SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 (November 1, 1996):
Wisconsin Energy Corporation Common stock, $.01 Par Value,
111,268,677 shares outstanding.
Wisconsin Electric Power Company Common stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company common stock.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 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
3. Quantitative and Qualitative Disclosures About Market Risk........... 19
Part II - Other Information
1. Legal Proceedings.................................................... 19
5. Other Information.................................................... 21
6. Exhibits and Reports on Form 8-K..................................... 27
Signatures........................................................... 28
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.
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 359,522 $ 359,213 $1,045,843 $1,044,374
Gas 37,987 38,333 252,064 241,229
Steam 3,105 1,255 16,304 10,341
---------- ---------- ---------- ----------
Total Operating Revenues 400,614 398,801 1,314,211 1,295,944
Operating Expenses
Fuel 86,804 74,935 240,269 221,993
Purchased power 32,864 9,949 93,661 22,094
Cost of gas sold 23,989 25,388 166,424 151,179
Other operation expenses 89,659 90,374 298,763 288,625
Maintenance 29,616 20,295 99,430 71,375
Depreciation 61,160 49,505 175,893 152,706
Taxes other than income taxes 18,443 19,288 56,669 59,384
Federal income tax 7,563 24,990 23,906 77,274
State income tax 2,019 5,870 6,184 18,145
Deferred income taxes - net 3,178 2,634 12,583 6,310
Investment tax credit - net (1,122) (1,120) (3,365) (3,361)
---------- ---------- ---------- ----------
Total Operating Expenses 354,173 322,108 1,170,417 1,065,724
Operating Income 46,441 76,693 143,794 230,220
Other Income and Deductions
Interest income 6,249 3,495 17,936 14,285
Allowance for other funds used
during construction 625 869 2,982 2,001
Merger expenses - - (30,684) -
Miscellaneous - net (461) (1,987) (2,394) (6,064)
Income taxes (54) 637 11,870 1,536
---------- ---------- ---------- ----------
Total Other Income and Deductions 6,359 3,014 (290) 11,758
Income Before Interest Charges and
Preferred Dividend 52,800 79,707 143,504 241,978
Interest Charges
Interest expense 30,153 27,505 89,410 83,362
Allowance for borrowed funds used
during construction (1,629) (1,529) (5,220) (4,074)
---------- ---------- ---------- ----------
Total Interest Charges 28,524 25,976 84,190 79,288
Preferred Dividend Requirement of Subsidiary 301 301 902 902
---------- ---------- ---------- ----------
Net Income $ 23,975 $ 53,430 $ 58,412 $ 161,788
========== ========== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 112,866 110,906 112,471 110,848
========== ========== ========== ==========
Earnings Per Share of Common Stock $ 0.21 $ 0.48 $ 0.52 $ 1.46
========== ========== ========== ==========
Dividends Per Share of Common Stock $ 0.3850 $ 0.3800 $ 1.1500 $ 1.1275
========== ========== ========== ==========
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 5,077,364 $ 4,725,832
Gas 516,479 503,041
Steam 61,893 60,480
Accumulated provision for depreciation (2,643,835) (2,441,950)
------------- -------------
3,011,901 2,847,403
Construction work in progress 75,678 135,040
Nuclear fuel - net 92,736 75,476
------------- -------------
Net Utility Plant 3,180,315 3,057,919
Other Property and Investments 808,430 716,223
Current Assets
Cash and cash equivalents 35,783 10,748
Accounts receivable 122,420 151,473
Accrued utility revenues 85,252 155,838
Materials, supplies and fossil fuel 182,288 184,416
Prepayments and other assets 55,348 63,383
------------- -------------
Total Current Assets 481,091 565,858
Deferred Charges and Other Assets
Accumulated deferred income taxes 163,527 153,806
Other 316,528 317,032
------------- -------------
Total Deferred Charges and Other Assets 480,055 470,838
------------- -------------
Total Assets $ 4,949,891 $ 4,810,838
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 730,783 $ 701,197
Retained earnings 1,173,298 1,244,147
------------- -------------
Total Common Stock Equity 1,904,081 1,945,344
Preferred stock 30,450 30,450
Long-term debt 1,488,415 1,416,067
------------- -------------
Total Capitalization 3,422,946 3,391,861
Current Liabilities
Long-term debt due currently 221,575 190,204
Short-term debt 163,006 69,265
Accounts payable 116,621 148,429
Accrued liabilities 74,313 84,197
Other 37,667 34,923
------------- -------------
Total Current Liabilities 613,182 527,018
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 532,379 511,399
Other 381,384 380,560
------------- -------------
Total Deferred Credits and Other Liabilities 913,763 891,959
------------- -------------
Total Capitalization and Liabilities $ 4,949,891 $ 4,810,838
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30
-------------------------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 58,412 $ 161,788
Reconciliation to cash
Depreciation 175,893 152,706
Nuclear fuel expense - amortization 2,562 18,489
Conservation expense - amortization 16,874 16,874
Debt premium, discount & expense - amortization 6,787 7,702
Deferred income taxes - net 12,583 6,310
Investment tax credit - net (3,365) (3,361)
Allowance for other funds used during construction (2,982) (2,001)
Write-off of merger costs 30,684 -
Change in - Accounts receivable 29,053 22,890
Inventories 2,128 (30,358)
Accounts payable (31,808) (489)
Other current assets 78,621 57,201
Other current liabilities (7,140) (12,217)
Other (39,668) 15,583
---------- ----------
Cash Provided by Operating Activities 328,634 411,117
Investing Activities
Construction expenditures (241,747) (252,274)
Allowance for borrowed funds used during construction (5,220) (4,074)
Nuclear fuel (5,837) (21,260)
Nuclear decommissioning trust (20,117) (20,857)
Conservation investments - net 200 328
Other 16,975 7,719
---------- ----------
Cash Used in Investing Activities (255,746) (290,418)
Financing Activities
Sale of common stock 29,586 8,453
Retirement of preferred stock - (1)
Sale of long-term debt - 12,838
Retirement of long-term debt (41,919) (46,965)
Change in short-term debt 93,741 13,614
Dividends on stock - common (129,261) (124,949)
---------- ----------
Cash Used in Financing Activities (47,853) (137,010)
---------- ----------
Change in Cash and Cash Equivalents $ 25,035 $ (16,311)
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 72,469 $ 70,235
Income taxes 49,816 84,771
<FN>
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues
Electric $ 359,522 $ 359,213 $1,045,843 $1,044,374
Gas 37,987 38,333 252,064 241,229
Steam 3,105 1,255 16,304 10,341
---------- ---------- ---------- ----------
Total Operating Revenues 400,614 398,801 1,314,211 1,295,944
Operating Expenses
Fuel 86,804 74,935 240,269 221,993
Purchased power 32,864 9,949 93,661 22,094
Cost of gas sold 23,989 25,388 166,424 151,179
Other operation expenses 89,659 90,374 298,763 288,625
Maintenance 29,616 20,295 99,430 71,375
Depreciation 61,160 49,505 175,893 152,706
Taxes other than income taxes 18,443 19,288 56,669 59,384
Federal income tax 7,563 24,990 23,906 77,274
State income tax 2,019 5,870 6,184 18,145
Deferred income taxes - net 3,178 2,634 12,583 6,310
Investment tax credit - net (1,122) (1,120) (3,365) (3,361)
---------- ---------- ---------- ----------
Total Operating Expenses 354,173 322,108 1,170,417 1,065,724
Operating Income 46,441 76,693 143,794 230,220
Other Income and Deductions
Interest income 4,635 2,163 13,210 10,857
Allowance for other funds used
during construction 625 869 2,982 2,001
Merger expenses - - (21,881) -
Miscellaneous - net (27) (971) (1,553) (3,356)
Income taxes (162) (92) 8,536 (539)
---------- ---------- ---------- ----------
Total Other Income and Deductions 5,071 1,969 1,294 8,963
Income Before Interest Charges 51,512 78,662 145,088 239,183
Interest Charges
Interest expense 29,218 26,446 86,412 80,387
Allowance for borrowed funds used
during construction (328) (477) (1,580) (1,107)
---------- ---------- ---------- ----------
Total Interest Charges 28,890 25,969 84,832 79,280
---------- ---------- ---------- ----------
Net Income 22,622 52,693 60,256 159,903
Preferred Stock Dividend Requirement 301 301 902 902
---------- ---------- ---------- ----------
Earnings Available for Common Stockholder $ 22,321 $ 52,392 $ 59,354 $ 159,001
========== ========== ========== ==========
<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>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Thousands of Dollars)
Assets
--------------
<S> <C> <C>
Utility Plant
Electric $ 5,077,364 $ 4,725,832
Gas 516,479 503,041
Steam 61,893 60,480
Accumulated provision for depreciation (2,643,835) (2,441,950)
------------- -------------
3,011,901 2,847,403
Construction work in progress 75,678 135,040
Nuclear fuel - net 92,736 75,476
------------- -------------
Net Utility Plant 3,180,315 3,057,919
Other Property and Investments 511,052 458,009
Current Assets
Cash and cash equivalents 11,112 1,871
Accounts receivable 114,580 140,256
Accrued utility revenues 85,252 155,838
Materials, supplies and fossil fuel 182,288 184,416
Prepayments and other assets 45,630 58,444
------------- -------------
Total Current Assets 438,862 540,825
Deferred Charges and Other Assets
Accumulated deferred income taxes 159,990 150,269
Other 310,221 300,138
------------- -------------
Total Deferred Charges and Other Assets 470,211 450,407
------------- -------------
Total Assets $ 4,600,440 $ 4,507,160
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 613,582 $ 613,582
Retained earnings 1,015,190 1,125,206
------------- -------------
Total Common Stock Equity 1,628,772 1,738,788
Preferred stock 30,450 30,450
Long-term debt 1,451,646 1,371,446
------------- -------------
Total Capitalization 3,110,868 3,140,684
Current Liabilities
Long-term debt due currently 207,960 183,635
Short-term debt 163,006 45,390
Accounts payable 111,836 145,894
Accrued liabilities 71,025 80,088
Other 36,388 32,588
------------- -------------
Total Current Liabilities 590,215 487,595
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 528,824 507,845
Other 370,533 371,036
------------- -------------
Total Deferred Credits and Other Liabilities 899,357 878,881
------------- -------------
Total Capitalization and Liabilities $ 4,600,440 $ 4,507,160
============= =============
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended September 30
-------------------------------------
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $ 60,256 $ 159,903
Reconciliation to cash
Depreciation 175,893 152,706
Nuclear fuel expense - amortization 2,562 18,489
Conservation expense - amortization 16,874 16,874
Debt premium, discount & expense - amortization 6,516 7,667
Deferred income taxes - net 12,583 6,310
Investment tax credit - net (3,365) (3,361)
Allowance for other funds used during construction (2,982) (2,001)
Write-off of merger costs 21,881 -
Change in - Accounts receivable 25,676 22,647
Inventories 2,128 (30,358)
Accounts payable (34,058) (1,073)
Other current assets 83,400 56,580
Other current liabilities (5,263) (14,752)
Other (43,059) 16,194
---------- ----------
Cash Provided by Operating Activities 319,042 405,825
Investing Activities
Construction expenditures (188,612) (217,378)
Allowance for borrowed funds used during construction (1,580) (1,107)
Nuclear fuel (5,837) (21,260)
Nuclear decommissioning trust (20,117) (20,857)
Conservation investments - net 200 328
Other (849) (6,852)
---------- ----------
Cash Used in Investing Activities (216,795) (267,126)
Financing Activities
Retirement of preferred stock - (1)
Sale of long-term debt - 12,838
Retirement of long-term debt (40,350) (46,530)
Change in short-term debt 117,616 7,530
Dividends on - Common stock (169,370) (125,411)
Preferred stock (902) (902)
---------- ----------
Cash Used in Financing Activities (93,006) (152,476)
---------- ----------
Change in Cash and Cash Equivalents $ 9,241 $ (13,777)
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 73,908 $ 70,911
Income taxes 47,308 89,022
<FN>
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
</TABLE>
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 nine
months ended September 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. On October 7, 1997, the shareholders of ESELCO, Inc. voted to
approve the proposed transaction. Consummation of the proposed
acquisition is contingent upon several conditions including receipt of
appropriate regulatory approvals 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 returned Point Beach Nuclear Plant ("Point Beach") Unit 2 to service
on August 6, 1997 following an extended outage to replace the unit's
steam generators. WE currently plans to take Unit 2 out of service in
November 1997 due to an issue with the auxiliary feedwater system, which
precludes simultaneous operation of both generating units at Point Beach.
WE expects to return Unit 2 to service in December 1997 after the
auxiliary feedwater system issue is resolved. Point Beach Unit 1 was
taken out of service in February 1997 due to equipment problems.
Following the shutdown of Unit 2, WE currently plans to restart Unit 1 in
November 1997 and keep it in service through early January 1998, when the
unit will begin a refueling and maintenance outage that is expected to
last through most of the first quarter of 1998. See ITEM 5. OTHER
INFORMATION - "NUCLEAR MATTERS" in Part II of this report for additional
information related to nuclear operations.
5. Ongoing extended outages at Point Beach, an extended maintenance outage
at Oak Creek Power Plant that was concluded in June 1997 and higher than
projected purchased power costs due to regional generation outages have
resulted in increased fuel and purchased power costs. WE estimates that
such costs will be $112 million higher than those reflected in 1997 base
electric rates. In March and September 1997, WE submitted separate fuel
filings with the Public Service Commission of Wisconsin ("PSCW")
requesting recovery of the portion of these increased fuel costs
attributable to retail electric service in Wisconsin. If the PSCW
approves the fuel surcharges included in the filings, WE would recover
approximately $59 million during the 1997-1998 biennial period.
Currently, WE does not expect to recover approximately $52 million of
increased 1997 fuel costs from customers. WE anticipates that the PSCW
will issue final orders on the two 1997 fuel filings in late December
1997. See ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS" and ITEM 1.
LEGAL PROCEEDINGS - "RATE MATTERS" in Part II of this report for
additional information related to the increased fuel costs and related
fuel filings.
6. WE anticipates that it will incur $30 million to $40 million of certain
nuclear non-fuel operation and maintenance costs during 1997 in excess of
those included in 1997 rates, of which $26 million to $34 million are
allocated to the Wisconsin electric retail jurisdiction. WE requested
that the PSCW allow deferred accounting treatment of these costs,
indicating that most of these costs 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. During the third
quarter of 1997, WE deferred approximately $20.2 million of nuclear non-
fuel operation and maintenance costs in Other Deferred Charges and Other
Assets. The PSCW has not yet decided how the deferred costs will be
treated for rate making purposes.
7. To meet a portion of WE's anticipated system increase in future electric
supply needs, WE entered into a 25 year power purchase contract with an
unaffiliated independent power producer, LSP-Whitewater L.P. ("LS
Power"). In September 1997, LS Power's gas-fired cogeneration facility,
located in Whitewater, Wisconsin, went into commercial operation. The
contract, for 236 megawatts of firm capacity from the LS Power facility,
includes no minimum energy purchase requirements. In September 1997, WE
recorded in utility plant a capitalized lease asset of $142 million and a
corresponding capital lease obligation in long-term debt.
8. In October 1997, Wisconsin Michigan Investment Corporation ("WMIC"), a
non-utility subsidiary of WEC, issued $15 million of 6.40% medium-term
notes due 2001 and $12 million of 6.33% medium-term notes due 2002.
Proceeds from the issues were added to WMIC's general funds and will be
used to finance non-utility projects.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation ("WEC" or the "Company") is a holding company
whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an
electric, gas and steam utility. As of September 30, 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. On October 7,
1997, the shareholders of ESELCO, Inc. voted to approve the proposed
transaction. Consummation of the proposed acquisition is contingent upon
several conditions including receipt of appropriate regulatory approvals 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
A number of forward looking statements are included in this document. When
used in this document, "anticipate", "believe", "estimate", "expect",
"objective", "plan", "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 approximately
$329 million during the nine months ended September 30, 1997 compared to $411
million provided during the same period in 1996. Cash provided by operating
activities decreased 20% between the comparative periods primarily due to
increased operating expenses at WE described below in RESULTS OF OPERATIONS.
WEC's consolidated net investing activities totaled approximately $256 million
for the nine months ended September 30, 1997 compared to $290 million during
the same period in 1996. Investments during the first nine months of 1997
included approximately $242 million for the construction of new or improved
facilities of which approximately $189 million was related to utility plant
and $53 million was for non-utility projects. Additional investments included
approximately $6 million for the acquisition of nuclear fuel and $20 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 nine months ended September 30, 1997,
included in Investing Activities-Other, reflect approximately $37 million of
cash proceeds from the sale of buildings and other capital distributions from
investments by WISPARK Corporation and $15 million of investments in energy
related businesses by WISVEST Corporation. WISPARK and WISVEST are both non-
utility subsidiaries of WEC.
During the first nine months of 1997, WEC used approximately $48 million for
financing activities compared to $137 million during the first nine months of
1996. Financing activities during the first nine months of 1997 included
principal payments of $10 million and $25 million on the maturity of 6-5/8%
and 6-1/8% WE first mortgage bonds, respectively. During the first nine
months of 1997, WE increased its short-term debt by approximately $118 million
while WEC's non-utility subsidiaries decreased their short-term debt by
approximately $24 million.
On July 1, 1997, WEC resumed the purchase of existing shares on the open
market for the Company's stock plans. Prior to July 1, 1997, WEC had issued
1,187,050 new shares of common stock during 1997 which were purchased by
participants in the Company's stock plans with cash investments and reinvested
dividends aggregating approximately $30 million. During the fourth quarter of
1997, WE currently anticipates receiving a $100 million capital contribution
from WEC.
Capital requirements for the remainder of 1997 are expected to be principally
for long-term debt maturity and sinking fund requirements, construction
expenditures and payments to the Fund for the eventual decommissioning of
Point Beach. These cash requirements are expected to be met primarily through
internal sources of funds from operations and short-term borrowings. However,
WE may issue up to $150 million of additional intermediate or long-term debt
later in 1997 or early 1998. Wisconsin Michigan Investment Corporation
("WMIC"), a non-utility subsidiary of WEC, issued $27 million of medium-term
notes in October 1997 and may issue up to $20 million of additional medium-
term notes during 1997. 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. As of November 1, 1997, WEC has
$259 million of unused lines of credit for short-term borrowing of which $134
million is available to WE and $125 million is available to WEC's non-utility
subsidiaries.
WE currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P") and Duff & Phelps, Inc. ("D&P") and Aa2 by Moody's
Investors Service ("Moody's"). In addition, WE currently has unsecured debt
ratings of AA by S&P and D&P and Aa3 by Moody's. In October 1997, Fitch
Investors Service ("Fitch") lowered their ratings on WE's approximately $1
billion of outstanding first mortgage bonds from AA+ to AA and their ratings
on WE's $31 million of outstanding preferred stock from AA to AA-. According
to the Fitch report, the revised ratings reflect a level of volatility in
operating income and financial protection measures due to nuclear operating
risks that are inconsistent with a AA+ rating as well as a regulatory
environment that is less predictable and less supportive of WE's credit
quality than in the past. Fitch's report stated, however, that despite the
downgrade, WE's quality and competitive position remain superior to most
electric utilities.
RESULTS OF OPERATIONS
1997 THIRD QUARTER
Earnings
During the third quarter of 1997, WEC's consolidated net income and earnings
per share of common stock were approximately $24.0 million and $0.21,
respectively, compared to net income of $53.4 million and earnings per share
of $0.48, respectively, during the third quarter of 1996. As described below,
earnings decreased primarily due to higher fuel and purchased power expenses
during the third quarter of 1997.
Electric Revenues, Gross Margins and Sales
Total electric operating revenues were flat during the third quarter of 1997
compared to the third quarter of 1996. An interim fuel surcharge in WE's
Wisconsin electric retail jurisdiction, effective May 24, 1997, offset the
impact of a decrease in total electric kilowatt-hour sales during the third
quarter of 1997 and 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 12.6% or approximately $34.5 million due to significantly higher fuel and
purchased power expenses during the third quarter of 1997.
==============================================================================
Three Months Ended September 30
-------------------------------
Electric Gross Margin ($000) 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 359,522 $ 359,213 0.1
Fuel & Purchased Power 119,668 84,884 41.0
---------- ----------
Gross Margin $ 239,854 $ 274,329 (12.6)
========== ==========
==============================================================================
Fuel and purchased power expenses increased by 41.0% or approximately $34.8
million during the third quarter of 1997 compared to the same period in 1996
as a result of the extended outages at Point Beach 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 generating capacity with higher cost
generation and with approximately a 185% increase in megawatt-hours of higher
cost power purchases in the third quarter of 1997 compared to the third
quarter of 1996.
Ongoing extended outages at Point Beach, an extended maintenance outage at Oak
Creek Power Plant ("Oak Creek") that was concluded in June 1997 and higher
than projected purchased power costs due to regional generation outages, have
resulted in increased fuel and purchased power costs. WE estimates that such
costs will be $112 million higher than those reflected in 1997 base electric
rates. In March and September 1997, WE submitted separate fuel filings with
the Public Service Commission of Wisconsin ("PSCW") requesting recovery of the
portion of these increased fuel costs attributable to retail electric service
in Wisconsin. If the PSCW approves the fuel surcharges included in the
filings, WE would recover approximately $59 million during the 1997-1998
biennial period. Currently, WE does not expect to recover approximately $52
million of increased 1997 fuel costs from customers. WE anticipates that the
PSCW will issue final orders on the two 1997 fuel filings in late December
1997. Effective May 24, 1997, the PSCW approved a $0.00109 per kilowatt-hour
interim fuel surcharge, subject to refund, in response to WE's first fuel
filing. During the three months ended September 30, 1997, WE collected
approximately $6.3 million, in additional revenues through the interim
surcharge. For further information concerning WE's two 1997 fuel filings, see
"Wisconsin Retail Jurisdiction - Fuel Cost Adjustment" in ITEM 1. LEGAL
PROCEEDINGS - "RATE MATTERS" in Part II of this report.
==============================================================================
Three Months Ended September 30
-------------------------------
Electric Sales (Megawatt-hours) 1997 1996 % Change
- ------------------------------- ---------- ---------- --------
Residential 1,702,707 1,747,795 (2.6)
Small Commercial/Industrial 1,942,548 1,928,793 0.7
Large Commercial/Industrial 2,820,472 2,865,994 (1.6)
Other-Retail/Municipal 326,254 351,521 (7.2)
Resale-Utilities 254,642 297,044 (14.3)
---------- ----------
Total Electric Sales 7,046,623 7,191,147 (2.0)
========== ==========
==============================================================================
Cooler weather during the third quarter of 1997 tempered 1997 electric sales
compared to 1996, primarily contributing to the 2.6% reduction in sales to
Residential customers. As measured by cooling degree days, the third quarter
of 1997 was 39.6% cooler than the same period during 1996 and 45.2% cooler
than normal. Electric energy sales to the Empire and Tilden ore mines
("Mines"), WE's two largest customers, decreased approximately 20.6% during
the third quarter of 1997 compared to the third quarter of 1996 due primarily
to a temporary shutdown during July and August 1997 of the Tilden mine.
Excluding the Mines, total electric sales decreased approximately 0.3% and
sales to the remaining Large Commercial/Industrial customers increased
approximately 3.7% between the comparative periods. Sales in the Other-
Retail/Municipal customer class decreased 7.2% primarily due to the continued
phase out in 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 approximately 14.3% 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 $0.3 million during the third quarter
of 1997 compared to the third quarter of 1996. Between the comparative
periods, the gross margin on gas operating revenues (gas operating revenues
less cost of gas sold) increased 8.1% or by approximately $1.1 million.
==============================================================================
Three Months Ended September 30
-------------------------------
Gas Gross Margin ($000) 1997 1996 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 37,987 $ 38,333 (0.9)
Cost of Gas Sold 23,989 25,388 (5.5)
---------- ----------
Gross Margin $ 13,998 $ 12,945 8.1
========== ==========
==============================================================================
Despite an annualized gas retail rate decrease effective February 18, 1997 of
$6.4 million or 2.0%, total gas operating revenues were unchanged and gross
margin increased during the third quarter of 1997 due to increased therm
deliveries in 1997.
==============================================================================
Three Months Ended September 30
-------------------------------
Therms Delivered - Thousands 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Residential 21,013 20,680 1.6
Commercial/Industrial 12,659 13,007 (2.7)
Interruptible 1,914 4,245 (54.9)
Interdepartmental 223 5,131 (95.7)
---------- ----------
Total Gas Sales 35,809 43,063 (16.9)
Transported Customer Owned Gas 63,734 53,759 18.6
Transported - Interdepartmental 24,284 9,119 166.3
---------- ----------
Total Gas Delivered 123,827 105,941 16.9
========== ==========
==============================================================================
WE delivers natural gas to WE generating facilities, including the Concord and
Paris Generating Stations, at rates approved by the 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 a 72%
increase in total therm deliveries to WE facilities during the third quarter
of 1997 compared to the same period in 1996. Excluding total WE
interdepartmental therm deliveries, therm deliveries during the third quarter
of 1997 increased 8.3%, primarily due to a 1997 increase in the transportation
of customer owned gas.
Operating Expenses
Other operation and maintenance expenses increased 7.8% or by $8.6 million
during the third quarter of 1997 compared to the third quarter of 1996,
including a $1.9 million increase in transmission system expenses and a $5.6
million increase in administrative and general expenses. Depreciation expense
increased 23.5% or by approximately $11.7 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 64.1% or by $20.7 million in 1997 as a result of lower
taxable income.
WE anticipates that it will incur $30 million to $40 million of certain
nuclear non-fuel operation and maintenance costs during 1997 in excess of
those included in 1997 rates, of which $26 million to $34 million are
allocated to the Wisconsin electric retail jurisdiction. WE requested that
the PSCW allow deferred accounting treatment of these costs, indicating that
most of these costs 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. During the third quarter of 1997, WE deferred
approximately $20.2 million of nuclear non-fuel operation and maintenance
costs. The PSCW has not yet decided how the deferred costs will be treated
for rate making purposes.
1997 YEAR-TO-DATE
Earnings
During the first nine months of 1997, WEC's consolidated net income and
earnings per share of common stock were $58.4 million and $0.52, respectively,
compared to net income of $161.8 million and earnings per share of $1.46,
respectively, during the first nine months of 1996. As described below,
earnings decreased primarily because a 1.4% increase in total operating
revenues during the first nine months of 1997 was offset by significantly
higher fuel and purchased power expenses, as well as increased purchased gas
costs, other operation and maintenance expenses, depreciation 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 were unchanged during the first nine months
of 1997 compared to the first nine months of 1996. An interim fuel surcharge
in WE's Wisconsin electric retail jurisdiction, effective May 24, 1997, offset
the impact on electric operating revenues of a Wisconsin electric retail rate
decrease effective February 18, 1997, of $7.4 million or 0.6% on an annualized
basis. Total year-to-date 1997 electric kilowatt-hour sales were unchanged
compared to the same period in 1996. Between the comparative periods, the
gross margin on electric operating revenues decreased by 11.0% or
approximately $88.4 million due to significantly higher fuel and purchased
power expenses during the first nine months of 1997.
==============================================================================
Nine Months Ended September 30
------------------------------
Electric Gross Margin ($000) 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,045,843 $1,044,374 0.1
Fuel & Purchased Power 333,930 244,087 36.8
---------- ----------
Gross Margin $ 711,913 $ 800,287 (11.0)
========== ==========
==============================================================================
Fuel and purchased power expenses increased by 36.8% or $89.8 million during
the nine months ended September 30, 1997 compared to the same period in 1996
as a result of the extended outages at Point Beach and at 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 this generating capacity
with higher cost generation and with a 300% increase in megawatt-hours of
higher cost power purchases in the first nine months of 1997 compared to the
same period in 1996. During the nine months ended September 30, 1997, WE
collected approximately $9.0 million, subject to refund, in additional
revenues through a PSCW approved interim fuel surcharge that became effective
May 24, 1997. For further information concerning the two 1997 WE fuel filings
with the PSCW and related fuel and purchased power cost increases, see
"Wisconsin Retail Jurisdiction - Fuel Cost Adjustment" in ITEM 1. LEGAL
PROCEEDINGS - "RATE MATTERS" in Part II of this report.
==============================================================================
Nine Months Ended September 30
------------------------------
Electric Sales (Megawatt-hours) 1997 1996 % Change
- ------------------------------- ---------- ---------- --------
Residential 5,116,164 5,222,537 (2.0)
Small Commercial/Industrial 5,578,497 5,463,373 2.1
Large Commercial/Industrial 8,239,765 8,101,893 1.7
Other-Retail/Municipal 1,051,350 1,092,404 (3.8)
Resale-Utilities 736,556 844,703 (12.8)
---------- ----------
Total Electric Sales 20,722,332 20,724,910 0.0
========== ==========
==============================================================================
Total electric sales during the first nine 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. Cooler weather during the
summer of 1997, however, primarily contributed to the 2.0% 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
7.9% during the first nine months of 1997 compared to the first nine months of
1996. Excluding the Mines, total electric sales increased 0.7% and sales to
the remaining Large Commercial/Industrial customers increased 4.4% between the
comparative periods. Sales in the Other-Retail/Municipal customer class
decreased approximately 3.8% primarily due to the continued phase out in 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 12.8% 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 approximately 4.5% or by $10.8 million
during the first nine months of 1997 compared to the same period in 1996.
Between the comparative periods, the gross margin on gas operating revenues
decreased by 4.9% or $4.4 million. The cost of gas sold increased
approximately 10.1% or by $15.2 million during the first nine months of 1997.
==============================================================================
Nine Months Ended September 30
------------------------------
Gas Gross Margin ($000) 1997 1996 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 252,064 $ 241,229 4.5
Cost of Gas Sold 166,424 151,179 10.1
---------- ----------
Gross Margin $ 85,640 $ 90,050 (4.9)
========== ==========
==============================================================================
Total gas operating revenues as well as the cost of gas sold increased during
the first nine months of 1997 compared to 1996 primarily due to higher gas
costs in 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.
==============================================================================
Nine Months Ended September 30
------------------------------
Therms Delivered - Thousands 1997 1996 % Change
- ---------------------------- ---------- ---------- --------
Residential 232,231 248,783 (6.7)
Commercial/Industrial 146,599 154,985 (5.4)
Interruptible 16,755 25,327 (33.8)
Interdepartmental 9,535 9,313 2.4
---------- ----------
Total Gas Sales 405,120 438,408 (7.6)
Transported Customer Owned Gas 223,035 191,189 16.7
Transported - Interdepartmental 69,670 18,602 274.5
---------- ----------
Total Gas Delivered 697,825 648,199 7.7
========== ==========
==============================================================================
During the first nine months of 1997 compared to the first nine months of
1996, natural gas therm deliveries to WE facilities increased approximately
185% due to increased generation by WE's gas-fired plants noted above.
Excluding total WE interdepartmental therm deliveries, therm deliveries during
the nine months ended September 1997 were unchanged compared to the same
period in 1996.
Operating Expenses
Other operation and maintenance expenses increased 10.6% or by approximately
$38.2 million during the first nine months of 1997 compared to the first nine
months of 1996, including a $15.9 million increase in non-fuel nuclear
expenses, a $5.8 million increase in transmission system expenses and a $16.4
million increase in administrative and general expenses. WE attributes the
increased non-fuel nuclear operation and maintenance expenses to the
unscheduled 1997 generating unit outages at Point Beach and to efforts by WE's
nuclear operations to achieve higher nuclear performance standards consistent
with NRC requirements. Depreciation expense increased 15.2% or by $23.2
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 60.0% or by
$59.1 million in 1997 as a result of lower taxable income.
As noted above, WE has deferred $20.2 million of nuclear non-fuel operation
and maintenance costs through September 30, 1997 under authority granted by
the PSCW on July 17, 1997. The PSCW has not yet decided how the deferred
costs will be treated for rate making purposes.
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.
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 Reports on Form 10-Q for the quarters ended March 31, 1997 and June
30, 1997 and with ITEM 5. OTHER INFORMATION in Part II of this report.
RATE MATTERS
Wisconsin Retail Jurisdiction
Fuel Cost Adjustment Procedure: Ongoing extended outages at Point Beach, an
extended maintenance outage at Oak Creek Power Plant that was concluded in
June 1997, and higher than projected purchased power costs due to regional
generation outages have resulted in increased fuel and purchased power costs.
WE estimates that such costs will be $112 million higher than those reflected
in 1997 base electric rates.
In the first quarter of 1997, WE filed a request with the PSCW requesting
recovery of the estimated increase in fuel and purchased power costs.
Effective May 24, 1997, the PSCW approved a $0.00109 per kilowatt-hour interim
fuel surcharge collectible during the 1997-1998 biennial period. In September
1997, the PSCW held public hearings to determine whether WE is justified in
recovering these fuel costs from customers through the fuel surcharge.
Depending upon the outcome of the hearings, the PSCW could require WE to
refund some or all of the revenues collected through the surcharge.
Because of delays in the schedule to restart the Point Beach units described
in ITEM 5. OTHER INFORMATION - "NUCLEAR MATTERS" in Part II of this report, WE
filed a second request with the PSCW on September 29, 1997 to recover
additional increased fuel and purchased power costs above those included in
the PSCW's May 24, 1997 interim fuel order. In the second fuel filing, WE
requested an additional fuel surcharge of $0.00110 per kilowatt-hour to be
effective during 1998. WE anticipates that the PSCW will hold public hearings
in November 1997 to determine whether WE is justified in recovering these fuel
costs from customers through the surcharge.
WE expects the PSCW to issue a combined final order on the two fuel filings in
late December 1997. If the PSCW approves the two fuel surcharges, WE would
accrue in December 1997 revenues for 1997 fuel costs expected to be recovered
during 1998.
The following table summarizes WE's current estimates of total 1997 fuel costs
in excess of those reflected in 1997 base rates, total potential recovery of
these fuel costs during the 1997-1998 biennial period if the PSCW approves the
two fuel surcharges and total unrecoverable 1997 fuel costs.
==============================================================================
(Millions of Dollars)
Total Estimated 1997 Fuel
Costs Not In 1997 Base Rates $112.0
Less: Total 1997 Fuel Costs Potentially
Recoverable in Wisconsin * 59.0
Less: Total 1997 Fuel Costs Recoverable
During 1997 Under FERC Jurisdiction 1.4
------
Total Unrecoverable 1997 Fuel Costs $ 51.6
======
==============================================================================
* Through September 1997, WE has collected approximately $9 million, subject
to refund, as a result of an interim fuel surcharge that became effective
May 24, 1997.
See ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - "RESULTS OF OPERATIONS" in Part I of this report for
additional information related to the fuel surcharge.
1998 Test Year: On September 22, 1997, WE filed testimony and exhibits with
the PSCW related to the 1998 test year showing a $220.4 million revenue
deficiency for its utility operations based upon a regulatory return on equity
of 12.5%, up from 11.8% authorized since February 13, 1997. The dollar
impacts and percentage increases on an annualized basis requested for
Wisconsin retail services are $192.7 million or 15.3% for electric operations,
$26.5 million or 7.9% for gas operations and $1.2 million or 9.0% for the City
of Milwaukee steam operations. In the filing, WE asked that the PSCW provide
interim rate relief effective January 1, 1998 for 90% of the revenue
deficiency, subject to refund, if the PSCW does not issue a final order by
this date. In November 1997, the PSCW is expected to conclude public hearings
on WE's request for interim rate relief and issue an order on interim rate
relief in December 1997. Public hearings on the 1998 Test Year filing are
anticipated in the first quarter of 1998.
The primary factors influencing the requested rate increases for 1998 include:
* Increased costs related to the construction, operation and maintenance of
generation, transmission and distribution facilities to assure the
reliability of electric service.
* Increased costs associated with the need to implement technological
solutions to ensure computer system compatibility with the year 2000 and
to meet customer expectations.
* Increased payroll and benefits due to (1) additional personnel to fill
unfilled positions that occurred while WEC and NSP were pursuing the
Primergy merger and (2) increased staff to support key areas such as
nuclear operations, customer service and information services.
* Increased fuel and purchased power costs.
* Increased cost of capital.
See ITEM 5. OTHER INFORMATION - "YEAR 2000 COMPUTER SOFTWARE AND HARDWARE
ISSUES" in Part II of this report for further information concerning the
estimated costs to examine and modify existing software application and
operational programs and hardware that is date sensitive and may not be Year
2000 compliant.
Nuclear Operation and Maintenance Cost Deferral: See ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
"RESULTS OF OPERATIONS" in Part I of this report for additional information
regarding approval by the PSCW for WE to defer certain excess non-fuel nuclear
operation and maintenance costs expected to be incurred during 1997. The PSCW
has not yet decided how the deferred costs will be treated for rate making
purposes.
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 Reports on Form 10-Q for the
periods ended March 31, 1997 and June 30, 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 in June 1997 to continue this status until the
NRC has an opportunity to evaluate the plant under operating conditions. WE
expects the NRC to reevaluate Point Beach's status in early 1998.
WE returned Point Beach Unit 2 to service on August 15, 1997 following an
extended outage to replace the unit's steam generators that began in October
1996. Unit 2 was temporarily taken out of service on September 5, 1997 to
resolve an issue with the unit's emergency diesel generators. Unit 2 was
returned to service on September 22, 1997. WE currently plans to take Unit 2
out of service in November 1997 until an issue with the auxiliary feedwater
system is resolved. WE expects to return Unit 2 to service in December 1997.
Point Beach Unit 1 was taken out of service in February 1997 due to equipment
problems. Currently, WE plans to restart Unit 1 in November 1997 and keep it
in service through early January 1998, when the unit will begin a refueling
and maintenance outage that is expected to last through most of the first
quarter of 1998.
Spent Fuel Storage and Disposal
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to an Independent Spent Fuel Storage Installation ("ISFSI"). To
date, WE has loaded two such casks. WE currently estimates that the remaining
10 casks along with remaining space in the spent fuel pool at Point Beach will
provide sufficient spent fuel storage capacity through the scheduled fall 2001
refueling outage. WE expects to file an application with the PSCW in mid-1998
for approval to begin loading by the year 2000 additional storage casks to the
12 that were previously approved.
As a result of the ignition of hydrogen gas during welding operations
associated with loading a third cask at Point Beach in May 1996, cask loading
had been halted until the NRC had reviewed and accepted plans to prevent
recurrence of such an event and until such plans are implemented. On
September 12, 1997, the NRC formally closed a confirmatory action letter
concerning the hydrogen gas ignition which had halted cask loading.
On May 16, 1997, the NRC sent WE a confirmatory action letter expressing
concerns with the welding process used on casks at Point Beach as well as 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 weld problems. On September 8, 1997,
the NRC issued a supplement to the May 16, 1997 confirmatory action letter
confirming that WE and the two unaffiliated utilities have committed to not
resume loading any casks until further actions have been taken to resolve the
welding problems. The NRC is currently requesting additional information and
commitment for additional inspections of the welds before lifting the May 16,
1997 confirmatory action letter. WE estimates that the remaining space in the
spent fuel pool at Point Beach will provide sufficient spent fuel storage
capacity through the scheduled spring 1999 refueling outage before authority
to resume loading casks with spent fuel will be necessary. The matter is
pending.
PSCW ADVANCE PLANS
WE filed its Advance Plan 8 forecast and supply modeling parameters with the
PSCW in May 1997. In discussion following WE's filing, the PSCW concluded
that the growth rate of demand and energy sales in the State of Wisconsin for
the period 1997-2006 should be 2.0% for planning purposes. WE had proposed an
annual growth rate of 1.4% for the same period. The PSCW also determined that
the planning reserve margin should be 18% throughout the ten-year period. WE
expects the PSCW to issue an order reflecting these decisions in November
1997.
ELECTRIC SYSTEM RELIABILITY MATTERS
As reported in WEC's and WE's combined Quarterly Reports on Form 10-Q for the
periods ended March 31, 1997 and June 30, 1997, the eastern part of the State
of Wisconsin experienced electricity supply shortages on four separate
occasions during the summer of 1997. Most of the conditions that led to these
shortages are not expected to simultaneously occur again in the future.
However, because of the events that occurred during the summer of 1997, the
PSCW announced in June 1997 that it intended to initiate a full scale inquiry
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.
PSCW Investigation into the Structure of the Electric Utility Industry
In December 1995, the PSCW had announced a 32-step process to transform the
electric industry in Wisconsin to a competitive model by the year 2001.
However, progress on the 32-step workplan had fallen behind schedule, and the
PSCW concluded that electric power shortages experienced during the summer of
1997 highlighted the need to address infrastructure issues.
On October 30, 1997, the PSCW expressed a desire to work on infrastructure and
to develop a robust competitive electric wholesale market. The PSCW also
expressed its belief that the question on whether to implement electric retail
competition in Wisconsin ultimately should be decided by the Wisconsin
Legislature rather than the PSCW. At the October 30, 1997 meeting, the PSCW
agreed to pursue the following priority infrastructure issues:
* Improvements to existing and addition of new electric transmission lines
in the State of Wisconsin;
* Additions of new generating capacity in the State of Wisconsin;
* Modifications to State of Wisconsin statutes to allow "merchant"
generating plants to be built in Wisconsin without prior PSCW
determination of need; and
* Development of an Independent System Operator ("ISO") for either the
electric transmission system in the State of Wisconsin or in the region.
Electric Reliability and Regulation Reports to the Governor of Wisconsin
In response to the July 1997 request by the Governor of the State of
Wisconsin, WE along with ten other organizations submitted a joint plan to
address electric system reliability within the state and region. The
recommendations sent to the Governor included a combination of improved
regional transmission connections, increased generating capacity and a
streamlined regulatory process for constructing new electric generation and
transmission facilities. The report acknowledged that eastern Wisconsin will
continue to face risks of future power shortages particularly if unusual
circumstances similar to those experienced in the region during the summer of
1997 repeat themselves. The report emphasized that unexpected events such as
power plant outages in the upper midwest, significant regional transmission
limitations or very hot weather will dictate the need to reevaluate regional
system reliability.
In the report, WE and three other investor owned utilities from Wisconsin
outlined a plan to allow the development of merchant plants as an accelerated
and cost-effective way to obtain new generation after the year 2000.
Other reports to the Governor echoed the utilities' themes of adding electric
transmission capability and streamlining the regulatory process in the State
of Wisconsin. The PSCW's report called for utilities to install inlet coolers
at existing combustion turbine power plants and to add electric supply sources
through the year 2002. The PSCW also advocated that the Wisconsin Legislature
raise the threshold from 12 MW to 100 MW for when the PSCW is required to
issue a Certificate of Public Convenience and Necessity for new generation. A
group representing various commercial and industrial electric users in
Wisconsin recommended full electric retail competition by the year 2000 and a
load management capacity trading system.
The Governor has indicated that in early 1998 he will propose electric
industry restructuring legislation that includes changes in the regulation of
electric utilities but stops short of a proposal for retail competition.
Current WE Electric Reliability Actions
Additional 250 MW of Capacity: In October 1997, WE announced its intention to
issue a request for proposal for contracts for 250 MW of generation capacity
to be built in eastern Wisconsin with an in-service date of June 1, 1999, if
possible, but no later that June 1, 2000. Neither WE nor its non-utility
affiliates will bid on the project. WE proposes contracting for the power for
three to eight years, but will not own or operate the facility. It is
anticipated that the capacity proposed in the bidding process will largely be
in the form of natural gas-fired facilities, but other types of facilities
will be considered. The new generation to be built in Wisconsin will
economically improve reliability in the region and make eastern Wisconsin more
self-sufficient.
Combustion Turbine Inlet Coolers: In October 1997, WE applied with the PSCW
for authority to install inlet coolers at its Concord, Paris and Germantown
peaking facilities. The inlet coolers, which are expected to be operational
by the summer of 1999 or sooner, will boost the generating capacity of these
three WE plants by a combined total of 110-150 MW. WE estimates that the
inlet coolers for the three plants will cost a total of $22 million to $30
million.
Electric Transmission Projects: In October 1997, WE announced its intention
to apply to the PSCW for approval of three transmission projects designed to
increase the electric import capability into eastern Wisconsin and to improve
reliability. If approved, the Plains-Falls Tap 345 kV upgrade project would
increase the transfer capability between the Upper Peninsula of Michigan and
eastern Wisconsin by 130 MW, the Oak Creek-Arcadian project would increase the
transfer capability between northern Illinois and eastern Wisconsin by 1,000
MW and the Oak Creek-New Lakeside project would improve reliability in the
metropolitan Milwaukee area.
Midwest ISO: In February 1996, WE and five other Midwest utilities announced
that they had agreed to pursue the development of an independent organization,
the Midwest ISO. The group has grown to include twenty-six transmission-
owning utilities in 11 states. WE believes that the Midwest ISO, which would
be responsible for overseeing the operations of combined bulk electric
transmission system of the utilities on a regional basis, will strengthen
reliability of the transmission system. Other transmission owners in the East
Central Area Reliability Council ("ECAR") and the Mid-America Interconnected
Network ("MAIN") have participated in the development of the Midwest ISO.
Plans for the Midwest ISO are expected to be filed with the FERC in December
1997 and would be implemented in stages after approval.
LS Power Cogeneration Facility: To meet a portion of WE's anticipated system
increase in future electric supply needs, WE entered into a 25 year power
purchase contract with an unaffiliated independent power producer, LSP-
Whitewater L.P. ("LS Power"). In September 1997, LS Power's gas-fired
cogeneration facility, located in Whitewater, Wisconsin, went into commercial
operation. The contract, for 236 megawatts of firm capacity from the LS Power
facility, includes no minimum energy purchase requirements. In September
1997, WE recorded in utility plant a capitalized lease asset of $142 million
and a corresponding capital lease obligation in long-term debt.
YEAR 2000 COMPUTER SOFTWARE AND HARDWARE ISSUES
Like many other companies, WEC expects to incur significant costs to examine
and modify existing software application and operational programs as well as
hardware that is date sensitive and may not be Year 2000 compliant. These
programs and hardware use two-character digits such as '00' to define the
applicable year rather than four-character digits such as '2000'. As a
result, the programs and systems may not properly recognize calendar dates
beginning in the year 2000, and the computers may either process data
incorrectly or shut down altogether. During 1997, WE developed a plan,
currently estimated to cost a total of approximately $30 million during 1998
and 1999, to address its Year 2000 compliance issues. In its 1998 Test Year
data filed with the PSCW, WE has requested recovery in rates during the 1998-
1999 biennial period of approximately $13 million per year for Year 2000
compliance examination and modification costs attributable to the Wisconsin
retail jurisdiction. WEC is still evaluating its non-utility subsidiaries for
Year 2000 compliance issues and is currently unable to quantify related costs.
COAL TRANPORTATION MATTERS
Coal deliveries to certain WE electric generating facilities, as well as to
the electric generating facilities of many other utilities, are currently
being impaired by massive congestion problems on the Union Pacific Railroad
("UP"). Since the merger of UP with the Southern Pacific Railroad, a backlog
of coal deliveries has caused stockpiles to decline at some of WE's power
plants and forced WE to seek alternative coal delivery routes. WE is
evaluating the impact of such delays on its operations and on its financial
position.
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", "plan", "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 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.
* Unanticipated developments while implementing the modifications necessary
to mitigate Year 2000 compliance problems, including the indirect impacts
of third parties with whom the company does business and who do not
mitigate their Year 2000 compliance problems.
* 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed with the applicable Form 10-Q report:
Exhibit No.
WEC Exhibits
(27)-1 Wisconsin Energy Corporation ("WEC") Financial Data Schedule
for the nine months ended September 30, 1997.
WE Exhibits
(27)-2 Wisconsin Electric Power Company ("WE") Financial Data
Schedule for the nine months ended September 30, 1997.
(b) Reports on Form 8-K.
Current Reports on Form 8-K dated as of September 22, 1997 were filed by
WEC and by WE on September 30, 1997 to report the filing with the PSCW
on September 22, 1997 of testimony and exhibits related to WE's 1998
Test Year.
No other reports on Form 8-K were filed by WEC nor by WE during the
quarter ended September 30, 1997.
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: November 14, 1997 Calvin H. Baker, Treasurer,
Chief Financial Officer and
duly authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
(Registrant)
/s/ Calvin H. Baker
----------------------------
Date: November 14, 1997 Calvin H. Baker, Vice
President-Finance,
Chief Financial Officer
and duly authorized
officer
WISCONSIN ENERGY CORPORATION
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1997
EXHIBIT INDEX
Exhibit No.
- -----------
The following Exhibits are filed with this report:
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the nine
months ended September 30, 1997.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS OF WISCONSIN ENERGY
CORPORATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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> SEP-30-1997
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,180,315
<OTHER-PROPERTY-AND-INVEST> 808,430
<TOTAL-CURRENT-ASSETS> 481,091
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 480,055
<TOTAL-ASSETS> 4,949,891
<COMMON> 1,128
<CAPITAL-SURPLUS-PAID-IN> 729,655
<RETAINED-EARNINGS> 1,173,298
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,904,081
0
30,450
<LONG-TERM-DEBT-NET> 1,112,391
<SHORT-TERM-NOTES> 50,495
<LONG-TERM-NOTES-PAYABLE> 209,588
<COMMERCIAL-PAPER-OBLIGATIONS> 112,511
<LONG-TERM-DEBT-CURRENT-PORT> 205,520
0
<CAPITAL-LEASE-OBLIGATIONS> 166,436
<LEASES-CURRENT> 16,055
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,142,364
<TOT-CAPITALIZATION-AND-LIAB> 4,949,891
<GROSS-OPERATING-REVENUE> 1,314,211
<INCOME-TAX-EXPENSE> 39,308
<OTHER-OPERATING-EXPENSES> 1,131,109
<TOTAL-OPERATING-EXPENSES> 1,170,417
<OPERATING-INCOME-LOSS> 143,794
<OTHER-INCOME-NET> (290)
<INCOME-BEFORE-INTEREST-EXPEN> 143,504
<TOTAL-INTEREST-EXPENSE> 84,190
<NET-INCOME> 59,314
902
<EARNINGS-AVAILABLE-FOR-COMM> 58,412
<COMMON-STOCK-DIVIDENDS> 129,261
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 328,634
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<FN>
See financial statements and footnotes in accompanying 10-Q.
</TABLE>
