulative performance over the last five years, the total
return to WEC stockholders has lagged that of the S&P 500 and of our own self-
defined peer group. However, the cumulative total return to WEC stockholders
was essentially the same as that of the average combination electric and
natural gas utility over the same period. Total return to stockholders is a
performance measurement that takes into account dividends paid and share price
changes. A $100 investment in WEC common stock on 12/31/91 was worth $132.91
after five years. A similar $100 investment in an index of investor-owned
combination electric and gas utilities would have been worth $135.74 at year-
end 1996. We are not satisfied with average performance -- our goal is to do
far better in the future.
What is the outlook for 1997 and beyond?
Our financial strength remains fundamentally sound. We have low rates, a low-
cost structure and a strong balance sheet. Our bond ratings, AA+ and Aa2,
continue to be among the best in the industry. We believe we have positioned
the company to succeed well in a competitive energy marketplace. With our low-
cost structure, we believe we can significantly increase our market share
after the marketplace opens to greater competition.
For the short-term, we are still facing the challenges presented by the Public
Service Commission of Wisconsin imposed rate decreases, as well as the
difficulties we have experienced at Point Beach Nuclear Plant. As a result, we
expect 1997 to be every bit as challenging as 1996 proved to be.
Will dividends increase?
The company has increased its dividend in each of the last 36 years. At this
time, we anticipate another dividend increase during 1997. In addition, the
merger with Northern States Power Company is anticipated to result in a
further increase in the dividend for WEC stockholders. Primergy anticipates
adopting the Northern States Power Company dividend, which is currently $1.70
per share after adjusting for the exchange ratio.
When do you anticipate the merger will be completed?
Although it's difficult at this time to predict when we will receive final
approval, we hope to complete the merger by mid-1997. We believe the
legitimate concerns of all parties have been addressed, and that the evidence
of the merger's benefits are clear. We remain confident that the regulatory
agencies reviewing the merger will find the benefits as compelling as we do
and ultimately give their approval.
B-5
<PAGE> 94
APPENDIX C
This appendix provides a narrative description of the differences between the
electronic format document and the printed copy relating to the substantive
graphic or image material contained in the proxy statement.
1. Under the heading "The Board of Directors and Corporate Governance", a
black and white photograph of each nominee and director appears
immediately to the left of the narrative of each respective nominee and
director. The photographs appear on pages 1 and 2 of the printed
copy.
2. Under the heading "Performance Graph", the table in the electronic
format document represent datapoints for the graph labeled "Five-Year
Cumulative Total Return", a paper copy of which is being filed
supplementally to the Branch Chief in the Division of Corporation
Finance. The performance graph appears on page 17 of the printed copy.
C-1
