<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (August 1, 1997):
Wisconsin Energy Corporation Common stock, $.01 Par Value,
112,865,844 shares outstanding.
Wisconsin Electric Power Company Common stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company common stock.
<PAGE>
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Item Page
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I - Financial Information
1. Financial Statements:
Wisconsin Energy Corporation
Consolidated Condensed Income Statement. . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheet . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
Wisconsin Electric Power Company
Condensed Income Statement . . . . . . . . . . . . . . . . . . . . 6
Condensed Balance Sheet. . . . . . . . . . . . . . . . . . . . . . 7
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements of
Wisconsin Energy Corporation and
Wisconsin Electric Power Company . . . . . . . . . . . . . . . . . 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Wisconsin Energy Corporation and
Wisconsin Electric Power Company . . . . . . . . . . . . . . . . . 11
Part II - Other Information
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 25
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INTRODUCTION
Wisconsin Energy Corporation ("WEC" or "Wisconsin Energy") is a holding
company whose principal subsidiary is Wisconsin Electric Power Company ("WE"
or "Wisconsin Electric"), an electric, gas and steam utility. The unaudited
interim financial statements presented in this combined Form 10-Q report
include the consolidated statements of WEC as well as separate statements for
WE. The unaudited statements have been prepared by WEC and WE pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The WEC and WE
financial statements should be read in conjunction with the financial
statements and notes thereto included in WEC's and WE's combined Annual Report
on Form 10-K for the year ended December 31, 1996. This combined Form 10-Q is
separately filed by WEC and WE. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf.<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 337,221 $ 334,337 $ 686,321 $ 685,161
Gas 61,228 64,880 214,077 202,896
Steam 4,765 2,469 13,199 9,086
---------- ---------- ---------- ----------
Total Operating Revenues 403,214 401,686 913,597 897,143
Operating Expenses
Fuel 76,204 71,265 153,465 147,058
Purchased power 32,936 6,381 60,797 12,145
Cost of gas sold 39,141 40,199 142,435 125,791
Other operation expenses 106,705 92,875 209,104 198,251
Maintenance 38,347 24,973 69,814 51,080
Depreciation 57,068 50,896 114,733 103,201
Taxes other than income taxes 19,039 19,249 38,226 40,096
Federal income tax (1,576) 21,656 16,343 52,284
State income tax (130) 5,117 4,165 12,275
Deferred income taxes - net 4,886 1,814 9,405 3,676
Investment tax credit - net (1,122) (1,121) (2,243) (2,241)
---------- ---------- ---------- ----------
Total Operating Expenses 371,498 333,304 816,244 743,616
Operating Income 31,716 68,382 97,353 153,527
Other Income and Deductions
Interest income 5,329 4,824 11,687 10,790
Allowance for other funds used
during construction 1,216 526 2,357 1,132
Merger expenses (30,684) - (30,684) -
Miscellaneous - net (1,874) (2,151) (1,933) (4,077)
Income taxes 12,079 452 11,924 899
---------- ---------- ---------- ----------
Total Other Income and Deductions (13,934) 3,651 (6,649) 8,744
Income Before Interest Charges and
Preferred Dividend 17,782 72,033 90,704 162,271
Interest Charges
Interest expense 29,866 27,550 59,257 55,857
Allowance for borrowed funds used
during construction (1,752) (1,371) (3,591) (2,545)
---------- ---------- ---------- ----------
Total Interest Charges 28,114 26,179 55,666 53,312
Preferred Dividend Requirement of Subsidiary 300 300 601 601
---------- ---------- ---------- ----------
Net Income (Loss) $ (10,632) $ 45,554 $ 34,437 $ 108,358
========== ========== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 112,577 110,819 112,270 110,819
========== ========== ========== ==========
Earnings (Loss) Per Share of Common Stock $ (0.09) $ 0.41 $ 0.31 $ 0.98
========== ========== ========== ==========
Dividends Per Share of Common Stock $ 0.3850 $ 0.3800 $ 0.7650 $ 0.7475
========== ========== ========== ==========
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
June 30, 1997 December 31, 1996
---------------- -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 4,793,284 $ 4,725,832
Gas 512,171 503,041
Steam 61,949 60,480
Accumulated provision for depreciation (2,569,370) (2,441,950)
------------- -------------
2,798,034 2,847,403
Construction work in progress 151,779 135,040
Nuclear fuel - net 93,840 75,476
------------- -------------
Net Utility Plant 3,043,653 3,057,919
Other Property and Investments 749,927 716,223
Current Assets
Cash and cash equivalents 67,977 10,748
Accounts receivable 135,802 151,473
Accrued utility revenues 93,532 155,838
Materials, supplies and fossil fuel 159,730 184,416
Prepayments and other assets 92,497 63,383
------------- -------------
Total Current Assets 549,538 565,858
Deferred Charges and Other Assets
Accumulated deferred income taxes 158,266 153,806
Other 303,633 317,032
------------- -------------
Total Deferred Charges and Other Assets 461,899 470,838
------------- -------------
Total Assets $ 4,805,017 $ 4,810,838
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 730,783 $ 701,197
Retained earnings 1,192,776 1,244,147
------------- -------------
Total Common Stock Equity 1,923,559 1,945,344
Preferred stock 30,450 30,450
Long-term debt 1,407,367 1,416,067
------------- -------------
Total Capitalization 3,361,376 3,391,861
Current Liabilities
Long-term debt due currently 183,676 190,204
Short-term debt 102,893 69,265
Accounts payable 129,448 148,429
Accrued liabilities 80,748 84,197
Other 38,999 34,923
------------- -------------
Total Current Liabilities 535,764 527,018
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 527,744 511,399
Other 380,133 380,560
------------- -------------
Total Deferred Credits and Other Liabilities 907,877 891,959
------------- -------------
Total Capitalization and Liabilities $ 4,805,017 $ 4,810,838
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended June 30
-------------------------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 34,437 $ 108,358
Reconciliation to cash
Depreciation 114,733 103,201
Nuclear fuel expense - amortization 1,494 11,864
Conservation expense - amortization 11,249 11,249
Debt premium, discount & expense - amortization 4,559 5,619
Deferred income taxes - net 9,405 3,676
Investment tax credit - net (2,243) (2,241)
Allowance for other funds used during construction (2,357) (1,132)
Write-off of merger costs 30,684 -
Change in - Accounts receivable 15,671 3,340
Inventories 24,686 2,275
Accounts payable (18,981) (24,614)
Other current assets 33,192 29,001
Other current liabilities 627 (841)
Other (27,070) 10,054
---------- ----------
Cash Provided by Operating Activities 230,086 259,809
Investing Activities
Construction expenditures (142,377) (129,055)
Allowance for borrowed funds used during construction (3,591) (2,545)
Nuclear fuel (5,811) (9,309)
Nuclear decommissioning trust (13,165) (15,231)
Conservation investments - net 165 285
Other 31,892 7,604
---------- ----------
Cash Used in Investing Activities (132,887) (148,251)
Financing Activities
Sale of common stock 29,586 -
Retirement of preferred stock - (1)
Sale of long-term debt - 12,838
Retirement of long-term debt (17,376) (41,351)
Change in short-term debt 33,628 (9,738)
Dividends on common stock (85,808) (82,837)
---------- ----------
Cash Used in Financing Activities (39,970) (121,089)
---------- ----------
Change in Cash and Cash Equivalents $ 57,229 $ (9,531)
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 51,170 $ 48,325
Income taxes 49,806 75,493
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 337,221 $ 334,337 $ 686,321 $ 685,161
Gas 61,228 64,880 214,077 202,896
Steam 4,765 2,469 13,199 9,086
---------- ---------- ---------- ----------
Total Operating Revenues 403,214 401,686 913,597 897,143
Operating Expenses
Fuel 76,204 71,265 153,465 147,058
Purchased power 32,936 6,381 60,797 12,145
Cost of gas sold 39,141 40,199 142,435 125,791
Other operation expenses 106,705 92,875 209,104 198,251
Maintenance 38,347 24,973 69,814 51,080
Depreciation 57,068 50,896 114,733 103,201
Taxes other than income taxes 19,039 19,249 38,226 40,096
Federal income tax (1,576) 21,656 16,343 52,284
State income tax (130) 5,117 4,165 12,275
Deferred income taxes - net 4,886 1,814 9,405 3,676
Investment tax credit - net (1,122) (1,121) (2,243) (2,241)
---------- ---------- ---------- ----------
Total Operating Expenses 371,498 333,304 816,244 743,616
Operating Income 31,716 68,382 97,353 153,527
Other Income and Deductions
Interest income 3,472 3,846 8,575 8,694
Allowance for other funds used
during construction 1,216 526 2,357 1,132
Merger expenses (21,881) - (21,881) -
Miscellaneous - net (1,281) (1,138) (1,526) (2,385)
Income taxes 8,966 (204) 8,698 (447)
---------- ---------- ---------- ----------
Total Other Income and Deductions (9,508) 3,030 (3,777) 6,994
Income Before Interest Charges 22,208 71,412 93,576 160,521
Interest Charges
Interest expense 28,898 26,500 57,194 53,941
Allowance for borrowed funds used
during construction (637) (294) (1,252) (630)
---------- ---------- ---------- ----------
Total Interest Charges 28,261 26,206 55,942 53,311
---------- ---------- ---------- ----------
Net Income (Loss) (6,053) 45,206 37,634 107,210
Preferred Stock Dividend Requirement 300 300 601 601
---------- ---------- ---------- ----------
Earnings Available for Common Stockholder $ (6,353) $ 44,906 $ 37,033 $ 106,609
========== ========== ========== ==========
<FN>
Note - Earnings and dividends per share of common stock are not applicable because all of Wisconsin
Electric Power Company's common stock is owned by Wisconsin Energy Corporation.
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
June 30, 1997 December 31, 1996
--------------- -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 4,793,284 $ 4,725,832
Gas 512,171 503,041
Steam 61,949 60,480
Accumulated provision for depreciation (2,569,370) (2,441,950)
------------- -------------
2,798,034 2,847,403
Construction work in progress 151,779 135,040
Nuclear fuel - net 93,840 75,476
------------- -------------
Net Utility Plant 3,043,653 3,057,919
Other Property and Investments 491,901 458,009
Current Assets
Cash and cash equivalents 10,868 1,871
Accounts receivable 129,920 140,256
Accrued utility revenues 93,532 155,838
Materials, supplies and fossil fuel 159,730 184,416
Prepayments and other assets 82,922 58,444
------------- -------------
Total Current Assets 476,972 540,825
Deferred Charges and Other Assets
Accumulated deferred income taxes 154,710 150,269
Other 298,562 300,138
------------- -------------
Total Deferred Charges and Other Assets 453,272 450,407
------------- -------------
Total Assets $ 4,465,798 $ 4,507,160
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 613,582 $ 613,582
Retained earnings 1,037,191 1,125,206
------------- -------------
Total Common Stock Equity 1,650,773 1,738,788
Preferred stock 30,450 30,450
Long-term debt 1,370,677 1,371,446
------------- -------------
Total Capitalization 3,051,900 3,140,684
Current Liabilities
Long-term debt due currently 170,061 183,635
Short-term debt 102,392 45,390
Accounts payable 130,952 145,894
Accrued liabilities 78,176 80,088
Other 37,805 32,588
------------- -------------
Total Current Liabilities 519,386 487,595
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 524,189 507,845
Other 370,323 371,036
------------- -------------
Total Deferred Credits and Other Liabilities 894,512 878,881
------------- -------------
Total Capitalization and Liabilities $ 4,465,798 $ 4,507,160
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended June 30
-------------------------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 37,634 $ 107,210
Reconciliation to cash
Depreciation 114,733 103,201
Nuclear fuel expense - amortization 1,494 11,864
Conservation expense - amortization 11,249 11,249
Debt premium, discount & expense - amortization 4,378 5,596
Deferred income taxes - net 9,405 3,676
Investment tax credit - net (2,243) (2,241)
Allowance for other funds used during construction (2,357) (1,132)
Write-off of merger costs 21,881 -
Change in - Accounts receivable 10,336 2,350
Inventories 24,686 2,275
Accounts payable (14,942) (23,981)
Other current assets 37,828 30,996
Other current liabilities 3,305 (652)
Other (29,868) 10,558
---------- ----------
Cash Provided by Operating Activities 227,519 260,969
Investing Activities
Construction expenditures (111,616) (110,847)
Allowance for borrowed funds used during construction (1,252) (630)
Nuclear fuel (5,811) (9,309)
Nuclear decommissioning trust (13,165) (15,231)
Conservation investments - net 165 285
Other (2,390) (1,570)
---------- ----------
Cash Used in Investing Activities (134,069) (137,302)
Financing Activities
Retirement of preferred stock - (1)
Sale of long-term debt - 12,838
Retirement of long-term debt (15,806) (40,916)
Change in short-term debt 57,002 (20,397)
Dividends on - Common stock (125,048) (82,933)
Preferred stock (601) (601)
---------- ----------
Cash Used in Financing Activities (84,453) (132,010)
---------- ----------
Change in Cash and Cash Equivalents $ 8,997 $ (8,343)
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 51,457 $ 48,153
Income taxes 47,308 75,196
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
/TABLE
<PAGE>
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements for
Wisconsin Energy Corporation ("WEC") and unaudited financial statements
for Wisconsin Electric Power Company ("WE") should be read in conjunction
with WEC's and WE's combined 1996 Annual Report on Form 10-K. In the
opinion of management, all adjustments, normal and recurring in nature,
necessary to a fair statement of the results of operations and financial
position of WEC and WE have been included in the accompanying income
statements and balance sheets. The results of operations for the six
months ended June 30, 1997 are not, however, necessarily indicative of
the results which may be expected for the year 1997 because of seasonal
and other factors.
2. On May 16, 1997, the Boards of Directors of WEC and Northern States Power
Company, a Minnesota corporation ("NSP"), agreed to terminate an
Agreement and Plan of Merger which provided for a business combination of
WEC and NSP to form Primergy Corporation. As a result, WEC recorded in
the second quarter of 1997 a $30.7 million charge ($18.8 million net of
tax or approximately 17 cents per share) to write off deferred
transaction costs and costs to achieve the merger, of which approximately
$21.9 million was attributable to WE. For additional information
concerning the merger termination, see WEC's Current Report on Form 8-K
dated May 16, 1997.
3. On May 13, 1997, WEC and ESELCO, Inc., parent company of Edison Sault
Electric Company, entered into an Agreement and Plan of Reorganization
setting forth the terms of the proposed acquisition of ESELCO, Inc. by
WEC. Consummation of the proposed transaction is contingent upon several
conditions including approval by the shareholders of ESELCO, Inc.,
receipt of appropriate regulatory approvals, the effectiveness of a
registration statement to be filed with the Securities and Exchange
Commission covering WEC shares to be issued in the transaction and other
customary conditions. There can be no assurance that the conditions will
be satisfied, or that the proposed transaction will be consummated. ITEM
5. OTHER INFORMATION - "PROPOSED ACQUISITION OF ESELCO, INC." in Part II
of WEC's and WE's combined Quarterly Report on Form 10-Q dated March 31,
1997 contains additional information regarding the proposed acquisition.
4. WE completed replacement of the Unit 2 steam generators at Point Beach
Nuclear Plant ("Point Beach") in January 1997. In July 1997, the United
States Nuclear Regulatory Commission closed a January 3, 1997
confirmatory action letter regarding Unit 2 restart commitments and
issued final license amendments necessary for the restart of Unit 2. The
Unit 2 reactor was taken critical on August 13, 1997 and is expected to
be on line at reduced power by August 15, 1997 with startup testing
continuing. Point Beach Unit 1 was taken out of service in February 1997
due to equipment problems. WE is currently evaluating the restart
schedule of Unit 1. See ITEM 5. OTHER INFORMATION - "NUCLEAR MATTERS" in
Part II of this report for additional information related to nuclear
operations.
5. Due to the ongoing extended outages at Point Beach and an extended
maintenance outage at Oak Creek Power Plant that was concluded in June
1997, WE has incurred and will continue to incur increased fuel and
purchased power costs beyond those reflected in its electric rates. Of
$67 million of additional annual fuel costs estimated in March 1997, WE
estimates that it may collect, subject to refund, as much as
approximately $40 million through a fuel surcharge, approved by the
Public Service Commission of Wisconsin ("PSCW"), that became effective on
May 24, 1997. The PSCW will hold contested public hearings in September
1997 to determine whether WE is justified in recovering increased fuel
and purchased power costs through the surcharge. Because of delays in
the schedule to restart Point Beach, and assuming the current restart
plans noted in ITEM 5. OTHER INFORMATION - "NUCLEAR MATTERS" in Part II
of this report, WE presently estimates that it will incur approximately
another $30 million to $40 million of fuel and purchased power costs in
1997 in addition to the $67 million of excess fuel costs estimated for
the May 1997 surcharge. See ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "1997 SECOND QUARTER
RESULTS OF OPERATIONS" in Part I of this report for additional
information related to the fuel cost surcharge.
6. To meet a portion of WE's anticipated increase in future electric system
supply needs, WE has entered into a 25 year power purchase contract with
an unaffiliated independent power producer, LSP-Whitewater L.P. ("LS
Power"). LS Power's cogeneration facility, located in Whitewater,
Wisconsin, was scheduled to startup on June 1, 1997. The plant is now
expected to achieve commercial operation in the third quarter of 1997.
The contract for 236 megawatts of firm capacity from the LS Power
facility includes no minimum take provisions for energy. WE anticipates
accounting for the contract as a capitalized lease and recording in the
third quarter of 1997 a plant asset and a corresponding long-term
obligation of approximately $140 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation ("WEC" or the "Company") is a holding company
whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an
electric, gas and steam utility. As of June 30, 1997, approximately 93% of
WEC's consolidated total assets were attributable to WE. The following
discussion and analysis of financial condition and results of operations
includes both WEC and WE unless otherwise stated.
Merger - Northern States Power Company
On May 16, 1997, the Boards of Directors of WEC and Northern States Power
Company, a Minnesota corporation ("NSP"), agreed to terminate the Agreement
and Plan of Merger which provided for a business combination of WEC and NSP to
form Primergy Corporation. As a result, WEC recorded in the second quarter of
1997 a $30.7 million charge ($18.8 million net of tax or approximately 17
cents per share) to write off deferred transaction costs and costs to achieve
the merger, of which approximately $21.9 million was attributable to WE. For
additional information concerning the merger termination, see WEC's Current
Report on Form 8-K dated May 16, 1997.
Proposed Acquisition of ESELCO, Inc.
On May 13, 1997, WEC and ESELCO, Inc., parent company of Edison Sault Electric
Company, entered into an Agreement and Plan of Reorganization setting forth
the terms of the proposed acquisition of ESELCO, Inc. by WEC. Consummation of
the proposed transaction is contingent upon several conditions including
approval by the shareholders of ESELCO, Inc., receipt of appropriate
regulatory approvals, the effectiveness of a registration statement to be
filed with the Securities and Exchange Commission covering WEC shares to be
issued in the transaction and other customary conditions. There can be no
assurance that the conditions will be satisfied, or that the proposed
transaction will be consummated. ITEM 5. OTHER INFORMATION - "PROPOSED
ACQUISITION OF ESELCO, INC." in Part II of WEC's and WE's combined Quarterly
Report on Form 10-Q dated March 31, 1997 contains additional information
regarding the proposed acquisition.
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 projected, including the factors that are
described in ITEM 5. OTHER INFORMATION - "CAUTIONARY FACTORS" in Part II of
this report.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by WEC's consolidated operating activities totaled $230 million
during the six months ended June 30, 1997. This compares to approximately
$260 million provided during the same period in 1996.
WEC's consolidated net investing activities totaled approximately $133 million
for the six months ended June 30, 1997 compared to $148 million during the
same period in 1996. Investments during the first half of 1997 included
$142 million for the construction of new or improved facilities of which
approximately $112 million was for a number of projects related to utility
plant. Additional investments included approximately $6 million for
acquisition of nuclear fuel and $13 million for payments to the Nuclear
Decommissioning Trust Fund ("Fund") for the eventual decommissioning of WE's
Point Beach Nuclear Plant ("Point Beach"). Net investing activities for the
six months ended June 30, 1997, included in Investing Activities-Other,
reflect approximately $35 million of cash proceeds from the sale of buildings
and other capital distributions from investments by WISPARK Corporation, a
non-utility subsidiary of WEC.
During the first half of 1997, WEC used approximately $40 million for
financing activities compared to $121 million during the first half of 1996.
Financing activities during the first six months of 1997 included a
$10 million payment of principal on the maturity of 6-5/8% WE first mortgage
bonds. During the first half of 1997, WE increased its short-term debt by
$57 million while WEC's non-utility subsidiaries decreased their short-term
debt by $23 million.
On July 1, 1997, WEC resumed the purchase of existing shares on the open
market for the Company's stock plans. During the six months ended June 30,
1997, WEC issued 1,187,050 new shares of common stock which were purchased by
participants in the Company's stock plans with cash investments and reinvested
dividends aggregating approximately $30 million.
Capital requirements for the remainder of 1997 are expected to be principally
for construction expenditures, payments to the Fund for the eventual
decommissioning of Point Beach and long-term debt maturity and sinking fund
requirements. These cash requirements are expected to be met primarily
through internal sources of funds from operations and short-term borrowings.
However, WE may issue additional intermediate or long-term debt later in 1997
or early 1998. The specific form, amount and timing of debt securities which
might be issued have not yet been determined and would depend upon market
conditions and other factors.
RESULTS OF OPERATIONS
1997 SECOND QUARTER
Earnings
During the second quarter of 1997, WEC's consolidated net loss and loss per
share of common stock were $10.6 million and $0.09, respectively, compared to
net income of $45.6 million and earnings per share of $0.41, respectively,
during the second quarter of 1996. As described below, earnings decreased
primarily due to higher fuel and purchased power expenses, increased other
operation and maintenance expenses and a second quarter 1997 write-off of
deferred costs related to WEC's terminated merger with NSP.
Electric Revenues, Gross Margins and Sales
Total electric operating revenues increased by 0.9% or approximately
$2.9 million during the second quarter of 1997 compared to the second quarter
of 1996. A 1997 increase in total electric kilowatt-hour sales combined with
a fuel surcharge in WE's Wisconsin retail jurisdiction effective May 24, 1997
offset the impact of a Wisconsin electric retail rate decrease effective
February 18, 1997 of $7.4 million or 0.6% on an annualized basis. Between the
comparative periods, the gross margin on electric operating revenues (electric
operating revenues less fuel and purchased power expenses) decreased by 11.1%
or $28.6 million due to significantly higher fuel and purchased power expenses
during the second quarter of 1997.
==============================================================================
Three Months Ended June 30
--------------------------
Electric Gross Margin ($000) 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 337,221 $ 334,337 0.9
Fuel & Purchased Power 109,140 77,646 40.6
---------- ----------
Gross Margin $ 228,081 $ 256,691 (11.1)
========== ==========
==============================================================================
Fuel and purchased power expenses increased by 40.6% or approximately
$31.5 million during the second quarter of 1997 compared to the same period in
1996 as a result of the extended outages at Point Beach and at Oak Creek Power
Plant ("Oak Creek") discussed in Notes 4 and 5 of ITEM 1. FINANCIAL STATEMENTS
- - "NOTES TO FINANCIAL STATEMENTS" in Part I of this report. WE replaced Point
Beach's and Oak Creek's generating capacity with higher cost generation and
with a 395% increase in megawatt-hours of power purchases in the second
quarter of 1997 compared to the second quarter of 1996.
In a first quarter of 1997 fuel filing with the PSCW, WE estimated that its
1997 annual fuel and purchased power costs would increase by about
$67 million, of which $53 million was allocated to the Wisconsin retail
electric jurisdiction. Effective May 24, 1997, the PSCW approved a $0.00109
per kilowatt-hour fuel surcharge for the 1997-1998 biennial period based upon
$50 million of increased fuel and purchased power costs allocated to the
Wisconsin jurisdiction. WE estimates that during the three months ending
June 1997, it collected approximately $2.7 million in additional revenues and
that it may collect as much as approximately $40 million as a result of the
surcharge. The PSCW will hold contested public hearings in September 1997 to
determine whether WE is justified in recovering these fuel costs from
customers through the fuel surcharge and, depending upon the outcome of the
hearings, could require WE to refund the revenues collected through the
surcharge. Because of delays in the schedule to restart Point Beach, and
assuming the current restart plans noted in ITEM 5. OTHER INFORMATION -
"NUCLEAR MATTERS" in Part II of this report, WE presently estimates that it
will incur approximately another $30 million to $40 million of fuel and
purchased power costs during 1997 in addition to the $67 million of excess
fuel costs estimated for the May 1997 surcharge.
==============================================================================
Three Months Ended June 30
--------------------------
Electric Sales (Megawatt-hours) 1997 1996 % Change
- ------------------------------- ---------- ---------- --------
Residential 1,586,421 1,656,649 (4.2)
Small Commercial/Industrial 1,798,886 1,737,394 3.5
Large Commercial/Industrial 2,773,689 2,662,097 4.2
Other-Retail/Municipal 330,708 349,725 (5.4)
Resale-Utilities 227,173 250,692 (9.4)
---------- ----------
Total Electric Sales 6,716,877 6,656,557 0.9
========== ==========
==============================================================================
During the second quarter of 1997 compared to the second quarter of 1996,
growth in the number of customers in all customer classes, especially the
Small and the Large Commercial/Industrial customer classes, combined with
increased use per customer by Small and Large Commercial/Industrial customers,
resulted in an increase in total electric sales of 0.9%. Cooler weather
during the second quarter of 1997, however, tempered 1997 sales, primarily
contributing to the 4.2% reduction in sales to Residential customers. As
measured by cooling degree days, the second quarter of 1997 was 30.9% cooler
than the same period during 1996 and 36.8% cooler than normal. Electric
energy sales to the Empire and Tilden ore mines ("Mines"), WE's two largest
customers, decreased 3.8% during the second quarter of 1997 compared to the
second quarter of 1996. Excluding the Mines, total electric sales increased
approximately 1.4% and sales to the remaining Large Commercial/Industrial
customers increased approximately 6.6% between the comparative periods. Sales
in the Other-Retail/Municipal customer class decreased 5.4% due to the
continued phase out in the second quarter of 1997 of firm wholesale contracts
with Upper Peninsula Power Company ("UPPCO") for its Iron River System and
with Oconto Electric Cooperative ("Oconto Electric"). Sales for resale to
other utilities, the Resale-Utilities customer class, decreased 9.4% primarily
as a result of reduced opportunity sales caused by the Point Beach and Oak
Creek outages discussed above.
Gas Revenues, Gross Margins and Sales
Total gas operating revenues decreased 5.6% or by approximately $3.7 million
during the second quarter of 1997 compared to the second quarter of 1996.
Between the comparative periods, the gross margin on gas operating revenues
(gas operating revenues less cost of gas sold) decreased 10.5 % or by
approximately $2.6 million.
==============================================================================
Three Months Ended June 30
--------------------------
Gas Gross Margin ($000) 1997 1996 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 61,228 $ 64,880 (5.6)
Cost of Gas Sold 39,141 40,199 (2.6)
---------- ----------
Gross Margin $ 22,087 $ 24,681 (10.5)
========== ==========
==============================================================================
Total gas operating revenues and gross margin declined primarily as a result
of an annualized gas retail rate decrease effective February 18, 1997 of
$6.4 million or 2.0% on an annualized basis and due to decreased therm
deliveries to Residential and Commercial/Industrial customers, who contribute
higher margins to earnings than other customer classes.
==============================================================================
Three Months Ended June 30
--------------------------
Therms Delivered - Thousands 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Residential 50,282 59,101 (14.9)
Commercial/Industrial 34,604 37,228 (7.0)
Interruptible 5,354 6,257 (14.4)
Interdepartmental 235 2,785 (91.6)
---------- ----------
Total Gas Sales 90,475 105,371 (14.1)
Transported Customer Owned Gas 72,802 61,953 17.5
Transported - Interdepartmental 27,090 6,392 323.8
---------- ----------
Total Gas Delivered 190,367 173,716 9.6
========== ==========
==============================================================================
WE delivers natural gas to WE generating facilities, including the Concord and
Paris Generating Stations ("Concord" and "Paris"), at rates approved by the
Public Service Commission of Wisconsin ("PSCW"). Due to the Point Beach and
Oak Creek outages noted above, WE increased generation at Concord and Paris,
natural gas-fired peak generating plants, resulting in approximately a 200%
increase in total therm deliveries to WE facilities during the second quarter
of 1997 compared to the same period in 1996. Excluding total WE
interdepartmental therm deliveries , therm deliveries during the second three
months of 1997 decreased 0.9%, primarily due to lower 1997 use per customer in
the Residential, Commercial/Industrial and Interruptible customer classes.
Operating Expenses
Other operation and maintenance expenses increased 23.1% or by $27.2 million
during the second quarter of 1997 compared to the second quarter of 1996,
including a $11.3 million increase in non-fuel nuclear operation and
maintenance, a $2.9 million increase in non-fuel fossil plant operation and
maintenance, a $2.4 million increase in transmission system operation expenses
and a $9.2 million increase in administrative and general expenses. WE
attributes most of these increases to the unscheduled 1997 generating unit
outages at Point Beach and Oak Creek noted above and to efforts by WE's
nuclear operations to achieve higher nuclear performance standards consistent
with United States Nuclear Regulatory Commission ("NRC") requirements.
Depreciation expense increased 12.1% or by approximately $6.2 million between
the same comparative periods primarily due to higher depreciable plant
balances and to higher depreciation rates included in the PSCW's 1997 rate
order. Total operating income taxes decreased 92.5% or by $25.4 million in
1997 as a result of lower taxable income.
WE anticipates that it will incur approximately $31 million of nuclear non-
fuel operation and maintenance costs during 1997 in excess of those included
1997 rates. On June 3, 1997, WE sent the PSCW a letter requesting deferred
accounting treatment of these costs and indicating that most of these costs,
which are of an infrequently recurring nature, will benefit the future
operations of Point Beach for the remainder of its plant licenses. On
July 17, 1997, the PSCW approved WE's request to defer these costs. However,
such deferral does not assure future rate recovery.
Other Items
As noted above, WEC recorded a charge in the second quarter of 1997 of
$30.7 million ($18.8 million net of tax) to write off deferred merger costs
related to the terminated merger agreement with NSP, of which approximately
$21.9 million was attributable to WE. The write-off of these merger expenses
appears in Other Income and Deductions on WEC's and WE's income statements.
1997 YEAR-TO-DATE
Earnings
During the first six months of 1997, WEC's consolidated net income and
earnings per share of common stock were $34.4 million and $0.31, respectively,
compared to $108.4 million and $0.98, respectively, during the first six
months of 1996. As described below, earnings decreased primarily because a
1.8% increase in total operating revenues during the first half of 1997 was
offset by significantly higher fuel and purchased power expenses as well as
increased other operation and maintenance expenses and a write-off in the
second quarter of 1997 of deferred costs related to WEC's terminated merger
with NSP.
Electric Revenues, Gross Margins and Sales
Total electric operating revenues increased by 0.2% or approximately
$1.2 million during the first six months of 1997 compared to the first six
months of 1996. A 1.0% increase in 1997 electric kilowatt-hour sales combined
with a fuel surcharge effective May 24, 1997 in WE's Wisconsin retail
jurisdiction offset the impact of a Wisconsin electric retail rate decrease
effective February 18, 1997 of $7.4 million or 0.6% on an annualized basis.
Between the comparative periods, the gross margin on electric operating
revenues decreased by 10.2% or approximately $53.9 million due to
significantly higher fuel and purchased power expenses during the first half
of 1997.
==============================================================================
Six Months Ended June 30
------------------------
Electric Gross Margin ($000) 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 686,321 $ 685,161 0.2
Fuel & Purchased Power 214,262 159,203 34.6
---------- ----------
Gross Margin $ 472,059 $ 525,958 (10.2)
========== ==========
==============================================================================
Fuel and purchased power expenses increased by 34.6% or approximately
$55.1 million during the six months ended June 30, 1997 compared to the same
period in 1996. As a result of the Point Beach and Oak Creek outages, WE
replaced this generating capacity with higher cost generation and with a 400%
increase in megawatt-hours of power purchases in the first half of 1997
compared to the same period in 1996.
==============================================================================
Six Months Ended June 30
------------------------
Electric Sales (Megawatt-hours) 1997 1996 % Change
- ------------------------------- ---------- ---------- --------
Residential 3,413,457 3,474,742 (1.8)
Small Commercial/Industrial 3,635,949 3,534,580 2.9
Large Commercial/Industrial 5,419,293 5,235,899 3.5
Other-Retail/Municipal 725,096 740,883 (2.1)
Resale-Utilities 481,914 547,659 (12.0)
---------- ----------
Total Electric Sales 13,675,709 13,533,763 1.0
========== ==========
==============================================================================
Total electric sales during the first six months of 1997 compared to the same
period in 1996 were positively impacted by growth in the number of customers
in the Residential, the Small Commercial/Industrial and the Large
Commercial/Industrial customer classes and by increased use per customer by
Small and Large Commercial/Industrial customers. The cooler weather noted
above during the second quarter of 1997, however, primarily contributed to the
1.8% decrease in 1997 year-to-date sales to Residential customers. Electric
energy sales to the Empire and Tilden ore mines ("Mines"), WE's two largest
customers, decreased approximately 1.2% during the first half of 1997 compared
to the first half of 1996. Excluding the Mines, total electric sales
increased approximately 1.3% and sales to the remaining Large
Commercial/Industrial customers increased 4.8% between the comparative
periods. Sales in the Other-Retail/Municipal customer class decreased 2.1%
due to the continued phase out in the second quarter of 1997 of firm wholesale
contracts with UPPCO and with Oconto Electric noted above. Sales for resale
to other utilities, the Resale-Utilities customer class, decreased 12.0%
primarily as a result of reduced opportunity sales caused by the Point Beach
and Oak Creek outages noted above.
Gas Revenues, Gross Margins and Sales
Total gas operating revenues increased 5.5% or by approximately $11.2 million
during the first half of 1997 compared to the same period in 1996. Between
the comparative periods, the gross margin on gas operating revenues decreased
by 7.1% or approximately $5.5 million. The cost of gas sold increased 13.2%
or by $16.6 million during the first half of 1997.
==============================================================================
Six Months Ended June 30
------------------------
Gas Gross Margin ($000) 1997 1996 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 214,077 $ 202,896 5.5
Cost of Gas Sold 142,435 125,791 13.2
---------- ----------
Gross Margin $ 71,642 $ 77,105 (7.1)
========== ==========
==============================================================================
Total gas operating revenues as well as the cost of gas sold increased during
the first half of 1997 compared to 1996 primarily due to higher gas costs in
the first quarter of 1997. 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.
The gross margin declined primarily as a result of an annualized gas retail
rate decrease effective February 18, 1997 of $6.4 million or 2.0% and as a
result of decreased therm deliveries to Residential and Commercial/Industrial
customers, who contribute higher margins to earnings than other customer
classes.
==============================================================================
Six Months Ended June 30
------------------------
Therms Delivered - Thousands 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Residential 211,218 228,103 (7.4)
Commercial/Industrial 133,940 141,978 (5.7)
Interruptible 14,841 21,082 (29.6)
Interdepartmental 9,312 4,182 122.7
---------- ----------
Total Gas Sales 369,311 395,345 (6.6)
Transported Customer Owned Gas 159,301 137,430 15.9
Transported - Interdepartmental 45,386 9,483 378.6
---------- ----------
Total Gas Delivered 573,998 542,258 5.9
========== ==========
==============================================================================
During the first half of 1997 compared to the first half of 1996, natural gas
therm deliveries to WE facilities increased approximately 300% due to
increased generation by WE's gas-fired plants noted above. Excluding total WE
interdepartmental therm deliveries, therm deliveries during the six months
ended June 1997 decreased 1.8% compared to the same period in 1996, primarily
as a result of warmer weather during 1997 and to lower 1997 use per customer
in the Residential, Commercial/Industrial and Interruptible customer classes.
As measured by heating degree days, the first half of 1997 was 6.8% warmer
than the first half of 1996.
Operating Expenses
Other operation and maintenance expenses increased 11.9% or by $29.6 million
during the first half of 1997 compared to the first half of 1996, including a
$15.0 million increase in non-fuel nuclear operation and maintenance, a
$1.4 million increase in non-fuel fossil plant operation and maintenance, a
$3.3 million increase in transmission system operation expenses and a
$10.8 million increase in administrative and general expenses. WE attributes
most of these increases to the unscheduled 1997 generating unit outages at
Point Beach and Oak Creek and to efforts by WE's nuclear operations to achieve
higher nuclear performance standards consistent with NRC requirements.
Depreciation expense increased 11.2% or by $11.5 million between the same
comparative periods primarily due to higher depreciable plant balances and to
higher depreciation rates included in the PSCW's 1997 rate order. Total
operating income taxes decreased 58.1% or by $38.3 million in 1997 as a result
of lower taxable income.
Other Items
Other Income and Deductions reflect the second quarter of 1997 write-off to
merger expense by WEC of $30.7 million ($18.8 million net of tax) of deferred
merger costs, of which approximately $21.9 million was attributable to WE.
For certain other information which may impact WEC and WE's future financial
condition or results of operations, see ITEM 1. FINANCIAL STATEMENTS - "NOTES
TO FINANCIAL STATEMENTS" in Part I of this report as well as ITEM 1. LEGAL
PROCEEDINGS and ITEM 5. OTHER INFORMATION in Part II of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to WEC nor to WE.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with ITEM 1. BUSINESS -
"ENVIRONMENTAL COMPLIANCE" and ITEM 3. LEGAL PROCEEDINGS in Part I of WEC's
and WE's combined Annual Report on Form 10-K for the year ended December 31,
1996, with ITEM 1. LEGAL PROCEEDINGS in Part II of WEC's and WE's combined
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and with
ITEM 5. OTHER INFORMATION in Part II of this report.
RATE MATTERS
Wisconsin Retail Jurisdiction
Fuel Cost Adjustment Procedure: Effective May 24, 1997, the PSCW approved a
fuel surcharge for the 1997-1998 biennial period applicable to customers in
the Wisconsin retail electric jurisdiction. WE estimates that it may collect
as much as approximately $40 million, subject to refund, as a result of the
surcharge. The PSCW will hold contested public hearings in September 1997 to
determine whether WE is justified in recovering increased fuel and purchased
power costs through the surcharge. See ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - "1997 SECOND
QUARTER RESULTS OF OPERATIONS" in Part I of this report for additional
information related to the fuel surcharge.
1998 Test Year: In August 1997, WE plans to file with the PSCW for utility
rate increases to be effective in January 1998. WE is currently compiling its
anticipated revenue deficiency. Key drivers for this filing include:
* Costs to improve the reliability of WE's generation, transmission and
distribution assets, recognizing the change in the nuclear regulatory
environment and the large number of unavailable nuclear generating units in
the region during 1997.
* Increased payroll and benefits due to additional personnel to fill unfilled
positions that occurred while WEC and NSP were pursuing the Primergy
merger, increased staff to support nuclear operations as well as to
implement technology and software improvement efforts, and the transfer
from UPPCO to WE, effective January 1, 1998, of personnel who currently
operate WE's Presque Isle Power Plant under contract.
* Hardware and software costs associated with implementation of new
technology including a new customer service system, software modifications
and other technology improvements.
See ITEM 5. OTHER INFORMATION - "ELECTRIC SYSTEM RELIABILITY MATTERS" in Part
II of this report for further information concerning nuclear generating
facility outages in the midwest.
Nuclear Operation and Maintenance Cost Deferral: See ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
"1997 SECOND QUARTER RESULTS OF OPERATIONS" in Part I of this report for
additional information regarding approval by the PSCW for WE to defer
approximately $31 million of excess non-fuel nuclear operation and maintenance
costs estimated to be incurred during 1997. Deferral of these costs does not
assure future rate recovery.
Purchased Gas Adjustment Tariffs: On July 1, 1997, WE filed a modified dollar
for dollar gas cost recovery mechanism ("GCRM") in accordance with a November
1996 PSCW order. Purchased gas adjustment mechanisms have been evaluated by
the PSCW as part of the PSCW's generic investigation of the natural gas
utility industry in the State of Wisconsin. The GCRM will include after the
fact prudence reviews by the PSCW. WE will be able to assess its level of gas
cost price risk once the PSCW approves the GCRM. WE does not expect that a
major portion of gas costs that are currently passed through to customers will
be subject to price risk under this GCRM.
ITEM 5. OTHER INFORMATION
NUCLEAR MATTERS
Previous information concerning the status of Point Beach is contained in
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - "FACTORS AFFECTING RESULTS OF OPERATIONS - Nuclear
Matters" in WEC's and WE's combined Annual Report on Form 10-K for the year
ended December 31, 1996 and in ITEM 5. OTHER INFORMATION - "NUCLEAR MATTERS"
of Part II of WEC's and WE's combined Quarterly Report on Form 10-Q for the
period ended March 31, 1997.
Point Beach Nuclear Plant
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. WE has been meeting regularly with NRC officials to discuss
steps taken to improve the identification and resolution of specific issues at
Point Beach. The NRC decided on June 25, 1997 to maintain Point Beach's
declining trend status for another six months until the NRC has an opportunity
to evaluate the plant under operating conditions.
On April 9, 1997, WE met with NRC officials at a predecisional enforcement
conference to discuss several apparent violations identified in NRC inspection
reports dated March 3 and April 3, 1997. On August 8, 1997, the NRC informed
WE that, while civil penalties would normally be considered for these
problems, it is exercising enforcement discretion and will not propose a civil
penalty. Reasons cited for not imposing a civil penalty include a previous
civil penalty of December 3, 1996, the confirmatory action letter of
January 3, 1997 mentioned below, WE's implementation of comprehensive
corrective actions and WE's dedication of significant resources to improvement
efforts.
Point Beach Unit 2 has been out of service since a scheduled maintenance
outage in October 1996 to replace the unit's steam generators. On July 9,
1997, the final license amendments necessary for restart of Unit 2 were issued
by the NRC. On July 18, 1997, the NRC formally closed a January 3, 1997
confirmatory action letter regarding Unit 2 restart commitments. However,
equipment problems which occurred during up have delayed the scheduled restart
of Unit 2. The Unit 2 reactor was taken critical on August 13, 1997 and is
expected to be on line at reduced power by August 15, 1997 with startup
testing continuing. Unit 1 was taken out of service in February 1997 due to
equipment problems. Based upon the need for generation, the availability of
on and off-system electric energy supplies, and Unit 1 fuel and technical
specification constraints, WE may return Unit 1 to service, a process which
will take a number of weeks, for a short period of time following the return
to service of Unit 2 or WE may keep Unit 1 out of service and commence a
refueling outage of the unit.
On May 27, 1997, the Dane County Circuit Court issued a decision affirming the
May 1996 order from the PSCW ("PSCW Order") which approved replacement of the
Unit 2 steam generators and reaffirmed 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. The Circuit Court's
decision was in response to a petition for judicial review of the PSCW Order
filed in August 1996 by a group of intervenors in the PSCW Order proceedings.
Spent Fuel Storage and Disposal
As a result of a hydrogen gas ignition during the loading of a third cask at
Point Beach in May 1996, cask loading has been halted until the NRC has
reviewed and accepted plans to prevent recurrence of such an event and until
such plans are implemented. WE is awaiting approval by the NRC of these plans
and hopes to resume loading of casks in September 1997. WE plans to load two
additional casks with spent fuel during the remainder of 1997.
On May 16, 1997, the NRC sent WE a confirmatory action letter expressing
concerns with the welding process used on two casks currently loaded with
spent fuel and transferred to the ISFSI at Point Beach as well as the welding
process on similar casks that have been loaded at two unaffiliated utilities.
The letter prohibits the loading of additional casks until the NRC accepts
modified welding procedures which address the NRC's concerns. On August 7,
1997, WE submitted a response to the NRC describing modifications to the
welding process that address the NRC concerns and documenting the conclusion
that the two casks already loaded with spent fuel at Point Beach have not
experienced undetected weld problems. The matter is pending.
The PSCW Order mentioned above authorizes WE to load up to 12 casks with spent
fuel and transfer the casks to the ISFSI. WE currently estimates that these
casks along with remaining space in the spent fuel pool at Point Beach will
provide sufficient spent fuel storage capacity through the year 2000. WE
expects to file in mid-1998 an application with the PSCW for approval to load
by the year 2000 further storage casks in addition to the 12 that were
previously approved.
On May 1, 1997, the Wisconsin Court of Appeals reversed and remanded a Dane
County Circuit Court decision which had vacated and remanded the February 13,
1995 order of the PSCW granting WE authority to construct and operate the
ISFSI. WE had completed construction of the ISFSI in December 1995. The
Circuit Court decision, issued in an action commenced by intervenors in the
PSCW proceeding regarding the ISFSI, was based primarily on the court's
determination that the related Environmental Impact Statement ("EIS"),
prepared by the PSCW for the project, was inadequate. WE joined in support of
the PSCW's appeal on the issues regarding the adequacy of the EIS. The Court
of Appeals concluded in its May 1, 1997 decision that there was a rational
basis for the PSCW's determination that the EIS was adequate. On June 2,
1997, the intervenors in the PSCW proceeding filed a petition with the
Wisconsin Supreme Court for review of the May 1, 1997 decision by the Court of
Appeals. On July 25, 1997, the Supreme Court denied the petition. This
concludes the litigation involving the PSCW's February 13, 1995 order.
As a potential temporary storage option until the United States Department of
Energy takes ownership of and permanently removes spent fuel from Point Beach
under a contract mandated by the Nuclear Waste Policy Act of 1982, as amended
in 1987, WE has been participating with a consortium of electric utilities to
establish a private facility for interim storage of spent nuclear fuel. In
July 1997, WE withdrew its participation in this project.
ELECTRIC SYSTEM RELIABILITY MATTERS
As reported in WEC's and WE's combined Quarterly Report on Form 10-Q for the
period ended March 31, 1997, the State of Wisconsin remains at risk of
electricity shortages during the summer of 1997 should the upper midwest
region experience extended periods of hot weather, widespread damaging storms
or unusual generating plant or transmission constraints. Point Beach Units 1
and 2 in Wisconsin, as well as five large nuclear generating units in the
State of Illinois, are currently out of service. Normally, Point Beach
represents approximately 30% of WE's electric energy supply, and the State of
Wisconsin routinely imports about 15% of its electricity from other states,
with a significant portion coming through Illinois. Due to transmission
system constraints, the eastern and central sections of Wisconsin would most
likely be affected by electricity shortages. WE intends to return Point Beach
Unit 2 to service in mid-August 1997 and is currently evaluating the restart
schedule for Unit 1. In addition, WE expects to have available up to 236
megawatts of committed capacity in the third quarter of 1997 from LS Power's
Whitewater Cogeneration Facility.
In April 1997, the PSCW accepted an electric system reliability emergency plan
in the event of regional electric supply shortages. Through July 1997, WE
has implemented various stages of this plan on four separate occasions,
including public appeals for customers to voluntarily reduce electric usage
and activation of various load management programs with participating
commercial, industrial and residential customers.
In June 1997, the PSCW announced that it intends to initiate a full scale
inquiry in September 1997 to determine the root causes of electric system
reliability problems in Wisconsin. In July 1997, the Governor of the State of
Wisconsin requested three separate groups to submit plans to him that would
mitigate or eliminate the risk of future electric shortages in the state. WE
intends to participate in the PSCW inquiry as well as in the planning process
requested by the Governor.
INDUSTRY RESTRUCTURING AND COMPETITION
PSCW Investigation Into Structure of Electric Utility Industry
The PSCW has conducted an investigation into the electric utility industry in
the State of 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.
The PSCW has opened dockets on six of these steps including:
* Required utilities to file plans to functionally segment the business into
generation, transmission, distribution and customer service operations.
* 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. A pre-hearing
conference was held in mid-July 1997.
* Decided that a public benefits advisory board should be created to carry
out policies to continue programs such as conservation and low-income
energy assistance as competition is introduced into the industry.
Discussions continue with other state agencies on the specific form the
board should take. Legislation will be required to enact PSCW decisions.
* 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.
* Examined the introduction of an Independent System Operator ("ISO") in the
State of Wisconsin that effectively separates control and operation of the
transmission system from the ownership of generation. In September 1996,
the PSCW issued an order setting forth principles for an acceptable ISO.
Among the principles are that an 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 had planned to
implement the ISO as a condition of the now terminated merger of WEC and
NSP. To date, the PSCW has not implemented any aspect of the ISO.
With progress on the 32-step plan falling behind schedule, the PSCW has called
for an internal review of its progress on the plan and is considering
modifications to the plan to consolidate work. The PSCW has expressed a
desire to pass along to the Wisconsin Legislature some parts of its plan for a
revised industry structure and has directed the PSCW staff to begin drafting
legislation that will, at a minimum, address allowing merchant generating
plants within the State of Wisconsin. As it considers ways to make its
process more efficient, all significant work on the plan, including the steps
described above, has been suspended. The PSCW is scheduled to make decisions
on revisions to the restructuring plan by the end of the summer of 1997.
MPSC Investigation Into Structure of Electric Utility Industry
On June 5, 1997, the Michigan Public Service Commission ("MPSC") issued an
order that phases in competition for all Michigan retail electric customers by
the year 2002. Under the plan, 2.5% of each utility's load per year will be
permitted to bid for the right to purchase electricity from other suppliers
through the year 2001, followed by full customer choice in the year 2002. On
July 30, 1997, WE sent a proposal to the MPSC, subject to resolution of a
number of items, to conduct a one time bidding for customer choice in its
service territory for 12.5% of its Michigan load on September 1, 1999,
followed by full customer choice in the year 2002. The matter is pending.
Several parties have petitioned for rehearing of the June 5, 1997 order, and
the Michigan Legislature will be required to approve certain parts of the
order.
NEW GAS SERVICE PROPOSAL
On July 17, 1997, the PSCW approved WE's application 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.
Approval of a portion of the project by the Federal Energy Regulatory
Commission is pending. WE expects to connect the first applicable customers
in 1998.
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 WEC's or WE's actual results to differ
materially from those contemplated in the statements. Readers are cautioned
not to place undue reliance on these forward-looking 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:
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of WE's generating
facilities including Point Beach; unscheduled generation outages,
maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel,
purchased power or gas supply costs or availability due to higher demand,
shortages, transportation problems or other developments; nonperformance by
electric energy or natural gas suppliers under existing power purchase or
gas supply contracts; nuclear or environmental incidents; resolution of
spent nuclear fuel storage and disposal 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.
* Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; Nuclear Regulatory Commission operating regulation changes
related to Point Beach Nuclear Plant; or the siting approval process for
new generating and transmission facilities.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of WE to transfer funds to WEC in
the form of cash dividends, loans or advances.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission ("SEC").
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Changes in social attitudes regarding the utility and power industries.
* Possible risks associated with 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.
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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed with the applicable Form 10-Q report:
Exhibit No.
WEC Exhibits
(27)-1 Wisconsin Energy Corporation ("WEC") Financial Data Schedule
for the six months ended June 30, 1997.
WE Exhibits
(27)-2 Wisconsin Electric Power Company ("WE") Financial Data
Schedule for the six months ended June 30, 1997.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated as of May 16, 1997 was filed by WEC
on May 22, 1997 to report the termination of the Agreement and Plan of
Merger which provided for a business combination of WEC and Northern
States Power Company, a Minnesota corporation ("NSP"), to form Primergy
Corporation.
No reports on Form 8-K were filed by WE during the quarter ended June
30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
--------------------------------------
(Registrant)
/s/ Calvin H. Baker
---------------------------------------
Date: August 14, 1997 Calvin H. Baker, Treasurer, Chief
Financial Officer and duly
authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------------
(Registrant)
/s/ Calvin H. Baker
---------------------------------------
Date: August 14, 1997 Calvin H. Baker, Vice President -
Finance, Chief Financial Officer
and duly authorized officer
<PAGE>
WISCONSIN ENERGY CORPORATION
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1997
EXHIBIT INDEX
Exhibit No.
- -----------
The following Exhibits are filed with this report:
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the six
months ended June 30, 1997.
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS OF WISCONSIN ENERGY
CORPORATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> 6-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,043,653
<OTHER-PROPERTY-AND-INVEST> 749,927
<TOTAL-CURRENT-ASSETS> 549,538
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 461,899
<TOTAL-ASSETS> 4,805,017
<COMMON> 1,128
<CAPITAL-SURPLUS-PAID-IN> 729,655
<RETAINED-EARNINGS> 1,192,776
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,923,559
0
30,450
<LONG-TERM-DEBT-NET> 1,172,045
<SHORT-TERM-NOTES> 50,996
<LONG-TERM-NOTES-PAYABLE> 209,416
<COMMERCIAL-PAPER-OBLIGATIONS> 51,897
<LONG-TERM-DEBT-CURRENT-PORT> 170,520
0
<CAPITAL-LEASE-OBLIGATIONS> 25,906
<LEASES-CURRENT> 13,156
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,157,072
<TOT-CAPITALIZATION-AND-LIAB> 4,805,017
<GROSS-OPERATING-REVENUE> 913,597
<INCOME-TAX-EXPENSE> 27,670
<OTHER-OPERATING-EXPENSES> 788,574
<TOTAL-OPERATING-EXPENSES> 816,244
<OPERATING-INCOME-LOSS> 97,353
<OTHER-INCOME-NET> (6,649)
<INCOME-BEFORE-INTEREST-EXPEN> 90,704
<TOTAL-INTEREST-EXPENSE> 55,666
<NET-INCOME> 35,038
601
<EARNINGS-AVAILABLE-FOR-COMM> 34,437
<COMMON-STOCK-DIVIDENDS> 85,808
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 230,086
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<FN>
See financial statements and footnotes in accompanying 10-Q.
<PAGE>
</TABLE>
