<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WISCONSIN ENERGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
WISCONSIN 6719 39-1391525
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
231 WEST MICHIGAN STREET
P.O. BOX 2949
MILWAUKEE, WISCONSIN 53201
(414) 221-2345
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CALVIN H. BAKER
TREASURER AND CHIEF FINANCIAL OFFICER
WISCONSIN ENERGY CORPORATION
231 WEST MICHIGAN STREET
P.O. BOX 2949
MILWAUKEE, WISCONSIN 53201
(414) 221-2345
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
BRUCE C. DAVIDSON JOE E. ARMSTRONG
QUARLES & BRADY KUTAK ROCK
411 EAST WISCONSIN AVENUE THE OMAHA BUILDING
MILWAUKEE, WISCONSIN 53202 1650 FARNAM STREET
(414) 277-5000 OMAHA, NEBRASKA 68102-2186
(402) 346-6000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the registration statement becomes
effective and all conditions prerequisite have been satisfied or waived.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(3) FEE(4)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value..... 3,250,000 shs. (2) $62,134,020 $18,828.49
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Under the Amended and Restated Agreement and Plan of Reorganization to
which this registration statement relates, outstanding shares of ESELCO,
Inc. ("ESELCO") common stock will be converted into shares of Wisconsin
Energy Corporation ("Wisconsin Energy") common stock based on a value of
$44.50 per ESELCO share. The number of Wisconsin Energy shares to be
issued per ESELCO share will be determined by dividing $44.50 by the
average closing sale price of Wisconsin Energy common stock on the New
York Stock Exchange for the ten trading days immediately preceding the
closing date. Since the number of Wisconsin Energy shares to be issued
will not be determined until the closing date, the number of shares
registered hereby is an arbitrary number intended to be more than
sufficient to cover the maximum number that could be issued under the
above pricing formula.
(2) Will not be determined until the closing date.
(3) Estimated pursuant to Rules 457(f)(1) and 457(c) under the Securities Act
of 1933, solely for the purpose of calculating the registration fee, based
on the $39.00 average of the high and low sale prices for shares of ESELCO
common stock as reported on The Nasdaq Stock Market's National Market on
August 26, 1997, multiplied by the maximum of 1,593,180 outstanding shares
of ESELCO common stock to be acquired.
(4) Includes the fee of $12,904.76 paid to the Commission on August 13, 1997,
upon filing the preliminary proxy materials of ESELCO. Pursuant to Rule
457(b), the $5,923.73 balance of the registration fee is being paid to the
Commission upon filing this registration statement.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WISCONSIN ENERGY CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B)
OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR CAPTION IN
ITEM NUMBER AND CAPTION PROXY STATEMENT/PROSPECTUS
----------------------- --------------------------
<S> <C>
A. INFORMATION ABOUT THE
TRANSACTION.
1. Forepart of Registration
Statement and Outside Front Outside Front Cover Page
Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of
Earnings to Fixed Charges and Summary
Other Information
4. Terms of the Transaction Summary; The Merger; Description of
Wisconsin Energy Capital Stock; Comparison
of Shareholder Rights
5. Pro Forma Financial *
Information
6. Material Contacts with the
Company Being Acquired Summary; The Merger
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed to be
Underwriters *
8. Interests of Named Experts and Legal Opinions
Counsel
9. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities *
B. INFORMATION ABOUT THE
REGISTRANT.
10. Information with Respect to S- Summary
3 Registrants
11. Incorporation of Certain Incorporation of Certain Documents by
Information by Reference Reference
12. Information with Respect to S- *
2 or S-3 Registrants
13. Incorporation of Certain *
Information by Reference
14. Information with Respect to
Registrants Other Than S-3 or S-
2 Registrants *
C. INFORMATION ABOUT THE COMPANY
BEING ACQUIRED.
15. Information with Respect to S- *
3 Companies
16. Information with Respect to S- Incorporation of Certain Documents by
2 or S-3 Companies Reference; Summary; Businesses of Parties
to the Reorganization; Management's
Discussion and Analysis of ESELCO's
Financial Condition and Results of
Operations; Index to ESELCO Financial
Statements
17. Information with Respect to
Companies Other Than S-3 or S-2
Companies *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR CAPTION IN
ITEM NUMBER AND CAPTION PROXY STATEMENT/PROSPECTUS
----------------------- --------------------------
<S> <C>
D. VOTING AND MANAGEMENT
INFORMATION.
18. Information if Proxies,
Consents or Authorizations are to Incorporation of Certain Documents by
be Solicited Reference; Summary; The Special Meeting;
The Merger; Certain Information Concerning
Wisconsin Energy and ESELCO
19. Information if Proxies,
Consents or Authorizations are
not to be Solicited or in an
Exchange Offer *
</TABLE>
- --------
* Not applicable.
<PAGE>
ESELCO
725 East Portage Avenue/Sault Ste. Marie, MI 49783
Telephone 906/632-2221
August 28, 1997
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
ESELCO, Inc. ("ESELCO") to be held on Tuesday, October 7, 1997 at the Ramada
Inn Conference Center, 3290 I-75 Business Spur, Sault Ste. Marie, Michigan
(the "Special Meeting"). The Special Meeting will begin at 10:00 a.m., Eastern
Daylight Time. At the Special Meeting, you will be asked to approve an Amended
and Restated Agreement and Plan of Reorganization dated as of May 13, 1997, as
amended and restated as of July 11, 1997, including the related Plan of Merger
(together, the "Reorganization Agreement"), which provides for the merger (the
"Merger") of ESL Acquisition, Inc. ("Acquisition"), a wholly-owned subsidiary
of Wisconsin Energy Corporation ("Wisconsin Energy"), with and into ESELCO.
The Reorganization Agreement provides that, upon consummation of the Merger,
all outstanding shares of ESELCO Common Stock will be converted into shares of
Wisconsin Energy Common Stock based on a value of $44.50 for each share of
ESELCO Common Stock. The exchange ratio will be equal to $44.50 divided by the
average closing price per share of Wisconsin Energy Common Stock on the New
York Stock Exchange for the ten trading days immediately preceding the closing
date of the Merger. Each issued and outstanding share of ESELCO Common Stock
will be converted into that number of shares of Wisconsin Energy Common Stock
as is equal to the exchange ratio. Any resulting fractional share interest
will be paid in cash.
THE BOARD OF DIRECTORS OF ESELCO BELIEVES THAT THE MERGER IS ADVISABLE, FAIR
AND IN THE BEST INTERESTS OF ESELCO AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE REORGANIZATION
AGREEMENT. ESELCO shareholders will receive shares of Wisconsin Energy Common
Stock in a tax-free reorganization having a market value representing a
significant premium to ESELCO's book value and market value at the time the
transaction was first announced. Wisconsin Energy Common Stock is actively
traded on the New York Stock Exchange and widely-held. Consequently, the
shareholders of ESELCO will have their shares converted into a much more
marketable security representing an ownership interest in a significantly
larger and more diversified enterprise. ESELCO's financial advisor, Pacific
Economics Group, has issued its opinion to the effect that, as of the date of
such opinion and based on the factors and assumptions described therein, the
exchange ratio is fair to the holders of ESELCO Common Stock from a financial
point of view.
The attached Proxy Statement/Prospectus will provide you with a detailed
description of the Reorganization Agreement and the transactions contemplated
thereby. The Reorganization Agreement itself is attached as Appendix A to the
Proxy Statement/Prospectus. Information concerning ESELCO, Wisconsin Energy
and Acquisition is also provided in the Proxy Statement/Prospectus or
incorporated by reference and available upon request.
The consummation of the Merger is subject to the satisfaction of certain
conditions, including the receipt of required regulatory approvals. Before the
Merger is consummated, you will receive instructions concerning the exchange
of your ESELCO Common Stock.
PLEASE NOTE THAT YOU SHOULD NOT SUBMIT YOUR ESELCO CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THOSE INSTRUCTIONS.
The affirmative vote of the holders of a majority of the outstanding shares
of ESELCO Common Stock entitled to vote at the Special Meeting is required for
approval of the Reorganization Agreement. The failure to
<PAGE>
execute and return the accompanying proxy card or to vote in person at the
Special Meeting will have the effect of a vote cast against approval of the
Reorganization Agreement. Furthermore, abstentions will have the same effect
as votes cast against approval of the Reorganization Agreement. To assure that
your shares are represented in voting on this very important matter, please
complete and return the accompanying proxy card promptly in the enclosed
envelope, whether or not you plan to attend the Special Meeting. If you do
attend, you may, if you wish, revoke your proxy and vote your shares in person
at the Special Meeting.
Very truly yours,
/s/ William R. Gregory
William R. Gregory
President and Chief Executive
Officer
<PAGE>
ESELCO, INC.
725 EAST PORTAGE AVENUE
SAULT STE. MARIE, MICHIGAN 49783
---------------
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD
ON OCTOBER 7, 1997
---------------
To the Shareholders of
ESELCO, Inc.:
A special meeting of the shareholders of ESELCO, Inc. ("ESELCO") will be held
at the Ramada Inn Conference Center, 3290 I-75 Business Spur, Sault Ste. Marie,
Michigan on Tuesday, October 7, 1997 at 10:00 a.m., Eastern Daylight Time (the
"Special Meeting"), for the following purposes:
(1) To consider and vote upon the approval of the Amended and Restated
Agreement and Plan of Reorganization, dated as of May 13, 1997, as amended
and restated as of July 11, 1997, by and among Wisconsin Energy Corporation
("Wisconsin Energy"), ESELCO and ESL Acquisition, Inc. ("Acquisition"),
including the related Plan of Merger between Acquisition and ESELCO
(together, the "Reorganization Agreement"), providing for the merger of
Acquisition with and into ESELCO, pursuant to which each issued and
outstanding share of ESELCO Common Stock will be converted into shares of
Wisconsin Energy Common Stock, plus cash in lieu of any fractional share,
all as described and set forth in the Proxy Statement/Prospectus
accompanying this notice; and
(2) To act upon such other matters as may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of ESELCO Common Stock at the close of business on
August 27, 1997 are entitled to notice of and to vote at the Special Meeting.
The affirmative vote of the holders of a majority of the outstanding shares of
ESELCO Common Stock entitled to vote at the Special Meeting is required for
approval of the Reorganization Agreement.
By Order of the Board of Directors,
/s/ Donald C. Wilson
Donald C. Wilson
Secretary
Sault Ste. Marie, Michigan
August 28, 1997
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. WHETHER OR
NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY CARD USING THE ENCLOSED SELF-ADDRESSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF FOR ANY REASON YOU
SHOULD DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS
VOTED AT THE SPECIAL MEETING.
<PAGE>
PROXY STATEMENT
OF
ESELCO, INC.
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 7, 1997
----------------
PROSPECTUS
OF
WISCONSIN ENERGY CORPORATION
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of ESL Acquisition, Inc., a Michigan corporation ("Acquisition"), a
wholly-owned subsidiary of Wisconsin Energy Corporation, a Wisconsin
corporation ("Wisconsin Energy"), with and into ESELCO, Inc., a Michigan
corporation ("ESELCO"), and is being furnished to the shareholders of ESELCO
in connection with the solicitation of proxies by the ESELCO Board of
Directors (the "ESELCO Board") for use at the special meeting of ESELCO
shareholders (the "Special Meeting") to be held at the Ramada Inn Conference
Center, 3290 I-75 Business Spur, Sault Ste. Marie, Michigan on Tuesday,
October 7, 1997 at 10:00 a.m., Eastern Daylight Time, and at any adjournment
or postponement thereof.
This Proxy Statement/Prospectus constitutes a prospectus of Wisconsin Energy
filed as part of the Registration Statement (defined below) with respect to up
to 3,250,000 shares of the Common Stock, $.01 par value per share, of
Wisconsin Energy ("Wisconsin Energy Common Stock") to be issued pursuant to an
Amended and Restated Agreement and Plan of Reorganization, dated as of May 13,
1997, as amended and restated as of July 11, 1997, by and among Wisconsin
Energy, Acquisition and ESELCO, including the related Plan of Merger between
Acquisition and ESELCO (together, the "Reorganization Agreement"). The actual
number of shares of Wisconsin Energy Common Stock to be issued pursuant to the
Reorganization Agreement will be determined by multiplying the number of then
outstanding shares of the Common Stock, $.01 par value per share, of ESELCO
("ESELCO Common Stock") (a maximum of 1,593,180 shares) by the exchange ratio
determined by dividing a value of $44.50 per share of ESELCO Common Stock by
the average closing price per share of Wisconsin Energy Common Stock on the
New York Stock Exchange for the ten trading days immediately preceding the
closing date of the Merger. See "The Merger--General."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
No person is authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Proxy Statement/Prospectus, and if given or made, such information or
representation should not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, the securities offered by this Proxy
Statement/Prospectus, in any jurisdiction, to or from any person to whom or
from whom it is unlawful to make such offer or solicitation of an offer in
such jurisdiction. Neither the delivery of this Proxy Statement/Prospectus nor
any distribution of the securities pursuant to this Proxy Statement/Prospectus
shall, under any circumstances, create an implication that there has been no
change in the affairs of Wisconsin Energy, Acquisition or ESELCO or in the
information set forth herein since the date of this Proxy
Statement/Prospectus.
This Proxy Statement/Prospectus does not cover any resale of the securities
to be received by shareholders of ESELCO upon consummation of the proposed
transaction, and no person is authorized to make any use of this Proxy
Statement/Prospectus in connection with any such resale.
The date of this Proxy Statement/Prospectus is August 28, 1997. This Proxy
Statement/Prospectus is first being mailed to shareholders of ESELCO on or
about August 29, 1997.
<PAGE>
AVAILABLE INFORMATION
Wisconsin Energy and ESELCO are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy or information
statements and other information with the Securities and Exchange Commission
(the "SEC"). Such reports, statements and other information filed with the SEC
can be inspected and copied at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material may also be obtained by mail from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. The SEC maintains an Internet site on the World
Wide Web at <http://www.sec.gov> that contains reports, statements and other
information. Wisconsin Energy Common Stock is listed on the New York Stock
Exchange (the "NYSE"), and such reports, statements and other information
concerning Wisconsin Energy should also be available for inspection at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. ESELCO Common
Stock is listed on The Nasdaq Stock Market, Inc.'s ("NASDAQ") National Market
(the "NASDAQ/NM"), and such reports, statements and other information
concerning ESELCO should also be available for inspection at the offices of
the NASDAQ, 1735 K Street, N.W., Washington, D.C. 20006.
Wisconsin Energy has filed with the SEC under the Securities Act of 1933, as
amended (the "Securities Act"), a registration statement on Form S-4 (together
with all amendments, schedules and exhibits thereto, the "Registration
Statement") with respect to the shares of Wisconsin Energy Common Stock
issuable pursuant to the Reorganization Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC. The Registration Statement is available
for inspection and copying as set forth above. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated by reference in
this Proxy Statement/Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE
UPON REQUEST FROM, IN THE CASE OF DOCUMENTS RELATING TO WISCONSIN ENERGY, MR.
THOMAS H. FEHRING, SECRETARY, WISCONSIN ENERGY CORPORATION, 231 W. MICHIGAN
STREET, P.O. BOX 2949, MILWAUKEE, WISCONSIN 53201 (TELEPHONE NUMBER: (800)
881-5882), AND IN THE CASE OF DOCUMENTS RELATING TO ESELCO, MR. DONALD C.
WILSON, SECRETARY, ESELCO, INC., 725 EAST PORTAGE AVENUE, SAULT STE. MARIE,
MICHIGAN 49783 (TELEPHONE NUMBER: (906) 632-2221). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY SEPTEMBER 30, 1997.
Wisconsin Energy and ESELCO will provide without charge to each person,
including any beneficial owner, to whom a copy of this Proxy
Statement/Prospectus is delivered, upon the written or oral request of such
person, a copy (without exhibits, except those specifically incorporated by
reference) of any and all of the documents which are incorporated herein by
reference. Requests for such documents should be directed to the persons
indicated above.
The following documents previously filed by Wisconsin Energy with the SEC
pursuant to the Exchange Act (File No. 1-9057) are incorporated in this Proxy
Statement/Prospectus by reference:
1. Wisconsin Energy's Annual Report on Form 10-K for the year ended
December 31, 1996, and Amendment No. 1 thereto (on Form 10-K/A) dated June
27, 1997.
2. Wisconsin Energy's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
3. Wisconsin Energy's Current Report on Form 8-K dated as of May 16,
1997.
2
<PAGE>
In lieu of incorporating by reference the description of Wisconsin Energy
Common Stock contained in Wisconsin Energy's Current Report on Form 8-K dated
October 31, 1991, which updates the description of Wisconsin Energy Common
Stock incorporated by reference in Wisconsin Energy's Registration Statement
on Form 8-B dated January 7, 1987, such description is included in this Proxy
Statement/Prospectus. See "Description of Wisconsin Energy Capital Stock."
All documents filed by Wisconsin Energy pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the date on
which the Special Meeting is held shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents.
The following documents filed by ESELCO with the SEC pursuant to the
Exchange Act (File No. 0-17736) are incorporated in this Proxy
Statement/Prospectus by reference:
1. ESELCO's Annual Report on Form 10-K for the year ended December 31,
1996.
2. ESELCO's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997.
3. ESELCO's Current Reports on Form 8-K dated as of January 23, 1997,
March 25, 1997 and May 13, 1997.
The information relating to Wisconsin Energy and ESELCO contained in this
Proxy Statement/Prospectus does not purport to be comprehensive and should be
read together with the information in the documents incorporated by reference
herein.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
Forward-Looking Statements; Cautionary Factors. This Proxy
Statement/Prospectus and the documents incorporated by reference herein may
contain forward-looking statements made by or on behalf of Wisconsin Energy or
ESELCO, respectively. Readers are cautioned not to place undue reliance on
these forward-looking statements. Such statements are based upon management's
expectations at the time made and are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements. The words "anticipate", "believe", "estimate", "expect",
"project", "objective" and similar expressions are intended to identify
forward-looking statements. In addition to the assumptions and other factors
referred to specifically in connection with such statements, factors that
could cause Wisconsin Energy's actual results to differ materially from those
contemplated in the forward-looking statements include factors described under
the caption "Cautionary Factors" in the Wisconsin Energy documents
incorporated herein by reference.
----------------
The information contained in this Proxy Statement/Prospectus with respect to
Wisconsin Energy and Acquisition has been supplied by Wisconsin Energy. The
information contained herein with respect to ESELCO has been supplied by
ESELCO.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 2
SUMMARY.................................................................... 6
The Parties to the Reorganization........................................ 6
The Special Meeting...................................................... 7
The Merger............................................................... 7
Comparison of Shareholder Rights......................................... 10
Selected Financial Data.................................................. 10
Comparative Per Share Data............................................... 13
Comparative Market Price Data............................................ 14
Recent Developments...................................................... 15
THE SPECIAL MEETING........................................................ 16
Place, Time and Date..................................................... 16
Purpose.................................................................. 16
Record Date; Shares Entitled to Vote..................................... 17
Vote Required for Approval............................................... 17
Proxies.................................................................. 17
No Dissenters' Rights.................................................... 18
THE MERGER................................................................. 18
General.................................................................. 18
Background of the Merger................................................. 19
Reasons for the Merger; Recommendation of the ESELCO Board............... 20
Opinion of ESELCO's Financial Advisor.................................... 21
Interest of Certain Persons in the Merger................................ 25
Certain Employment Matters............................................... 26
Management and Operations of ESELCO After the Merger..................... 27
Conduct of Business Pending the Merger................................... 28
Representations, Warranties and Covenants................................ 28
Conditions to Consummation of the Merger................................. 29
No Solicitation; Termination Fee......................................... 29
Termination; Amendment; Waiver........................................... 30
Standstill Provisions.................................................... 31
Exchange of ESELCO Certificates; No Fractional Shares.................... 31
Dividend Reinvestment Plan............................................... 33
Regulatory Requirements.................................................. 33
Certain Federal Income Tax Consequences.................................. 36
Resale of Wisconsin Energy Common Stock.................................. 37
Accounting Treatment..................................................... 37
BUSINESSES OF THE PARTIES TO THE REORGANIZATION............................ 38
Wisconsin Energy......................................................... 38
Acquisition.............................................................. 38
ESELCO................................................................... 38
Certain Business Relationships Between Wisconsin Energy and ESELCO....... 39
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF ESELCO'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 40
For the Three Years Ended December 31, 1996.............................. 40
For the Three Months, Six Months and Twelve Months Ended June 30, 1997
and 1996................................................................ 44
DESCRIPTION OF WISCONSIN ENERGY CAPITAL STOCK.............................. 46
Preferred Stock.......................................................... 46
Common Stock............................................................. 47
Certain Anti-Takeover Provisions......................................... 48
COMPARISON OF SHAREHOLDER RIGHTS........................................... 48
Comparison of Wisconsin Energy Articles and Bylaws to ESELCO Articles and
Bylaws.................................................................. 49
Comparison of Michigan and Wisconsin Law................................. 53
CERTAIN INFORMATION CONCERNING WISCONSIN ENERGY AND ESELCO................. 60
LEGAL OPINIONS............................................................. 60
EXPERTS.................................................................... 61
OTHER MATTERS.............................................................. 61
SHAREHOLDER PROPOSALS...................................................... 61
INDEX TO ESELCO FINANCIAL STATEMENTS....................................... F-1
APPENDIX A--Amended and Restated Agreement and Plan of Reorganization
(including Plan of Merger)................................................ A-1
APPENDIX B--Opinion of Pacific Economics Group............................. B-1
</TABLE>
5
<PAGE>
SUMMARY
The following summary information is qualified by reference to, and should
be read in conjunction with, the more detailed information appearing elsewhere
in this Proxy Statement/Prospectus, including the Appendices and the documents
incorporated herein by reference. Unless otherwise indicated, all financial
and other data in this Proxy Statement/Prospectus have been restated to give
retroactive effect to stock dividends. Capitalized terms used and not
otherwise defined in this Summary have the meanings ascribed to them elsewhere
in this Proxy Statement/Prospectus.
THE PARTIES TO THE REORGANIZATION
WISCONSIN ENERGY
Wisconsin Energy is a holding company whose principal subsidiary is
Wisconsin Electric Power Company ("Wisconsin Electric"), an electric, gas and
steam utility. As of December 31, 1996, approximately 94% of Wisconsin
Energy's consolidated total assets were attributable to Wisconsin Electric.
Effective January 1, 1996, Wisconsin Energy merged its wholly-owned natural
gas utility subsidiary, Wisconsin Natural Gas Company ("Wisconsin Natural"),
into Wisconsin Electric to form a single combined utility subsidiary.
Wisconsin Electric generates, transmits, distributes and sells electric energy
in a territory of approximately 12,000 square miles with a population
estimated at 2,300,000 in southeastern (including the metropolitan Milwaukee
area), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. Wisconsin Electric purchases, distributes and sells natural gas to
retail customers and transports customer-owned gas in three distinct service
areas totalling about 2,800 square miles in Wisconsin: west and south of the
City of Milwaukee, the Appleton area and the Prairie du Chien area. The gas
service territory, which has an estimated population of over 1,100,000, is
largely within Wisconsin Electric's electric service area. Wisconsin Electric
distributes and sells steam supplied by its power plants to certain customers
in the metropolitan Milwaukee area. Wisconsin Energy also has certain
subsidiaries engaged in various non-utility businesses. Wisconsin Energy's
principal executive offices are located at 231 West Michigan Avenue, P.O. Box
2949, Milwaukee, Wisconsin 53201 (telephone number: (414) 221-2345). See
"Businesses of the Parties to the Reorganization--Wisconsin Energy."
ACQUISITION
Acquisition, a wholly-owned subsidiary of Wisconsin Energy, is a Michigan
corporation which was incorporated by Wisconsin Energy for the purpose of
consummating the Merger. It will have no operations except as contemplated by
the Reorganization Agreement. At the Effective Time of Merger, Acquisition
will be merged with and into ESELCO, which will be the surviving corporation
in the Merger. Following the Effective Time of Merger, Acquisition will cease
to exist. Acquisition's principal executive offices are located at 231 West
Michigan Avenue, P.O. Box 2949, Milwaukee, Wisconsin 53201 (telephone number:
(414) 221-2345). See "Businesses of the Parties to the Reorganization--
Acquisition."
ESELCO
ESELCO is a holding company whose principal subsidiary is Edison Sault
Electric Company ("Edison Sault"), an electric utility engaged in the
generation, purchase, transmission, distribution and sale, at wholesale and
retail, of electric energy. Edison Sault accounts for the major share of
ESELCO's total assets, revenues and income. Edison Sault serves more than
21,000 residential, commercial and industrial customers throughout Michigan's
Eastern Upper Peninsula in a service territory of over 2,000 square miles with
a population of approximately 55,000. ESELCO has two other subsidiaries, ESEG,
Inc. ("ESEG") and Northern Tree Service, Inc. ("NTS"). Edison Sault, ESEG and
NTS are all wholly-owned subsidiaries of ESELCO, and are referred to herein
collectively with ESELCO as the "ESELCO Companies". ESELCO's principal
executive offices are located at 725 East Portage Avenue, Sault Ste. Marie,
Michigan 49783 (telephone number: (906) 632-2221). See "Businesses of the
Parties to the Reorganization--ESELCO."
6
<PAGE>
THE SPECIAL MEETING
PLACE, TIME AND DATE; PURPOSE
The Special Meeting of ESELCO shareholders will be held at the Ramada Inn
Conference Center, 3290 I-75 Business Spur, Sault Ste. Marie, Michigan on
Tuesday, October 7, 1997 at 10:00 a.m., Eastern Daylight Time. The purpose of
the Special Meeting is to consider and vote upon the approval of the Amended
and Restated Agreement and Plan of Reorganization (attached hereto as Appendix
A), including the related Plan of Merger (together the "Reorganization
Agreement"), providing for the Merger. See "The Special Meeting--Place, Time
and Date" and "--Purpose."
RECORD DATE; SHARES ENTITLED TO VOTE
The ESELCO Board has fixed the close of business on August 27, 1997 as the
record date (the "Record Date") for determination of the shareholders entitled
to notice of and to vote at the Special Meeting. Only holders of record of
shares of the Common Stock, $.01 par value per share, of ESELCO ("ESELCO
Common Stock") on the Record Date will be entitled to notice of and to vote at
the Special Meeting. Each share of ESELCO Common Stock is entitled to one
vote. At the Record Date, there were 1,593,180 shares of ESELCO Common Stock
outstanding. See "The Special Meeting--Record Date; Shares Entitled to Vote."
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the outstanding shares
of ESELCO Common Stock entitled to vote at the Special Meeting is required for
approval of the Reorganization Agreement. At the Record Date, the directors
and executive officers of ESELCO and their affiliates beneficially owned
approximately 11% of the outstanding shares of ESELCO Common Stock entitled to
vote at the Special Meeting. All of the directors and executive officers of
ESELCO have indicated their intention to vote their shares for approval of the
Reorganization Agreement. No shares of ESELCO Common Stock were beneficially
owned at the Record Date by Wisconsin Energy directors, executive officers and
their affiliates. See "The Special Meeting--Vote Required for Approval."
NO DISSENTERS' RIGHTS
The Michigan Business Corporation Act (the "MBCA"), under which ESELCO is
incorporated, does not give ESELCO shareholders the right to dissent from, and
obtain payment of the fair value of such shareholders' shares upon
consummation of, the Merger. See "The Special Meeting--No Dissenters' Rights."
THE MERGER
GENERAL
At the Effective Time of Merger, Acquisition will merge with and into
ESELCO. At such time, each issued and outstanding share of ESELCO Common Stock
will be converted into that number of shares of Wisconsin Energy Common Stock
as is equal to the exchange ratio determined pursuant to the Reorganization
Agreement (the "Exchange Ratio"). The Exchange Ratio will be equal to that
number (carried to the fourth decimal place) obtained by dividing $44.50 by
the Average Wisconsin Energy Price. The Average Wisconsin Energy Price will be
equal to the average of the closing sale price per share of Wisconsin Energy
Common Stock as reported on the New York Stock Exchange--Composite
Transactions on each of the ten (10) consecutive trading days ending with the
trading day immediately preceding the Closing Date (as defined). No fractional
shares of Wisconsin Energy Common Stock will be issued in the Merger. In lieu
thereof, each holder of shares of ESELCO Common Stock who would otherwise have
been entitled to a fraction of a share of Wisconsin Energy Common Stock will
be paid the cash value of such fraction based on the Average Wisconsin Energy
Price. PLEASE NOTE THAT SHAREHOLDERS OF ESELCO SHOULD NOT SUBMIT THEIR ESELCO
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE INSTRUCTIONS TO DO SO. As a
result of the Merger, the independent corporate existence of Acquisition will
cease and ESELCO, as the surviving corporation in the Merger, will become a
wholly-owned subsidiary of Wisconsin Energy. See "The Merger--General."
7
<PAGE>
RECOMMENDATION OF THE ESELCO BOARD
THE ESELCO BOARD HAS APPROVED THE MERGER AS ADVISABLE, FAIR AND IN THE BEST
INTERESTS OF ESELCO AND THE ESELCO SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A
VOTE FOR THE APPROVAL OF THE REORGANIZATION AGREEMENT, INCLUDING THE PLAN OF
MERGER, AND THE TRANSACTIONS CONTEMPLATED THEREBY.
For a discussion of the circumstances surrounding the Merger and the factors
considered by the ESELCO Board in making its recommendation, see "The Merger--
Background of the Merger" and "--Reasons for the Merger; Recommendation of the
ESELCO Board." Approval of the Reorganization Agreement by the shareholders of
ESELCO is a condition to consummation of the Merger. See "The Merger--
Conditions to Consummation of the Merger."
OPINION OF ESELCO'S FINANCIAL ADVISOR
Pacific Economics Group ("Pacific"), ESELCO's financial advisor, has
delivered a written opinion to the ESELCO Board, dated May 13, 1997, to the
effect that, as of that date, the Exchange Ratio was fair to ESELCO
shareholders from a financial point of view. A copy of Pacific's opinion
letter, setting forth the assumptions made, matters considered, procedures
followed and limits of Pacific's review, is attached hereto as Appendix B and
should be read by ESELCO shareholders in its entirety. See "The Merger--
Opinion of ESELCO's Financial Advisor."
INTEREST OF CERTAIN PERSONS IN THE MERGER
Edison Sault has severance agreements with each of its full-time executive
officers that contain provisions which require the payment of severance
benefits under certain circumstances that may occur in connection with a
"change in control," which the Merger will constitute. The Reorganization
Agreement provides that, after the Effective Time of Merger, Wisconsin Energy
shall cause Edison Sault to honor such agreements, subject to the terms
thereof. Certain officers and other employees are eligible to elect coverage
under a Special Early Retirement Window Program, pursuant to which each
individual may retire incident to the Merger. Edison Sault's Supplemental
Executive Retirement Plan is to be terminated in connection with the Merger,
and any participant who would not be eligible to receive benefits under the
plan if his employment were to have terminated at the time of the Merger shall
be entitled to an immediate lump-sum payment of an amount determined to be the
actuarial equivalent of his prospective benefits under the plan, grossed up
for the effect of state and federal taxes. Edison Sault's fee deferral plan
for its directors will be terminated in connection with the Merger; however,
accumulated balances shall continue to accrue earnings identical to the
interest rates or other methods allowed to participants under the Wisconsin
Energy Directors' Deferred Compensation Plan. ESELCO's Director's Retirement
Plan will also be terminated in connection with the Merger; however, ESELCO's
obligations thereunder will continue to be honored. The shares of restricted
stock awarded to officers under ESELCO's Restricted Stock Bonus Plan will vest
as of the day before the Effective Time of Merger. Pursuant to the
Reorganization Agreement, subject to collective bargaining obligations of
Edison Sault, Wisconsin Energy has agreed to provide benefits to ESELCO
employees similar to those currently provided under other benefit plans
maintained at Wisconsin Electric for the benefit of employees generally,
without regard to whether any such plans are currently maintained by ESELCO.
The Reorganization Agreement also provides that from and after the Effective
Time of Merger, Wisconsin Energy shall cause ESELCO (and successors to ESELCO)
to indemnify each present and former employee, agent, director and officer of
any of the ESELCO Companies against any amounts incurred in connection with
any claim arising out of or relating to the transactions contemplated by the
Reorganization Agreement or any such person having served as an employee,
agent, director or officer of any of the ESELCO Companies or otherwise on
behalf of any of the ESELCO Companies. The persons covered by ESELCO's
directors and officers insurance as of the date of the Reorganization
Agreement shall also be covered by directors' and officers' liability
insurance for at least three years from the Effective Time of Merger. See "The
Merger--Interest of Certain Persons in the Merger."
8
<PAGE>
MANAGEMENT AND OPERATIONS OF ESELCO AFTER THE MERGER
After the Effective Time of Merger, ESELCO, as the surviving corporation in
the Merger, will become a wholly-owned subsidiary of Wisconsin Energy.
Immediately after the Merger, Edison Sault will continue to be a wholly-owned
public utility subsidiary of ESELCO. The duly qualified and acting directors
and officers of Acquisition immediately prior to the Effective Time of Merger
shall be the directors and officers of ESELCO after the Effective Time of
Merger. Wisconsin Energy may eliminate ESELCO as an intermediate holding
company by merging ESELCO with and into Wisconsin Energy after the Merger,
subject to the receipt of a private letter ruling from the Internal Revenue
Service, with the result that Edison Sault would become a direct wholly-owned
subsidiary of Wisconsin Energy. See "The Merger--Management and Operations of
ESELCO After the Merger."
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Wisconsin Energy, Acquisition and ESELCO to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions, including, among others: approval of the Reorganization Agreement
by the requisite vote of shareholders of ESELCO; the securing of all requisite
regulatory approvals, including those of the Federal Energy Regulatory
Commission ("FERC") and the SEC, and compliance with all necessary
requirements of Section 7A of the Clayton Act, enacted by the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (the "HSR Act"); the absence of any
condition in such governmental approvals applicable to the ESELCO Companies,
Wisconsin Energy or Acquisition which is, in the reasonable judgment of
Wisconsin Energy, materially adverse in any manner to the ESELCO Companies,
Wisconsin Energy or Acquisition; receipt of an opinion of counsel to the
effect that the Merger will be treated for federal income tax purposes as a
tax-free reorganization; and receipt of an opinion from the independent
accountants of Wisconsin Energy that the Merger qualifies for pooling of
interests accounting treatment. See "The Merger--Conditions to Consummation of
the Merger."
NO SOLICITATION; TERMINATION FEE
The Reorganization Agreement provides that ESELCO shall not solicit,
initiate, facilitate, encourage or negotiate any inquiry or proposal with
respect to certain business combinations involving any of the ESELCO
Companies; a sale, transfer or other disposition of all or a significant
portion of the assets of any of the ESELCO Companies; a sale of, or a tender
offer or exchange offer for, or acquisition by any person of a substantial
interest in the capital stock of any of the ESELCO Companies. The
Reorganization Agreement also provides that if the Merger is not consummated
by reason of the occurrence of certain events, ESELCO will pay Wisconsin
Energy $2,000,000. See "The Merger--No Solicitation; Termination Fee."
REGULATORY REQUIREMENTS
Edison Sault does not own or operate utility facilities in Wisconsin, is not
a Wisconsin corporation and does not provide utility service in Wisconsin.
Wisconsin Energy will be acquiring ESELCO and maintaining Edison Sault as a
separate electric utility not providing service in Wisconsin. Wisconsin Energy
and ESELCO believe that approval of the Merger is not required from either the
Michigan Public Service Commission ("MPSC") or the Public Service Commission
of Wisconsin ("PSCW"). Consummation of the Merger is subject to expiration or
termination of the waiting period under the HSR Act. Wisconsin Energy and
ESELCO will file appropriate notifications under the HSR Act. The waiting
period under the HSR Act will expire or terminate within 30 days thereafter
unless a request for additional information is made by either the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
or the Federal Trade Commission (the "FTC"). Consummation of the Merger is
subject to approval by the FERC under the Federal Power Act and by the SEC
under the Public Utility Holding Company Act of 1935, as amended (the
"PUHCA"). Wisconsin Energy and ESELCO will file a joint application with the
FERC for FERC approval. Wisconsin Energy and ESELCO will file an application
with the SEC to obtain SEC approval of the Merger under the PUHCA and also to
confirm that the Merger will not affect Wisconsin Energy's and ESELCO's
existing exemptions from the registration
9
<PAGE>
and certain other requirements of the PUHCA. Under the Reorganization
Agreement, Wisconsin Energy and ESELCO have agreed to use their reasonable
efforts to obtain all necessary regulatory approvals. Wisconsin Energy and
ESELCO believe that they will receive the requisite regulatory approvals for
the Merger, but there can be no assurance that such approvals will be received
or that, if received, the approvals will be obtained on terms which satisfy
the applicable conditions to the Reorganization Agreement. See "The Merger--
Conditions to Consummation of the Merger" and "--Regulatory Requirements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is conditioned upon the receipt by Wisconsin Energy and ESELCO of
an opinion of Quarles & Brady, Wisconsin Energy's counsel, dated prior to the
mailing date of this Proxy Statement/Prospectus, to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that Wisconsin Energy, Acquisition and ESELCO will each be a
party to that reorganization within the meaning of Section 368(b) of the Code,
which opinion (a copy of which is filed as an exhibit to the Registration
Statement) shall not have been withdrawn or modified in any material respect
as of the Closing Date and the Effective Time of Merger. Assuming the Merger
so qualifies, then for federal income tax purposes: (i) no gain or loss will
be recognized by Wisconsin Energy, Acquisition or ESELCO as a result of the
Merger; and (ii) no gain or loss will be recognized by the holders of ESELCO
Common Stock upon the conversion of their shares of ESELCO Common Stock into
shares of Wisconsin Energy Common Stock pursuant to the Reorganization
Agreement, except with respect to cash, if any, received in lieu of fractional
shares of Wisconsin Energy Common Stock. All shareholders are urged to consult
their own tax advisors as to the specific tax consequences to them of the
Merger and the other transactions contemplated in connection therewith,
including the applicability and effect of federal, state, local, foreign and
other tax laws. See "The Merger--Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger has been structured to qualify as a pooling of interests for
accounting and financial reporting purposes. The obligation of Wisconsin
Energy to consummate the Merger is subject to the receipt from Price
Waterhouse LLP ("Price Waterhouse"), its independent accountants, of their
opinion that the Merger qualifies for pooling of interests accounting
treatment. See "The Merger--Conditions to Consummation of the Merger" and "--
Accounting Treatment."
COMPARISON OF SHAREHOLDER RIGHTS
Wisconsin Energy is incorporated in the State of Wisconsin and is governed
by Wisconsin law. ESELCO is incorporated in the State of Michigan and is
governed by Michigan law. For a discussion of certain differences in the
rights of shareholders under Wisconsin law and Michigan law, and under the
respective articles of incorporation and bylaws of Wisconsin Energy and
ESELCO. See "Comparison of Shareholder Rights."
SELECTED FINANCIAL DATA
The summary below sets forth selected historical financial data for
Wisconsin Energy and ESELCO. The Wisconsin Energy financial data should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Wisconsin Energy documents incorporated by reference
herein. The ESELCO financial data should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Proxy
Statement/Prospectus and in the ESELCO documents incorporated by reference
herein. See "Incorporation of Certain Documents by Reference" and "Index to
ESELCO Financial Statements."
10
<PAGE>
WISCONSIN ENERGY
The selected historical consolidated year end financial data of Wisconsin
Energy set forth below have been derived from the consolidated financial
statements of Wisconsin Energy for each of the five fiscal years in the period
ended December 31, 1996. The selected historical consolidated twelve month end
financial data of Wisconsin Energy set forth below have been derived from the
consolidated financial statements of Wisconsin Energy for the twelve month
period ended June 30, 1997. The consolidated financial statements for each of
the five years in the period ended December 31, 1996 have been audited by
Price Waterhouse. The consolidated financial statements for the twelve month
period ended June 30, 1997 are unaudited. In the opinion of Wisconsin Energy
management, such unaudited data include all adjustments, consisting only of
normal recurring accruals, necessary for fair presentation.
<TABLE>
<CAPTION>
TWELVE MONTHS YEARS ENDED DECEMBER 31,
ENDED ---------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
------------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(A)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... $1,790,274 $1,773,820 $1,770,484 $1,742,192 $1,693,235 $1,595,515
Net income.............. 144,214(b) 218,135 234,034 180,868(c) 190,135 171,239
Earnings per average
common share........... 1.29 1.97 2.13 1.67(c) 1.80 1.66
Total assets............ 4,805,017 4,810,838 4,560,735 4,408,259 4,270,592 3,788,955
Long-term debt and
preferred stock-
redemption required.... 1,407,367 1,416,067 1,367,644 1,283,686 1,300,781 1,289,082
Short-term debt(d)...... 286,569 259,469 208,773 284,586 229,558 144,469
Cash dividends declared
per common share....... 1.53 1.51 1.46 1.40 1.34 1.29
Book value per share.... 17.04 17.42 16.89 16.01 15.56 14.86
</TABLE>
- --------
(a) No pro forma consolidated financial data for Wisconsin Energy, giving
effect to the Merger, is presented, since the effect of the Merger on such
financial data is immaterial.
(b) Includes nonrecurring $30.7 million charge in June 1997 ($18.8 million net
of tax or $.17 per share) related to the write-off of Primergy Corporation
merger expenses. See "--Recent Developments--Wisconsin Energy--Termination
of Merger Agreement with Northern States Power Company" and "--Recent
Developments--Wisconsin Energy--Financial Results from Operations for the
Twelve Months Ended June 30, 1997."
(c) Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax
or $.42 per share) related to Wisconsin Electric's Revitalization Program.
(d) Includes current portion of long-term debt and capitalized lease
obligations.
11
<PAGE>
ESELCO
The selected historical consolidated year end financial data of ESELCO set
forth below have been derived from the consolidated financial statements of
ESELCO for each of the five fiscal years in the period ended December 31,
1996. The selected historical consolidated twelve month end financial data of
ESELCO set forth below have been derived from the consolidated financial
statements of ESELCO for the twelve month period ended June 30, 1997. The
consolidated financial statements for each of the five years in the period
ended December 31, 1996 have been audited by Arthur Andersen LLP, independent
public accountants. The consolidated financial statements for the twelve month
period ended June 30, 1997 are unaudited. In the opinion of ESELCO management,
such unaudited data include all adjustments, consisting of only normal
recurring accruals, necessary for fair presentation.
<TABLE>
<CAPTION>
TWELVE MONTHS YEARS ENDED DECEMBER 31,
ENDED ---------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
(UNAUDITED) AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues....... $38,120 $37,500 $36,845 $35,260 $33,573 $30,292
Net income............... 3,174 2,798 2,365 2,200 1,998 1,865
Earnings per average
common share(a)......... 2.00 1.80 1.56 1.47 1.36 1.29
Total assets............. 57,728 57,156 55,322 51,070 47,900 46,592
Long-term debt........... 17,692 19,674 16,788 15,484 16,582 17,065
Short-term debt(b)....... 4,123 4,072 5,153 5,769 4,349 4,041
Cash dividends declared
per common share(a)..... 1.08 1.04 0.97 0.91 0.89 0.85
Book value per share(a).. 13.47 12.75 12.03 11.36 10.45 9.65
</TABLE>
- --------
(a) Retroactively adjusted for stock dividends.
(b) Includes current portion of long-term debt and capitalized lease
obligations.
12
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth per share data of Wisconsin Energy and ESELCO
on both historical and pro forma combined bases and on an equivalent pro forma
basis for ESELCO. This table should be read in conjunction with the
consolidated financial statements and notes thereto of Wisconsin Energy
contained in the Wisconsin Energy documents incorporated by reference herein,
and with the consolidated financial statements and notes thereto of ESELCO
appearing elsewhere in this Proxy Statement/Prospectus and in the ESELCO
documents incorporated by reference herein. See "Incorporation of Certain
Documents by Reference" and "Index to ESELCO Financial Statements." Pro forma
combined and equivalent pro forma per share data reflect the combined results
of Wisconsin Energy and ESELCO, after giving effect to the Merger under the
pooling of interests accounting method, as if the Merger had occurred on the
date of such data, in the case of book value data, and on January 1, 1994, in
the case of earnings data.
<TABLE>
<CAPTION>
PRO FORMA WISCONSIN ENERGY AND
EQUIVALENT PRO FORMA
HISTORICAL(A) ESELCO(B)
-------------------- ----------------------------------
YEARS ENDED YEARS ENDED
TWELVE MONTHS DECEMBER 31, TWELVE MONTHS DECEMBER 31,
ENDED -------------------- ENDED --------------------
JUNE 30, 1997 1996 1995 1994 JUNE 30, 1997 1996 1995 1994
------------- ------ ------ ------ ------------- ------ ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WISCONSIN ENERGY
Earnings per average
common share.......... $ 1.29(c) $ 1.97 $ 2.13 $ 1.67(d) $ 1.29 $ 1.94 $ 2.10 $ 1.65
Cash dividends declared
per common share (e).. 1.53 1.51 1.46 1.40 1.53 1.51 1.46 1.40
Book value per share... 17.04 17.42 16.89 16.01 16.81 17.17 16.65 15.78
ESELCO
Earnings per average
common share.......... $ 2.00 $ 1.80 $ 1.56 $ 1.47 $ 2.29 $ 3.44 $ 3.72 $ 2.92
Cash dividends declared
per common share...... 1.08 1.04 0.97 0.91 2.71 2.68 2.59 2.48
Book value per share... 13.47 12.75 12.03 11.36 29.79 30.43 29.50 27.96
</TABLE>
- --------
(a) Retroactively adjusted for ESELCO stock dividends.
(b) The equivalent per share data for ESELCO presents the pro forma results
for Wisconsin Energy, taking into account an assumed Exchange Ratio of
1.7720 shares of Wisconsin Energy Common Stock for each share of ESELCO
Common Stock (which is what the Exchange Ratio would have been if the
Merger had been consummated on May 13, 1997, the date of the
Reorganization Agreement, when the Average Wisconsin Energy Price would
have been $25.1125), based upon a comparison of the number of shares of
Wisconsin Energy Common Stock issued in connection with the Merger and the
total number of shares of ESELCO Common Stock outstanding. The actual
Exchange Ratio will reflect Wisconsin Energy's average closing price per
share for the ten days immediately preceding the Closing Date.
(c) Includes nonrecurring $30.7 million charge in June 1997 ($18.8 million net
of tax or $.17 per share) related to the write-off of Primergy Corporation
merger expenses. See "--Recent Developments--Wisconsin Energy--Termination
of Merger Agreement with Northern States Power Company" and "--Recent
Developments--Wisconsin Energy--Financial Results from Operations for the
Twelve Months Ended June 30, 1997."
(d) Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax
or $.42 per share) related to Wisconsin Electric's Revitalization Program.
(e) Wisconsin Energy pro forma cash dividends per share amounts reflect
Wisconsin Energy historical cash dividends per share.
13
<PAGE>
COMPARATIVE MARKET PRICE DATA
Wisconsin Energy Common Stock is listed on the NYSE. ESELCO Common Stock is
listed on the NASDAQ/NM. The table below sets forth, for the calendar quarters
indicated, the high and low sales prices of Wisconsin Energy Common Stock and
ESELCO Common Stock as reported on the NYSE Composite Tape and on the
NASDAQ/NM, respectively, and the dividends declared in each such quarter.
<TABLE>
<CAPTION>
WISCONSIN ENERGY ESELCO
COMMON STOCK COMMON STOCK
-------------------------- ----------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS(A)
-------- ------- --------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter......... $ 27 1/2 $24 $.33875 $21.768 $19.991 $ 0.22
Second Quarter........ 26 3/8 23 1/8 .3525 22.192 19.676 0.23
Third Quarter......... 26 3/8 23 3/8 .3525 22.192 20.362 0.23
Fourth Quarter........ 27 24 1/2 .3525 22.192 20.362 0.23
1995
First Quarter......... $28 1/4 $25 1/2 $ .3525 $22.192 $19.447 $0.238
Second Quarter........ 29 26 3/4 .3675 21.680 19.559 0.245
Third Quarter......... 28 1/2 26 1/8 .3675 21.680 19.795 0.245
Fourth Quarter........ 30 7/8 28 .3675 23.565 20.266 0.245
1996
First Quarter......... $32 $27 1/4 $ .3675 $24.743 $21.680 $0.255
Second Quarter........ 28 7/8 26 .38 27.913 24.515 0.262
Third Quarter......... 29 1/8 26 3/8 .38 25.971 23.301 0.262
Fourth Quarter........ 28 3/8 26 1/8 .38 25.243 23.301 0.262
1997
First Quarter......... $27 7/8 $23 1/4 $ .38 $39.806 $25.243 $0.272
Second Quarter........ 25 5/8 23 .385 41.000 35.000 0.28
Third Quarter (through
August 26)........... 25 9/16 23 1/2 .385 40.500 38.500 0.28
</TABLE>
- --------
(a) Edison Sault's First Mortgage Bond Indenture and the short term line of
credit agreement(s) contain restrictions on the payment of cash dividends.
As of December 31, 1996, under these provisions, $6,294,000 of Edison
Sault's retained earnings were available for the declaration of dividends.
On January 22, 1997, the last day ESELCO's Common Stock traded prior to the
public announcement by ESELCO that it was in the preliminary stages of
discussion with possible acquirors, the closing price per share of ESELCO
Common Stock, as reported on the NASDAQ/NM, was $28.641.
On March 24, 1997, the last full trading day prior to the public
announcement that ESELCO and Wisconsin Energy had entered into a letter of
intent setting forth the preliminary terms of the potential acquisition of
ESELCO by Wisconsin Energy, the closing price per share of Wisconsin Energy
Common Stock, as reported on the NYSE Composite Tape, was $24.50, and the
closing price per share of ESELCO Common Stock, as reported on the NASDAQ/NM,
was $29.612. Assuming the Merger was consummated on March 24, 1997, the
Exchange Ratio would have been 1.8417 shares of Wisconsin Energy Common Stock
for each share of ESELCO Common Stock, based on an Average Wisconsin Energy
Price of $24.1625.
On August 26, 1997, the most recent date for which it was practicable to
obtain market price data prior to the printing of this Proxy
Statement/Prospectus, the closing price per share of Wisconsin Energy Common
Stock, as reported on the NYSE Composite Tape, was $25.0625, and the closing
price per share of ESELCO Common Stock, as reported on the NASDAQ/NM, was
$39.00. At that date, there were approximately 100,000 holders of record of
Wisconsin Energy Common Stock and approximately 1,300 holders of record of
ESELCO Common Stock. HOLDERS OF ESELCO COMMON STOCK ARE URGED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR SHARES OF WISCONSIN ENERGY COMMON STOCK AND
ESELCO COMMON STOCK.
14
<PAGE>
RECENT DEVELOPMENTS
ESELCO
Manistique River/Harbor Environmental Matter. As previously reported by
ESELCO, Edison Sault received notification in 1993 from the U.S. Environmental
Protection Agency (the "U.S. EPA") that it and others were being named
potentially responsible parties ("PRPs") at the Manistique River/Harbor Area
of Concern (the "AOC") in Manistique, Michigan due to PCBs which were found in
the area. Pursuant to an Administrative Order on Consent executed in December,
1996, the U.S. EPA and the PRPs agreed to a cash-out settlement whereby the
PRPs would pay to the U.S. EPA the $6.4 million cost of in-place capping for
the right to be absolved from any future legal actions concerning PCB
pollution. Edison Sault has incurred a total cost of $3.6 million on this
project.
Edison Sault filed an action on February 4, 1997 in the Circuit Court for
the County of Schoolcraft, Michigan against certain insurance carriers to
recover unreimbursed defense costs and expenses associated with defending this
matter of approximately $350,000 and indemnification for its costs of
approximately $3.2 million in settling the matter with the U.S. EPA and
obtaining a release of the property damage claims asserted by the U.S. EPA.
The certainty and magnitude of any insurance recovery is unknown at this time.
On April 28, 1997, Michigan Mutual Insurance Company filed a counter-claim for
approximately $1.7 million for previously paid defense costs. Legal counsel
for Edison Sault believes, based on the information currently available, that
the counterclaim lacks merit.
WISCONSIN ENERGY
Termination of Merger Agreement with Northern States Power Company. On May
16, 1997, the Boards of Directors of Wisconsin Energy and Northern States
Power Company ("NSP") agreed to terminate the Amended and Restated Agreement
and Plan of Merger, dated as of April 28, 1995, as amended and restated as of
July 26, 1995 (the "Merger Agreement"), by and among NSP, Wisconsin Energy and
their respective subsidiaries, Northern Power Wisconsin Corp. and WEC Sub
Corp., which provided for a business combination of Wisconsin Energy and NSP
to form Primergy Corporation (the "Transaction"). Accordingly, the parties to
the Merger Agreement entered into a Termination Agreement, dated as of May 16,
1997, which terminated the Merger Agreement by mutual written consent. The
Termination Agreement also terminated the mutual Stock Option Agreements,
dated as of April 28, 1995, entered into between Wisconsin Energy and NSP in
connection with the Merger Agreement.
On May 14, 1997, the FERC issued an Opinion and Order in which it concluded
that it could not approve the Transaction at that time and reversed the
earlier decision of its own administrative law judge who had found that the
proposed Transaction, as conditioned, was consistent with the public interest.
The FERC remanded the case to a settlement judge and directed the participants
to attempt to reach a resolution of the market power issues which formed the
basis of the FERC's reversal of the administrative law judge's findings.
The Board of Directors of Wisconsin Energy (the "Wisconsin Energy Board")
concluded that continuing the proposed Transaction, given the current
regulatory climate, was not in the best interest of Wisconsin Energy's
shareholders, customers and employees. In reaching its decision to terminate
the Merger Agreement, the Wisconsin Energy Board considered many factors,
including: the May 14, 1997 FERC ruling; the fact that any regulatory
approvals that might be obtained appeared to involve conditions which would
significantly reduce the benefits of the Transaction; and the impact on
shareholders and other constituencies of further delays in the regulatory
approval process as a result of the FERC action.
As reported in Wisconsin Energy's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, Wisconsin Energy charged to expense in the second
quarter of 1997 $30.7 million ($18.8 million net of tax or $.17 per share) of
deferred transaction costs and costs to achieve the Primergy Corporation
merger. See "--Financial Results from Operations for the Twelve Months Ended
June 30, 1997" below.
15
<PAGE>
Financial Results from Operations for the Twelve Months Ended June 30, 1997.
Wisconsin Energy's net income for the twelve months ended June 30, 1997
decreased $74 million or 34% compared to the year ended December 31, 1996.
This decrease reflects the $18.8 million net of tax nonrecurring write-off in
the second quarter of 1997 of Primergy merger related expenses and higher
purchased power, fuel and maintenance expenses due to the unscheduled outages
at Wisconsin Electric's Point Beach Nuclear Plant ("Point Beach") and the Oak
Creek Power Plant. The table below provides Wisconsin Energy's unaudited net
income and earnings per average common share for the three and six months
ended June 30, 1997 and June 30, 1996:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS ENDED
----------------- ----------------
JUNE JUNE
JUNE 30, 30, 30, JUNE 30,
1997(A) 1996 1997(A) 1996
-------- ------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net Income (Loss)............................ $(10,632) $45,554 $34,437 $108,358
Earnings (Loss) Per Average
Common Share................................ (0.09) 0.41 0.31 0.98
</TABLE>
- --------
(a) Includes nonrecurring $30.7 million charge in June 1997 ($18.8 million net
of tax or $.17 per share) related to the write-off of Primergy Corporation
merger expenses.
Replacement of the Point Beach Unit 2 steam generators has been completed.
Unit 2 returned to service in August 1997. Point Beach Unit 1 was taken out of
service in February 1997 due to equipment problems. Wisconsin Electric is
currently evaluating the restart schedule of Unit 1. In May 1997, the PSCW
approved an interim fuel charge to collect, subject to refund, a portion of
the increased costs based on the estimates included in Wisconsin Electric's
request to the PSCW in the first quarter of 1997 for an increase in electric
rates to cover the Wisconsin portion of the higher fuel costs. Wisconsin
Electric estimates that, of the $67 million of additional annual fuel costs
included in the request to the PSCW for an interim fuel charge, it may
collect, subject to refund, as much as approximately $40 million. The portion
of the higher fuel and purchased power costs that ultimately will be recovered
in electric rates will be determined by the PSCW, after public hearings.
Because of further delays in restarting Point Beach, Wisconsin Electric
presently estimates that it will incur additional fuel and purchased power
costs of approximately $30 million to $40 million in 1997 above the $67
million of excess fuel costs estimated for the May 1997 surcharge. Further
information regarding these and other matters is contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Wisconsin Energy's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, which is incorporated by reference herein.
THE SPECIAL MEETING
PLACE, TIME AND DATE
The Special Meeting of ESELCO shareholders will be held at the Ramada Inn
Conference Center, 3290 I-75 Business Spur, Sault Ste. Marie, Michigan on
Tuesday, October 7, 1997, at 10:00 a.m., Eastern Daylight Time. This Proxy
Statement/Prospectus is being sent to holders of ESELCO Common Stock and
accompanies a form of proxy which is being solicited by the ESELCO Board for
use at the Special Meeting and any adjournment or postponement thereof.
PURPOSE
The purpose of the Special Meeting is to consider and vote upon the approval
of the Amended and Restated Agreement and Plan of Reorganization, including
the related Plan of Merger (together, the "Reorganization Agreement")
providing for, among other things, the merger of Acquisition with and into
ESELCO and the conversion of shares of ESELCO Common Stock into shares of
Wisconsin Energy Common Stock, as well as to transact such other business, if
any, as may properly come before the Special Meeting.
16
<PAGE>
RECORD DATE; SHARES ENTITLED TO VOTE
The ESELCO Board has fixed the close of business on August 27, 1997 as the
Record Date for determination of the shareholders entitled to notice of and to
vote at the Special Meeting. Only holders of record of ESELCO Common Stock,
the only class of voting stock of ESELCO outstanding, on the Record Date will
be entitled to notice of and to vote at the Special Meeting. Each share of
ESELCO Common Stock is entitled to one vote. At the Record Date, there were
1,593,180 shares of ESELCO Common Stock outstanding.
VOTE REQUIRED FOR APPROVAL
A majority of the shares entitled to vote, represented in person or by
proxy, will constitute a quorum of ESELCO shareholders at the Special Meeting.
Abstentions and broker non-votes will be considered present for purposes of
determining whether a quorum exists. The affirmative vote of the holders of a
majority of the outstanding shares of ESELCO Common Stock entitled to vote at
the Special Meeting is required for approval of the Reorganization Agreement.
Abstentions and broker non-votes will have the same effect as votes cast
against approval of the Reorganization Agreement.
At the Record Date, the directors and executive officers of ESELCO and their
affiliates beneficially owned an aggregate of approximately 175,250 shares of
ESELCO Common Stock, representing approximately 11% of the outstanding shares
of ESELCO Common Stock entitled to vote at the Special Meeting. All of the
directors and executive officers of ESELCO have indicated their intention to
vote their shares for the approval of the Reorganization Agreement. No shares
of ESELCO Common Stock were beneficially owned at the Record Date by Wisconsin
Energy directors, executive officers and their affiliates.
PROXIES
Holders of ESELCO Common Stock may vote either in person or by properly
executed proxy. Shares of ESELCO Common Stock represented by a properly
executed proxy received prior to or at the Special Meeting will, unless such
proxy is revoked, be voted in accordance with the instructions indicated on
such proxy. If no instructions are indicated on a properly executed proxy, the
shares will be voted FOR the proposal to approve the Reorganization Agreement.
FAILURE TO RETURN THE PROXY CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING
WILL HAVE THE EFFECT OF A VOTE AGAINST THE PROPOSAL.
Any proxy given pursuant to this solicitation or otherwise may be revoked by
the person giving it at any time before it is voted by delivering to the
Corporate Secretary of ESELCO, on or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy or a later dated proxy related to the same shares of ESELCO Common
Stock, or by attending the Special Meeting and voting in person. Attendance at
the Special Meeting will not in itself constitute revocation of a proxy.
The expense of soliciting proxies will be borne by ESELCO. The expense of
printing this Proxy Statement/Prospectus and the expense of printing and
filing the Registration Statement are to be shared equally by ESELCO and
Wisconsin Energy. Wisconsin Energy will pay the filing fee relating to the
filing required by the HSR Act. All other costs and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expenses. Proxies will be
solicited principally by mail, but may also be solicited by the directors,
officers and other regular employees of ESELCO in person or by telephone,
facsimile or other means of communication. Such directors, officers and
employees will receive no compensation therefor in addition to their regular
compensation, but may be reimbursed for out-of-pocket expenses in connection
with such solicitation. Brokers and others who hold ESELCO Common Stock on
behalf of another will be asked to send proxy material to the beneficial
owners of such stock, and ESELCO will reimburse them for their expenses.
If any other matters are properly presented at the Special Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Special Meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons
named in the proxy and acting thereunder
17
<PAGE>
will have discretion to vote on such matters in accordance with their best
judgment. As of the date hereof, the ESELCO Board of Directors knows of no
such other matters.
NO DISSENTERS' RIGHTS
Because Wisconsin Energy's Common Stock is listed on the NYSE, the MBCA does
not give ESELCO shareholders the right to dissent from, and obtain payment of
the fair value of such shareholders' shares upon consummation of, the Merger.
See "Comparison of Shareholder Rights--Comparison of Michigan and Wisconsin
Law--Dissenters' Rights."
THE MERGER
The information contained in this Proxy Statement/Prospectus with respect to
the Merger is qualified in its entirety by reference to the Reorganization
Agreement, which is attached hereto as Appendix A and is incorporated herein
by reference.
GENERAL
The Amended and Restated Agreement and Plan of Reorganization, including the
related Plan of Merger (together, the "Reorganization Agreement"), provides
for the merger of Acquisition, a wholly-owned subsidiary of Wisconsin Energy,
with and into ESELCO. ESELCO will be the surviving corporation in the Merger.
At the Effective Time of Merger (as defined below), all outstanding shares of
ESELCO Common Stock will be converted into Wisconsin Energy Common Stock and
ESELCO will become a wholly-owned subsidiary of Wisconsin Energy. The closing
to consummate the Merger (the "Closing") is scheduled to occur on December 30,
1997 or, if all requisite regulatory approvals have not been received on or
before December 23, 1997, the date which is five business days after receipt
of the last of such approvals, or such other date as the parties may mutually
agree to in writing (the "Closing Date"). The Merger shall be effective at
12:01 a.m., Central Time, on January 1, 1998 or, if the Closing occurs after
December 30, 1997, the date and time of the filing of the Certificate of
Merger and the Plan of Merger with the Michigan Department of Consumer and
Industry Services-Corporation, Securities and Land Development Bureau (the
"Effective Time of Merger"). While Wisconsin Energy and ESELCO believe that
they will receive the requisite regulatory approvals for the Merger, there can
be no assurance as to the receipt of such approvals or, if received, as to the
timing of such approvals or as to the ability to obtain such approvals on
satisfactory terms. See "--Conditions to Consummation of the Merger" and "--
Regulatory Requirements" below.
Upon the terms and subject to the conditions set forth in the Reorganization
Agreement, at the Effective Time of Merger, and without any action on the part
of the holders thereof, each issued and outstanding share of ESELCO Common
Stock will be converted into that number of shares of Wisconsin Energy Common
Stock as is equal to the Exchange Ratio. The Exchange Ratio will be equal to
that number (carried to the fourth decimal place) obtained by dividing $44.50
by the Average Wisconsin Energy Price. The Average Wisconsin Energy Price will
be equal to the average of the closing sale price of Wisconsin Energy Common
Stock as reported on the New York Stock Exchange--Composite Transactions on
each of the ten consecutive trading days ending with the trading day
immediately preceding the Closing Date. No fractional shares of Wisconsin
Energy Common Stock will be issued in the Merger. In lieu thereof, each holder
of shares of ESELCO Common Stock who would otherwise have been entitled to a
fraction of a share of Wisconsin Energy Common Stock will be paid the cash
value of such fraction based on the Average Wisconsin Energy Price. See "--
Exchange of ESELCO Certificates; No Fractional Shares" below. Any shares of
ESELCO Common Stock which are held as treasury stock by ESELCO or owned by its
subsidiaries at the Effective Time of Merger will be cancelled and retired and
no Wisconsin Energy Common Stock or other consideration will be issued or
delivered in exchange therefor.
As a result of the Merger, the independent corporate existence of
Acquisition will terminate, and ESELCO shall be the surviving corporation in
the Merger. At the Effective Time of Merger, ESELCO shareholders' direct
equity interest in ESELCO will cease and their equity interest in Wisconsin
Energy will commence.
18
<PAGE>
BACKGROUND OF THE MERGER
Prior to December 1996, ESELCO conducted very limited discussions with
certain companies in response to their unsolicited, preliminary expressions of
interest in possibly acquiring ESELCO. The Board of Directors of ESELCO
determined that it was not in the best interests of ESELCO or its shareholders
at those times to pursue a potential sale of ESELCO with these or any other
companies.
At the regular Board meeting held on November 14, 1996, the Board of
Directors began to reassess its determination not to pursue the potential sale
of ESELCO because of the possible impact of regulatory reforms in the electric
utility industry on ESELCO and its shareholders. Regulatory reforms, including
the proposed program of direct access that will allow customers to purchase
electricity from providers of their choice, are likely to increase competition
for ESELCO and has increased merger and acquisition activity in the industry.
The Board believed that it should reconsider whether ESELCO could maximize
shareholder value by remaining independent or pursuing a potential sale in
light of these regulatory reforms and the resulting changes in the business
environment of the industry.
At a special Board meeting held on December 9, 1996, the Board of Directors
was informed of the process to be observed when evaluating the potential sale
of ESELCO. The Board of Directors was presented an internal management study
which analyzed the consolidation benefits of a sale or merger of ESELCO with
potentially interested parties and included a summary of mergers and
acquisitions in the industry prepared by a third party. Additionally, the
Board authorized management to obtain a valuation of ESELCO from Pacific.
Although the Board did not conclude at the meeting that ESELCO was for sale,
it did agree to continue evaluating a potential sale with two companies (one
of which was Wisconsin Energy) which had expressed previously a potential
interest in acquiring ESELCO and which were believed to be the most capable of
consummating a transaction with ESELCO. The Board also provided directions to
Mr. William R. Gregory, ESELCO's President and Chief Executive Officer,
regarding further discussions with these two companies.
Following the Board meeting on December 9, 1996, Mr. Gregory conducted
further discussions with the two companies which had expressed previously a
potential interest in acquiring ESELCO. During these discussions, the two
companies expressed additional interest in acquiring ESELCO. Wisconsin Energy
and the other interested company entered into confidentiality agreements with
ESELCO dated January 16 and 21, 1997, respectively, and began conducting their
due diligence investigations of ESELCO. Both companies were informed by ESELCO
that due diligence investigations were to be completed no later than February
28, 1997, that written proposals regarding a potential transaction were to be
submitted no later than March 7, 1997 and that meetings would be held to
discuss any proposals later in March 1997.
At a meeting held on January 21, 1997 the Board of Directors of ESELCO
determined that recent unexplained market activity made it appropriate to
issue a press release disclosing that ESELCO was conducting preliminary
discussions with potential acquirors. After ESELCO issued the press release on
January 23, 1997, a third company contacted ESELCO and requested the
opportunity to participate in the due diligence investigation and to submit a
written proposal. Since the third company expressed significant interest at
high levels, had previously expressed an interest in acquiring ESELCO, and
since it appeared that the third company could comply with the established
schedule for the completion of due diligence and the submission of written
proposals, ESELCO agreed that the third company could participate. The third
party entered into a confidentiality agreement with ESELCO dated February 5,
1997 and began conducting its due diligence investigation. Two other companies
who submitted unsolicited inquiries later in February 1997 were not allowed to
participate in the process, because management believed that, based on the
nature of the inquiries and the manner in which they were made, the level of
interest expressed by these companies was not comparable to the interest of
the other three companies, that these companies could not meet the established
schedule and that any resulting delays might jeopardize a potential
transaction with one of the existing potential acquirors. These two companies
were informed that ESELCO would consider future discussions with them,
depending on the nature of their inquiries and the results of the current
discussions with the other three companies.
19
<PAGE>
ESELCO received written proposals regarding the potential acquisition of
ESELCO from each of the three companies by March 7, 1997, all of which
proposed stock-for-stock transactions. On March 12 and 13, 1997, the Board of
Directors of ESELCO met with its advisers, including Pacific, and
representatives of each of the three companies regarding the proposals. The
Board of Directors of ESELCO considered a number of factors, without
attributing relative weights to any of them, in evaluating whether ESELCO
should remain independent or should pursue further discussions and
negotiations with any or all of the three companies, including: (i) the
potential for ESELCO's shareholders to realize a premium based on the proposed
purchase price and the reasonableness of the proposed purchase price to
ESELCO's shareholders; (ii) the business, operational and financial profiles
and prospects of each of the three companies, including the liquidity of their
stock and the anticipated amount and sustainability of dividends payable by
them; (iii) the effect of an acquisition on ESELCO's shareholders, customers,
employees and communities served; (iv) the business, operational and financial
prospects of ESELCO; and (v) the ability to consummate the acquisition. After
evaluating the proposals, the Board of Directors of ESELCO rejected each of
them as inadequate and invited each company to submit revised proposals by
March 19, 1997.
ESELCO received revised proposals from each of the three companies by March
19, 1997. After analyzing each of the revised proposals based on the foregoing
and other factors, without attributing relative weights to any of the factors
considered, and the advice of Pacific, the Board of Directors determined at
its meeting on March 20, 1997 that it was in the best interests of ESELCO and
its shareholders to pursue further discussions with Wisconsin Energy and to
negotiate a letter of intent regarding a proposed acquisition of ESELCO by
Wisconsin Energy on terms substantially similar to those contained in
Wisconsin Energy's revised proposal.
Representatives of Wisconsin Energy and ESELCO negotiated the terms
contained in Wisconsin Energy's proposed letter of intent at a meeting on
March 21, 1997 and in further discussions conducted through March 24, 1997. As
a result of these negotiations, Wisconsin Energy proposed in its letter of
intent dated March 24, 1997 to acquire ESELCO in a tax-free reorganization in
which all of the outstanding shares of ESELCO Common Stock would be converted
into Wisconsin Energy Common Stock, at the Exchange Ratio determined by
dividing $44.50 for each share of ESELCO Common Stock by the Average Wisconsin
Energy Price. After evaluating this proposal and reviewing the available
alternatives, and based on the advice of Pacific, the ESELCO Board voted at
its meeting on March 24, 1997 to enter into the letter of intent, which was
executed on that same day.
After execution of the letter of intent, representatives of Wisconsin Energy
and ESELCO negotiated and prepared the terms and provisions of the
Reorganization Agreement. The Reorganization Agreement was approved by the
Board of Directors of ESELCO at a meeting held on May 12, 1997 and was
executed as of May 13, 1997. The Reorganization Agreement was amended and
restated as of July 11, 1997, in part, to remove the terms and conditions
related to Wisconsin Energy's cancelled merger with NSP.
REASONS FOR THE MERGER; RECOMMENDATION OF THE ESELCO BOARD
ESELCO. The terms of the Reorganization Agreement are the product of arm's-
length negotiations between representatives of ESELCO and Wisconsin Energy.
Among the factors considered by the ESELCO Board in approving and recommending
the Merger, the Reorganization Agreement (including the Plan of Merger) and
the consummation of the transactions contemplated thereby, were: (i) the
business, operational and financial prospects of ESELCO and Wisconsin Energy;
(ii) Pacific's opinion that, as of the date of the Reorganization Agreement,
the Exchange Ratio was fair to the holders of ESELCO Common Stock from a
financial point of view; (iii) the procedure used for soliciting and
evaluating proposals for business combinations with ESELCO; (iv) the
opportunity for ESELCO shareholders to obtain capital stock representing an
interest in a larger, diversified enterprise, with significantly greater
liquidity than, and offering a relatively attractive and sustainable dividend
compared to, ESELCO Common Stock; (v) the ability of Wisconsin Energy to
consummate the Merger; and (vi) the price Wisconsin Energy was willing to pay.
In making its determination, the ESELCO Board did not ascribe relative weights
to the factors which it considered.
20
<PAGE>
Based on the considerations discussed above, the ESELCO Board has determined
that the Merger is advisable, fair and in the best interests of ESELCO and its
shareholders and has approved the Merger, the Reorganization Agreement
(including the Plan of Merger) and the consummation of the transactions
contemplated thereby.
THE ESELCO BOARD HAS APPROVED THE MERGER AS ADVISABLE, FAIR AND IN THE BEST
INTERESTS OF ESELCO AND THE ESELCO SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS A
VOTE FOR THE APPROVAL OF THE REORGANIZATION AGREEMENT, INCLUDING THE PLAN OF
MERGER, AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Wisconsin Energy. The Wisconsin Energy Board believes that the terms and
conditions of the Merger are fair to, and in the best interests of, Wisconsin
Energy and its shareholders. Wisconsin Energy believes that, based on the
factors described below, the consideration to be paid in the Merger reflects
the value that will result from the efficiencies and other opportunities which
will result from the Merger.
Wisconsin Energy has been involved in the utility business in the Upper
Peninsula of Michigan for many years and Wisconsin Electric currently provides
electric utility service in the central Upper Peninsula of Michigan. While
there is no current physical interconnection between the electric systems of
Wisconsin Electric and Edison Sault, a transmission facility is being
constructed with completion expected in 1999. See "Businesses of the Parties
to the Reorganization -- Certain Business Relationships between Wisconsin
Energy and ESELCO."
Wisconsin Energy believes that Edison Sault is a very-well managed electric
utility and is one of the low cost providers of electricity in the region.
Wisconsin Energy currently plans to have Edison Sault remain a separate
utility subsidiary and Wisconsin Energy will thus have two utility
subsidiaries, Wisconsin Electric and Edison Sault. There will be opportunities
to achieve some administrative cost savings, since Wisconsin Electric will be
able to provide certain administrative services to Edison Sault. In addition,
the Merger provides a modest expansion of both Wisconsin Energy's overall
customer base and the diversity of its customer mix.
Edison Sault is strategically located for future growth, both in terms of
the customer base in the Upper Peninsula of Michigan and its geographic
location. Edison Sault is interconnected to the Lower Peninsula of Michigan
through a cable running beneath the Straits of Mackinac. In addition, Edison
Sault's proximity to Canada may prove to be advantageous if there ever is
another electrical interconnection between the United States and Canada.
Other potential benefits of the Merger may include providing Edison Sault
with the opportunity to obtain lower cost financing and with a broader array
of services than would otherwise be available to an electric utility of its
size.
OPINION OF ESELCO'S FINANCIAL ADVISOR
ESELCO retained Pacific in February 1997 to act as its financial advisor.
Pacific's engagement included rendering a written opinion on the fairness of
the consideration to be received by ESELCO stockholders from a financial point
of view in connection with a business combination.
Pacific is not affiliated with ESELCO or Wisconsin Energy. Pacific has
previously provided consulting services and expert testimony to both ESELCO
and Wisconsin Energy for which it received customary compensation. Pacific's
previous work for Wisconsin Energy is unrelated to the Merger. Pacific has not
received any compensation or other consideration from Wisconsin Energy with
respect to the Merger or for any ongoing or future assignments. For previous
consulting work and for work on the Merger, Pacific has received fees totaling
about $150,000 to date, plus various out-of-pocket expenses. Pacific expects
additional fees will not exceed $125,000. None of these payments to Pacific
are conditioned upon ESELCO shareholders approving the Merger or its actual
completion. ESELCO has also agreed to pay Pacific for certain out-of-pocket
expenditures
21
<PAGE>
incurred in connection to its work on the Merger. ESELCO has agreed to
indemnify Pacific and related persons against certain liabilities, including
those under the federal securities law, related to or arising out of its
engagement.
Pacific is a nationally and internationally recognized economic and
financial consulting firm which was created by former associates of Arthur
Andersen Economic Consulting. Pacific's members are no longer part of Arthur
Andersen LLP, and Pacific's members have severed all financial ownership and
income participation ties to Arthur Andersen LLP. The members of Pacific have
analyzed the economic and financial aspects of more than 50 potential energy,
utility and other industry mergers. About half of these merger analyses have
occurred since forming Pacific as a separate and totally independent entity on
November 1, 1996. The Board of ESELCO retained Pacific based on its expertise
and knowledge of utility company evaluation, regulation and mergers. At no
time did the Board intend, nor did Pacific request, to pay Pacific any fees
based upon or contingent upon the actual completion of any transaction or
based upon any evaluation estimate or range of estimates performed by Pacific.
ESELCO placed no limitations on the scope of Pacific's investigation related
to the matters for which Pacific was engaged.
The terms of the Merger were negotiated by representatives of ESELCO and
Wisconsin Energy. Pacific consulted with representatives of ESELCO on the
terms of the Reorganization Agreement. On May 13, 1997, Pacific rendered a
written opinion to the effect that, as of that date, the Exchange Ratio was
fair to ESELCO stockholders from a financial point of view.
Introduction. In arriving at its fairness opinion, Pacific, among other
things: (i) reviewed Wisconsin Energy's and ESELCO's Annual Reports, Forms 10-
K and related financial information for the years ended December 31, 1995 and
1996 and Forms 10-Q and related unaudited financial information for the
quarterly periods ended September 30, 1996; (ii) reviewed certain other
filings made with the SEC by Wisconsin Energy and ESELCO, including proxy
statements, Forms 8-K and registration statements; (iii) reviewed certain
information, including earnings, dividends, assets and prospects of Wisconsin
Energy and ESELCO, furnished to Pacific by Wisconsin Energy and ESELCO,
respectively; (iv) reviewed various forecasted financial information, income
statements and cash flow statements provided by ESELCO; (v) conducted
discussions with senior management of Wisconsin Energy and ESELCO concerning
their respective businesses, regulatory environments, prospects and strategic
objectives and possible operating and administrative synergies which might be
realized subsequent to the Merger; (vi) reviewed the historical market prices
and trading activity for Wisconsin Energy and ESELCO Common Stock; (vii)
compared the results from operations of Wisconsin Energy and ESELCO with other
companies determined by Pacific to be comparable; (viii) compared the proposed
financial terms with the terms offered in certain other relevant mergers and
acquisitions; (ix) compared the relative value of Wisconsin Energy and ESELCO
stock using various relevant valuation methodologies; (x) considered the pro
forma effect of the Merger in terms of net income available to stockholders,
dividends per common share, book value per common share and capitalization;
(xi) reviewed drafts of the Reorganization Agreement as revised through the
date of the opinion; and (xii) reviewed other relevant financial and
econometric analyses and considered all other matters Pacific considered
relevant and necessary for preparing its opinion.
In preparing its opinion, Pacific relied upon the accuracy and completeness
of all information supplied or otherwise made available to it by Wisconsin
Energy and ESELCO. Pacific did not independently verify such information or
any underlying assumptions. Pacific did not independently appraise or
physically inspect the assets or liabilities (contingent or otherwise) of
Wisconsin Energy or ESELCO. Pacific assumed that the financial projections or
forecasts furnished to it by Wisconsin Energy and ESELCO were reasonably
prepared in accordance with accepted industry practices and reflected the best
currently available estimates and judgments of Wisconsin Energy's and ESELCO's
managements as to the expected future financial performance of Wisconsin
Energy and ESELCO. Pacific also assumed that the financial forecasts
reasonably reflected all legal, regulatory and other contingencies known to
ESELCO's management. Pacific assumed that the transaction will be completed as
a reorganization whereby ESELCO would be acquired in a nontaxable statutory
merger. Pacific's opinion was based on general economic, market, monetary and
other conditions as they existed and could be
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evaluated, and the information made available to Pacific, as of the date of
its opinion. The Pacific opinion does not constitute a recommendation to any
ESELCO shareholder as to how that shareholder should vote at the ESELCO
meeting.
The Pacific opinion relied upon numerous macroeconomic, operating and
financial assumptions with respect to industry performance, general business
and economic conditions which are largely beyond the control of Wisconsin
Energy and ESELCO and involve complex methodologies and educated judgment. The
estimates used in Pacific's analyses do not necessarily indicate actual past
or future results or values, which may be significantly more or less favorable
than these estimates. Pacific's estimated values do not purport to be
appraisals and do not necessarily reflect the prices at which businesses or
companies may be sold in the future. The Pacific opinion does not discuss the
relative merits of the Merger as compared to any other business plan or
opportunity that might be presented to ESELCO.
Pacific assumed that, in connection with the receipt of all necessary
regulatory and governmental approvals for the Merger, no restriction will be
imposed that would have a material adverse effect on the contemplated benefits
expected to be derived in the proposed transaction.
Preparing a fairness opinion is complex and is not necessarily susceptible
to partial analysis or summary description. Selecting portions of the
individual analyses described below, without considering the analyses as a
whole, could create an incomplete or misleading view of the detailed and in-
depth analyses and the process used by Pacific to form and determine its
fairness opinion. Pacific has not indicated that any particular analysis which
it performed had a greater significance than any other. The ranges of
particular evaluations should not necessarily be taken to be the value that
Pacific places on ESELCO's actual value.
The following summarizes the financial and econometric analyses completed by
Pacific in reaching its fairness opinion.
Description of Analyses. Pacific used several analytic approaches in forming
its fairness opinion. These include:
(a) Stock Price and Volume History Analysis. Pacific analyzed ESELCO's
daily stock trading range over a period from July 1, 1996 to May 2, 1997.
In its analysis, Pacific also considered broad stock indices and the
cumulative shareholder return to other utilities and ESELCO from 1990 to
1996. The indices studied included the S&P 500 and S&P Electric. This
analysis provides the starting point or basis from which Pacific analyzed
the fairness of the Wisconsin Energy transaction.
(b) Comparable Transactions Analysis. Pacific analyzed all the
acquisition premia publicly proposed to be paid for public utility
companies since 1988. Pacific used a proprietary econometric model to
determine the various underlying financial factors of the targets and
acquirors, synergy projections, operational characteristics and degree of
control involved in these actual transactions. The econometric model
determined the degree to which these factors combine to establish the
specific premia paid in these recent public utility (actual and pending
potential) transactions. The various equations explain some 90% of the
variation among these recent public utility acquisition premia.
Pacific used its econometric model to predict and establish the basis for
a fair ESELCO acquisition premium from Wisconsin Energy. The various
statistical equations predict acquisition premia for ESELCO ranging from
27.9% to 41.4%. The higher premia would apply if strategic value was
included in the estimate.
(c) Discounted Cash Flow ("DCF") Analysis. Pacific also determined the
fair market value for ESELCO using a DCF analysis which projected
exceptional stand-alone income growth over a five-year, forward-looking
period. Pacific's approach calculated ESELCO's Net Present Value ("NPV")
under a Modigliani-Miller method for finite exceptional growth. These
future income growth projections were prepared by ESELCO's management.
Pacific did not independently analyze or evaluate the validity of these
growth assumptions.
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Pacific used two approaches. The first used a return on assets ("ROA") to
measure the return on equity ("ROE") in the Modigliani-Miller DCF analysis.
This approach resulted in a "low" value of $57,337,571 and a "high" value
of $59,896,088. The second relied on a smaller ROE estimate provided by
management. This approach resulted in a "low" value of $59,850,549 and a
"high" value of $62,578,587. The higher estimate is based on ESELCO's
improving its growth in earnings above its projections.
Pacific estimated that these various projections of growth in earnings
and estimates of ESELCO's weighted average cost of capital ("WACC") would
place the value of ESELCO between 26.6% and 38.3% above its early 1997
value of $29.50 per share price, or $45,282,000. The higher estimates of
earnings growth can be interpreted as including the synergy gains expected
in the proposed merger of ESELCO and Wisconsin Energy.
(d) Share Value Model. Pacific reviewed various price earnings ratios for
ESELCO and comparable public utility companies and compared these to data
provided by Wisconsin Energy to ESELCO. Based on Pacific's analysis and
additional data of other recent public utility mergers gathered by Pacific,
Pacific concluded that the data provided to ESELCO suggested that Wisconsin
Energy proposed to pay a price multiple above the typical range found in
utility mergers.
Pacific performed an additional shareholder value analysis using a
proprietary Pacific model, which includes adjustments for price/earnings,
synergy savings, dividend payout increases and acquisition premia paid.
Based on this detailed analysis and multiple sensitivity studies, Pacific
concluded that Wisconsin Energy could pay at least a 40% premium to ESELCO
without suffering any Wisconsin Energy shareholder dilution.
(e) Other Evaluation Factors. Pacific considered two additional factors
in reaching its fairness opinion. First, Pacific compared the differences
in current and expected dividends that ESELCO shareholders would receive
after their stock was exchanged for Wisconsin Energy stock. Based on what
the Exchange Ratio would have been if the Merger had taken place on May 13,
1997, Pacific would expect ESELCO's current shareholders to receive
dividends which are about 2.5 times ESELCO's cash dividends at the date of
the fairness opinion.
Second, Pacific analyzed the value of the reduced risk associated with
the "fixed purchase price" offer made by Wisconsin Energy to acquire
ESELCO. This transaction is based on a fixed purchase price of $44.50 per
share for all outstanding shares of ESELCO. Pacific recommended to the
Board that the straightforward fixed price per share and variable exchange
rate, which Wisconsin Energy proposed to ESELCO, was preferable to a
variable exchange mechanism from both risk avoidance and value received
standpoints. Under the Wisconsin Energy fixed price of $44.50 per ESELCO
share approach, declining market prices for Wisconsin Energy would give
ESELCO a higher exchange rate, and vice versa. However, more importantly
the amount received by ESELCO shareholders would be fixed regardless of
Wisconsin Energy's share price.
These two factors combine to add additional value to this transaction.
Nevertheless, Pacific did not rely upon them to form its threshold fairness
value of the Wisconsin Energy/ESELCO transaction. These two additional
factors would, in all likelihood, add value to current ESELCO shareholders.
Accordingly, each contributes to Pacific's overall fairness opinion.
Fairness Opinion. Wisconsin Energy has offered to pay ESELCO a fixed price
of $44.50 per share for the 1,593,180 shares outstanding, or a sum equal to
approximately $70,900,000. Pacific has performed various analyses which show
that a premium exceeding 40% would be a fair value for ESELCO's stock when it
was trading at $29.50 per share.
The Wisconsin Energy offer exceeds this Pacific estimate of a threshold fair
value by a reasonable amount given the conservative nature of Pacific's
assumptions that were used to establish the 40% minimum or threshold value of
fairness. The Wisconsin Energy offer at $44.50 per share is equivalent to a
50.85% premium over a $29.50 per share market value for ESELCO. As such, the
proposed transaction is well within the reasonable range of fairness.
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A further measure of shareholder value is the strong pro-active positioning
of Wisconsin Energy as a low-cost, customer-oriented provider in an
increasingly competitive electric power market.
In addition, based on what the Exchange Ratio would have been if the Merger
had taken place on May 13, 1997, shareholders would expect to receive a cash
dividend which is about 2.5 times ESELCO's cash dividends at the time of the
fairness opinion. Wisconsin Energy's dividend and earnings record has often
historically been the envy of the electric power industry. ESELCO shareholders
can expect to benefit from the higher Wisconsin Energy dividend and exchange
rate trading effect.
For the reasons discussed above, Pacific concludes the Wisconsin Energy
offer is fair to the shareholders of ESELCO from a financial perspective.
A COPY OF PACIFIC'S MAY 13, 1997 OPINION IS ATTACHED AS APPENDIX B TO THIS
PROXY STATEMENT/PROSPECTUS. SHAREHOLDERS OF ESELCO ARE URGED TO READ THIS
OPINION IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS CONSIDERED, PROCEDURES
FOLLOWED AND LIMITS OF REVIEW BY PACIFIC.
INTEREST OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the ESELCO Board with respect to the
Merger, ESELCO shareholders should be aware that certain members of ESELCO's
management and the ESELCO Board have certain interests, in addition to the
interests of shareholders of ESELCO generally, that are described below that
may present them with actual or potential conflicts of interest in connection
with the Merger.
Severance Agreements. Edison Sault has severance agreements with each of its
full-time executive officers: William R. Gregory, President and Chief
Executive Officer; Donald Sawruk, Executive Vice President and Chief Operating
Officer; David R. Hubbard, Vice President--Finance; James L. Beedy, Vice
President--Engineering; Steven L. Boeckman, Vice President/Treasurer; Donald
C. Wilson, Corporate Secretary; Ernest H. Maas, Vice President--Operations;
David H. Jirikovic, Assistant Vice President--Operations; and Paul A.
Schemanski, Assistant Vice President--Information Systems. All of the
executive officers of Edison Sault hold identical positions with ESELCO,
except Messrs. Beedy, Maas, Jirikovic and Schemanski, who are not titled
officers of ESELCO. The severance agreements contain provisions which require
the payment of severance benefits under certain circumstances that may occur
in connection with a "change in control," which the Merger will constitute.
Specifically, the severance agreements provide that if, after a change in
control, and for the period ending three years thereafter, the officer's
employment is involuntarily terminated other than for cause or due to
disability, or the officer voluntarily resigns for good reason, Edison Sault
shall make a lump-sum payment to the officer generally in an amount equal to
three times his average total compensation for the five year period ending
with the year preceding the year in which employment is terminated. If
termination of employment occurs in circumstances under which the officer dies
or retires in accordance with the normal retirement policy of Edison Sault, no
payment will be due under the severance plan. The severance agreement expires,
however, if the officer gives three month's notice of a desire to terminate
the agreement, resigns before a change of control occurs, dies, becomes
disabled in certain circumstances or retires in accordance with Edison Sault's
normal retirement policy. Further, any officer electing coverage under the
Special Early Retirement Window Program, described below, would not be
entitled to any payment under the severance plan. The Reorganization Agreement
provides that, after the Effective Time of Merger, Wisconsin Energy shall
cause Edison Sault to honor all obligations which may be incurred by Edison
Sault under the severance agreements, subject to the terms thereof.
Special Early Retirement Window Program. Messrs. Nurnberger, Hubbard, Beedy
and Gregory are eligible to elect coverage under the Special Early Retirement
Window Program, pursuant to which each individual may retire incident to the
Merger with a pension entitlement computed with two additional years of
service and without sustaining an early retirement reduction.
Supplemental Executive Retirement Plan. Edison Sault maintains an unfunded,
nonqualified Supplemental Executive Retirement Plan for the nine full time
officers plus the Chairman of the Board, providing retirement benefits in
excess of those payable under the Pension Plan for Management Employees of
Edison Sault. The
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supplemental plan is to be terminated in connection with the Merger, and any
participant who would not be eligible to receive benefits under the plan if
his employment were to have terminated at the time of the Merger shall be
entitled to an immediate lump-sum payment of an amount determined to be the
actuarial equivalent of his prospective benefits under the plan, grossed up
for the effect of state and federal taxes.
Director's Retirement Plan. ESELCO's Director's Retirement Plan (the "ESELCO
Director Plan") will be terminated in connection with the Merger; however,
Wisconsin Energy has agreed to cause ESELCO to continue to honor all
obligations under the ESELCO Director Plan as in effect at such termination.
Director's Fee Deferral Plan. Edison Sault maintains for its directors a fee
deferral plan under which amounts which directors have elected to defer accrue
interest at a rate equal to Edison Sault's own rate of return. This plan will
be amended and terminated in connection with the Merger; accumulated balances
shall continue to accrue earnings identical to the interest rates or other
methods allowed to participants under the Wisconsin Energy Directors' Deferred
Compensation Plan. An earlier director's fee deferral plan will also be
amended and terminated in connection with the Merger. Wisconsin Energy shall
cause Edison Sault to continue to honor all obligations under such plans, as
amended and in effect at their termination as of the Effective Time of Merger.
Restricted Stock Bonus Plan. In May 1996, shareholders of ESELCO approved
adoption of the Restricted Stock Bonus Plan. Under this plan, ESELCO can, from
time to time, grant to officers or other key employees awards of restricted
stock. The maximum number of shares reserved for this purpose is 50,000
shares. In 1996, 31,500 shares, with a total fair market value of $878,000 at
the date of grant, were granted to officers of ESELCO. Under the terms of
agreements with the recipients, the shares are not vested for a five-year
period following the grant, subject to acceleration in the event of a change
in control of ESELCO, and the shares are forfeited if a recipient leaves the
employment of ESELCO prior to the end of the five-year holding period. The
shares will vest as of the day before the Effective Time of Merger.
Indemnification. The Reorganization Agreement provides that from and after
the Effective Time of Merger, Wisconsin Energy shall cause ESELCO (and
successors to ESELCO) to indemnify and hold harmless each present and former
employee, agent, director or officer of any of the ESELCO Companies, and the
heirs, successors and assigns of such persons, against any amounts incurred in
connection with any claim, action, suit, proceeding or investigation arising
out of or relating to the transactions contemplated by the Reorganization
Agreement or any such person having served as a committee member, director,
officer, employee or agent of any of the ESELCO Companies, or as a trustee or
fiduciary of any employee benefit plan of any of the ESELCO Companies or
otherwise on behalf of any of the ESELCO Companies. Such indemnification shall
be in accordance with, and substantially equivalent to, the indemnification
provided by subsidiaries of Wisconsin Energy to their employees, agents,
directors and officers. In addition, Wisconsin Energy shall maintain in
effect, for at least three years from the Effective Time of Merger, directors'
and officers' liability insurance, not less in terms of coverage and amount
than that maintained by ESELCO, covering those persons insured under ESELCO's
directors' and officers' liability insurance as of the date of the
Reorganization Agreement.
See "--Certain Employment Matters" below regarding certain other
arrangements with respect to employee plans provided for by the Reorganization
Agreement.
CERTAIN EMPLOYMENT MATTERS
In addition to the plans and arrangements discussed above under "--Interest
of Certain Persons in the Merger," the Reorganization Agreement addresses
certain other employment matters, including the following:
Edison Sault Management Pension Plan. Pursuant to the Reorganization
Agreement, Wisconsin Energy has agreed to merge the Pension Plan for
Management Employees of Edison Sault (the "Edison Sault Management Plan") into
the Wisconsin Electric Power Company Retirement Account Plan (the "Retirement
Account Plan"), and to amend the Retirement Account Plan to provide that
employees of Edison Sault who: (i) were covered
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under the Edison Sault Management Plan; (ii) become covered under the
Retirement Account Plan by reason of the merger of the plans; and (iii)
subsequently terminate on or prior to December 31, 2010 with a 100% fully
vested interest, shall be entitled to an accrued pension benefit not less than
what they would have received under the provisions of the Edison Sault
Management Plan as in existence as of the Effective Time of Merger.
Edison Sault Employee Incentive Investment and Stock Ownership Plan.
Pursuant to the Reorganization Agreement, Wisconsin Energy has agreed to merge
the Employee Incentive Investment and Stock Ownership Plan of Edison Sault
into the Wisconsin Electric Power Company Employees Savings Plan and to extend
that Savings Plan to the employees of ESELCO and its subsidiaries (the "ESELCO
Companies").
Retiree Health Care Plan. Pursuant to the Reorganization Agreement,
Wisconsin Energy has agreed to cause the retiree health care program in effect
at the ESELCO Companies as of the Effective Time of Merger (the "ESELCO
Retiree Health Plan") to be continued, subject to and in accordance with its
terms (including any reserved right to amend or terminate the same), with
respect to individuals who were already retired at such time and with respect
to those who retire or otherwise terminate from the service of the ESELCO
Companies in such manner as to entitle them to benefit from such program,
until at least one year from the Effective Time of Merger (the "Changeover
Date"), with such individuals (both those already retired and those who
subsequently retire) to pay 45% of the cost thereof, except for certain
classes of individuals who will only be obligated to pay 40%. From the
Changeover Date until December 31, 2004, Wisconsin Energy has agreed to cause
the ESELCO Companies to continue the same program of benefits at the same
total premium costs, subject to certain terms and conditions, and retiree
contributions shall be 50% of such costs.
Other Employee Plans and Benefits. Pursuant to the Reorganization Agreement,
subject to collective bargaining obligations of ESELCO, Wisconsin Energy has
agreed to extend coverage to ESELCO employees of benefits similar to those
currently provided under other benefit plans maintained at Wisconsin Electric
for the benefit of employees generally (including severance benefits), without
regard to whether any such plans are currently maintained by ESELCO. For
purposes of the accrual and vesting of such benefits, Wisconsin Energy will
extend credit to ESELCO employees for their pre-merger years of service with
ESELCO.
MANAGEMENT AND OPERATIONS OF ESELCO AFTER THE MERGER
At the Effective Time of Merger, ESELCO, as the surviving corporation in the
Merger, will become a wholly-owned subsidiary of Wisconsin Energy. Immediately
after the Merger, Edison Sault will continue to be a wholly-owned public
utility subsidiary of ESELCO, subject to regulation to the extent now
regulated by the MPSC and other applicable regulatory agencies. The duly
qualified and acting directors and officers of Acquisition immediately prior
to the Effective Time of Merger shall be the directors and officers of ESELCO
immediately after the Effective Time of Merger. ESELCO's Articles of
Incorporation (the "ESELCO Articles") and Bylaws (the "ESELCO Bylaws") as in
effect immediately prior to the Effective Time of Merger shall be ESELCO's
Articles and Bylaws immediately after the Effective Time of Merger.
Wisconsin Energy currently intends that the operations of Edison Sault and
the other subsidiaries of ESELCO after the Effective Time of Merger will be
conducted substantially in the same manner as prior to the Effective Time of
Merger, with present management of Edison Sault and the other subsidiaries of
ESELCO retained, except that: (a) Thomas S. Nurnberger, William R. Gregory,
David R. Hubbard and James L. Beedy have indicated their intention to retire
as of the Effective Time and Wisconsin Energy currently anticipates that
Donald Sawruk will be appointed as President of Edison Sault; (b) Wisconsin
Electric intends to provide certain administrative functions to Edison Sault
and the other subsidiaries of ESELCO after the Effective Time, including
accounting, insurance and legal services; (c) NTS is expected to become a
direct non-utility subsidiary of Wisconsin Energy; and (d) ESEG may be merged
into Edison Sault.
Wisconsin Energy is considering the possible merger of ESELCO with and into
Wisconsin Energy subsequent to both the Merger and the receipt by Wisconsin
Energy of a private letter ruling from the Internal Revenue Service to the
effect that the merger of ESELCO into Wisconsin Energy will not adversely
affect the
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treatment of the Merger for federal income tax purposes. The purpose and
effect of such a merger would be to eliminate ESELCO as an intermediate
holding company with the result that Edison Sault would become a direct
wholly-owned subsidiary of Wisconsin Energy.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Reorganization Agreement, ESELCO has agreed, pending
consummation of the Merger, unless otherwise consented to in writing by
Wisconsin Energy, that it will, and will cause each of Edison Sault, ESEG and
NTS to, among other things: (i) diligently carry on its business in the
regular course and consistent with past practices and not make or institute
any unusual or novel methods of purchase, sale, lease, management, accounting
or operation; (ii) use, operate, maintain and repair its assets and properties
in a normal business manner; (iii) not do any act or omit to do any act, or
permit any act or omission to act, which would cause a breach of any
contracts, agreements and leases, written or oral, to which it is a party or
by which it is bound; (iv) use reasonable efforts to maintain all of its
existing insurance policies in full force and effect; (v) not grant any
increase in the rate of pay of any of its employees, except as disclosed
pursuant to the Reorganization Agreement, institute or amend any of its
employee benefit plans or enter into or modify any written employment
arrangement with any person; (vi) not enter into any contract or commitment or
engage in any transaction not in the usual or ordinary course of business and
consistent with its normal business practices and, except as disclosed
pursuant to the Reorganization Agreement, not purchase, lease, sell or dispose
of any capital asset; (vii) not create, incur or assume any indebtedness or
make any investment, other than certain investments in fixed properties or
fixed assets acquired and used in the ordinary course of business; (viii) use
its reasonable efforts to preserve its business organization intact, retain
the services of its present officers and key employees and preserve the
goodwill of suppliers, customers, creditors and others having business
relationships with it; (ix) comply in all respects with all applicable laws;
(x) timely and properly file all federal, state, local and foreign tax returns
which are required to be filed and pay or make provision for the payment of
all taxes owed by it; (xi) not amend its articles of incorporation or bylaws,
except that ESELCO may amend the ESELCO Articles to increase the authorized
number of shares of ESELCO Common Stock from 3,000,000 shares to 9,840,000
shares; and (xii) except for ESELCO's 3% stock dividend paid to ESELCO
shareholders on May 15, 1997, not issue any additional shares of stock of any
class or grant any warrants, options or rights to subscribe for or acquire any
additional shares of stock of any class or directly or indirectly redeem,
purchase or otherwise acquire, recapitalize or reclassify any of its stock or
liquidate in whole or in part. In addition, pending consummation of the
Merger, the ESELCO Companies may not declare or pay any dividend or make any
capital or surplus distributions of any nature, except for cash dividends by
Edison Sault, ESEG or NTS to ESELCO, and regular quarterly cash dividends by
ESELCO on the outstanding ESELCO Common Stock with usual record and payment
dates not exceeding, during any fiscal year of ESELCO, 106% of the cash
dividends paid on the ESELCO Common Stock during the immediately preceding
fiscal year of ESELCO.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Reorganization Agreement contains various customary representations and
warranties of the parties for a transaction of this kind. The Reorganization
Agreement also contains various customary covenants between the parties,
including that ESELCO will, and will cause Edison Sault, ESEG and NTS to,
afford agents, accountants, attorneys and other representatives of Wisconsin
Energy reasonable access to all of its books, records, financial information,
facilities, key personnel and other documents and materials, and that each
party will use reasonable efforts to cause its respective representations and
warranties contained in the Reorganization Agreement to be true and correct in
all respects at the Effective Time of Merger with the same force and effect as
if such representations and warranties had been made on and as of the
Effective Time of Merger, and will use reasonable efforts to obtain any third
party consents or approvals required by the Reorganization Agreement and to
cause all of the conditions precedent to the obligations of the parties set
forth in the Reorganization Agreement to be satisfied. As described below,
ESELCO and Wisconsin Energy each has the right under the Reorganization
Agreement to terminate the Reorganization Agreement (whether before or after
approval of the Reorganization Agreement by the ESELCO shareholders) at any
time prior to the consummation of the Merger if, among other
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things, the representations and warranties of the other party in the
Reorganization Agreement are not true and correct in all material respects, or
if the other party shall not have performed and complied in all material
respects with all of its obligations under the Reorganization Agreement. See
"--Conditions to Consummation of the Merger" and "--Termination; Amendment;
Waiver" below.
CONDITIONS TO CONSUMMATION OF THE MERGER
In addition to the approval of the Reorganization Agreement by the requisite
vote of shareholders of ESELCO, the respective obligations of the parties to
consummate the Merger are subject to the fulfillment or waiver of certain
conditions specified in the Reorganization Agreement, including among others,
(i) the performance of and compliance in all material respects by the
respective parties with all the obligations under the Reorganization Agreement
required to be performed or complied with prior to or on the Closing Date and
as of the Effective Time of Merger; (ii) the absence of any suit, action or
other proceeding in which the consummation of the transactions contemplated by
the Reorganization Agreement is restrained or enjoined or in which the relief
requested is to restrain, enjoin or prohibit the consummation of the
transactions contemplated by the Reorganization Agreement; (iii) the
continuing accuracy in all material respects as of the Closing Date and as of
the Effective Time of Merger of the representations and warranties of the
respective parties contained in the Reorganization Agreement; (iv) the absence
through the Effective Time of Merger of any event, condition or fact which is,
or reasonably may be expected to be, materially adverse to the financial
condition, properties, business, results of operations or prospects of the
ESELCO Companies taken as a whole (an "ESELCO Material Adverse Effect"), or
the absence as of the Closing Date of any event, condition or fact which is
materially adverse to the financial condition of Wisconsin Energy and its
subsidiaries, taken as a whole; (v) the securing of all requisite permissions,
approvals, determinations, consents and waivers from all appropriate state and
federal regulatory authorities, including the FERC and the SEC, required in
order for Wisconsin Energy and Acquisition to consummate the Merger and the
transactions described in the Reorganization Agreement and so that Wisconsin
Energy either continues to be an exempt holding company or becomes a
registered holding company under the PUHCA; (vi) compliance with all necessary
requirements of the HSR Act and expiration prior to the Closing Date or
termination by the appropriate agency of any waiting periods applicable to the
Merger and to the transactions described in the Reorganization Agreement which
are imposed by the HSR Act; (vii) the continuing effectiveness of the
Registration Statement and the registration or exemption from registration
under applicable state securities law of the Wisconsin Energy Common Stock to
be issued in the Merger; (viii) the approval for listing on the NYSE, subject
to official notice of issuance, of the shares of Wisconsin Energy Common Stock
to be issued in the Merger; (ix) the receipt of officers' certificates, legal
opinions of counsel and the accountants' comfort letters; (x) the receipt of a
tax opinion of counsel to Wisconsin Energy to the effect that the Merger will
be treated for federal income tax purposes as a tax-free reorganization; (xi)
receipt of an opinion from Price Waterhouse LLP to the effect that the Merger
qualifies for pooling of interests accounting treatment if consummated in
accordance with the Reorganization Agreement; (xii) certain agreements (as
described below) shall have been executed by affiliates of ESELCO and
delivered to Wisconsin Energy; and (xiii) the aggregate of the fractional
share interests in Wisconsin Energy Common Stock to be paid in cash pursuant
to the Reorganization Agreement shall not be more than 5% of the maximum
aggregate number of shares of Wisconsin Energy Common Stock which could be
issued as a result of the Merger. The conditions to Wisconsin Energy's and
Acquisition's obligations to effect the Merger also include that the above-
mentioned governmental approvals shall not contain any condition applicable to
the ESELCO Companies, Wisconsin Energy or Acquisition which is, in the
reasonable judgment of Wisconsin Energy, materially adverse in any manner to
the ESELCO Companies, Wisconsin Energy or Acquisition. See "--Regulatory
Requirements" below.
NO SOLICITATION; TERMINATION FEE
The Reorganization Agreement provides that ESELCO shall not, and shall not
permit its subsidiaries, or officers, directors, employees, agents or other
representatives of any of the ESELCO Companies (including, without limitation,
any investment banker, attorney or accountant retained or engaged by any of
the ESELCO Companies) to solicit, initiate, facilitate, encourage, negotiate
with respect to, discuss or agree to: (i) any of the
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following, on or prior to the later of January 16, 1999 or six months after
the termination of the Reorganization Agreement (the "Special Date"), other
than the Merger: (a) a merger, consolidation, share exchange, exchange of
securities, reorganization, business combination or similar transaction
involving any of the ESELCO Companies; (b) a sale, transfer or other
disposition of all or any significant portion of the assets of any of the
ESELCO Companies in a single transaction or series of related transactions;
(c) a sale of, or tender offer or exchange offer for, or acquisition by any
person or group of beneficial owners of, a substantial interest in the
outstanding capital stock of any of the ESELCO Companies in a single
transaction or series of related transactions; or (d) a public announcement of
a proposal, plan, intention or agreement to do any of the foregoing (each such
event, an "Other Transaction"); or (ii) any inquiry, proposal or offer
relating in any manner to an Other Transaction (an "Other Offer"), except to
the extent required by the fiduciary duties of ESELCO's officers and Board
under applicable law if so advised by a written opinion of outside counsel.
ESELCO is generally required to notify Wisconsin Energy within 24 hours
following receipt of any Other Offer, and to give Wisconsin Energy five days
prior notice and an opportunity to negotiate with ESELCO before entering into,
executing or agreeing to any Other Offer or Other Transaction. After giving
Wisconsin Energy such opportunity, ESELCO may, by notice to Wisconsin Energy
at any time prior to the Effective Time of Merger, terminate the
Reorganization Agreement if ESELCO enters into, executes or agrees to an Other
Offer or Other Transaction following a determination by the ESELCO Board, on
the written advice of counsel, that such action is required by its fiduciary
duties under applicable law.
In order to induce Wisconsin Energy to enter into the Reorganization
Agreement and to compensate Wisconsin Energy for the time and expenses
incurred in connection with the Reorganization Agreement and the Merger and
losses suffered by Wisconsin Energy from foregone opportunities, the
Reorganization Agreement provides that ESELCO shall pay $2,000,000 (the
"Special Fee") to Wisconsin Energy if, on or prior to the Special Date: (a) a
person unrelated to Wisconsin Energy has consummated, or has publicly
announced or proposed (and subsequently consummates after the Special Date),
an Other Transaction; or (b) any of the ESELCO Companies has entered into an
agreement with respect to an Other Transaction; or (c) ESELCO terminates the
Reorganization Agreement for the purpose of pursuing an Other Offer or Other
Transaction (each such event, a "Special Event"). The Special Fee is to be
paid in immediately available funds within five business days after the
occurrence of a Special Event. However, no Special Fee is payable as a result
of a Special Event which occurs after the Reorganization Agreement is
terminated: (i) by mutual written agreement of Wisconsin Energy and ESELCO; or
(ii) by Wisconsin Energy based on a failure of either or both of the
conditions in the Reorganization Agreement relating to the accuracy of the
representations and warranties made by ESELCO and the absence of any ESELCO
Material Adverse Effect (except if such failure results from any willful or
intentional acts of any of the ESELCO Companies); or (iii) by Wisconsin Energy
if the Closing has not occurred by the termination date specified in the
Reorganization Agreement (as described below).
TERMINATION; AMENDMENT; WAIVER
The Reorganization Agreement may be terminated (whether before or after
approval thereof by the ESELCO shareholders) and the transactions contemplated
by the Reorganization Agreement may be abandoned at any time prior to the
Closing, as follows: (i) by mutual written agreement of Wisconsin Energy and
ESELCO; (ii) by either Wisconsin Energy or ESELCO if any of their respective
conditions precedent to consummation of the transactions set forth in the
Reorganization Agreement have not been satisfied by the Closing; (iii) by
Wisconsin Energy if any updated disclosure by ESELCO as required by the
Reorganization Agreement, in the reasonable judgment of Wisconsin Energy, has
or may have an ESELCO Material Adverse Effect or which may be materially
adverse in any manner to Wisconsin Energy and the parties cannot resolve any
differences regarding the disclosure within a reasonable period of time (not
to exceed 30 calendar days); (iv) by ESELCO if it enters into, executes or
agrees to an Other Offer or Other Transaction following a determination by the
ESELCO Board on the written advice of counsel that such action is required by
its fiduciary duties under applicable law, after giving Wisconsin Energy an
opportunity to negotiate with ESELCO with respect thereto; or (v) by either
Wisconsin Energy or ESELCO if the Closing has not occurred on or before
December 31, 1998, but if on such date the conditions relating to receipt of
requisite governmental approvals have not been fulfilled, then the termination
date will be extended to June 30, 1999.
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In the event of termination of the Reorganization Agreement by either
Wisconsin Energy or ESELCO as provided above, there shall be no liability or
obligation on the part of either Wisconsin Energy or ESELCO or their
respective directors, officers or other representatives thereunder other than:
(a) the obligations of Wisconsin Energy under the Confidentiality Agreement
between Wisconsin Energy and ESELCO dated January 16, 1997, as amended by the
Reorganization Agreement (the "Confidentiality Agreement"), and its
obligations to comply with certain specified provisions of the Reorganization
Agreement; (b) the obligations of ESELCO to pay the Special Fee, if such fee
is payable under the provisions of the Reorganization Agreement described
above under "--No Solicitation; Termination Fee," and to comply with certain
other specified provisions of the Reorganization Agreement; and (c) each party
shall retain any and all remedies which it may have for breach of contract
provided by law based on another party's willful failure to comply with the
terms of the Reorganization Agreement.
The Reorganization Agreement may be amended by ESELCO, Wisconsin Energy and
Acquisition at any time before or after approval thereof by the holders of
ESELCO Common Stock, but after any such approval, no amendment shall be made
which changes the Exchange Ratio at which ESELCO Common Stock is to be
converted into Wisconsin Energy Common Stock or which materially adversely
affects the rights of holders of ESELCO Common Stock, without the further
approval of such holders. No amendment, supplement, modification, waiver or
termination of the Reorganization Agreement shall be binding unless executed
in writing by the party to be bound thereby. If any of the conditions to the
respective parties' obligations to consummate the Merger pursuant to the
Reorganization Agreement have not been satisfied, a party may nevertheless
elect to proceed with consummation of the transactions contemplated by the
Reorganization Agreement. Any such election to proceed shall be evidenced by a
certificate signed on behalf of the waiving party by an officer of that party.
STANDSTILL PROVISIONS
Pursuant to the Confidentiality Agreement, Wisconsin Energy has agreed that
(other than as contemplated in the Reorganization Agreement), during the
period beginning on January 16, 1997, and ending on that date which is the
later of January 16, 1999, or one year after the termination of the
Reorganization Agreement, without the prior written consent of ESELCO, it will
not, and will cause each of its affiliates not to: (i) acquire, offer or agree
to acquire any assets, securities or interests or any rights or options to
acquire any interests in ESELCO; (ii) participate in or encourage the
formation of any group which owns or seeks to acquire beneficial ownership of
interests or securities in ESELCO or rights to acquire such interests or
securities or which seeks to affect control of ESELCO, or for the purpose of
circumventing any provisions of the Confidentiality Agreement; or (iii)
otherwise act, alone or in concert with others (including by providing
financing for another party), to seek to control or influence the management
of ESELCO.
EXCHANGE OF ESELCO CERTIFICATES; NO FRACTIONAL SHARES
As of the Effective Time of Merger, Wisconsin Energy will act as the
exchange agent or will designate a bank or trust company to act as exchange
agent (the "Exchange Agent") to effect the exchange of share certificates in
connection with the Merger. As soon as reasonably practicable after the
Effective Time of Merger, the Exchange Agent will mail to each holder of
record of a certificate or certificates that immediately prior to the
Effective Time of Merger represented outstanding shares of ESELCO Common Stock
(the "ESELCO Certificates") a form letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the ESELCO
Certificates shall pass, only upon actual delivery of the ESELCO Certificates
to the Exchange Agent) and instructions for effecting the surrender of the
ESELCO Certificates in exchange for certificates representing shares of
Wisconsin Energy Common Stock.
PLEASE NOTE THAT SHAREHOLDERS OF ESELCO SHOULD NOT SUBMIT THEIR ESELCO
CERTIFICATES FOR EXCHANGE UNTIL SUCH LETTER OF TRANSMITTAL AND INSTRUCTIONS
ARE RECEIVED.
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Upon surrender of an ESELCO Certificate for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such other
documents as the Exchange Agent may reasonably require, the holder of such
ESELCO Certificate will be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Wisconsin Energy
Common Stock into which the shares of ESELCO Common Stock formerly represented
by the ESELCO Certificate surrendered have been converted in the Merger
pursuant to the Exchange Ratio, plus cash in lieu of any fractional share of
Wisconsin Energy Common Stock to which such holder would otherwise be entitled
as more fully described below, and the ESELCO Certificate so surrendered will
be cancelled.
At the Effective Time of Merger, the stock transfer books of ESELCO will be
closed and there will be no further registration of transfers of shares of
ESELCO Common Stock thereafter on the records of ESELCO. From and after the
Effective Time of Merger, the holders of ESELCO Certificates outstanding
immediately prior to the Effective Time of Merger will cease to have any
rights with respect to the shares of ESELCO Common Stock formerly represented
thereby except as otherwise provided in the Reorganization Agreement or by
law.
In the event of a transfer of ownership of shares of ESELCO Common Stock
which is not registered in the transfer records of ESELCO, a certificate
representing the proper number of shares of Wisconsin Energy Common Stock may
be issued to the transferee if the ESELCO Certificate formerly representing
such shares of ESELCO Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid.
Until surrendered as contemplated by the Reorganization Agreement, each
ESELCO Certificate shall be deemed at all times after the Effective Time of
Merger to represent only the right to receive upon surrender a certificate
representing shares of Wisconsin Energy Common Stock and cash in lieu of any
fractional share of Wisconsin Energy Common Stock as contemplated by the
Reorganization Agreement.
No dividends or other distributions declared or made after the Effective
Time of Merger with respect to Wisconsin Energy Common Stock with a record
date after the Effective Time of Merger shall be paid to the holder of any
unsurrendered ESELCO Certificate with respect to the shares of Wisconsin
Energy Common Stock represented thereby until surrender of such ESELCO
Certificate. Subject to the effect of any applicable law, following surrender
of any such ESELCO Certificate, there will be paid to the holder of the
certificate representing whole shares of Wisconsin Energy Common Stock issued
in exchange therefor, without interest, any such dividends or distributions to
which such holder is entitled.
All shares of Wisconsin Energy Common Stock issued upon conversion of the
ESELCO Common Stock in accordance with the terms of the Reorganization
Agreement (and any cash paid in lieu of fractional share interests) shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to the ESELCO Common Stock.
No fractional shares of Wisconsin Energy Common Stock shall be issued in the
Merger. All fractional share interests of a holder of more than one ESELCO
Certificate at the Effective Time of Merger shall be aggregated to maximize
the number of whole shares of Wisconsin Energy Common Stock to be issued and
minimize the fractional interest to be paid in cash. If a fractional share
interest results after such aggregation, each holder of a fractional share
interest shall be paid an amount in cash equal to the product obtained by
multiplying such fractional share interest by the Average Wisconsin Energy
Price. As soon as practicable after the determination of the amount of cash to
be paid to holders of fractional share interests, Wisconsin Energy will make
available such amount for payment to such holders in accordance with the
Reorganization Agreement, as described above.
Any portion of the Wisconsin Energy Common Stock certificates, together with
any dividends or distributions with respect thereto and any cash in lieu of
fractional shares deposited with the Exchange Agent, which remains
undistributed to ESELCO shareholders as of a date which is six months after
the Effective Time of Merger shall be delivered to Wisconsin Energy, upon
demand, and any ESELCO shareholders who have not theretofore surrendered their
ESELCO Certificates shall thereafter look only to Wisconsin Energy for payment
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thereof. Neither the Exchange Agent nor any party to the Reorganization
Agreement will be liable to any ESELCO shareholder for any such property
delivered to a public official pursuant to applicable abandoned property,
escheat, or similar laws.
DIVIDEND REINVESTMENT PLAN
ESELCO's Dividend Reinvestment and Common Stock Purchase Plan (the "ESELCO
DRIP") has been suspended effective as of May 15, 1997, and will be terminated
at the Effective Time of Merger. All shares of ESELCO Common Stock held in the
ESELCO DRIP will be held therein until the Effective Time of Merger, subject
to earlier withdrawal in accordance with the terms of the plan. All shares of
ESELCO Common Stock held in the ESELCO DRIP at the Effective Time of Merger
will be converted into shares of Wisconsin Energy Common Stock as provided in
the Reorganization Agreement. If Wisconsin Energy provides such an election,
as is expected, participants in the ESELCO DRIP who elect to have such
Wisconsin Energy Common Stock credited to accounts established for them under
Wisconsin Energy's dividend reinvestment and stock purchase plan, the Stock
Plus Investment Plan, will have their ESELCO shares held in the ESELCO DRIP
converted into the number of whole shares and any fractional share of
Wisconsin Energy Common Stock resulting from the application of the Exchange
Ratio, instead of having any such fractional share paid in cash.
REGULATORY REQUIREMENTS
Consummation of the Merger is subject to various regulatory approvals. Set
forth below is a summary of certain regulatory requirements affecting the
Merger.
State Approvals and Related Matters. Edison Sault does not own or operate
utility facilities in Wisconsin, is not a Wisconsin corporation and does not
provide utility service in Wisconsin. Wisconsin Energy will be acquiring
ESELCO and maintaining Edison Sault as a separate electric utility not
providing service in Wisconsin. Wisconsin Energy and ESELCO believe that
approval of the Merger is not required from either the MPSC or the PSCW.
Wisconsin Electric is subject to the jurisdiction of the PSCW and the MPSC
with respect to retail utility service provided in Wisconsin and the Upper
Peninsula of Michigan, respectively. As a result of its ownership of Wisconsin
Electric, Wisconsin Energy is a public utility holding company (a "holding
company") under Section 196.795 of the Wisconsin Statutes (the "Wisconsin
Holding Company Act") and is subject to the jurisdiction of the PSCW as such.
Edison Sault is subject to the jurisdiction of the MPSC with respect to retail
electric utility service provided in the Upper Peninsula of Michigan. Edison
Sault and Wisconsin Electric are subject to regulation by the MPSC as to
various matters associated with the providing of retail electric service in
Michigan, including retail electric rates, standards of service, billing
practices, and various other matters. Although the MPSC has the authority to
regulate electric utilities doing business in Michigan, it has no statutory
authority conferring jurisdiction over mergers of corporations owning such
electric utilities.
The Wisconsin Holding Company Act prohibits any person from forming a
holding company or acquiring or holding more than 10% of the outstanding
voting securities of a holding company, without PSCW approval. The PSCW, if it
finds the capital of any public utility affiliate will be impaired by payment
of a dividend, may order the utility affiliate to limit or cease payment of
dividends to the holding company. Various transactions by a public utility
affiliate with others in the holding company system are prohibited, including
lending money, guaranteeing obligations, combined advertising, providing
utility service on terms different from those for other consumers in the same
class, and, without PSCW approval after establishment that the utility
affiliate will be paid at fair market value, certain sales or leases of real
property and use of services of utility employees. The Wisconsin Holding
Company Act prohibits (i) any public utility affiliate from providing any non-
utility product or service in a manner or at a price that unfairly
discriminates against any competing provider, (ii) any non-utility activity
from being subsidized materially by the customers of any public utility in the
system, (iii) the operation of the system in any way which materially impairs
the credit, ability to acquire capital on reasonable terms or ability to
provide safe, reasonable, reliable and adequate utility service, of any public
utility affiliate in the system, (iv) any transfer by a public utility
affiliate to any other system company of any confidential public utility
information, including customer lists, for any non-utility purpose, unless the
PSCW has approved the transfer, and (v) any termination of the system's
interest in a public utility affiliate without PSCW approval. Other
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statutory provisions which pre-existed the Wisconsin Holding Company Act
include requirements for submission to the PSCW for approval of certain
contracts or other arrangements for furnishing property or services between a
public utility and an affiliate.
The Wisconsin Holding Company Act also limits non-utility diversification,
in that, stated generally, the net book value of the assets (other than
investment in system affiliates) of all non-utility affiliates may not exceed
the sum of 25% of the net book value of all electric utility affiliates and a
percentage, to be determined by the PSCW (but not less than 25%), of the net
book value of all other public utility affiliates. The Merger will not have
any material impact with respect to these limitations. Further, the Wisconsin
Holding Company Act requires the PSCW to periodically investigate the impact
of the operation of every holding company system on every public utility
affiliate in the system and to determine whether each non-utility affiliate
does, or can reasonably be expected to do, at least one of the following: (a)
substantially retain, attract or promote business activity or employment or
provide capital to businesses within the service territory of any public
utility affiliate or certain others, (b) increase or promote energy
conservation or develop, produce or sell renewable energy products or
equipment, (c) conduct a business that is functionally related to the
provision of utility service or to the development or acquisition of energy
resources, and (d) develop or operate commercial or industrial parks in the
service territory of any public utility affiliate. Wisconsin Energy believes
that its and ESELCO's existing non-utility businesses meet the requirements of
the Wisconsin Holding Company Act. The PSCW also is authorized to order a
holding company to terminate its interest in a public utility affiliate if the
PSCW finds that, based upon clear and convincing evidence, termination of the
interest is necessary to protect the interest of utility investors in a
financially healthy utility and the interest of consumers in reasonably
adequate utility service at a just and reasonable price.
Pre-Merger Antitrust Notification. The HSR Act and the rules and regulations
thereunder provide that certain acquisition transactions (including the
Merger) may not be consummated until certain information has been submitted to
the Antitrust Division and the FTC and specified HSR Act waiting period
requirements have been satisfied. Wisconsin Energy and ESELCO will file
appropriate notifications under the HSR Act. The waiting period under the HSR
Act will expire or terminate within 30 days thereafter unless a request for
additional information is made by either the Antitrust Division or the FTC. If
the Merger is not consummated within one year after the expiration of the HSR
Act waiting period, Wisconsin Energy and ESELCO will be required to refile
under the HSR Act. Moreover, the expiration or earlier termination of the HSR
Act waiting period does not preclude the Antitrust Division or the FTC from
challenging the Merger on antitrust grounds. Wisconsin Energy and ESELCO
expect to submit the same information to interested State Attorneys General.
Neither Wisconsin Energy nor ESELCO believes that the Merger would violate
federal or state antitrust laws.
Public Utility Holding Company Act of 1935. Wisconsin Energy is required to
obtain SEC approval under Section 9(a)(2) of the PUHCA in connection with the
Merger. Section 9(a)(2) of the PUHCA provides that it is unlawful for any
person to acquire, directly or indirectly, any security of any public utility
company if that person owns, or by virtue of that transaction will come to
own, 5% or more of the voting securities of that public utility company and of
any other public utility company, without the prior approval of the SEC. Under
the applicable standards of the PUHCA, the SEC is directed to approve a
proposed acquisition unless it finds that (1) the acquisition would tend
towards detrimental interlocking relations or a detrimental concentration of
control, (2) the consideration to be paid in connection with the acquisition
is not reasonable, (3) the acquisition would unduly complicate the capital
structure of the applicant's holding company system or would be detrimental to
the proper functioning of the applicant's holding company system, or (4) the
acquisition would violate applicable state law. In order to approve a proposed
acquisition, the SEC must also find that the acquisition would tend towards
the development of an integrated public utility system and would otherwise
conform to the PUHCA's integration and corporate simplification standards.
Wisconsin Energy is a "holding company" and Edison Sault is a "public
utility company" for purposes of the PUHCA. The PUHCA requires the
registration under such Act of entities that are "holding companies" and are
not otherwise exempt from such registration requirements and pervasively
regulates the activities of
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registered holding companies and their subsidiaries. Wisconsin Energy is
currently exempt from the registration and other requirements of the PUHCA,
other than Section 9(a)(2) thereof, pursuant to an order of the SEC under
Section 3(a)(1) of the PUHCA. ESELCO is also an exempt holding company under
Section 3(a)(1) of the PUHCA. The basis of the exemption under Section 3(a)(1)
is that Wisconsin Energy and its public utility subsidiary, and ESELCO and its
public utility subsidiary, are predominantly intrastate in character and carry
on their business substantially in a single state in which they are organized
(Wisconsin and Michigan, respectively). Such exemption may be revoked if the
SEC finds the exemption to be "detrimental to the public interest or the
interest of investors or consumers."
In order to qualify for the Section 3(a)(1) exemption, a holding company,
and every public utility subsidiary thereof from which the holding company
derives, directly or indirectly, any material part of its income, must be
predominantly intrastate in character and carry on their business
substantially in a single state in which such holding company and every such
subsidiary company thereof are organized. Because Edison Sault is relatively
small as compared to Wisconsin Energy and Wisconsin Electric, it is believed
that, under applicable SEC standards and interpretations, Wisconsin Energy
will continue to qualify for the Section 3(a)(1) exemption after the Merger.
After the Merger, ESELCO will continue to be an exempt holding company under
Section 3(a)(1).
Wisconsin Energy and ESELCO will file an application with the SEC to obtain
SEC approval of the Merger under Section 9(a)(2) of the PUHCA and to confirm
that, following consummation of the Merger, Wisconsin Energy and ESELCO will
be entitled to maintain their respective exemptions from registration under
Section 3(a)(1) of the PUHCA.
Federal Power Act. Edison Sault is subject to the jurisdiction of the FERC
under the Federal Power Act with respect to rates, service, interconnections,
accounting and other matters in connection with its purchases and sales of
electricity for resale and transmission of electricity in interstate commerce.
Section 203 of the Federal Power Act provides that no public utility shall
sell or otherwise dispose of its jurisdictional facilities or, directly or
indirectly, merge or consolidate such facilities with those of any other
person or acquire any security of any other public utility without first
having obtained authorization from the FERC. The approval of the FERC is
required in order to consummate the Merger. Under Section 203 of the Federal
Power Act, the FERC will approve a merger if it finds the merger "consistent
with the public interest." The Merger will come under the FERC's new merger
guidelines, released in December 1996. Under such guidelines, the FERC's
review of mergers and acquisitions is based on three primary factors: effect
on competition, effect on rates and effect on regulation. Under the
guidelines: (i) post-merger market power must not be increased, or must be
within acceptable thresholds or be satisfactorily mitigated; (ii) acceptable
customer rate protections must be in place; and (iii) any adverse effect on
regulation by FERC, Wisconsin and Michigan must be addressed. After the
Merger, Wisconsin Electric and Edison Sault will continue to operate in
separate electric control areas, but they will be interconnected when the
Central Upper Peninsula Transmission Project (as defined below) is completed.
They will offer a single system open access transmission rate over their
interconnected systems. For this purpose, the two utilities will file an
appropriate joint tariff and agreement under Section 205 of the Federal Power
Act, to become effective when the transmission facility becomes operational.
See "Business of the Parties to the Reorganization--Certain Business
Relationships Between Wisconsin Energy and ESELCO."
Wisconsin Energy and ESELCO will file a joint application with the FERC
requesting that the FERC approve the Merger under Section 203 of the Federal
Power Act.
General. Under the Reorganization Agreement, each party has agreed to use
reasonable efforts to obtain all necessary regulatory approvals. Wisconsin
Energy and ESELCO believe that they will receive the requisite regulatory
approvals for the Merger, but there can be no assurance that such approvals
will be received or that, if received, the approvals will be obtained on terms
which satisfy the applicable conditions to the Reorganization Agreement. In
this regard, Wisconsin Energy may terminate the Reorganization Agreement and
not consummate
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the Merger in the event that regulatory approvals are received but those
regulatory approvals impose terms which in Wisconsin Energy's reasonable
judgment are materially adverse to the ESELCO Companies, Wisconsin Energy or
Acquisition. See "--Conditions to Consummation of the Merger" above.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is conditioned upon the receipt by Wisconsin Energy and ESELCO of
an opinion from Quarles & Brady, counsel to Wisconsin Energy, dated prior to
the mailing date of this Proxy Statement/Prospectus, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that Wisconsin Energy,
Acquisition and ESELCO will each be a party to that reorganization within the
meaning of Section 368(b) of the Code, which opinion shall not have been
withdrawn or modified in any material respect as of the Closing Date and the
Effective Time of Merger. Such opinion has been delivered and is filed as an
exhibit to the Registration Statement. The opinion is based upon certain
assumptions and representations by the managements of Wisconsin Energy and
ESELCO.
The following summarizes certain federal income tax consequences of the
Merger based on the provisions of the Code, the applicable regulations
thereunder, judicial authority and current administrative rulings and practice
as of the date hereof, all of which are subject to change, possibly with
retroactive effect: (i) no gain or loss will be recognized by Wisconsin
Energy, Acquisition or ESELCO as a result of the Merger; (ii) no gain or loss
will be recognized by the holders of ESELCO Common Stock upon the conversion
of their shares of ESELCO Common Stock into shares of Wisconsin Energy Common
Stock pursuant to the Reorganization Agreement, except with respect to cash,
if any, received in lieu of fractional shares of Wisconsin Energy Common
Stock; (iii) the tax basis of the shares of Wisconsin Energy Common Stock into
which shares of ESELCO Common Stock are converted will be the same as the
basis of the shares of ESELCO Common Stock converted into such Wisconsin
Energy Common Stock, reduced by any amount allocable to the fractional share
interests for which cash is received; (iv) the holding period for shares of
Wisconsin Energy Common Stock into which shares of ESELCO Common Stock are
converted will include the period that such shares of ESELCO Common Stock were
held by the holder, provided such shares were held as capital assets of the
holder at the Effective Time of Merger; and (v) the payment of cash to a
holder of ESELCO Common Stock in lieu of a fractional share interest, if any,
of Wisconsin Energy Common Stock will be treated as if such fractional share
were distributed as part of the Merger and were subsequently redeemed by
Wisconsin Energy and will be treated as having been received as a distribution
in full payment in exchange for the fractional share of Wisconsin Energy
Common Stock redeemed, as provided in Section 302(a) of the Code.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER WITHOUT REGARD TO THE PARTICULAR FACTS
AND CIRCUMSTANCES OF EACH SHAREHOLDER OF ESELCO. ALL SHAREHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED IN CONNECTION THEREWITH,
INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
No rulings have been or are expected to be sought from the Internal Revenue
Service concerning the tax consequences of the Merger directly. However, it is
proposed that a private letter ruling will be sought from the Internal Revenue
Service to the effect that the possible merger of ESELCO into Wisconsin Energy
after the Merger, to eliminate ESELCO as an intermediate holding company, will
not adversely affect the treatment of the Merger for federal income tax
purposes. See "--Management and Operations of ESELCO After the Merger" above.
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RESALE OF WISCONSIN ENERGY COMMON STOCK
The Wisconsin Energy Common Stock issued pursuant to the Reorganization
Agreement will be freely transferable under the Securities Act except for
shares issued to any ESELCO shareholder who may be deemed to be an "affiliate"
of ESELCO, Acquisition or Wisconsin Energy for purposes of Rule 145 under the
Securities Act. It is expected that each such affiliate will enter into an
agreement with Wisconsin Energy providing that such affiliate will not
transfer any Wisconsin Energy Common Stock received in the Merger except in
compliance with the Securities Act and has not made and will not make a
disposition of any Wisconsin Energy or ESELCO stock (or any interest therein)
during the period commencing 30 days prior to the Effective Time of Merger
through the date on which financial results covering at least 30 days of
combined operations of Wisconsin Energy and ESELCO after the Merger have been
published. Wisconsin Energy's and Acquisition's obligations to consummate the
Merger are conditioned upon the receipt of such an agreement, substantially in
the form of Exhibit 1 to the Reorganization Agreement attached hereto as
Appendix A, from each person who may be deemed to be an affiliate of ESELCO.
Persons who may be deemed to be affiliates of ESELCO, Acquisition or
Wisconsin Energy include individuals or entities that, directly or indirectly
through one or more intermediaries, control, are controlled by, or are under
common control with any of such parties, and may include directors and
officers of such party, as well as principal shareholders of such party.
This Proxy Statement/Prospectus does not cover resales of Wisconsin Energy
Common Stock received by any person who may be deemed to be an affiliate of
ESELCO, Acquisition or Wisconsin Energy.
ACCOUNTING TREATMENT
The Merger has been structured to qualify as a pooling of interests for
accounting and financial reporting purposes. The obligation of Wisconsin
Energy to consummate the Merger is subject to the receipt from Price
Waterhouse LLP, its independent accountants, of their opinion that the Merger
qualifies for pooling of interests accounting treatment. See "--Conditions to
Consummation of the Merger" above.
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BUSINESSES OF THE PARTIES TO THE REORGANIZATION
WISCONSIN ENERGY
Wisconsin Energy is a holding company whose principal subsidiary is
Wisconsin Electric, an electric, gas and steam utility. Wisconsin Energy also
has certain non-utility subsidiaries. As of December 31, 1996, approximately
94% of Wisconsin Energy's consolidated total assets were attributable to
Wisconsin Electric. Effective January 1, 1996, Wisconsin Energy merged its
wholly-owned natural gas utility subsidiary, Wisconsin Natural, into Wisconsin
Electric to form a single combined utility subsidiary.
Wisconsin Electric generates, transmits, distributes and sells electric
energy in a territory of approximately 12,000 square miles with a population
estimated at 2,300,000 in southeastern Wisconsin (including the Milwaukee
area), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. Wisconsin Electric purchases, distributes and sells natural gas to
retail customers and transports customer-owned gas in three distinct service
areas totalling about 2,800 square miles in Wisconsin: west and south of the
City of Milwaukee, the Appleton area and the Prairie Du Chien area. The gas
service territory, which has an estimated population of over 1,100,000, is
largely within Wisconsin Electric's electric service area. Wisconsin Electric
distributes and sells steam supplied by its power plants to certain customers
in the metropolitan Milwaukee area. At December 31, 1996, Wisconsin Electric
had approximately 969,000 electric customers, 367,000 gas customers and 465
steam customers.
Wisconsin Energy's non-utility subsidiaries are devoted primarily to
stimulating economic growth in the Wisconsin Electric service area and to
capitalizing on diversified business opportunities for shareholders. Wisconsin
Energy's non-utility assets amounted to approximately $304 million at December
31, 1996.
Wisconsin Energy is an exempt holding company by order of the SEC under
Section 3(a)(1) of the PUHCA and accordingly is exempt from the provisions of
that Act, other than with respect to certain acquisitions of securities of a
public utility. ESELCO also is an exempt holding company under Section
3(a)(1). Wisconsin Energy and ESELCO will be filing an application with the
SEC to obtain SEC approval of the Merger and to confirm that Wisconsin Energy
and ESELCO will each be entitled to maintain its exempt status under the PUHCA
following the Merger. Wisconsin Energy is subject to certain restrictions
under the Wisconsin Holding Company Act which limit diversification in non-
utility activities by imposing limits on the sum of the assets of all non-
utility affiliates in Wisconsin Energy's holding company system. See "The
Merger--Regulatory Requirements."
Additional information concerning Wisconsin Energy is included in the
Wisconsin Energy documents filed with the SEC which are incorporated by
reference herein. See "Incorporation of Certain Documents by Reference."
ACQUISITION
Acquisition, a wholly-owned subsidiary of Wisconsin Energy, is a Michigan
corporation which was incorporated by Wisconsin Energy for the purpose of
consummating the Merger. Acquisition will have no operations except as
contemplated by the Reorganization Agreement. At the Effective Time of Merger,
Acquisition will be merged with and into ESELCO, which will be the surviving
corporation in the Merger, and each share of common stock of Acquisition
issued and outstanding at the Effective Time of Merger will be converted into
one share of ESELCO Common Stock. As a result, immediately following the
Merger, Acquisition will cease to exist and ESELCO will be a wholly-owned
subsidiary of Wisconsin Energy.
ESELCO
ESELCO is an exempt holding company under Section 3(a)(1) of the PUHCA (and
accordingly is exempt from the provisions of that Act, other than with respect
to certain acquisitions of securities of a public utility), whose subsidiaries
are Edison Sault, ESEG and NTS.
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<PAGE>
Edison Sault is an electric utility engaged in the generation, purchase,
transmission, distribution and sale, at wholesale and retail, of electric
energy. NTS, a non-utility subsidiary, provides tree trimming, right-of-way
clearing and tree removal services to Edison Sault, other utilities,
municipalities and private individuals throughout the Upper Peninsula and
Northern Lower Michigan, and owns a radio tower near Engadine, Michigan. NTS
began operations in May 1990 and accounts for less than one percent of
ESELCO's total consolidated operating revenues. In connection with the Merger,
it is contemplated that NTS will become a direct non-utility subsidiary of
Wisconsin Energy. ESEG is currently inactive but, having received appropriate
approval of the FERC, the business conducted by ESEG will be the ownership of
two 138KV submarine cables under the Straits of Mackinac which are being
purchased from Consumers Energy Company (formerly Consumers Power Company) and
will be leased to Edison Sault. Edison Sault has been leasing these cables
from Consumers Energy Company. In connection with the Merger, ownership of the
cables, or the contract to purchase the cables, is expected to be transferred
to Edison Sault by a merger of ESEG into Edison Sault or otherwise.
Edison Sault is the principal operating subsidiary of ESELCO and accounts
for the major share of ESELCO's total assets, revenues and income. Edison
Sault serves more than 21,000 residential, commercial and industrial customers
throughout Michigan's Eastern Upper Peninsula. This area includes the cities
of Sault Ste. Marie, Manistique, St. Ignace and Mackinac Island. On December
31, 1988, Edison Sault acquired approximately 1,900 customers from Wisconsin
Electric. This acquisition increased its service territory to over 2,000
square miles with a population of approximately 55,000 people.
During 1996 Edison Sault generated 27% of its total electric energy
requirements in its own hydroelectric generating plant located on the St.
Marys River in Sault Ste. Marie, Michigan. It purchased the other 73% of its
requirements, principally under contracts with the United States Corps of
Engineers, Consumers Energy Company and American Electric Power Company.
Edison Sault was assigned a contract between Wisconsin Electric and Upper
Peninsula Power Company ("UPPCo") to purchase power from UPPCo to serve a
portion of the customers acquired by Edison Sault from Wisconsin Electric in
1988.
Additional information concerning ESELCO is included in the ESELCO documents
filed with the SEC which are incorporated by reference herein. See
"Incorporation of Certain Documents by Reference."
CERTAIN BUSINESS RELATIONSHIPS BETWEEN WISCONSIN ENERGY AND ESELCO
As noted above, on December 31, 1988, Edison Sault acquired approximately
1,900 customers from Wisconsin Electric and was assigned a contract between
Wisconsin Electric and UPPCo to purchase power from UPPCo to serve a portion
of such customers.
In October 1994, Edison Sault entered into a construction and joint use
agreement with Wisconsin Electric, UPPCo and Cloverland Electric Cooperative,
Inc., an R.E.A. cooperative to which Edison Sault sells and from which Edison
Sault may purchase wholesale electric energy in the normal course of business.
This agreement relates to the construction of a 138KV transmission line from
Arnold, Michigan to Manistique, Michigan, expected to be completed in 1999,
which will connect the transmission systems of Wisconsin Electric and Edison
Sault (the "Central Upper Peninsula Transmission Project"). Edison Sault's
transmission system is already directly interconnected with the systems of
Consumers Energy Company and Cloverland Electric Cooperative. Edison Sault
purchases power from Consumers Energy Company and American Electric Power
Company over the interconnection with Consumers Energy Company.
Edison Sault has a 10-year agreement to purchase 20 megawatts of firm power
from Wisconsin Electric commencing January 1, 1998.
See "The Merger--Regulatory Requirements" for information regarding certain
regulatory requirements affecting the Merger in light of the businesses of the
parties.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF ESELCO'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
Corporate Structure
ESELCO, Inc. (ESELCO), is the parent holding company of Edison Sault
Electric Company (Edison Sault), ESEG, Inc. (ESEG), and Northern Tree Service,
Inc. (NTS). Edison Sault is engaged in the generation, purchase, transmission,
and sale of electric energy. NTS, its tree trimming subsidiary, began
operation in May of 1990. Edison Sault is the principal operating subsidiary
of ESELCO and accounts for the major share of ESELCO's total assets, revenues,
and income. Therefore, the following discussion and analysis deal primarily
with the operations of Edison Sault.
Sales, Expenses, and Income
For the year 1996, total kilowatt-hour sales and revenue increased 3% and
2%, respectively, over 1995. Resale kwhr sales and revenue increased by 8% in
1996.
Residential kwhr sales and revenue increased 2% over 1995. The average
number of residential customers and use per customer increased 1% during 1996.
Commercial sales and revenue increased 2% during 1996 due to a 1% increase
in customers and use per customer.
Industrial sales increased 1% in 1996. Sales to Michigan Limestone,
Specialty Minerals, and Manistique Papers increased 5%, 4%, and 1%,
respectively. Sales in 1996 to Lakehead Pipe Line, Inc., were approximately
equal to 1995 sales. Total 1996 revenue from the industrial customers was
approximately equal to 1995 levels due to a rate reduction to Manistique
Papers during 1996.
During 1995, kwhr sales and operating revenues increased 5% over 1994. Sales
to the industrial, commercial, and residential customer classes increased 9%,
4%, and 2%, respectively, during this period. Total revenue increased as a
result of the net increase in sales and an increase in purchased power
revenue.
Total hydro plant output increased 6% during 1996 due to an increase in
water available for hydro generation. Power purchased from other utilities
increased 2% in 1996 due to increased requirements. Purchased power expense in
1996 was down 3% as a result of purchases from a lower-cost supplier for part
of Edison Sault's requirements. During 1995, purchased power requirements
increased by 13% due to a decrease in hydro output and increased requirements.
Purchased power expense increased 7% in 1995 as a result of increased
requirements which were partially offset by decreased costs from the U.S.
Government hydro plant.
Other operations and maintenance expenses increased 9% over 1995. Payroll
and associated employee benefit costs increased approximately 9% in 1996.
Pension expense increased as a result of improvements made to the Bargaining
Unit Pension Plan and changes in actuarial assumptions. In addition, employee
benefit expense increased as a result of the Restricted Stock Plan that was
approved by shareholders in 1996. The Plan is discussed in more detail in the
Notes to the Financial Statements.
Fuel and water expense increased 16% as a result of increased water lease
payments made to the U.S. Government. The water lease payments increased due
to a larger quantity of water being available for hydro generation and higher
rates.
Major maintenance expense increased 20%, largely as a result of increased
maintenance expense associated with the Manistique diesels.
Depreciation and amortization increased 5% in 1996 due to an increase in
depreciable assets. Income taxes increased 12% in 1996 as a result of higher
taxable income.
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During 1995, other operation and maintenance expenses decreased 4% from 1994
figures. Payroll and associated benefit costs increased 1% in 1995 due to
increases in employee benefit costs. The increase in payroll and employee
benefit costs was offset by decreases in other expenses. Depreciation and
amortization expense increased 8% during 1995 due to an increase in
depreciable assets and increased rates as approved by the Michigan Public
Service Commission (MPSC). Income taxes increased substantially in 1995 as a
result of higher taxable income.
Based on the previously described changes, earnings per common share
restated for stock dividends increased by 15% in 1996, as compared with a 6%
increase for 1995.
Rates and Regulatory Matters
On August 22, 1995, Edison Sault filed an application with the MPSC for
authority to implement price cap regulation of retail rates. In the
application, Edison Sault proposed that its base rates be capped at present
levels, that its existing Power Supply Cost Recovery (PSCR) factor be rolled
into base rates, and that its existing PSCR Clause be suspended. Edison Sault
published the required notice of opportunity to comment or request a hearing.
No comments were received, and on September 21, 1995, the MPSC approved Edison
Sault's application, subject to the modification that Edison Sault gives 30
days notice rather than two weeks notice for rate decreases and that Edison
Sault file an application by October 1, 2000, to address its experience under
the price cap mechanism. With the latter modification, the price cap
authorization represents an experimental regulatory mechanism. The order also
allows Edison Sault to file an application seeking an increase in rates only
under extraordinary circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed an
intervention and petition for rehearing in Edison Sault's Price Cap Order. The
Attorney General's intervention was based on the grounds that the MPSC did not
have authority to approve price cap regulation. On December 21, 1995, the MPSC
rejected the Attorney General's petition for rehearing. On January 19, 1996,
the Attorney General filed an appeal with the Michigan Court of Appeals.
Legal counsel for Edison Sault believes that the Attorney General's appeal
is without merit and that Edison Sault will prevail. A decision in this case
is not expected until mid-1997. Edison Sault implemented the Price Cap Order
on January 1, 1996.
In light of the Price Cap Order and other potential changes in the industry,
Edison Sault continually reviews the applicability of accounting under SFAS
71. As previously stated, the Price Cap Order is a five-year experimental
regulatory mechanism containing language allowing Edison Sault to seek rate
relief for costs incurred under extraordinary circumstances. In addition,
final implementation of the plan is subject to resolution of the Attorney
General's appeal. Based on a current evaluation of the factors affecting the
applicability of SFAS 71, Edison Sault has determined that it is currently
appropriate to continue accounting in accordance with SFAS 71.
In the event Edison Sault was to discontinue accounting under SFAS 71, the
accounting impact would be an extraordinary after-tax non-cash charge to
earnings in an amount represented largely by any unamortized net regulatory
assets existing at that point in time. Edison Sault's regulatory assets and
liabilities are shown in Note B to the Financial Statements.
Liquidity and Capital Commitments
Investing Activities. ESELCO invested $4,266,000 in net property, plant, and
equipment in 1996. Included in this amount is approximately $840,000 related
to the rebuilding of the hydro canal in Sault Ste. Marie. During 1995,
approximately $482,000 was invested in this project. In addition to
investments in net property, plant, and equipment, $3,510,000 was spent to
resolve the environmental issue discussed under Environmental Matters.
For the three-year period ending December 31, 1996, Edison Sault made a net
investment of $12,024,000 in property, plant, and equipment.
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<PAGE>
Capital Requirements. In October 1994, Edison Sault entered a construction
and joint use agreement with Wisconsin Electric Power Company, Upper Peninsula
Power Company, and Cloverland Electric Cooperative. This agreement specifies
each party's responsibility in the construction of a new transmission line
from Arnold, Michigan, to Manistique, Michigan. Edison Sault continues to plan
for the construction of this new line. This project has an expected completion
date of mid-1998. Edison Sault expects that its share of the cost of this
project will be approximately $9.0 million with approximately $3.2 million of
this being spent in 1997. During 1996, $460,000 was invested in the new 138 kv
interconnect project.
In December 1996, Edison Sault signed a purchase agreement with Consumers
Power Company for the purchase of a 138 kv submarine circuit across the
Straits of Mackinac. Since 1990 Edison Sault had leased these cables at an
annual net lease cost of approximately $466,000. The purchaser of the cables
is ESEG, a wholly-owned subsidiary of ESELCO, Inc. ESEG has not previously
been an active subsidiary of ESELCO. ESEG will lease the cables to Edison
Sault under an operating lease arrangement. The purchase and lease are subject
to approval by the Federal Energy Regulatory Commission (FERC). The cost of
the purchase when consummated in 1997 will be approximately $3.8 million.
Cash Provided by Operating and Financing Activities. For the year ended
December 31, 1996, cash provided by operating activities totaled $6,932,000.
Included in the figure for cash provided from operating activities is an
increase in deferred taxes of approximately $1.0 million due, in large part,
to tax matters relating to the timing of the expenditures made in settlement
of the environmental matter discussed elsewhere. After payment of dividends,
internal sources of funds provided 68% of the capital requirements during 1996
and 70% of the capital requirements for the three-year period ending December
31, 1996. ESELCO paid dividends of $1,634,000 in 1996 which represented a 58%
payout ratio. For the three-year period ending December 31, 1996, ESELCO paid
out $4,465,000 in dividends, or a 61% dividend payout ratio.
During 1996, Edison Sault borrowed $3.2 million under a bank term loan
agreement. The proceeds of this loan were used for payment to the U.S.
Environmental Protection Agency in settlement of the issue discussed under
environmental matters. In addition, ESEG has arranged bank secured term loan
financing for its planned acquisition of the 138 kv submarine cables described
above.
Edison Sault has authority to issue up to $10 million in short-term
obligations. Included in this authority is a line of credit in the amount of
$4 million at the prime rate. In addition, Edison Sault has authority to issue
short-term thrift notes to Michigan residents. Edison Sault's short-term
financing requirements relate primarily to financing customer accounts
receivable, unbilled revenues resulting from cycle billing, and capital
expenditures until permanently financed. At December 31, 1996, Edison Sault
had approximately $7.6 million of unused bank line of credit and additional
energy thrift note authority. These two sources of short-term financing have
been sufficient to meet Edison Sault's short-term capital requirements.
ESELCO's shareholders reinvested approximately $711,000 through the Dividend
Reinvestment Plan (DRP) in 1996. For the three-year period ending December 31,
1996, the DRP provided approximately $1.8 million of capital.
Edison Sault also has authority to issue up to $10 million in Long-term
Energy Thrift Notes to Michigan residents. At December 31, 1996, there were
$6,895,000 of Long-term Energy Thrift Notes outstanding, of which $5,355,000
are classified as long-term debt on the statement of financial position.
At December 31, 1996, Edison Sault's long-term debt from First Mortgage
Bonds totaled $7,995,000. The First Mortgage Bonds are secured by the utility
plant of Edison Sault. At December 31, 1996, there was approximately $10.4
million of unutilized bond financing capability resulting from plant additions
and bond retirements.
At December 31, 1996, there was approximately $13.5 million of long-term
credit available under Edison Sault's First Mortgage Bond Indentures and Long-
term Energy Thrift Note authorization.
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<PAGE>
Capital Structure. ESELCO has maintained a relatively high ratio of common
equity to total capitalization as a result of its earnings growth, dividend
reinvestment plan, and low payout ratio. At December 31, 1996, common equity
represented 49% of total capitalization, including current maturities of long-
term debt and short-term debt. The ratio of common equity to total
capitalization is relatively high as compared with the rest of the industry
and as such represents a fairly conservative capital structure.
The capital structure of ESELCO is illustrated below:
<TABLE>
<CAPTION>
CAPITALIZATION AT DECEMBER 31 1996 1995 1994
----------------------------- ---- ---- ----
<S> <C> <C> <C>
Common equity............................................... 49% 49% 48%
Long-term debt (Including current maturities)............... 48% 41% 39%
Short-term debt............................................. 3% 10% 13%
---- ---- ----
Total................................................... 100% 100% 100%
</TABLE>
With ESELCO's unutilized short and long-term financing sources and its
relatively conservative capital structure, ESELCO believes it is well
positioned to finance its future capital requirements.
Environmental Matters
In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially
Responsible Party" at the Manistique River/Harbor Area of Concern (AOC) in
Manistique, Michigan. There were a number of other potentially responsible
parties, some of whom have been notified by the U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of Concern"
(AOC) due to PCBs which have been found in that area. An Environmental
Engineering/Cost Analysis (EECA) was submitted to the U.S. EPA which provided
an analysis of various methods of remediation for the harbor. The EECA
presented six alternatives of remediation action and ultimately recommended a
remediation method of in-place capping. Management believed this to be the
most prudent course of action. Although the total ultimate cost of specific
remedial action and Edison Sault's potential liability were not known at that
time, management had estimated Edison Sault's minimum cost of this remedy to
be $2.9 million. That figure represented an increase of $1.9 million from the
amount recorded during 1994. Certain other expenditures for investigation of
any necessary remedial action were incurred and are reflected in the
accompanying financial statements. Future costs related to this issue are not
expected to have a material impact on Edison Sault's financial position or
future results of operations.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate the
harbor through in-place capping at a total cost of $6.4 million, with the
Edison Sault portion costing $3.2 million. Through further negotiations, the
U.S. EPA and the PRPs agreed to a cash-out settlement whereby the PRPs would
pay to the U.S. EPA the $6.4 million cost of capping for the right to be
absolved from any future legal actions concerning PCB pollution. To effect
this settlement, an Administrative Order on Consent was executed by all
parties in December 1996, with payments made to the U.S. EPA prior to year-end
1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this
project. Edison Sault has retained legal assistance to start a process of
recovering these costs through several insurance entities. The certainty and
magnitude of insurance recovery are unknown at this time.
Edison Sault believes that the costs discussed above, including the payment
to the U.S. EPA to be relieved of future liability, are a legitimate cost of
doing business and would be recoverable through utility rates. Further, in
November 1993, the MPSC issued an order authorizing Edison Sault to defer and
amortize, over a period not to exceed 10 years, environmental assessment and
remediation costs associated with the Manistique River AOC. Therefore, Edison
Sault has recorded a regulatory asset in the amount of $3.2 million, plus
unreimbursed cost of $300,000, for a total of $3.5 million, which Edison Sault
could begin amortizing in 1997.
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Other Matters
On January 23, 1997, ESELCO issued a press release stating that it is in the
preliminary stages of discussion with possible acquirors. It also stated that
these discussions have been exploratory in nature and have not resulted in a
letter of intent or other agreement in principle and, thus, there can be no
assurance that any acquisition will be consummated.
FOR THE THREE MONTHS, SIX MONTHS AND TWELVE MONTHS ENDED JUNE 30, 1997 AND
1996
Results of Operations
Three Months Ended June 30, 1997 and 1996
Operating revenues for the second quarter of 1997 were 5% higher than the
corresponding period in 1996, while total kilowatthour sales increased 2%.
Residential and resale sales are up about 2% while industrial sales were up 4%
based on increased sales to three of our four industrial customers. Commercial
sales were the same as last year.
Purchased power expense decreased 2% because of increased hydro generation
and lower costs of power purchased from Consumers Power Company.
Other operating and maintenance expenses increased 11% during the second
quarter of 1997 due to an increase in payroll and associated employee benefits
costs as well as the ten year write-off of costs associated with the
Manistique Harbor EPA Project.
Depreciation and amortization expenses increased 8% due to Edison Sault's
ongoing construction program.
Income taxes increased $79,000 due to the increase in taxable income.
Interest expense increased 13%, primarily due to an increase in borrowings
which included a term loan to cover the payment to the U.S. EPA in connection
with the Manistique Harbor EPA Project.
Based on the above changes, net income available for common stock increased
27% from last year.
Six Months Ended June 30, 1997 and 1996
Operating revenues for the first half of 1997 were 3% higher than last year,
while total kilowatthour sales increased 1%. Residential and commercial sales
are down from last year reflecting warmer weather in 1997. Industrial sales
were up 3% based on increased sales to three of our four industrial customers.
Resale sales are up slightly, however, revenue is higher due to the pass
through of cost from the new Consumers Power Company purchased power contract.
Purchased power expense decreased 4% due to lower requirements resulting
from a net increase in hydro generation.
Other operating and maintenance expenses increased 8% during the first half
of 1997 due to an increase in payroll and associated employee benefits costs
as well as the ten year write-off of costs associated with the Manistique
Harbor EPA Project.
Income taxes increased $161,000 due to the increase in taxable income.
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Interest expense increased 14%, primarily due to an increase in borrowings
which included a term loan to cover the payment to the U.S. EPA in connection
with the Manistique Harbor EPA Project.
Based on the above changes, net income available for common stock increased
31% from last year.
Twelve Months Ended June 30, 1997 and 1996
Operating revenues during the current twelve month period were 2% higher
than a year ago. Total electric sales increased 1% during the current twelve
month period. Residential and commercial sales were down during the period
while industrial sales increased a net of 2%. Resale sales were up 3% for the
period.
Purchased power expense decreased 6% due to decreased requirements
reflecting an increase in hydro generation. In addition, higher cost energy
purchases were replaced with lower cost energy from American Electric Power
Company during the period.
Other operating and maintenance expenses were up 10% during the current
twelve month period, due to increased payroll and associated employee benefit
costs and higher water costs reflecting higher rates and additional water
available for generation at Edison Sault's hydro plant. In addition, the
current period includes the write off of costs associated with the Manistique
Harbor EPA Project.
Depreciation and amortization expenses increased 6% due to Edison Sault's
ongoing construction program.
Based on an increase in taxable income, income taxes increased 16% during
the period.
Based on the above changes, net income available for common stock increased
22% from the prior twelve month period.
Liquidity and Capital Commitments
Investing Activities. ESELCO invested $2,171,000 in property, plant, and
equipment in the six month period ending June 30, 1997. For the same period in
1996, ESELCO invested approximately $1,606,000 in property, plant, and
equipment.
Investment expenditures during both periods included costs associated with
the planned construction of a new 138 KV interconnection with Wisconsin
Electric Power Company. This project has a planned completion date of 1999.
Edison Sault's projected share of the cost of this project is $9.3 to $13.0
million. Most of these expenditures are expected to be made in late 1997 and
1998.
In December, 1996 ESEG, Inc. ("ESEG") signed a purchase agreement with
Consumers Power Company for the purchase of a 138 KV submarine circuit across
the Straits of Mackinac. Since 1990, Edison Sault has leased these cables at
an annual net lease cost of approximately $466,000. ESEG, a wholly-owned
subsidiary of ESELCO, has been an inactive subsidiary of ESELCO. ESEG will
lease the cables to Edison Sault under an operating lease arrangement. The
purchase and lease are subject to approval by the Federal Energy Regulatory
Commission (FERC). The cost of the purchase, which is expected to be
consummated in 1997, will be approximately $3.8 million.
Cash Provided by Operating and Finance Activities. Cash provided by
operating activities for the six month periods ending June 30, 1997, and June
30, 1996, totalled $4,226,000 and $2,728,000, respectively. After payment of
dividends, internal sources of funds exceeded the capital requirements of
ESELCO for the six months ending June 30, 1997. Dividend payments for the six
months ending June 30, 1997, totalled $879,000 which represented a 55% payout
ratio. For the same period in 1996, dividends totalled $803,000 which
represented a 66% dividend payout ratio.
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During 1996, Edison Sault borrowed $3.2 million under a bank term loan
agreement. The proceeds from this loan were used for payment to the U.S. EPA
in settlement of the Manistique Harbor Project. In addition, ESEG has arranged
bank secured term loan financing for its planned acquisition of the 138 KV
submarine cables described above.
Edison Sault has authority to issue up to $10 million in short-term
obligations. Included in this authority is a line of credit in the amount of
$4 million at the prime rate. In addition, Edison Sault has authority to issue
short-term thrift notes to Michigan residents. Edison Sault's short-term
financing requirements relate primarily to financing customer accounts
receivable, unbilled revenue resulting from cycle billing, and capital
expenditures until permanently financed.
At June 30, 1997, Edison Sault had approximately $7.8 million of unused bank
line of credit and additional energy thrift notes. These two sources of short-
term financing should be sufficient to meet Edison Sault's short-term capital
requirements.
ESELCO's shareholders reinvested approximately $207,000 through the dividend
reinvestment plan (DRP) in the first half of 1997. For the six month period
ending June 30, 1996, the DRP provided $406,000 of capital.
Effective March 24, 1997 the Board of Directors of ESELCO, Inc. declared the
suspension of the DRP. The DRP has been suspended pending the potential
acquisition of ESELCO, Inc. by Wisconsin Energy Corporation.
At June 30, 1997, the long-term portion of first mortgage bonds totalled
$6,170,000 which is a decrease of $1,825,000 from the December 31, 1996
amount. First mortgage bonds are secured by the utility plant of Edison Sault.
At December 31, 1996, there was approximately $10.4 million of unutilized bond
financing capability resulting from plant additions and bond retirements.
Edison Sault also has authority to issue up to $10 million in long-term
energy thrift notes to Michigan residents. At June 30, 1997, the long-term
portion of energy thrift notes outstanding was $5,567,000 which is an increase
of $212,000 over the December 31, 1996 amount.
DESCRIPTION OF WISCONSIN ENERGY CAPITAL STOCK
At August 27, 1997, the authorized capital stock of Wisconsin Energy
consisted of 325,000,000 shares of Common Stock, $.01 par value per share, of
which 112,865,844 shares were outstanding, and 15,000,000 shares of Preferred
Stock, $.01 par value per share ("Wisconsin Energy Preferred Stock"), of which
none were outstanding. The following summary does not purport to be a complete
description of the applicable provisions of Wisconsin Energy's Restated
Articles of Incorporation (the "Wisconsin Energy Articles") and Bylaws (the
"Wisconsin Energy Bylaws") or of applicable statutory or other law, and is
qualified in its entirety by reference thereto. See "Available Information."
PREFERRED STOCK
Under the Wisconsin Energy Articles, subject to any approval of the SEC
which may be required under the PUHCA should Wisconsin Energy become a
registered holding company under the PUHCA, the Wisconsin Energy Board is
authorized to divide the Wisconsin Energy Preferred Stock into series, to
issue shares of any such series and, within the limitations set forth in the
Wisconsin Energy Articles or prescribed by law, to fix and determine the
relative rights and preferences of the shares of any series so established,
including the dividend rate, redemption price and terms, amount payable upon
liquidation, and any sinking fund provisions, conversion privileges and voting
rights. There are no present plans to issue any Wisconsin Energy Preferred
Stock.
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<PAGE>
COMMON STOCK
The holders of Wisconsin Energy Common Stock are entitled to receive such
dividends as the Wisconsin Energy Board may from time to time declare, subject
to any rights of holders of Wisconsin Energy Preferred Stock, if any is
issued. Each holder of Wisconsin Energy Common Stock is entitled to one vote
per share on each matter submitted to a vote at a meeting of shareholders,
subject to any class or series voting rights of holders of any Wisconsin
Energy Preferred Stock. The holders of Wisconsin Energy Common Stock are not
entitled to cumulate votes for the election of directors. In the event of any
liquidation, dissolution or winding-up of Wisconsin Energy, the holders of
Wisconsin Energy Common Stock, subject to any rights of the holders of any
Wisconsin Energy Preferred Stock, will be entitled to receive the remainder,
if any, of the assets of Wisconsin Energy after the discharge of its
liabilities. Holders of Wisconsin Energy Common Stock are not entitled to
preemptive rights to subscribe for or purchase any part of any new or
additional issue of stock or securities convertible into stock. The Wisconsin
Energy Common Stock does not have any redemption provisions or conversion
rights.
The shares of Wisconsin Energy Common Stock to be issued pursuant to the
Reorganization Agreement, when so issued, will be fully paid and
nonassessable. However, a Wisconsin statute imposes on the shareholders of a
corporation a liability "to an amount equal to the par value of shares owned
by them respectively . . . for all debts owing to employees of the corporation
for services performed for such corporation, but not exceeding 6 months'
service in any one case." In a case involving shares in a privately held
corporation, the Wisconsin Supreme Court by an evenly divided vote affirmed a
lower court decision that "par value," as used in that provision in a
substantially identical predecessor statute, means the subscription price for
the shares.
Wisconsin Energy's ability to pay dividends depends primarily upon the
ability of its subsidiaries to pay dividends or otherwise transfer funds to
it. Various financing arrangements, charter provisions and regulatory
requirements impose certain restrictions on the ability of Wisconsin Energy's
public utility subsidiaries to transfer funds to Wisconsin Energy in the form
of cash dividends, loans or advances. Under Wisconsin law, Wisconsin Energy's
public utility affiliates are prohibited from loaning funds, either directly
or indirectly, to Wisconsin Energy.
So long as any of Wisconsin Electric's First Mortgage Bonds, 5 1/8% Series
due September 15, 1998 are outstanding (the most recent series of First
Mortgage Bonds issued under Wisconsin Electric's Mortgage and Deed of Trust
dated October 28, 1938, as amended and supplemented), Wisconsin Electric may
not declare any dividend on its common stock, par value $10.00 per share
("Wisconsin Electric Common Stock"), other than in Wisconsin Electric Common
Stock, or make any other distribution on, or acquire for value any shares of
Wisconsin Electric Common Stock (except in exchange for Wisconsin Electric
Common Stock) if, after giving effect thereto, the aggregate of all such
dividends, distributions or acquisitions between July 1, 1993 and the last day
of the third month preceding the month in which any such dividend,
distribution or acquisition is paid or made exceeds the sum of $860,062,914
and the net income of Wisconsin Electric during such period applicable to the
Wisconsin Electric Common Stock. Wisconsin Electric's outstanding First
Mortgage Bonds of other series contain similar dividend restrictions. No
dividends on Wisconsin Electric Common Stock may be paid by Wisconsin Electric
if there are dividends in arrears on Wisconsin Electric preferred stock. The
dividend restrictions referred to above are not expected to impair the ability
of Wisconsin Electric to make dividend payments consistent with past practice.
In addition, under the Wisconsin Holding Company Act, Wisconsin Energy's
public utility affiliates will be prohibited from loaning funds, either
directly or indirectly, to Wisconsin Energy and the PSCW has the power to
preclude the payment of dividends by Wisconsin Electric to Wisconsin Energy.
See "The Merger--Regulatory Matters."
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CERTAIN ANTI-TAKEOVER PROVISIONS
Wisconsin Energy's Articles and Bylaws contain provisions which may have the
effect of discouraging persons from acquiring large blocks of Wisconsin Energy
stock or delaying or preventing a change in control of Wisconsin Energy. The
material provisions which may have such an effect are (i) an anti-greenmail
provision prohibiting the purchase of shares of Wisconsin Energy Common Stock
from any person whom the Wisconsin Energy Board believes to be a beneficial
owner of more than 5% of the outstanding shares of Wisconsin Energy Common
Stock at a market premium unless such holder owned the shares for at least two
years, such purchase was approved by a majority of the combined voting power
of the shareholders, or the purchase is pursuant to a tender offer to all
holders of Wisconsin Energy Common Stock on the same terms (such provision may
diminish a person's incentive to acquire a significant block of Wisconsin
Energy Common Stock if such person concluded that it could not be cashed out
at a premium); (ii) classification of the Wisconsin Energy Board into three
classes with the term of only one class expiring each year; (iii) a provision
permitting removal of a director without cause only by at least an 80%
shareholder vote; (iv) authorization for the Wisconsin Energy Board (subject
to any required regulatory approval) to issue Wisconsin Energy Preferred Stock
in series and to fix rights and preferences of the series (including, among
other things, whether, and to what extent, the shares of any series will have
voting rights and the extent of the preferences of the shares of any series
with respect to dividends and other matters); (v) advance notice procedures
with respect to shareholder nominations of directors or shareholder proposals
at a meeting of shareholders, other than those adopted or recommended by the
Wisconsin Energy Board; and (vi) provisions permitting amendment of certain of
these and related provisions only by at least an 80% shareholder vote at a
meeting. In addition, the Wisconsin Business Corporation Law (the "WBCL"),
under which Wisconsin Energy is incorporated, contains supermajority
voting/"fair price" provisions and business combination provisions that would
be applicable to certain mergers, share exchanges or sales of substantially
all assets involving Wisconsin Energy or a subsidiary and a significant
shareholder, and which could have the effect of substantially increasing the
cost to the acquiror and thus discouraging any such transaction. See
"Comparison of Shareholder Rights--Comparison of Michigan and Wisconsin Law--
Anti-Takeover Statutes."
The WBCL permits shareholders to adopt an amendment to a corporation's
articles of incorporation opting out of the supermajority voting/"fair price"
provisions but not the business combination provisions. The Wisconsin Energy
Articles do not opt out of the supermajority voting/"fair price" provisions
and require an 80% shareholder vote to do so, but do opt out of the control
share acquisition provisions of the WBCL. See "Comparison of Shareholder
Rights--Comparison of Michigan and Wisconsin Law--Anti-Takeover Statutes."
The Wisconsin Statutes also contain provisions specifying that the approval
of the PSCW is necessary for any acquisition or holding of more than 10% of
the outstanding voting shares of Wisconsin Energy. Certain acquisitions of
outstanding voting shares of Wisconsin Energy would also require approval of
the SEC under the PUHCA. See "The Merger--Regulatory Requirements" and
"Comparison of Shareholder Rights."
The Wisconsin Energy Common Stock is listed on the NYSE. The transfer agent
and registrar for the Wisconsin Energy Common Stock is The First National Bank
of Boston.
COMPARISON OF SHAREHOLDER RIGHTS
Wisconsin Energy is incorporated in the State of Wisconsin while ESELCO is
incorporated in the State of Michigan. Shareholders of ESELCO, whose rights
are currently governed by Michigan law and the ESELCO Articles and Bylaws
will, upon consummation of the Merger, become shareholders of Wisconsin Energy
and their rights will be governed by Wisconsin law and the Wisconsin Energy
Articles and Bylaws.
The Wisconsin Energy Articles and the Wisconsin Energy Bylaws are different
in certain respects from the ESELCO Articles and the ESELCO Bylaws. In
addition, certain differences exist between the WBCL and the MBCA with respect
to shareholders' rights. While it is impracticable to compare all these
differences, certain
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similarities and differences between the Wisconsin Energy Articles and the
Wisconsin Energy Bylaws, on the one hand, and the ESELCO Articles and the
ESELCO Bylaws, on the other hand, are summarized below under "--Comparison of
Wisconsin Energy Articles and Bylaws to ESELCO Articles and Bylaws," and
certain similarities and differences between the WBCL and the MBCA with
respect to shareholders' rights are summarized below under "--Comparison of
Michigan and Wisconsin Law."
The following discussion is not intended to be complete and is qualified in
its entirety by reference to the Wisconsin Energy Articles and the Wisconsin
Energy Bylaws, the ESELCO Articles and the ESELCO Bylaws, which are filed as
exhibits to Wisconsin Energy's and ESELCO's respective SEC filings (see
"Available Information" and "Incorporation of Certain Documents by
Reference"), and the WBCL and the MBCA.
COMPARISON OF WISCONSIN ENERGY ARTICLES AND BYLAWS TO ESELCO ARTICLES AND
BYLAWS
Authorized Capital Stock
The Wisconsin Energy Articles authorize the issuance of 325,000,000 shares
of Wisconsin Energy Common Stock, of which 112,865,844 shares were issued and
outstanding as of the Record Date, and the issuance of 15,000,000 shares of
Wisconsin Energy Preferred Stock, of which no shares were issued and
outstanding as of the Record Date. The Wisconsin Energy Board is authorized to
divide the Wisconsin Energy Preferred Stock into series, to issue shares of
any such series and to fix and determine the relative rights and preferences
of the shares of any series so established. See "Description of Wisconsin
Energy Capital Stock."
The ESELCO Articles, as amended at the 1997 Annual Meeting of Stockholders,
authorize the issuance of 9,840,000 shares of ESELCO Common Stock, of which
1,593,180 shares were issued and outstanding as of the Record Date, and the
issuance of 160,000 shares of Preferred Stock, $.01 par value per share
("ESELCO Preferred Stock"), no shares of which were issued and outstanding as
of the Record Date. The ESELCO Board is authorized to divide the ESELCO
Preferred Stock into series, to issue shares of any such series and to fix and
determine the relative rights and preferences of the shares of any series so
established.
Board of Directors
The ESELCO Articles provide that the ESELCO Board shall be divided into
three classes, which classes shall be as nearly equal in number as possible,
the term of one class expiring each year. The ESELCO Bylaws provide that the
ESELCO Board shall consist of five members, which number may be increased or
decreased from time to time by the Board to a number not greater than seven
and not less than five. The ESELCO Board currently consists of five directors.
The Wisconsin Energy Articles provide that the number of directors will be
fixed from time to time by or in the manner provided in the Wisconsin Energy
Bylaws, which may provide that the directors shall be divided into three
classes as permitted by the WBCL. The Wisconsin Energy Bylaws provide that the
number of directors will be fixed from time to time by the Wisconsin Energy
Board, but will not be less than three. Like the ESELCO directors, as provided
in the Wisconsin Energy Bylaws, the Wisconsin Energy directors are divided
into three classes, which classes shall be as nearly equal in number as
possible, the term of one class expiring each year. The Wisconsin Energy Board
currently consists of seven directors.
Certain Share Acquisitions and Business Combinations
Certain provisions of the MBCA could have the effect of discouraging persons
from acquiring large blocks of ESELCO stock or delaying or preventing a change
of control of ESELCO. Under certain circumstances, these provisions could have
the effect of, among other things, (i) prohibiting a 10% shareholder from
engaging in a business combination with ESELCO for five years following the
date of acquisition of such 10% interest without approval by a super-majority
vote both of all shareholders entitled to vote and the disinterested
shareholders, (ii) reducing the voting power of shares acquired by a 20%
shareholder, and (iii) prohibiting the payment of a market
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premium (i.e., greenmail) to a 3% shareholder who has held such shares for
less than two years. See
"--Comparison of Michigan and Wisconsin Law--Anti-Takeover Statutes" below for
a more complete discussion of such provisions, including the circumstances
under which such provisions are triggered.
The WBCL contains somewhat similar and somewhat different provisions. See
"--Comparison of Michigan and Wisconsin Law--Anti-Takeover Statutes" below.
Under the Wisconsin Energy Articles, however, Wisconsin Energy has opted out
of the WBCL voting power reduction provision. In addition, although the WBCL
contains an anti-greenmail provision, the Wisconsin Energy Articles also
contain a somewhat different anti-greenmail provision that will prohibit
Wisconsin Energy from purchasing shares of Wisconsin Energy Common Stock from
a 5% holder at a market premium, unless such holder has owned the shares for
at least two years, such purchase was approved by a majority of the combined
voting power of the shareholders (a majority of the aggregate number of votes
which the holders of the then outstanding shares of Wisconsin Energy Common
Stock and Wisconsin Energy Preferred Stock, if any, are entitled to cast,
voting together as a class, in the election of directors), or the purchase is
pursuant to a tender offer to all holders on the same terms.
Removal of Directors
The ESELCO Articles provide that a director may be removed by the
affirmative vote of a majority of the members of the Board then in office, or
by the shareholders, but only for cause, at an annual meeting of shareholders
and by the affirmative vote of a majority of the shares then entitled to vote
for the election of directors. As defined in the ESELCO Articles, cause for
removal shall be construed to exist only if a director whose removal is
proposed has been convicted of a felony by a court of competent jurisdiction
and such conviction is no longer subject to appeal or has been adjudged by a
court of competent jurisdiction to be liable for willful misconduct in the
performance of his or her duty to ESELCO in a manner of substantial importance
to ESELCO and such adjudication is no longer subject to appeal.
The Wisconsin Energy Bylaws provide that directors may be removed for cause
(which is not defined by the Bylaws) by a majority vote of the combined voting
power of the shareholders. Removal without cause requires an 80% vote of the
combined voting power of the shareholders.
Vacancies on the Board of Directors
The ESELCO Bylaws provide that vacancies on the ESELCO Board shall be filled
by appointment made by the remaining directors. The Wisconsin Energy Bylaws
provide that all vacancies may be filled by the shareholders or the remaining
directors. The Wisconsin Energy Bylaws also provide that if the remaining
directors are less than a quorum, vacancies may be filled by the affirmative
vote of a majority of all directors remaining in office. Both the ESELCO
Bylaws and the Wisconsin Energy Bylaws provide that any new director elected
to fill a vacancy will serve for the remainder of the then present term of the
class of directors in which the vacancy is being filled.
Amendments to Articles of Incorporation
The MBCA generally provides that proposed amendments to a corporation's
articles of incorporation must be approved by a majority of the outstanding
shares entitled to vote thereon, and, in addition, a majority of the
outstanding shares of each class or series entitled to vote thereon as a
class, unless a greater proportion is required by the MBCA or the articles of
incorporation. Whether or not entitled to vote thereon by the articles of
incorporation, the holders of the outstanding shares of a class are entitled
to vote on a proposed amendment if the amendment would increase or decrease
the aggregate number of authorized shares of the class, or alter or change the
powers, preferences or special rights of the shares of the class or other
classes so as to affect the class adversely. If a proposed amendment would
adversely affect one or more series of a class, but not the entire class, then
only the shares of the affected series shall as a group be considered a single
class for purposes of voting on the proposed amendment. The ESELCO Articles
provide that the provisions therein relating to the
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classification and removal of directors of ESELCO may not be repealed or
amended unless such repeal or amendment is approved by the vote or consent of
the holders of at least two-thirds of all shares entitled to vote in elections
of directors, considered as one class.
The WBCL generally provides that amendments to the articles of incorporation
may be approved by a majority of the votes cast by each voting group
(class(es) or series of shares) entitled to vote thereon, if a quorum exists,
unless a greater proportion is required by the WBCL, the articles or the
bylaws. The Wisconsin Energy Articles generally provide that amendments to the
Wisconsin Energy Articles require the affirmative vote of a majority of the
votes entitled to be cast thereon; provided that amendments to certain
sections (including those sections relating to the Preferred Stock provisions,
restrictions on greenmail, the voting requirements for amending the Wisconsin
Energy Articles and any provision that would have the effect of rendering
inapplicable to Wisconsin Energy the supermajority/fair price and anti-
greenmail provisions of the WBCL) require the affirmative vote of 80% of the
votes entitled to be cast thereon. See--"Comparison of Michigan and Wisconsin
Law--Amendment of Articles" below.
Amendments to Bylaws
The MBCA provides that the shareholders or the board of directors may amend
or repeal bylaws or adopt new bylaws unless the articles of incorporation or
bylaws provide that the power to adopt new bylaws is reserved exclusively to
the shareholders or that the bylaws or any particular bylaw shall not be
altered or repealed by the board of directors. The ESELCO Bylaws provide that
the shareholders or the ESELCO Board may make and amend any Bylaws.
The Wisconsin Energy Board has the power to adopt, amend and repeal the
Wisconsin Energy Bylaws, provided that the Bylaws generally may be amended or
repealed by a majority of the votes cast at a shareholders meeting at which a
quorum is present. Certain provisions of the Wisconsin Energy Bylaws,
including those provisions (i) authorizing shareholder action by unanimous
consent, (ii) fixing the number of directors, (iii) providing for a classified
board of directors, (iv) establishing procedures for removing directors, (v)
requiring notice of board meetings, (vi) providing indemnification rights for
officers and directors, and (vii) setting forth the vote required for certain
amendments, may not be amended or repealed, nor may any provision inconsistent
therewith be adopted, without the approval of holders of 80% of the combined
voting power of the then outstanding shares of Wisconsin Energy Common Stock
and Preferred Stock, if any.
Voting/Cumulative Voting
The ESELCO Articles and the Wisconsin Energy Articles each provide that each
share of the respective Common Stock is entitled to one vote on each matter
submitted to a vote of shareholders. The ESELCO Articles provide that no
holder of any shares of any series of ESELCO Preferred Stock, if any were to
be issued, shall be entitled to vote for the election of directors or in
respect of any other matter except as may be required by the MBCA or as is
permitted by the resolution or resolutions adopted by the ESELCO Board
authorizing the issue of such series of Preferred Stock. The voting rights of
Wisconsin Energy Preferred Stock, if any were to be issued, will be determined
by the Wisconsin Energy Board at the time such Preferred Stock is issued.
Neither the ESELCO Articles nor the Wisconsin Energy Articles provide for
cumulative voting in the election of directors.
Special Meetings of Shareholders; Shareholder Action by Written Consent
The ESELCO Bylaws provide that special meetings of shareholders shall be
held at ESELCO's registered office in Sault Ste. Marie, Michigan, or at such
other place in Sault Ste. Marie, as designated by the ESELCO Board, whenever
called by the ESELCO Board, the Chairman of the Board, or the President. In
addition, under the MBCA, upon application of the holders of not less than 10%
of all the shares entitled to vote at a meeting, a court, for good cause
shown, may order a special meeting of shareholders to be called and held.
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The Wisconsin Energy Bylaws provide that the Chairman, President or a
majority of the Wisconsin Energy Board may call a special meeting of the
shareholders. In addition, the Wisconsin Energy Bylaws provide that, if and as
required by the WBCL, shareholders holding at least 10% of the votes entitled
to be cast on an issue may demand that a special meeting be called.
The ESELCO Articles and Bylaws are silent as to whether shareholders may
take action by written consent, unanimous or otherwise, without a meeting. The
MBCA provides that any action required or permitted by the MBCA to be taken at
an annual or special meeting of shareholders may be taken without a meeting,
without prior notice, and without a vote, if before or after the action all
the shareholders entitled to vote consent in writing. The MBCA also provides
that the articles of incorporation may provide that any action required or
permitted by the MBCA to be taken at an annual or special meeting of
shareholders may be taken without a meeting, without prior notice, and without
a vote, if consents in writing, setting forth the action so taken, are signed
by the holders of outstanding shares having not less than the minimum number
of votes that would be necessary to authorize or take the action at a meeting
at which all shares entitled to vote on the action were present and voted. The
WBCL contains a similar provision, but the Wisconsin Energy Articles are
silent as to action without a meeting and the Wisconsin Energy Bylaws provide
that shareholders may take action without a meeting only by unanimous written
consent.
Notice of Shareholder Proposals/Nominations
The ESELCO Articles and Bylaws are silent concerning advance notice of the
introduction by shareholders of business at annual or special meetings of
shareholders.
Wisconsin Energy's Bylaws require advance notice of the nomination by a
shareholder of a person for election as a director or the introduction by
shareholders of business at annual or special meetings of shareholders. For a
nomination or proposal not adopted or recommended by the Wisconsin Energy
Board to be properly brought before an annual or special meeting by
shareholders, the Secretary of Wisconsin Energy must have received written
notice thereof not less than 70 days nor more than 100 days, in the case of an
annual meeting, and a reasonable period of time, in the case of a special
meeting, prior to the meeting. The notice must contain (i) the name and
address of the shareholder who intends to make the proposal, (ii) a
representation that the shareholder is a holder of record entitled to vote at
the meeting (including the number of shares the shareholder owns as of the
record date and the length of time the shares have been held) and intends to
appear in person or by proxy to make the proposal specified in the notice,
(iii) the proposal and a brief supporting statement of such proposal, and (iv)
such other information regarding the proposal as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the SEC.
Indemnification/Limitation of Liability
The ESELCO Articles provide that ESELCO shall indemnify any person against
expenses (including attorneys fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by such person by reason of the
fact that such person is or was a director or officer of ESELCO, in connection
with any threatened, pending or completed action, suit or proceeding to the
full extent allowed by the MBCA. See "--Comparison of Michigan and Wisconsin
Law" below. The ESELCO Articles also limit the personal liability of directors
for monetary damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to ESELCO or
its shareholders, (ii) for acts or omissions not in good faith which involve
intentional misconduct or a knowing violation of law, (iii) for a violation of
the provisions of the MBCA relating to directors' liability for certain
corporate actions, including declaration of an improper dividend or other
distribution to shareholders or the making of a loan to a director, officer or
employee of ESELCO or a subsidiary contrary to the MBCA, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Wisconsin Energy Articles do not contain such a provision limiting director
liability, but a comparable limitation is statutorily mandated by the WBCL.
See "--Comparison of Michigan and Wisconsin Law--Limited Liability of
Directors."
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The Wisconsin Energy Bylaws provide that Wisconsin Energy shall indemnify to
the fullest extent permitted by law any person who is or was a party or
threatened to be made a party to any legal proceeding by reason of the fact
that such person is or was a director or officer of Wisconsin Energy, or is or
was serving at the request of Wisconsin Energy as a director or officer of
another enterprise against expenses (including attorneys fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person. This right of indemnity includes the advancement of expenses upon
receipt of an undertaking to repay upon specified conditions. The Wisconsin
Energy Bylaws also provide the directors or officers who have been successful
on the merits or otherwise in the defense of any proceeding shall receive
indemnification within twenty days of their request. The right to
indemnification (except in the event of a successful defense, in which case
such indemnification is automatic) will be determined, at the indemnified
party's election, by (i) majority vote of a quorum of disinterested directors,
(ii) independent legal counsel, (iii) a panel of three arbitrators, (iv)
majority vote of the shareholders, (v) a court, or (vi) such other method
provided for in any additional right to indemnification.
COMPARISON OF MICHIGAN AND WISCONSIN LAW
In general, as described below, the MBCA and the WBCL provide shareholders
with similar rights and protections, with certain differences. A comparison of
certain provisions of the MBCA as it applies to ESELCO and the WBCL as it
applies to Wisconsin Energy is set forth below. See "--Comparison of Wisconsin
Energy Articles and Bylaws to ESELCO Articles and Bylaws" above for a
description of certain provisions contained in such articles and bylaws as
permitted or required by the WBCL and MBCA.
Classified Board of Directors; Removal of Directors; Vacancies
Both the MBCA and the WBCL allow the board of directors to be divided into
classes. Under both the MBCA and the WBCL, absent a provision to the contrary
in the corporation's articles of incorporation (or, in the case of the WBCL,
the bylaws), a director can be removed with or without cause by the requisite
vote of the shares of the classes or series such director represents, which
under the WBCL is a majority of the votes cast, and under the MBCA is a
majority of the shares entitled to vote. Under both the MBCA and the WBCL, in
the case of a corporation having cumulative voting, a director is not removed
from the board if there are cast against removal of such director the votes of
a proportion of the voting power sufficient to elect such director at an
election of the entire board under cumulative voting. Under both the MBCA and
the WBCL, absent provisions to the contrary in the articles of incorporation,
vacancies may be filled by the affirmative vote of a majority of the
directors, even though less than a quorum, or by the shareholders.
Interested Director Transactions
Under both the MBCA and the WBCL, contracts or transactions in which one or
more of the corporation's directors has an interest are not void or voidable
solely because of such interest or because such director was present at the
directors' or shareholders' meeting where such contract or transaction was
approved, if certain conditions were met. Under both the WBCL and the MBCA, if
the material facts of the transaction and the director's interest are fully
disclosed and a vote is taken, such contracts or transactions may be approved
by a majority vote of the disinterested directors or by a majority vote of
disinterested shareholders. If the contracts or transactions are shown to be
fair to the corporation at the time they are entered into, separate
disinterested shareholder or disinterested director approval is not required.
Indemnification of Directors and Officers
The WBCL provides for mandatory indemnification of a director or officer
against certain liabilities and expenses if the director or officer was a
party to a proceeding because of his or her status as such: (a) to the extent
such director or officer is successful on the merits or otherwise in the
defense of the proceeding; and (b) in proceedings in which the director or
officer is not successful in the defense thereof, unless it is determined
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that the liability was incurred because the director or officer breached or
failed to perform a duty that he or she owes to the corporation and the breach
or failure to perform constitutes: (i) a willful failure to deal fairly with
the corporation or its shareholders in connection with a matter in which the
director or officer has a material conflict of interest; (ii) a violation of
criminal law, unless the director or officer had reasonable cause to believe
that his or her conduct was lawful or no reasonable cause to believe that his
or her conduct was unlawful; (iii) a transaction from which the director or
officer derived an improper personal profit; or (iv) willful misconduct.
Unless otherwise provided by the articles, bylaws or a written agreement
between the director or officers and the corporation, determination of whether
indemnification is required under (b) shall be made by one of the means
provided for in the WBCL selected by the director or officer seeking
indemnification, which include determination by a majority vote of
disinterested directors, independent legal counsel, a panel of three
arbitrators, a vote of disinterested shareholders, a court, or any other
method provided for in any additional right to indemnification permitted under
the WBCL. Indemnification under the WBCL is not required if the director or
officer has previously received indemnification from any person, including the
corporation, in connection with the same proceeding. The WBCL provides that a
corporation's articles may limit its obligation to indemnify directors and
officers. The WBCL also contains provisions which, subject to certain
conditions, permit reimbursement of expenses as incurred, provide for court-
ordered indemnification and permit additional rights to indemnification. The
WBCL specifically states that it is the public policy of Wisconsin to require
or permit indemnification in connection with a proceeding involving securities
regulation, as described therein, to the extent otherwise required or
permitted under the WBCL.
The MBCA generally provides that a corporation may, and in certain
circumstances must, indemnify any person who is or was made or threatened to
be made a party to any action, suit or proceeding (other than a derivative
action by or in the right of the corporation) by reason of the fact that he or
she is or was a director, officer, employee or agent of such corporation for
expenses, judgments, penalties, fines and settlements actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the corporation or its
shareholders and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. A similar
provision permits indemnification against expenses, including attorneys fees,
and amounts paid in settlement actually and reasonably incurred by the person
in connection with derivative actions. To the extent that such a person has
been successful on the merits or otherwise in defense of such litigation, the
MBCA requires indemnification against actual and reasonable expenses incurred.
Unless indemnification is ordered by a court, the determination of whether a
director, officer, employee or agent has met the applicable standard of
conduct is made (i) by a majority vote of a quorum of the board consisting of
directors who are not parties or threatened to be made parties to the action,
suit or proceeding, (ii) if a quorum cannot be obtained under (i), by majority
vote of a committee duly designated by the board and consisting solely of two
or more directors not at the time parties or threatened to be made parties to
the action, suit or proceeding, (iii) by independent legal counsel in a
written opinion, (iv) by all independent directors who are not parties to or
threatened to be made parties to the action, suit or proceeding, or (v) by the
shareholders (but shares held by directors, officers, employees or agents who
are parties or threatened to made parties to the action, suit or proceeding
may not be voted). The MBCA also permits a corporation to advance expenses to
directors, officers and others upon a determination of eligibility, so long as
the requesting party undertakes to repay the amounts advanced if it is
ultimately determined that the party was not entitled to be indemnified. The
MBCA provides that a corporation may provide additional rights to those
seeking indemnification or advancement of expenses.
Limited Liability of Directors
The MBCA permits a corporation to include in its articles of incorporation a
provision providing that a director will not be personally liable to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty, provided that such provision may not eliminate or
limit the liability of a director for (i) a breach of the director's duty of
loyalty to the corporation or its shareholders, (ii) acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of
law, (iii) violations of the provisions
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of the MBCA regarding declaration of dividends or other distributions to
shareholders or the making of loans to directors, officers or employees, or
(iv) a transaction from which the director derived an improper personal
benefit.
The WBCL provides for the limitation or elimination of the personal
liability of a corporation's directors to the corporation or its shareholders
for monetary damages for a breach of the directors' fiduciary duty. The
immunity is automatic under the WBCL, except to the extent limited in the
corporation's articles of incorporation. The statutory limitation of liability
does not apply if the person asserting liability proves that the director's
breach or failure to perform constitutes (i) a willful failure to deal fairly
with the corporation or its shareholders in connection with a matter in which
the director or officer has a material conflict of interest, (ii) a violation
of criminal law, unless the director or officer had reasonable cause to
believe that his or her conduct was lawful or no reasonable cause to believe
that his or her conduct was unlawful, (iii) a transaction from which the
director or officer derived an improper personal profit, or (iv) willful
misconduct.
Amendment of Articles
The MBCA generally provides that proposed amendments to a corporation's
articles of incorporation must be submitted to a vote at a meeting of
shareholders, except as otherwise provided by the MBCA. Under the MBCA, a
proposed amendment shall be adopted upon receiving the affirmative vote of a
majority of the outstanding shares entitled to vote thereon and, in addition,
if any class or series of shares is entitled to vote thereon as a class, a
majority of the outstanding shares of each such class or series, unless a
greater voting requirement is provided by the articles of incorporation or the
MBCA. As noted above, the ESELCO Articles require a two-thirds vote to amend
the provisions therein relating to the classification and removal of
directors.
Under the WBCL, and unless the articles, bylaws adopted under authority
granted in the articles, the board (if the board is proposing the amendment)
or the WBCL requires a greater vote or a vote by voting groups, a proposed
amendment is adopted if approved by a majority of the votes cast by every
voting group entitled to vote on the amendment. In addition, both the WBCL and
the MBCA require that certain amendments must be approved by a separate vote
of a class or series of stock if, among other things, the amendment would make
a prejudicial change to the rights or preferences of such shares. The
Wisconsin Energy Articles require a shareholder vote of a majority of the
outstanding shares to amend most provisions therein and an 80% shareholder
vote to amend certain provisions thereof. See "--Comparison of Wisconsin
Energy Articles and Bylaws to ESELCO Articles and Bylaws--Amendments to
Articles of Incorporation."
Amendment of Bylaws
Under the MBCA and WBCL, unless reserved by the articles or bylaws to the
shareholders, the power to adopt, amend or repeal a corporation's bylaws is
generally vested in the board of directors, subject to the power of the
shareholders to adopt, amend or repeal bylaws adopted, amended or repealed by
the board. See "--Comparison of Wisconsin Energy Articles and Bylaws to ESELCO
Articles and Bylaws--Amendments to Bylaws."
Vote Required for Certain Reorganizations
Subject to certain exceptions, the WBCL and the MBCA both provide for a
shareholder vote (except for certain mergers between a parent company and its
90% owned subsidiary) of: (i) each corporation that is party to a plan of
merger; (ii) the corporation whose shares will be acquired in a statutory
share exchange; and (iii) the selling corporation for the sale by the
corporation of substantially all of its assets if not in the usual and regular
course of business. The WBCL and the MBCA also provide for a shareholder vote
to approve the voluntary dissolution of a corporation.
Under the WBCL and the MBCA, unless a higher voting requirement is imposed
by law, by the articles of incorporation or, in the case of the WBCL, by
bylaws adopted under authority granted in the articles, the vote required to
approve a plan of merger, statutory share exchange, sale of substantially all
assets not in the ordinary
55
<PAGE>
course of business or voluntary dissolution is a majority of the voting power
of all shares entitled to vote of each corporation whose shareholders have a
right to vote thereon, and of any class or series of shares entitled to vote
separately thereon.
The WBCL does not require the vote of the shareholders of the surviving
corporation in a merger if (i) the corporation's articles of incorporation
will not be amended in the transaction (except for amendments permitted to be
made by the board without a shareholder vote under the WBCL), (ii)
shareholders of the corporation immediately before the effective date of the
transaction will hold the same number of shares with identical rights
immediately after the effective date, (iii) the number of shares entitled to
vote immediately after the merger (plus shares issuable upon certain
conversions or pursuant to certain rights) does not exceed by more than 20%
the number of shares entitled to vote immediately before the transaction; and
(iv) the number of participating shares of the corporation (outstanding shares
of the corporation that entitle their holders to participate, without
limitation, in distributions by the corporation) immediately after the merger,
plus the number of participating shares of the corporation issuable on the
conversion of, or on the exercise of rights to purchase, securities issued in
the transaction, will not exceed by more than 20% the number of participating
shares of the corporation immediately before the transaction.
Except as indicated below or unless required by the articles, the MBCA does
not require the vote of the shareholders of the surviving corporation in a
merger if (i) the articles of the surviving corporation will not differ from
its articles before the merger, and (ii) each shareholder of the surviving
corporation whose shares were outstanding immediately before the effective
date of the merger will hold the same number of shares, with identical
designations, preferences, limitations, and relative rights, immediately
after. Except as described below, a vote by the shareholders of the acquiring
corporation on a plan of share exchange is not required by the MBCA. Under the
MBCA, shareholders of a corporation which proposes to issue its shares or
other securities in a merger, share exchange or other acquisition of shares or
assets of another entity have the same rights to receive notice of and to vote
on the proposed acquisition as provided in the case of a merger or share
exchange requiring a shareholder vote (and may be entitled to assert
dissenters' rights) if (a) the securities to be issued or delivered in the
acquisition are, or may be converted into, shares of the acquiring
corporation's common stock, and (b) the number of the acquiring corporation's
common shares to be issued or delivered, plus those initially issuable upon
conversion or exchange of any other securities to be issued or delivered, will
exceed 100% of the number of its common shares outstanding immediately prior
to the acquisition plus the number of its common shares, if any, initially
issuable upon conversion or exchange of any other securities then outstanding.
Class Vote for Certain Reorganizations
Both the MBCA and the WBCL provide, with certain exceptions, that a class or
series of shares of a corporation is entitled to vote on a plan of merger or
statutory share exchange as a class or a series if, in the case of a merger,
any provision of the plan would, if contained in a proposed amendment to the
articles of incorporation, entitle the class or series of shares to vote as a
class or series and, in the case of a share exchange, if the class or series
is included in the plan of exchange. In addition to the voting requirements
discussed above, anti-takeover legislation adopted in both Michigan and
Wisconsin imposes additional restrictions on mergers and other business
combinations between certain shareholders and the corporation. See "--Anti-
Takeover Statutes."
Shareholder Action by Consent
Both the MBCA and the WBCL permit shareholders to take action without a
meeting by unanimous written consent. The MBCA and the WBCL also allow a
corporation, if it so elects in its articles of incorporation, to take such
action by less than unanimous written consent by the written consents of
shareholders possessing not less than the minimum voting power that would be
necessary to authorize or take the action at a meeting at which all shares
entitled to vote on the action were presented and voted. See "--Comparison of
Wisconsin Energy Articles and Bylaws to ESELCO Articles and Bylaws -- Special
Meetings of Shareholders; Shareholder Action by Written Consent."
56
<PAGE>
Statutory Shareholder Liability
The WBCL provides that shareholders of Wisconsin domestic corporations are
personally liable for certain debts owed to employees for services performed,
but not exceeding six months service in any one case. While the WBCL specifies
that such liability is limited to the par value of the shares, this has been
interpreted by a Wisconsin trial court to mean the consideration paid to a
corporation for shares. This decision was affirmed by a split decision of the
Wisconsin Supreme Court without any written opinion and with one justice
abstaining. The MBCA does not contain any comparable provision.
Distributions
Both the MBCA and the WBCL are the same in all material respects with regard
to distributions. Under both statutes, the board of directors may authorize
and the corporation may make, subject to any restriction by the articles of
incorporation, distributions to its shareholders unless after such
distribution the corporation would not be able to pay its debts as they become
due or its total assets after the distribution would be less than the sum of
its total liabilities, plus the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution. Under both statutes,
a distribution means a direct or indirect transfer by a corporation of money
or other property, other than its shares, or an incurrence of indebtedness by
a corporation, to or for the benefit of its shareholders in respect to any of
its shares, including but not limited to a dividend, a purchase, redemption or
other acquisition of shares, or a distribution or issuance of indebtedness.
Special Meetings of Shareholders
Under the MBCA, a special meeting of shareholders may be called by the
board, or by officers, directors or shareholders as provided in the bylaws. In
addition, notwithstanding any such provision, upon application of the holders
of not less than 10% of all the shares entitled to vote at a meeting, the
circuit court of the county in which the principal place of business or
registered office of the corporation is located, for good cause shown, may
order a special meeting of shareholders to be called and held at such time and
place, upon such notice and for the transaction of such business as may be
designated in the order; and at any such meeting, the shareholders present in
person or by proxy and having voting power constitute a quorum for the
transaction of the business designated in the order.
Under the WBCL, a special meeting of shareholders may be called by the board
of directors or by any person authorized by the articles of incorporation or
bylaws to call a special meeting, or pursuant to a written demand of the
holders of not less than 10% of the votes entitled to be cast at such a
meeting. The WBCL also contains provisions whereby a shareholder may petition
a court to order a meeting to be held if an annual or special meeting of
shareholders has not been held as required.
Dissenters' Rights
Both the MBCA and WBCL entitle shareholders of a corporation to dissent from
and obtain fair value for their shares in the event of certain corporate
actions. Subject to certain exceptions, limitations and conditions,
shareholders may dissent under both statutes from (1) a plan of merger, (2) a
plan of share exchange, and (3) a sale of all or substantially all of the
assets of the corporation. Under the MBCA, shareholders are also entitled to
dissenters' rights in the event of: (a) an amendment to the articles that
materially and adversely affects the rights or preferences of the shares of
the dissenting shareholder in certain specified ways (the WBCL provides that
the articles of incorporation may give this right to shareholders); (b) the
proposed issuance, directly or through a subsidiary, of securities in the
course of a merger, acquisition of some or all of the outstanding shares of
another corporation, or some or all of the assets of a business organization,
in the circumstances described in the last sentence of the last paragraph
under "--Vote Required for Certain Reorganizations" above; and (c) the
approval of a control share acquisition giving rise to a right to dissent.
Both the MBCA and the WBCL allow corporations to create additional dissenters'
rights by affirmative provision in the articles or bylaws or by board
resolution.
57
<PAGE>
Under the WBCL, except in a "Section 180.1130 Business Combination" (as
described below under "Anti-Takeover Statutes") or unless the articles of
incorporation provide otherwise, dissenters' rights are not available to
holders of shares registered on a national securities exchange or quoted on
the NASDAQ on the record date for a meeting of shareholders at which action on
the proposed transaction otherwise subject to dissenters' rights is to be
taken. As a result, assuming that continued listing of the Wisconsin Energy
Common Stock on the NYSE, under the WBCL, shareholders will not be entitled to
dissenters' rights with respect to any future merger, plan of share exchange
or sale of all or substantially all of the assets of Wisconsin Energy which
might occur following the Merger (unless it constitutes a Section 180.1130
Business Combination). Under the MBCA, unless otherwise provided in the
articles, bylaws, or a resolution of the board, dissenters' rights are not
available to holders of shares listed on a national securities exchange or
held of record by not less than 2,000 persons on the record date fixed to
determine the shareholders entitled to receive notice of and to vote at the
meeting of shareholders at which the corporate action is to be acted upon, or
with respect to a merger, share exchange or sale of all or substantially all
the corporation's assets in which shareholders receive cash or shares that are
so listed or held.
Director and Officer Discretion
The WBCL provides that, in discharging his or her duties to the corporation
and in determining what he or she believes to be in the best interests of the
corporation, a director or officer may, in addition to considering the effects
of any action on shareholders, consider (i) the effects of the action on
employees, suppliers and customers of the corporation, (ii) the effects of the
action on the communities in which the corporation operates and (iii) any
other factors that the director or officer considers pertinent. The MBCA
contains no equivalent provision.
Anti-Takeover Statutes
1. Business Combination Statutes. The MBCA and the WBCL both restrict
covered corporations from engaging in certain enumerated "business
combinations."
The MBCA provides that business combinations (defined to include, generally,
any merger, consolidation, or share exchange of the corporation or any
subsidiary which alters the contract rights of the shares or which changes or
converts, in whole or in part, the outstanding shares of the corporation; any
sale, lease, transfer, or other disposition, not in the ordinary course of
business, of assets having an aggregate book value of 10% or more of the
corporation's net worth; the issuance or transfer of equity securities having
an aggregate market value of 5% or more of the total market value of the
corporation's outstanding shares; the adoption of any plan or proposal for
liquidation or dissolution in which an interested shareholder or any affiliate
thereof will receive anything but cash; and any reclassification of
securities, recapitalization, or merger, consolidation or share exchange which
has the effect of increasing by 5% or more the total number of outstanding
shares of any class of equity securities of the corporation or any subsidiary
owned by any interested shareholder or affiliate thereof) between covered
Michigan business corporations, such as ESELCO, or their subsidiaries and an
interested shareholder (defined as the direct or indirect beneficial owner of
10% or more of the voting power of the outstanding voting shares of the
corporation, or an affiliate of the corporation which was the direct or
indirect beneficial owner of 10% or more of the voting power of the
outstanding voting shares of the corporation within the preceding two years)
or an affiliate thereof can be consummated only if approved by at least 90% of
the votes of each class of the corporation's stock entitled to vote and by at
least two-thirds of the votes of each such class of stock other than voting
shares beneficially owned by the interested shareholder or an affiliate or
associate thereof, unless five years have elapsed after the person involved
became an interested shareholder and unless certain fair price and other
conditions are satisfied. The board of directors may exempt business
combinations with a particular interested shareholder by resolution adopted
prior to the time the interested shareholder attained that status.
The WBCL restricts resident domestic corporations, such as Wisconsin Energy,
from engaging in certain enumerated business combinations (defined to include,
generally, a merger or statutory share exchange; a sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets equal to at least 5%
or more of the
58
<PAGE>
aggregate market value of all the assets or at least 5% of the aggregate
market value of the outstanding stock or at least 10% of the earning power or
income; the issuance or transfer of stock with a market value equal to at
least 5% of the outstanding stock; the adoption of a plan or proposal for
liquidation or dissolution; and certain other transactions) involving an
interested shareholder (defined generally as a shareholder who beneficially
owns at least 10% of the outstanding voting power or is an affiliate or
associate of the corporation and beneficially owned 10% of the voting power of
the then outstanding voting stock within the preceding three years)), for a
period of three years following the date that the person became an interested
shareholder ("share acquisition date"). This restriction applies for three
years unless the business combination or the acquisition of shares by the
interested shareholder is approved by the board of directors prior to the
share acquisition date. Following such three-year period, such business
combinations are permitted if (i) the acquisition of shares was approved by
the board of directors prior to the share acquisition date, (ii) the business
combination is approved by a majority of the voting stock not beneficially
owned by the interested shareholder or (iii) the consideration to be received
by the corporation's shareholders satisfies certain "fair price" provisions.
2. Control Share Acquisition Statutes. The MBCA provides that, unless the
corporation's articles of incorporation or bylaws provide otherwise, "control
shares" of an "issuing public corporation," such as ESELCO, have only such
voting rights as are granted by resolution approved by the majority of the
votes cast by the holders of shares entitled to vote thereon (and of the votes
cast by any class or series of shares entitled to vote separately thereon) and
by a majority of the votes cast by the holders of all shares and of any class
or series entitled to vote, excluding all "interested shares" (as defined).
"Control shares" are shares that, when added to the shares already owned by an
entity, would give the entity voting power in the election of directors over
any of 3 thresholds: one-fifth, one-third and a majority. The effect of the
statute is to condition the acquisition of voting control of a corporation on
the approval of a majority of the pre-existing disinterested shareholders.
Among other exceptions, the acquisition of shares pursuant to a merger or a
share exchange effected in compliance with the MBCA does not constitute a
control share acquisition if the issuing public corporation is a party to the
agreement of merger or share exchange.
The WBCL contains similar provisions, except that the WBCL applies only to
acquisitions of more than 1/5 of the voting power of the corporation. Under
the WBCL, unless otherwise provided in the articles of incorporation, the
voting power of shares, including shares issuable upon conversion of
convertible securities or exercise of options or warrants, of an "issuing
public corporation" held by any person (including two or more persons acting
as a group) in excess of 20% of the voting power in the election of directors
is limited (in voting on any matter) to 10% of the full voting power of those
shares. This restriction does not apply to shares acquired directly from the
issuing public corporation, or in certain specified transactions, or incident
to a transaction in which the corporation's shareholders have approved
restoration of the full voting power of the otherwise restricted shares.
Under both the MBCA and WBCL, the person whose voting rights are reduced may
demand a shareholders' meeting at which the shareholders shall vote on
resolutions to restore full voting rights to such person's shares. Under the
MBCA, if authorized in an issuing public corporation's articles of
incorporation or bylaws before a control share acquisition has occurred, (i)
control shares acquired in a control share acquisition, with respect to which
no acquiring person statement has been filed with the issuing public
corporation, may, at any time during the period ending 60 days after the last
acquisition of control shares or the power to direct the exercise of voting
power of control shares by the acquiring person, be subject to redemption by
the corporation at the fair value of the shares (defined to mean not less than
the highest price paid per share by the acquiring person in the control share
acquisition) pursuant to the procedures adopted by the corporation, or (ii)
after an acquiring person statement has been filed and after the meeting at
which the voting rights of the control shares acquired in a control share
acquisition are submitted to the shareholders, the shares are subject to
redemption by the corporation at the fair value of the shares pursuant to the
procedures adopted by the corporation unless the shares are accorded full
voting rights by the shareholders as provided in the MBCA.
The MBCA and WBCL permit a corporation to opt out of the foregoing
provisions on control share acquisitions. The Wisconsin Energy Articles opt
out of the WBCL control share acquisition provisions.
59
<PAGE>
3. Anti-Greenmail Statutes. The MBCA and WBCL also contain so-called "anti-
greenmail" provisions which, absent shareholder approval, restrict the ability
of certain publicly held corporations to repurchase voting shares at above
market value from certain large shareholders, unless an identical or better
offer to purchase is made to all owners of such shares. Under the MBCA, these
provisions apply to purchases from a person or a group who owns more than 3%
of the shares of a corporation which has shares listed on a national
securities exchange and who has beneficially owned such shares for less than
two years. Under the WBCL, the provisions apply to purchases during a takeover
offer of more than 5% of the corporation's shares from a person or group that
holds more than 3% of the corporation's voting shares and has held the shares
for less than two years. These provisions may have the effect of deterring a
shareholder from acquiring a corporation's shares with the goal of seeking to
have the corporation repurchase such shares at a premium over market value.
The WBCL also provides that shareholder approval is required for the
corporation during a takeover offer to sell or option assets of the
corporation which amount to at least 10% of the market value of the
corporation, unless the corporation has at least three independent directors
(directors who are not officers or employees) and a majority of the
independent directors vote not to have this provision apply to the
corporation.
4. Fair Price Provisions. The WBCL provides that in addition to any approval
otherwise required, certain mergers, share exchanges or sales, leases,
exchanges or other dispositions involving an issuing public corporation, such
as Wisconsin Energy, and a 10% holder or affiliate of the issuing public
corporation who was a 10% holder at any time within the preceding two years (a
"significant shareholder") are subject to a super majority vote of
shareholders, unless certain fair price standards have been met. Specifically,
approval of (i) 80% of the total voting power of the corporation and (ii) at
least 66 2/3% of the voting power not beneficially owned by the significant
shareholder or its affiliates or associates is required, unless the
consideration is in cash (or the form of consideration used to acquire the
largest number of shares) and such aggregate per share consideration is equal
to the greater of (a) the highest price paid by such significant shareholder
within the prior two-year period, (b) the market value of the shares on the
date of commencement of a tender offer by such significant shareholder, or (c)
the highest liquidation or dissolution distribution to which the shareholders
would be entitled. The Wisconsin Energy Articles require an 80% shareholder
vote to opt out of the WBCL "fair price" provisions.
CERTAIN INFORMATION CONCERNING WISCONSIN ENERGY AND ESELCO
Information regarding the names, ages, positions and business backgrounds of
the executive officers and directors of Wisconsin Energy, as well as
additional information, including executive compensation, security ownership
of certain beneficial owners and management and certain relationships and
related transactions, is incorporated by reference to Items 10, 11, 12 and 13
of Wisconsin Energy's Annual Report on Form 10-K for the year ended December
31, 1996 (which incorporates portions of Wisconsin Energy's Proxy Statement,
dated March 14, 1997, for its Annual Meeting of Shareholders held on April 29,
1997).
Information regarding the names, ages, positions and business backgrounds of
the executive officers and directors of ESELCO, as well as additional
information, including executive compensation, security ownership of certain
beneficial owners and management and certain relationships and related
transactions, is incorporated by reference to Items 10, 11, 12 and 13 of
ESELCO's Annual Report on Form 10-K for the year ended
December 31, 1996 (which incorporates portions of ESELCO's Proxy Statement,
dated March 31, 1997, for its Annual Meeting of Shareholders held on May 6,
1997).
LEGAL OPINIONS
The legality of the Wisconsin Energy Common Stock to be issued in the Merger
will be passed upon for Wisconsin Energy by Quarles & Brady, Milwaukee,
Wisconsin. Larry J. Martin, a partner in Quarles & Brady, is General Counsel
of Wisconsin Energy and certain of its subsidiaries. Quarles & Brady attorneys
providing services with respect to this matter own an aggregate of
approximately 5,500 shares of Wisconsin Energy Common Stock.
60
<PAGE>
EXPERTS
The financial statements and schedule incorporated in this Proxy
Statement/Prospectus by reference to Wisconsin Energy's Annual Report on Form
10-K for the year ended December 31, 1996 have been so incorporated in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements and schedule included and incorporated in this
Proxy Statement/Prospectus by reference to ESELCO's Annual Report on Form 10-K
for the year ended December 31, 1996, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included and incorporated herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
OTHER MATTERS
The management of ESELCO knows of no matters to be acted upon at the Special
Meeting other than as set forth in the Notice of such Special Meeting as
attached to this Proxy Statement/Prospectus. If any other matters properly
come before the Special Meeting, or any adjournment or postponement thereof,
it is the intention of the persons named in the proxy to vote such proxies in
accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS
In the event that the Merger is not consummated before the Annual Meeting of
Shareholders of ESELCO to be held in 1998, any ESELCO shareholder who wishes
to present a proposal for inclusion in the Proxy Statement for such annual
meeting must comply with the rules and regulations of the SEC then in effect.
As previously stated in ESELCO's Proxy Statement for its 1997 annual meeting,
such proposal must be received by ESELCO at its principal offices not later
than December 1, 1997.
61
<PAGE>
INDEX TO ESELCO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Information:
Consolidated Statement of Income for the Years Ended December 31, 1996,
1995 and 1994.......................................................... F- 2
Consolidated Statement of Financial Position as of December 31, 1996 and
1995................................................................... F- 3
Consolidated Statement of Changes in Common Equity for the Years Ended
December 31, 1996, 1995 and 1994....................................... F- 4
Consolidated Statement of Cash Flow for the Years Ended December 31,
1996, 1995 and 1994.................................................... F- 5
Consolidated Statement of Capitalization as of December 31, 1996 and
1995................................................................... F- 6
Notes to Financial Statements........................................... F- 7
Report of Independent Public Accountants................................ F-18
Unaudited Interim Period Financial Information:
Consolidated Statement of Financial Position as of June 30, 1997 and
December 31, 1996...................................................... F-19
Consolidated Statement of Capitalization as of June 30, 1997 and
December 31, 1996...................................................... F-20
Consolidated Statement of Income for the Three Months, Six Months and
Twelve Months
Ended June 30, 1997 and 1996........................................... F-21
Consolidated Statement of Cash Flow for the Six Months Ended June 30,
1997 and 1996.......................................................... F-22
Notes to Financial Statements........................................... F-23
</TABLE>
F-1
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES....................... $37,499,931 $36,844,488 $35,260,292
----------- ----------- -----------
OPERATING EXPENSES
Operation--Purchased power............. $18,851,035 $19,531,448 $18,279,172
- --Other.................................. 6,743,273 6,164,031 6,408,682
Maintenance............................ 2,142,159 1,983,348 2,102,781
Depreciation and amortization.......... 2,614,395 2,498,773 2,307,787
Property and other taxes............... 1,556,351 1,560,496 1,470,238
Income taxes........................... 1,247,196 1,116,784 982,627
----------- ----------- -----------
Total operating expenses............. $33,154,409 $32,854,880 $31,551,287
----------- ----------- -----------
Net operating income................. $ 4,345,522 $ 3,989,608 $ 3,709,005
----------- ----------- -----------
OTHER INCOME (DEDUCTIONS), NET........... $ (47,594) $ (68,773) $ (31,114)
----------- ----------- -----------
INTEREST CHARGES
Interest on long-term debt............. $ 1,367,387 $ 1,243,954 $ 1,258,301
Other interest......................... 132,456 311,915 219,182
----------- ----------- -----------
Total interest charges............... $ 1,499,843 $ 1,555,869 $ 1,477,483
----------- ----------- -----------
NET INCOME............................... $ 2,798,085 $ 2,364,966 $ 2,200,408
=========== =========== ===========
EARNINGS PER AVERAGE SHARE OF
COMMON STOCK(a)......................... $ 1.85 $ 1.61 $ 1.52
=========== =========== ===========
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK(a)......................... $ 1.07 $ 1.00 $ 0.94
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING(a)..... 1,510,907 1,469,112 1,446,848
=========== =========== ===========
</TABLE>
- --------
(a)Retroactively adjusted for stock dividends.
( )Denotes deduction.
See notes to financial statements.
F-2
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
ELECTRIC PLANT, at original cost...................... $71,802,321 $68,027,994
Less-Accumulated depreciation....................... 29,671,038 27,465,011
----------- -----------
$42,131,283 $40,562,983
Asset acquired under capital lease.................. 2,851,622 2,917,609
----------- -----------
$44,982,905 $43,480,592
----------- -----------
CURRENT ASSETS:
Cash................................................ $ 293,883 $ 302,845
Accounts receivable, less reserve of $32,000........ 2,999,783 3,396,213
Unbilled revenue.................................... 1,693,826 1,789,655
Materials and supplies, at average cost............. 1,148,046 1,191,419
Prepayments......................................... 1,966,932 1,765,406
----------- -----------
$ 8,102,470 $ 8,445,538
----------- -----------
OTHER ASSETS:
Debt expense, being amortized....................... $ 28,972 $ 38,018
Regulatory asset.................................... 3,510,181 2,850,000
Other............................................... 531,193 508,106
----------- -----------
$ 4,070,346 $ 3,396,124
----------- -----------
$57,155,721 $55,322,254
=========== ===========
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (See Statement):
Common equity....................................... $20,234,722 $18,363,998
Preferred stock..................................... 0 0
Long-term debt (less current portion)............... 16,898,187 13,935,889
----------- -----------
$37,132,909 $32,299,887
----------- -----------
OTHER NONCURRENT LIABILITIES:
Obligation under capital lease...................... $ 2,775,905 $ 2,851,622
Other............................................... 0 2,850,000
----------- -----------
$ 2,775,905 $ 5,701,622
----------- -----------
CURRENT LIABILITIES:
Notes payable....................................... $ 1,119,000 $ 3,652,000
Current portion of long-term debt................... 2,877,323 1,435,206
Current portion of lease obligation................. 75,717 65,987
Accounts payable.................................... 2,143,082 2,121,036
Dividends declared.................................. 415,960 373,873
Accrued taxes....................................... 1,754,101 2,115,320
Current deferred income taxes....................... 66,755 81,108
Accrued interest.................................... 166,215 257,973
Other............................................... 270,116 243,993
----------- -----------
$ 8,888,269 $10,346,496
----------- -----------
DEFERRED CREDITS:
Deferred income taxes............................... $ 4,454,626 $ 3,199,515
Net regulatory liability............................ 1,193,526 1,292,861
Unamortized investment tax credit................... 873,181 940,998
Other............................................... 1,837,305 1,540,875
----------- -----------
$ 8,358,638 $ 6,974,249
----------- -----------
$57,155,721 $55,322,254
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- CAPITAL RETAINED UNEARNED COMMON
SHARES AMOUNT SURPLUS EARNINGS COMPENSATION EQUITY
--------- ------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 1,311,431 $ 9,180 $11,721,959 $4,300,487 $ (561,994) $15,469,632
3% Stock Dividend..... 39,209 274 881,928 (889,224) (7,022)
Common Stock issued
under Dividend
Reinvestment Plan.... 22,498 158 517,448 517,606
Net income............ 2,200,408 2,200,408
Unearned compensation
--ESOP.............. 246,077 246,077
Cash Dividends--
Common Stock, $.94
per share (a)...... (1,355,732) (1,355,732)
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1994................... 1,373,138 $ 9,612 $13,121,335 $4,255,939 $ (315,917) $17,070,969
3% Stock Dividend..... 41,061 287 887,863 (894,585) (6,435)
Common Stock issued
under Dividend
Reinvestment Plan.... 23,776 167 536,214 536,381
Net income............ 2,364,966 2,364,966
Unearned compensation
--ESOP.............. (126,454) (126,454)
Cash Dividends--
Common Stock, $1.00
per share (a)...... (1,475,429) (1,475,429)
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1995................... 1,437,975 $10,066 $14,545,412 $4,250,891 $ (442,371) $18,363,998
3% Stock Dividend..... 43,129 302 1,202,134 (1,210,551) (8,115)
Common Stock issued
under Dividend
Reinvestment Plan.... 27,988 196 710,655 710,851
Net income............ 2,798,085 2,798,085
Unearned compensation
--ESOP & Restricted
Stock Bonus Plan... 31,500 220 878,000 (874,477) 3,743
Cash Dividends--
Common Stock, $1.07
per share (a)...... (1,633,840) (1,633,840)
--------- ------- ----------- ---------- ----------- -----------
Balance at December 31,
1996................... 1,540,592 $10,784 $17,336,201 $4,204,585 $(1,316,848) $20,234,722
========= ======= =========== ========== =========== ===========
</TABLE>
- --------
(a) Retroactively adjusted for stock dividends.
( ) Denotes deduction.
See notes to financial statements.
F-4
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
NET CASH FLOW FROM (USED BY)
OPERATING ACTIVITIES
Net income.............................. $ 2,798,085 $ 2,364,966 $ 2,200,408
Noncash expenses, revenue, losses and
gains included in income Depreciation
and amortization....................... 2,706,428 2,605,376 2,414,827
Deferred taxes and charge equivalent to
investment tax credit, net of
amortization........................... 1,073,606 58,230 (77,343)
Net decrease (increase) in receivables
and unbilled revenue................... 492,259 (805,148) (227,875)
Net decrease (increase) in materials and
supplies and prepayments............... (158,153) (613,593) 55,597
Net increase (decrease) in accounts
payable, accrued taxes, and other
current liabilities.................... (313,050) 181,086 159,816
Increase (decrease) in interest accrued,
but not paid........................... (91,758) (78,833) (100,009)
Other................................... 424,411 83,626 (2,113)
----------- ----------- -----------
Net cash from operating activities...... $ 6,931,828 $ 3,795,710 $ 4,623,326
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisition of property, plant, and
equipment.............................. $(4,296,974) $(3,494,997) $(4,371,649)
Proceeds from disposals of property,
plant, and equipment................... 31,292 53,545 54,312
EPA payments............................ (3,510,181) 0 0
----------- ----------- -----------
Net cash used by investing activities... $(7,775,863) $(3,441,452) $(4,317,337)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds of short-term debt............. $10,274,000 $16,752,000 $ 6,937,000
Payments to settle short-term debt...... (12,807,000) (17,594,500) (5,917,000)
Issuance of long-term debt, net......... 5,701,000 2,674,000 402,000
Payments on long-term debt.............. (1,409,938) (1,212,153) (804,761)
Proceeds from sale of common stock...... 710,851 536,381 517,606
Dividends paid.......................... (1,633,840) (1,475,429) (1,355,732)
----------- ----------- -----------
Net cash (used) provided by financing
activities............................. $ 835,073 $ (319,701) $ (220,887)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS....................... $ (8,962) $ 34,557 $ 85,102
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR.................. 302,845 268,288 183,186
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR........................ $ 293,883 $ 302,845 $ 268,288
=========== =========== ===========
INTEREST PAID........................... $ 1,644,511 $ 1,637,731 $ 1,378,932
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995
----------------- -----------------
AMOUNT % AMOUNT %
----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
COMMON EQUITY
COMMON STOCK, par value $.007 per share
<CAPTION>
1996 1995
---------------------------
<S> <C> <C> <C> <C> <C> <C>
Authorized shares.... 3,000,000 3,000,000
========== ==========
Outstanding shares... 1,540,592 1,437,975 $ 10,784 $ 10,066
========== ==========
Capital surplus.............................. 17,336,201 14,545,412
Retained earnings............................ 4,204,585 4,250,891
Unearned compensation--ESOP and Restricted
Stock Bonus Plan............................ (1,316,848) (442,371)
----------- -----------
$20,234,722 54% $18,363,998 57%
----------- -----------
PREFERRED STOCK, value $.01 per share,
authorized 160,000 shares..................... $ 0 0% $ 0 0%
----------- -----------
LONG-TERM DEBT of subsidiaries (less current
portion)
First Mortgage Bonds:
Series D, 7.00%, due 1998.................. $ 855,000 $ 867,000
Series F, 10.31%, due 2001................. 1,200,000 1,500,000
Series G, 10.25%, due 2009................. 4,440,000 4,810,000
Series H, 7.90%, due 2002.................. 1,500,000 1,800,000
Energy Thrift Notes, 5.8%-10%, due 1997-2006. 5,355,000 4,414,000
Equipment Loan, floating rate, due 1998...... 147,786 200,724
ESOP Loans of the Corporation, floating rate,
due 2000-2001............................... 421,110 344,165
Term Loan, floating rate, due 1999........... 2,979,291 0
----------- -----------
$16,898,187 46% $13,935,889 43%
----------- ---- ----------- ----
TOTAL CAPITALIZATION......................... $37,132,909 100% $32,299,887 100%
=========== ==== =========== ====
</TABLE>
F-6
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A
ORGANIZATION
The consolidated financial statements include the accounts of ESELCO, Inc.
(ESELCO), and its wholly-owned subsidiaries, Edison Sault Electric Company
(Edison Sault); ESEG, Inc. (ESEG); and Northern Tree Service, Inc. (NTS).
Edison Sault (Company) is engaged in the generation, purchase, transmission,
and sale of electric energy in the Eastern Upper Peninsula of Michigan. NTS is
a tree trimming subsidiary that began operation in May of 1990, but accounts
for less than one percent of total consolidated operating revenues.
NOTE B
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting records of Edison Sault are maintained in accordance with the
Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and the Michigan Public Service Commission (MPSC). The
preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates that could differ
from actual results.
UTILITY REGULATION
Edison Sault accounts for the effects of regulation under Statement of
Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of
Certain Types of Regulations." As a result, the actions of regulators affect
when revenues, expenses, assets, and liabilities are recognized.
In accordance with SFAS 71, the Company capitalizes, as deferred regulatory
assets, costs which are expected to be recovered in future utility rates. The
Company also records, as deferred regulatory liabilities, costs which are to
be paid in the future. These consist primarily of amounts related to the
adoption of SFAS 109 and the environmental matter discussed in Note J.
RATES AND REGULATORY MATTERS
On August 22, 1995, Edison Sault filed an application with the MPSC for
authority to implement price cap regulation. In the application, the Company
proposed that its base rates be capped at present levels, that its existing
Power Supply Cost Recovery (PSCR) factor be rolled into base rates, and that
its existing PSCR Clause be suspended. The Company published the required
notice of opportunity to comment or request a hearing. No comments were
received, and on September 21, 1995, the MPSC approved the Company's
application subject to the modification that the Company gives 30 days notice
rather than two weeks notice for rate decreases and that the Company file an
application by October 1, 2000, to address its experience under the price cap
mechanism. With the latter modification, the price cap authorization
represents an experimental regulatory mechanism. The order also allows Edison
Sault to file an application seeking an increase in rates only under
extraordinary circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed an
intervention and petition for rehearing in the Company's Price Cap Order. The
Attorney General's intervention was based on the grounds that the MPSC did not
have authority to approve price cap regulation. On December 21, 1995, the MPSC
rejected the Attorney General's petition for rehearing. On January 19, 1996,
the Attorney General filed an appeal with the Michigan Court of Appeals.
Legal counsel for the Company believes that the Attorney General's appeal is
without merit and that the Company will prevail. A decision in this case is
not expected until mid-1997. The Company implemented the Price Cap Order on
January 1, 1996.
F-7
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In light of the Price Cap Order and other potential changes in the industry,
the Company continually reviews the applicability of accounting under SFAS 71.
As previously stated, the Price Cap Order is a five-year experimental
regulatory mechanism containing language allowing Edison Sault to seek rate
relief for costs incurred under extraordinary circumstances. In addition,
final implementation of the plan is subject to resolution of the Attorney
General's appeal. Based on a current evaluation of the factors affecting the
applicability of SFAS 71, the Company has determined that it is currently
appropriate to continue accounting in accordance with SFAS 71. In the event
the Company was to discontinue accounting under SFAS 71, the accounting impact
would be an extraordinary after-tax non-cash charge to earnings in an amount
represented largely by any unamortized net regulatory assets existing at that
point in time.
THE FOLLOWING REGULATORY ASSETS AND (LIABILITIES) WERE REFLECTED IN THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
SAFS 109
Regulatory assets................................. $ 208 $ 219 $ 239
SAFS 109
Regulatory liability.............................. (1,401) (1,512) (1,576)
------- ------- -------
SAFS 109 Net
Regulatory liability.............................. $(1,193) $(1,293) $(1,337)
Environmental Matter
Regulatory asset.................................. 3,510 2,850 1,000
------- ------- -------
Total Net Regulatory Asset (Liability).......... $ 2,317 $ 1,557 $ (337)
======= ======= =======
</TABLE>
In accordance with SFAS 71, the Company has recorded a capital lease on its
statement of financial position and has been amortizing the capital lease
asset over the life of the lease. If the Company did not account for this in
accordance with SFAS 71, the asset value of the capital lease would be
approximately $660,000 less than what is reflected on its statement of
financial position at December 31, 1996.
REVENUES
Edison Sault records revenue monthly, as billed, on the basis of meter
readings throughout the month and includes an estimate of unbilled revenue
relative to power consumed from the meter reading date to the end of the month
in the current month's revenue.
For the first two years presented (1994 and 1995), Edison Sault was able to
recover changes in its power supply cost from its residential and commercial
customers through its Power Supply Cost Recovery Clause. The clause provided
for an annual reconciliation of actual costs to projected costs and settlement
of any over- or under-collection, both with interest. Edison Sault was able,
on a monthly basis, to pass on to its industrial customers substantially all
changes in its power supply costs from its suppliers, as it affects these
customers.
As previously discussed, Edison Sault implemented price cap regulation
January 1, 1996; and with this change, the PSCR clause was suspended.
Revenues resulting from sales to Cloverland Electric Cooperative represented
approximately 13% of total revenues for 1996, 12% for 1995, and 13% for 1994.
Revenues resulting from sales to Manistique Papers, Inc., represented
approximately 12% of total revenues for each year presented.
F-8
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Customer receivables, electric sales, and resale revenues arise from
operations of Edison Sault which delivers electric energy to a diversified
base of residential, commercial, and industrial customers within the eastern
portion of Michigan's Upper Peninsula. Edison Sault continually reviews its
customers' credit-worthiness and requests deposits or refunds deposits based
on that review.
UTILITY PLANT--ELECTRIC
Utility plant is stated at original cost, including engineering, material,
labor, supervision, other related items, and an allowance for funds used
during construction.
Maintenance and repairs are charged to expense as incurred, while
replacements and betterments are capitalized. Upon the sale or retirement of
an asset, the original cost of the property retired, plus the cost of removal
(less salvage) is charged to accumulated depreciation.
Edison Sault depreciates the original cost of property over its estimated
useful life by the straight-line method at composite rates approved by the
MPSC. The composite rate was approximately 3.8% for 1996 and 1995 and 3.6% for
1994.
CASH AND CASH EQUIVALENTS
ESELCO considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Other non-cash items
relating to the capitalized lease totaled approximately $66,000 in 1996,
$58,000 in 1995, and $50,000 in 1994.
OTHER
In 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-
lived Assets and Long-lived Assets to be Disposed of." This statement imposed
a stricter criterion for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. The Company adopted
this standard on January 1, 1996. Adoption did not have an impact on the
financial position or results of operations due to the regulatory structure
set forth in the Price Cap Order previously discussed. This conclusion may
change in the future as competitive factors influence pricing in this
industry.
NOTE C
LONG-TERM DEBT
ANNUAL SINKING FUND REQUIREMENTS ON FIRST MORTGAGE BONDS AND MATURITIES OF
LONG-TERM DEBT FOR EACH OF THE FIVE YEARS SUBSEQUENT TO DECEMBER 31, 1996,
ARE:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C>
1997.............................. $2,877
1998.............................. $3,863
1999.............................. $5,071
2000.............................. $1,299
2001.............................. $1,942
</TABLE>
Substantially all of Edison Sault's utility plant is pledged as collateral
for the First Mortgage Bonds.
Edison Sault has authority to issue up to $10 million of Long-term Thrift
Notes to Michigan residents.
F-9
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provisions of Edison Sault's bond indentures and the short-term line of
credit agreement contain various covenants pertaining to the maintenance of
debt to equity ratios and the payment of dividends. Under the most restrictive
of these covenants, the declaration of cash dividends by Edison Sault is
restricted to $600,000, plus net income available for common stock and capital
contributions subsequent to January 1, 1992, after deducting all dividends
paid on common stock. At December 31, 1996, $6,294,000 of Edison Sault's
retained earnings are available for the declaration of dividends. There are no
additional restrictions on ESELCO's ability to pay dividends.
NOTE D
STOCKHOLDERS' INVESTMENT EARNINGS PER SHARE
Earnings per average share of common stock are computed on the basis of the
weighted average number of common shares outstanding after giving retroactive
effect to the 3% stock dividends in each year presented. Shares granted under
the Restricted Stock Plan, which is described in Note H, have been included in
the calculation of earnings per share for 1996.
NOTE E
SHORT-TERM BORROWING ARRANGEMENTS
Edison Sault has authority to issue up to $10 million in short-term
obligations. Included in this authority, Edison Sault has available a line of
credit in the amount of $4 million at the prime rate with a bank in its
service area. In addition, Edison Sault has authority to issue Short-term
Thrift Notes to Michigan residents. These notes mature one year from the date
of issue, with interest at 2.5% to 3.0% below the New York prime rate,
depending on the amount of the note. Included in notes payable at December 31,
1996, are $719,000 in thrift notes to Michigan residents.
NOTE F
LEASES AND PURCHASED POWER AGREEMENTS
Edison Sault's hydroelectric plant at Sault Ste. Marie is operated by the
diversion of surplus waters of the St. Marys River. This surplus water is
leased under an agreement with the Secretary of the Army expiring in the year
2050. Annual rentals under this lease were $886,000 in 1996, $759,000 in 1995,
and $754,000 in 1994, and are determined based on the amount of water used for
power generation. Edison Sault also leases certain office and computer
equipment and vehicles for which gross rentals were $73,000 in 1996, $99,000
in 1995, and $121,000 in 1994 under agreements that extend up to six years.
Edison Sault purchased the output of a government-owned hydroelectric
station in Sault Ste. Marie, Michigan, under a contract which expires in the
year 2040. Payments under the contract were $1,914,000 annually, with
modifications to such payments for power outages and the cost of designated
repairs in excess of the federal share of such costs. Annual payments are
subject to renegotiation every five years. During 1996, the Company
renegotiated the annual payment for the five-year period starting in November
of 1996. The new annual payment is $1,820,000.
Edison Sault also purchases power from Consumers Power Company (Consumers)
under an agreement which expires in 2020, or 2010 under an early termination
provision. Rates under the agreement provide for capacity and energy charges
which are approved by the FERC. The cost of power purchased from Consumers
totaled $12,875,000, $17,638,000, and $16,228,000 for 1996, 1995, and 1994,
respectively.
F-10
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, Edison Sault reached agreement with Consumers on a new purchase
power agreement which became effective January 1, 1997. Under this new
agreement, Edison Sault will purchase 35 megawatts of firm power and a
variable amount of interruptible power for a five-year period. After the
initial five-year period, Edison is obligated to purchase a minimum of 20
megawatts of firm power through the contract term which remains the same as
the previous agreement.
During 1990, Edison Sault entered a 20-year capital lease with Consumers for
two 138 kv cables across the Straits of Mackinac. ESEG has reached agreement
with Consumers for the purchase of these cables at an approximate cost of $3.8
million. In turn, ESEG will lease these cables to Edison Sault under an
operating lease arrangement. Both the purchase and lease of the cables are
subject to FERC approval.
Effective January 1, 1996, Edison Sault began purchasing 20 Mw of firm
capacity and energy from American Electric Power Company under the terms of
two one-year contracts. This purchase replaced a portion of the capacity and
energy that had been purchased under the wholesale contract with Consumers.
The cost of this power, including transmission charges for use of Consumers'
system in 1996, was $4,007,000.
Commencing January 1, 1998, Edison Sault will purchase 20 megawatts of firm
power from Wisconsin Electric Power Company under the terms of a 10-year
agreement.
NOTE G
INCOME TAXES
THE FOLLOWING SUMMARIZES THE COMPONENTS OF INCOME TAX EXPENSE AND RECONCILES
THE STATUTORY FEDERAL INCOME TAX RATE TO THE EFFECTIVE RATE.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------
1996 1995 1994
------ ------ ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Income taxes--Currently payable........................ $ 155 $1,045 $1,058
------ ------ ------
- --Deferred--Depreciation............................... $ 50 $ 103 $ 145
Property taxes......................................... 15 13 (101)
EPA matter............................................. 1,193 0 0
Other, net............................................. (98) 25 (49)
------ ------ ------
$1,160 $ 141 $ (5)
------ ------ ------
Amortization of deferred investment tax credit......... $ (68) $ (69) $ (70)
------ ------ ------
Income taxes per statement of income................... $1,247 $1,117 $ 983
Allocated to other accounts............................ (31) (38) (14)
------ ------ ------
Total Income Taxes..................................... $1,216 $1,079 $ 969
------ ------ ------
Total Income Taxes Paid................................ $ 645 $1,045 $1,000
====== ====== ======
</TABLE>
F-11
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(THOUSANDS OF DOLLARS)
AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at statutory
rate............................. $1,365 34.0% $1,171 34.0% $1,078 34.0%
Reduction in taxes resulting
from--
Capitalized costs deducted
currently for tax purposes*.... (1) 0.0% (1) 0.0% (1) (0.1)%
Depreciation and pension
differences*................... 32 0.8% 38 1.1% 31 1.0%
Amortization of deferred
investment tax credit.......... (68) (1.7)% (69) (2.0)% (70) (2.2)%
Refund of excess deferred taxes
resulting from reduction in tax
rates*......................... (74) (1.8)% (43) (1.3)% (58) (1.8)%
Other, net...................... (38) (1.0)% (17) (0.5)% (11) (0.3)%
------ ---- ------ ---- ------ ----
Total Income Taxes............ $1,216 30.3% $1,079 31.3% $ 969 30.6%
====== ==== ====== ==== ====== ====
</TABLE>
- --------
* Accounting treatment in accordance with regulatory commission policy.
THE FOLLOWING SUMMARIZES THE PRINCIPAL COMPONENTS OF ESELCO'S DEFERRED TAX
ASSETS (LIABILITIES)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Property.................. $(3,454) $(3,305) $(3,158)
EPA Regulatory Asset...... (1,193) 0 0
Property taxes............ (210) (196) (183)
Other..................... 336 220 231
------- ------- -------
Total................... $(4,521) $(3,281) $(3,110)
------- ------- -------
Total Deferred Tax Assets. $ 2,243 $ 2,183 $ 2,188
Total Deferred Tax
Liabilities.............. (6,764) (5,464) (5,298)
------- ------- -------
Total................... $(4,521) $(3,281) $(3,110)
======= ======= =======
</TABLE>
NOTE H
PENSION PLAN AND OTHER BENEFITS
Edison Sault has two trusteed, noncontributory, defined benefit pension
plans, covering substantially all management and bargaining unit employees.
Annual retirement benefits are based upon the employee's years of service and
compensation level. Edison Sault's funding policy is to contribute amounts to
the plans sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts
as Edison Sault may determine to be appropriate from time to time.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for both plans was raised to 7.5% as
of December 31, 1996. This change reduced the projected benefit obligation as
of December 31, 1996, by $641,000 for both plans. The plans' assets are
invested primarily in listed debt and equity securities and ESELCO's common
stock. At December 31, 1996, the pension plans held 51,000 shares of ESELCO
common stock with a market value of $1,254,000. During 1996, $53,000 of
dividends were paid on the shares held by the plans.
F-12
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
THE PLANS' FUNDED STATUS AND EXPENSE AT DECEMBER 31, ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested Benefit Obligation.......................... $ (9,032) $ (8,857)
======== ========
Accumulated Benefit Obligation..................... $ (9,887) $ (9,692)
======== ========
Projected benefit obligation....................... $(10,696) $(10,532)
Plan assets at fair value............................ 9,170 8,606
-------- --------
Projected benefit obligation (in excess of) or less
than plan assets ................................... $ (1,526) $ (1,926)
Unrecognized net loss................................ 766 856
Unrecognized net obligation at January 1, net of
amortization........................................ 634 942
Additional liability................................. (592) (958)
-------- --------
Net Pension (liability) Recognized in the Statement
of Financial Position............................... $ (718) $ (1,086)
======== ========
Net pension expense combined for both plans,
included the following components:
Service cost-benefits earned during the period....... $ 285 $ 211 $221
Interest cost on projected benefit obligations....... 755 680 648
Actual return on plan assets......................... (623) (1,237) 32
Net amortization and deferral........................ (32) 619 (642)
-------- -------- ----
Net Pension Expense.................................. $ 385 $ 273 $259
======== ======== ====
Rates used for calculation (%):
Discount rate...................................... 7.5% 7.0% 8.0%
Assumed rate of increase in salary levels.......... 3.5-4.0% 3.5-4.0% 4.5%
Expected long-term return on investments........... 9.0% 9.0% 9.0%
</TABLE>
F-13
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Edison Sault accrues postretirement benefits (such as health care benefits)
during the years an employee provides services in accordance with SFAS 106.
The 1996 costs were calculated using the health care plan in effect January
1, 1996. The accumulated postretirement benefit obligation was calculated by
the actuary as of January 1, 1996, using a discount rate of 7.0%. Effective
December 31, 1996, the discount rate used for valuing the accumulated
postretirement benefit obligation was raised to 7.5%. The health care cost
trend rate used by the actuary for the January 1, 1996, valuation was 10.6%,
then decreasing gradually to 5.0% by the year 2004. The health care cost trend
rate used by the actuary for the December 31, 1996, valuation was 9.4%, then
decreasing gradually to 5.0% by the year 2004. A 1% increase in the health
care cost trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1996, by $80,000 and the net periodic
postretirement benefit cost for 1996 by $6,000.
THE FUNDED STATUS OF THE POSTRETIREMENT BENEFIT PLAN IS RECONCILED WITH THE
RECORDED LIABILITY AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation
(APBO):
Retirees.......................................... $ (669) $ (629) $ (727)
Eligible for retirement........................... (209) (205) (216)
Not yet eligible.................................. (236) (268) (227)
------- ------- -------
Total APBO.......................................... $(1,114) $(1,102) $(1,170)
Plan assets at fair value......................... 0 0 0
------- ------- -------
Total APBO in excess of plan assets................. $(1,114) $(1,102) $(1,170)
Unrecognized transition obligation................ 1,038 1,103 1,168
Unrecognized net (gains)/losses................... (314) (306) (214)
------- ------- -------
Net Postretirement Benefit Liability Recognized in
the Statement of Financial Position at December
31,................................................ $ (390) $ (305) $ (216)
======= ======= =======
Net postretirement benefit expense:
Service cost...................................... $ 15 $ 14 $ 15
Interest cost..................................... 78 86 109
Amortization of transition obligation ............ 65 65 65
Net amortization and deferral..................... (13) (13) 0
------- ------- -------
Net Postretirement Benefit Expense................ $ 145 $ 152 $ 189
======= ======= =======
Postretirement benefit expense reconciled to the
accrued cost:
Beginning net benefit liability................... $ (305) $ (216) $ (106)
Net benefit expense............................... (145) (152) (189)
Actual premium paid............................... 60 63 79
------- ------- -------
Net Postretirement Benefit Liability Recognized in
the Statement of Financial Position at December
31,................................................ $ (390) $ (305) $ (216)
======= ======= =======
</TABLE>
Edison Sault has an employee stock ownership plan (ESOP) which covers
substantially all its non-bargaining unit employees. In accordance with
applicable accounting rules, ESELCO has recorded the ESOP indebtedness for the
following loans in current and long-term debt on its balance sheet, with an
offsetting charge to common stock equity captioned "Unearned compensation--
ESOP."
F-14
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In December 1992, the plan borrowed $625,000 to purchase 20,000 shares of
ESELCO, Inc. common stock. Dividends and other income received by the trust
and used for this debt service in 1996 were approximately $127,000. Interest
expense on this debt incurred by the trust in 1996 was $14,000.
In February 1995, the plan borrowed $357,000 to purchase an additional
15,445 shares of ESELCO, Inc., common stock. Dividends and other income
received by the trust and used for this debt service in 1996 were $108,000.
Interest expense on this debt incurred by the trust in 1996 was $15,000.
In April 1996, the plan borrowed $364,000 to purchase 13,120 shares of
ESELCO, Inc., common stock. Dividends and other income received by the trust
and used for this debt service in 1996 were $63,000. Interest expense on this
debt incurred by the trust in 1996 was $18,000.
The market value of the total allocated shares held by the ESOP amounted to
$3,649,000 at December 31, 1996.
Edison Sault has an unfunded, nonqualified Supplemental Executive Retirement
Plan (SERP) that provides benefits which are integrated with its Management
Pension Plan. The projected benefit obligation for service rendered to date
for the plan was $396,000 as of December 31, 1996, and the accrued liability
of the plan included in ESELCO's Statement of Financial Position at December
31, 1996, was $334,000. Expense recognized under the plan in 1996 was
$102,000.
In May 1996, stockholders approved adoption of the Restricted Stock Bonus
Plan. Under this plan, ESELCO can, from time to time, grant to officers or
other key employees awards of restricted stock. The maximum number of shares
reserved for this purpose is 50,000 shares. In 1996, 31,500 shares, with a
total fair market value of $878,000 were granted to the officers of the
Company. Under the terms of agreements with each of the recipients, shares are
not vested for a five-year period following the grant and the shares are
forfeited if a recipient leaves the employment of the Company prior to the
five-year holding period. The Restricted Stock Committee can, at their
discretion, accelerate the vesting of these shares. In addition, a change in
control of ESELCO, Inc., would accelerate the vesting. In accordance with SFAS
123--Accounting for Stock Based Compensation, the Company recorded
compensation expense in the amount of $117,000 in 1996.
NOTE I
QUARTERLY FINANCIAL DATA (UNAUDITED)
UNAUDITED QUARTERLY FINANCIAL DATA PERTAINING TO RESULTS OF OPERATIONS ARE
SHOWN BELOW:
<TABLE>
<CAPTION>
JUNE
MARCH 31 30 SEPTEMBER 30 DECEMBER 31
-------- ------ ------------ -----------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1996
Operating Revenue................... $9,777 $8,948 $9,045 $9,730
Operating Income.................... 897 1,094 1,185 1,170
Net Income Available for Common
Stock.............................. 531 685 779 803
Earnings per Average Share of Common
Stock(a)........................... 0.36 0.46 0.51 0.52
1995
Operating Revenue................... $9,232 $8,834 $9,399 $9,380
Operating Income.................... 887 912 1,075 1,116
Net Income Available for Common
Stock.............................. 488 490 654 733
Earnings per Average Share of Common
Stock(a)........................... 0.33 0.33 0.45 0.50
</TABLE>
- --------
(a) Retroactively adjusted for stock dividends.
F-15
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE J
COMMITMENTS AND CONTINGENCIES
Environmental Matters
In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially
Responsible Party" at the Manistique River/Harbor Area of Concern (AOC) in
Manistique, Michigan. There were a number of other potentially responsible
parties, some of whom have been notified by the U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of Concern"
(AOC) due to PCBs which have been found in that area. An Environmental
Engineering/Cost Analysis (EECA) was submitted to the U.S. EPA which provided
an analysis of various methods of remediation for the harbor. The EECA
presented six alternatives of remediation action and ultimately recommended a
remediation method of in-place capping. Management believed this to be the
most prudent course of action. Although the total ultimate cost of specific
remedial action and Edison Sault's potential liability were not known at that
time, management had estimated Edison Sault's minimum cost of this remedy to
be $2.9 million. That figure represented an increase of $1.9 million from the
amount recorded during 1994. Certain other expenditures for investigation of
any necessary remedial action were incurred and are reflected in the
accompanying financial statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate the
harbor through in-place capping at a total cost of $6.4 million, with the
Edison Sault portion costing $3.2 million. Through further negotiations, the
U.S. EPA and the PRPs agreed to a cash-out settlement whereby the PRPs would
pay to the U.S. EPA the $6.4 million cost of capping for the right to be
absolved from any future legal actions concerning PCB pollution. To effect
this settlement, an Administrative Order on Consent was executed by all
parties in December 1996 with payments made to the U.S. EPA prior to year-end
1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this
project. Edison Sault has retained legal assistance to start a process of
recovering these costs through several insurance entities. The certainty and
magnitude of insurance recovery is unknown at this time.
Edison Sault believes that the costs discussed above, including the payment
to the U.S. EPA to be relieved of future liability, are a legitimate cost of
doing business and would be recoverable through utility rates. Further, in
November 1993, the MPSC issued an order authorizing Edison Sault to defer and
amortize, over a period not to exceed 10 years, environmental assessment and
remediation costs associated with the Manistique River AOC. Therefore, Edison
Sault has recorded a regulatory asset in the amount of $3.2 million, plus
unreimbursed cost of $300,000, for a total of $3.5 million, which the Company
will begin amortizing in 1997. Future costs related to this issue are not
expected to have a material impact on Edison Sault's financial position or
future results of operations.
OTHER MATTERS
In October 1994, Edison Sault entered a construction and joint use agreement
with Wisconsin Electric Power Company, Upper Peninsula Power Company, and
Cloverland Electric Cooperative. This agreement specifies each party's
responsibility in the construction of a new transmission line from Arnold,
Michigan, to Manistique, Michigan. Edison Sault continues to plan for the
construction of this new line. This project has an expected completion date of
mid-1998. Edison Sault expects that its share of the cost of this project will
be approximately $9.0 million with approximately $3.2 million of this being
spent in 1997. During 1996, $460,000 was invested in the new 138 kv
interconnect project.
F-16
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In December 1996, ESEG signed a purchase agreement with Consumers Power
Company for the purchase of a 138 kv submarine circuit across the Straits of
Mackinac. Since 1990, Edison Sault had leased these cables at an annual net
lease cost of approximately $466,000. The purchaser of the cables is ESEG, a
wholly-owned subsidiary of ESELCO, Inc. ESEG has not previously been an active
subsidiary of ESELCO. ESEG will lease the cables to Edison Sault under an
operating lease arrangement. The purchase and lease are subject to approval by
FERC. The cost of the purchase when consummated will be approximately $3.8
million.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ESELCO, Inc.:
We have audited the accompanying consolidated statements of financial
position and capitalization of ESELCO, Inc. (a Michigan corporation), and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in common equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ESELCO,
Inc., and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Detroit, Michigan
February 6, 1997
F-18
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
ELECTRIC PLANT, at original cost..................... $73,852,064 $71,802,321
Less--Accumulated depreciation..................... 31,041,007 29,671,038
----------- -----------
$42,811,057 $42,131,283
Asset acquired under capital lease................. 2,815,065 2,851,622
----------- -----------
$45,626,122 $44,982,883
----------- -----------
CURRENT ASSETS:........................................
Cash................................................. $ 74,844 $ 293,883
Accounts receivable, less reserve of $39,151 and
$32,000 respectively................................ 3,701,942 2,999,783
Unbilled revenue..................................... 1,474,430 1,693,826
Materials and supplies, at average cost.............. 1,305,028 1,148,046
Prepayments.......................................... 1,293,987 1,966,932
----------- -----------
$ 7,850,231 $ 8,102,470
----------- -----------
OTHER ASSETS:..........................................
Debt expense, being amortized........................ $ 25,372 $ 28,972
Regulatory asset..................................... 3,334,381 3,510,181
Other................................................ 891,762 531,193
----------- -----------
$ 4,251,515 $ 4,070,346
----------- -----------
$57,727,868 $57,155,721
=========== ===========
STOCKHOLDERS' INVESTMENT AND LIABILITIES:
CAPITALIZATION (See Statement):
Common Equity...................................... $21,454,303 $20,234,722
Preferred stock.................................... 0 0
Long-term debt (less current portion).............. 14,958,420 16,898,187
----------- -----------
$36,412,723 $37,132,909
----------- -----------
OTHER NONCURRENT LIABILITIES:........................
Obligation under capital lease..................... $ 2,733,956 $ 2,775,905
----------- -----------
CURRENT LIABILITIES:
Notes payable...................................... $ 741,500 $ 1,119,000
Current portion of long-term debt.................. 3,300,660 2,877,323
Current portion of lease obligation................ 81,109 75,717
Accounts payable................................... 3,331,196 2,143,082
Dividends declared................................. 446,090 415,960
Accrued taxes...................................... 1,455,259 1,754,101
Current deferred income taxes...................... 61,955 66,755
Accrued interest................................... 164,773 166,215
Other.............................................. 306,214 270,116
----------- -----------
$ 9,888,756 $ 8,888,269
----------- -----------
DEFERRED CREDITS:....................................
Deferred income taxes.............................. $ 4,316,446 $ 4,454,626
Net regulatory liability........................... 1,199,526 1,193,526
Unamortized investment tax credit.................. 839,581 873,181
Other.............................................. 2,336,880 1,837,305
----------- -----------
$ 8,692,433 $ 8,358,638
----------- -----------
$57,727,868 $57,155,721
=========== ===========
</TABLE>
F-19
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------------ ------------------
AMOUNT % AMOUNT $
----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
COMMON EQUITY:
COMMON STOCK, par
value $.01 per share.
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Authorized shares... 9,840,000 3,000,000
========= =========
Outstanding shares.. 1,593,180 1,540,592 $ 15,932 $ 15,406
========= =========
Capital surplus....... 19,256,710 17,331,579
Retained earnings..... 3,176,178 4,204,585
Unearned
compensation--ESOP
and Restricted Stock
Bonus Plan........... (994,517) (1,316,848)
----------- -----------
$21,454,303 59% $20,234,722 54%
----------- -----------
PREFERRED STOCK, value
$.01 per share,
authorized 160,000
shares................. $0 0% $0 0%
----------- -----------
LONG-TERM DEBT of
Subsidiaries (less
current portion)
First Mortgage Bonds: $0 $ 855,000
Series D, 7.00%, due
1998............... 900,000 1,200,000
Series F, 10.31%,
due 2001........... 4,070,000 4,440,000
Series G, 10.25%,
due 2009........... 1,200,000 1,500,000
Series H, 7.90%, due
2002............... 5,567,000 5,355,000
Energy Thrift Notes,
5.8%-10%, due 1998-
2007.................
Equipment Loan,
Floating Rate, due
1998................. 119,382 147,786
ESOP Loans of the
Corporation, floating
rate, due 2000-2001.. 230,336 421,110
Term Loan, floating
rate, due 1999....... 2,871,702 2,979,291
----------- -----------
$14,958,420 41% $16,898,187 46%
----------- ----- ----------- -----
TOTAL CAPITALIZATION.. $36,412,723 100% $37,132,909 100%
=========== ===== =========== =====
</TABLE>
F-20
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THE THREE MONTHS THE SIX MONTHS THE TWELVE MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
---------------------- ------------------------ ------------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES...... $9,429,787 $8,947,935 $19,345,122 $18,725,187 $38,119,866 $37,503,321
---------- ---------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Operation--Purchased
power......... $4,270,580 $4,346,701 $ 9,244,697 $ 9,667,957 $18,427,775 $19,581,393
--Other............... 1,854,521 1,621,286 3,768,765 3,309,360 7,202,678 6,335,548
Maintenance........... 546,732 539,001 1,063,837 1,149,176 2,056,820 2,079,690
Depreciation and
amortization......... 700,229 646,931 1,400,438 1,315,826 2,699,007 2,552,495
Property and other
taxes................ 400,312 397,268 805,066 766,236 1,595,181 1,559,438
Income taxes.......... 381,200 302,400 686,400 525,400 1,408,196 1,212,584
---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........... $8,157,574 $7,853,587 $16,969,203 $16,733,955 $33,389,657 $33,321,148
---------- ---------- ----------- ----------- ----------- -----------
Net operating
income............. $1,272,213 $1,094,348 $ 2,375,919 $ 1,991,232 $ 4,730,209 $ 4,182,173
---------- ---------- ----------- ----------- ----------- -----------
OTHER INCOME
(DEDUCTIONS), NET...... $ (15,048) $ (30,304) $ (30,961) $ (46,722) $ (31,833) $ (58,568)
---------- ---------- ----------- ----------- ----------- -----------
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION.... $ 39,900 $ 0 $ 79,800 $ 0 $ 79,800 $ 0
---------- ---------- ----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term
debt................. $ 393,545 $ 338,136 $ 784,053 $ 665,198 $ 1,486,242 $ 1,312,592
Other interest........ 33,776 40,827 48,999 63,314 118,141 207,748
---------- ---------- ----------- ----------- ----------- -----------
Total interest
charges............ $ 427,321 $ 378,963 $ 833,052 $ 728,512 $ 1,604,383 $ 1,520,340
---------- ---------- ----------- ----------- ----------- -----------
NET INCOME AVAILABLE FOR
COMMON STOCK........... $ 869,744 $ 685,081 $ 1,591,706 $ 1,215,998 $ 3,173,793 $ 2,603,265
---------- ---------- ----------- ----------- ----------- -----------
EARNINGS PER AVERAGE
SHARE OF COMMON STOCK.. $ 0.55 $ 0.44 $ 1.00 $ 0.79 $ 2.00 $ 1.70
========== ========== =========== =========== =========== ===========
CASH DIVIDENDS DECLARED
PER SHARE OF COMMON
STOCK.................. $ 0.28 $ 0.26 $ 0.55 $ 0.52 $ 1.08 $ 1.01
========== ========== =========== =========== =========== ===========
AVERAGE COMMON SHARES
OUTSTANDING............ 1,593,180 1,539,538 1,591,251 1,535,473 1,583,419 1,528,305
========== ========== =========== =========== =========== ===========
</TABLE>
F-21
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET CASH FLOWS FROM (USED BY):
OPERATING ACTIVITIES:
Net income......................................... $ 1,591,706 $ 1,215,998
Noncash expenses, revenue, losses and gains
included in income
Depreciation and amortization.................... 1,437,137 1,364,353
Deferred taxes and charge equivalent to
investment tax credit, net of amortization...... (170,580) 446,388
Net decrease (increase) in receivables and
unbilled revenue................................ (482,763) 691,626
Net decrease (increase) in materials and supplies
and prepayments................................. 515,963 862,039
Net increase (decrease) in accounts payable,
accrued taxes, and other current liabilities.... 925,370 (1,846,409)
Increase (decrease) in interest accrued but not
paid............................................ (1,442) (92,138)
Other............................................ 410,583 86,578
----------- -----------
Net cash from operating activities............. $ 4,225,974 $ 2,728,435
----------- -----------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment....... $(2,170,664) $(1,605,611)
Proceeds from disposals of property, plant and
equipment......................................... 57,353 16,120
----------- -----------
Net cash used by investing activities.......... $(2,113,311) $(1,589,491)
FINANCING ACTIVITIES:
Proceeds of short-term debt........................ $ 3,576,000 $ 5,923,500
Payments to settle short-term debt................. (3,953,500) (7,252,500)
Issuance of long-term debt (net)................... 534,000 1,609,000
Payments on long-term debt......................... (1,815,699) (1,241,679)
Proceeds from sale of common stock................. 206,844 405,664
Dividends paid..................................... (879,347) (803,460)
----------- -----------
Net cash used by financing activities.......... $(2,331,702) $(1,359,475)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. $ (219,039) $ (220,531)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE
YEAR................................................ 293,883 302,845
----------- -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD... $ 74,844 $ 82,314
=========== ===========
INTEREST PAID...................................... $ 897,955 $ 881,358
=========== ===========
INCOME TAXES PAID.................................. $ 330,000 $ 645,000
=========== ===========
</TABLE>
F-22
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) These consolidated financial statements include the accounts of ESELCO,
Inc. (ESELCO) and its wholly owned subsidiaries, Edison Sault Electric
Company (Edison Sault), ESEG, Inc. and Northern Tree Service, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements as of June 30, 1997
and 1996 included herein, which are unaudited, reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented. Sales of electricity by Edison Sault, ESELCO's major
subsidiary, are affected to some degree by variations in weather
conditions, and results of operations for interim periods are not
necessarily indicative of results to be expected for the entire year.
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 rules and regulations
of the Securities and Exchange Commission, although ESELCO believes that
the disclosures which are made are adequate to make the information
presented not misleading. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in ESELCO, Inc. 1996 Annual Report on Form
10K, which incorporates by reference the financial statements in the 1996
Annual Report to Shareholders.
(2) On March 12, 1997, the Board of Directors of ESELCO declared a 3% stock
dividend for shareholders of record May 1, 1997. The outstanding number of
common shares of ESELCO previously reported in the Consolidated Statement
of Capitalization in the Form 10-Q for the period ended March 31, 1997 to
reflect the effect of this 3% stock dividend did not take into account the
reduction for the number of fractional shares for which ESELCO was to pay
cash in lieu of fractional shares. Accordingly, after taking into account
this reduction, the number of shares outstanding after the 3% stock
dividend was declared and cash was paid in lieu of fractional shares is
1,593,180 shares.
(3) On August 22, 1995, Edison Sault filed an application with the Michigan
Public Service Commission (MPSC) for authority to implement price cap
regulation. In the application Edison Sault proposed that its base rates
be capped at present levels, that its existing power supply cost recovery
(PSCR) factor be rolled into base rates, and that its existing PSCR Clause
be suspended. Edison Sault published the required notice of opportunity to
comment or request a hearing. No comments were received and on September
21, 1995, the MPSC approved Edison Sault's application subject to the
modification that Edison Sault give 30 days notice rather than 2 weeks
notice for rate decreases and that Edison Sault file an application by
October 1, 2000, to address its experience under the price cap mechanism.
With the latter modification the price cap authorization represents an
experimental regulatory mechanism. The order also allows Edison Sault to
file an application seeking an increase in rates only under extraordinary
circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed
an intervention and petition for rehearing in Edison Sault's price cap
order. The Attorney General's intervention was based on the grounds that
the MPSC did not have authority to approve price cap regulation. On
December 21, 1995, the MPSC rejected the Attorney General's petition for
rehearing. On January 19, 1996, the Attorney General filed an appeal with
the Michigan Court of Appeals.
Legal counsel for Edison Sault believes that the Attorney General's appeal
is without merit and that Edison Sault will prevail. A decision in this
case is not expected until mid to late 1997. Edison Sault implemented the
price cap order on January 1, 1996.
(4) In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially
Responsible Party" at the Manistique River/Harbor Area of Concern (AOC) in
Manistique, Michigan. There were a number of other potentially responsible
parties, some of whom have been notified by the U.S. EPA.
F-23
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of
Concern" (AOC) due to PCBs which have been found in that area. An
Environmental Engineering/Cost Analysis (EECA) was submitted to the U.S.
EPA which provided an analysis of various methods of remediation for the
harbor. The EECA presented six alternatives of remediation action and
ultimately recommended a remediation method of in-place capping. Management
believed this to be the most prudent course of action. Although the total
ultimate cost of specific remedial action and Edison Sault's potential
liability were not known at that time, management had estimated Edison
Sault's minimum cost of this remedy to be $2.9 million. That figure
represented an increase of $1.9 million from the amount recorded during
1994. Certain other expenditures for investigation of any necessary
remedial action were incurred and are reflected in the accompanying
financial statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate
the harbor through in-place capping at a total cost of $6.4 million, with
the Edison Sault portion costing $3.2 million. Through further
negotiations, the U.S. EPA and the PRPs agreed to a cash-out settlement
whereby the PRPs would pay to the U.S. EPA the $6.4 million cost of capping
for the right to be absolved from any future legal actions concerning PCB
pollution. To effect this settlement, an Administrative Order on Consent
was executed by all parties in December, 1996 with payments made to the
U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this
project. Edison Sault filed an action on February 4, 1997 in the Circuit
Court for the County of Schoolcraft, Michigan against certain insurance
carriers to recover unreimbursed defense costs and expenses associated with
defending this matter of approximately $350,000 and indemnification for its
costs of approximately $3.2 million in settling the matter with the U.S.
EPA and obtaining a release of the property damage claims asserted by the
U.S. EPA. The certainty and magnitude of any insurance recovery is unknown
at this time. On April 28, 1997, Michigan Mutual Insurance Company filed a
counterclaim for approximately $1.7 million for previously paid defense
costs. Legal counsel for Edison Sault believes, based on the information
currently available, that the counterclaim lacks merit.
In November 1993, the MPSC issued an order authorizing Edison Sault to
defer and amortize, over a period not to exceed ten years, environmental
assessment and remediation costs associated with the Manistique River AOC.
Therefore, Edison Sault has recorded a regulatory asset in the amount of
$3.2 million, plus unreimbursed costs of $350,000, for a total of $3.55
million, which it began amortizing in 1997.
(5) On May 14, 1997 ESELCO, Inc. and Wisconsin Energy Corporation (Wisconsin
Energy) announced that they had entered into a definitive agreement
regarding the acquisition of ESELCO by Wisconsin Energy. The terms of the
definitive agreement were approved by both companies' boards. Upon
completion of the acquisition, ESELCO would continue to operate from Sault
Ste. Marie, Michigan.
All outstanding shares of ESELCO common stock would be converted into
shares of Wisconsin Energy common stock based on a value of $44.50 for each
share of ESELCO common stock in a transaction proposed to be structured as
a tax-free reorganization. The total purchase price would be approximately
$71.0 million. The exact number of shares of Wisconsin Energy common stock
to be issued in the transaction would be determined by dividing $44.50 by
the average closing prices of Wisconsin Energy common stock for the ten
trading days immediately preceding the closing date. Pursuant to the
definitive agreement, Wisconsin Energy will be paid a fee of $2.0 million
if ESELCO consummates or enters into an agreement with respect to, a
business combination with a party unrelated to Wisconsin Energy or ESELCO
terminates the definitive agreement to pursue a business combination with a
party unrelated to Wisconsin Energy prior to the end of the period
specified in the agreement.
The transaction is contingent upon several conditions, including the
approval by the shareholders of ESELCO, receipt of all appropriate
regulatory approvals and the effectiveness of a registration statement to
F-24
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
be filed with the Securities and Exchange Commission covering the Wisconsin
Energy shares to be issued in the transaction. Shareholders of ESELCO will
be provided a proxy statement describing the terms of the transaction prior
to being asked to vote on the transaction at a special meeting of
shareholders, which is expected to take place later in 1997. There can be
no assurance that the conditions will be satisfied or that the transaction
will be consummated.
F-25
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
WISCONSIN ENERGY CORPORATION
AND
ESELCO, INC.
AND
ESL ACQUISITION, INC.
DATED AS OF MAY 13, 1997,
AS AMENDED AND RESTATED
AS OF JULY 11, 1997
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TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
RECITALS................................................................. A-7
ARTICLE I DEFINITIONS
1.1 Accounts........................................................... A-7
1.2 Acquisition........................................................ A-7
1.3 Affiliates......................................................... A-7
1.4 Affiliate Letter................................................... A-7
1.5 Agreement.......................................................... A-7
1.6 Buildings.......................................................... A-7
1.7 Certificate of Merger.............................................. A-7
1.8 Closing............................................................ A-7
1.9 Closing Date....................................................... A-8
1.10 Code............................................................... A-8
1.11 Confidentiality Agreement.......................................... A-8
1.12 Contracts.......................................................... A-8
1.13 Disclosure Schedule................................................ A-8
1.14 Edison Sault....................................................... A-8
1.15 Employee Benefit Plans............................................. A-8
1.16 Equipment.......................................................... A-8
1.17 ERISA.............................................................. A-8
1.18 ESEG............................................................... A-8
1.19 ESELCO............................................................. A-8
1.20 ESELCO Closing Certificate......................................... A-8
1.21 ESELCO Common Stock................................................ A-8
1.22 ESELCO Companies................................................... A-8
1.23 ESELCO Counsel Opinion............................................. A-9
1.24 ESELCO DRIP........................................................ A-9
1.25 ESELCO Material Adverse Effect..................................... A-9
1.26 ESELCO Special Meeting............................................. A-9
1.27 ESELCO Stockholders................................................ A-9
1.28 ESELCO SEC Reports................................................. A-9
1.29 Exchange Act....................................................... A-9
1.30 Existing Contracts................................................. A-9
1.31 Existing Indebtedness.............................................. A-9
1.32 Existing Insurance Policies........................................ A-9
1.33 Existing Investments............................................... A-9
1.34 Existing Liens..................................................... A-9
1.35 Existing Litigation................................................ A-9
1.36 Existing Permits................................................... A-10
1.37 Existing Plans..................................................... A-10
1.38 Existing Real Estate............................................... A-10
1.39 FERC............................................................... A-10
1.40 HSR Act............................................................ A-10
1.41 Indebtedness....................................................... A-10
1.42 Investment......................................................... A-10
1.43 Knowledge of ESELCO................................................ A-10
1.44 Law................................................................ A-10
1.45 Letter of Intent................................................... A-10
1.46 Lien............................................................... A-10
1.47 MDCI............................................................... A-10
</TABLE>
A-2
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<TABLE>
<C> <S> <C>
1.48 MPSC............................................................... A-10
1.49 Merger............................................................. A-11
1.50 NTS................................................................ A-11
1.51 Permitted Liens.................................................... A-11
1.52 Person............................................................. A-11
1.53 Plan of Merger..................................................... A-11
1.54 Proxy Statement.................................................... A-11
1.55 PUHCA.............................................................. A-11
1.56 Registration Statement............................................. A-11
1.57 SEC................................................................ A-11
1.58 Securities Act..................................................... A-11
1.59 Subsidiary......................................................... A-11
1.60 Wisconsin Energy................................................... A-11
1.61 Wisconsin Energy Closing Certificate............................... A-11
1.62 Wisconsin Energy Counsel Opinion................................... A-11
1.63 Wisconsin Energy Common Stock...................................... A-11
1.64 Wisconsin Energy SEC Reports....................................... A-11
1.65 Other Terms........................................................ A-12
ARTICLE II THE MERGER
2.1 The Merger......................................................... A-13
2.2 Effective Time of Merger........................................... A-13
2.3 Articles of Incorporation of Surviving Corporation................. A-13
2.4 Bylaws of Surviving Corporation.................................... A-13
2.5 Directors and Officers of Surviving Corporation.................... A-13
2.6 Conversion of ESELCO Common Stock.................................. A-13
2.7 Conversion of Acquisition Common Stock............................. A-14
2.8 Exchange of ESELCO Certificates.................................... A-14
2.9 Stock Transfer Books............................................... A-15
2.10 Reorganization; Pooling............................................ A-16
2.11 Dissenters' Rights................................................. A-16
ARTICLE III OTHER AGREEMENTS
3.1 Proxy Statement and Registration Statement......................... A-16
3.2 Approval of ESELCO Stockholders.................................... A-16
3.3 Access............................................................. A-16
3.4 Disclosure Schedule................................................ A-17
3.5 Duties Concerning Representations.................................. A-17
3.6 Deliveries of Information; Consultation............................ A-17
3.7 Affiliates; Accounting and Tax Treatment........................... A-18
3.8 Other Transactions................................................. A-18
3.9 Letter of ESELCO's Accountants..................................... A-19
3.10 Letter of Wisconsin Energy's Accountants........................... A-20
3.11 Legal Conditions to Merger......................................... A-20
3.12 Stock Exchange Listing............................................. A-20
3.13 Public Announcements............................................... A-20
3.14 Indemnification and Insurance...................................... A-20
3.15 Employment Matters................................................. A-21
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ESELCO
4.1 Organization; Business............................................. A-23
4.2 Capitalization..................................................... A-24
</TABLE>
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<TABLE>
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4.3 Authorization; Enforceability...................................... A-24
4.4 No Violation or Conflict........................................... A-25
4.5 Title to Assets.................................................... A-25
4.6 Litigation......................................................... A-25
4.7 ESELCO SEC Reports and Books and Records........................... A-25
4.8 Absence of Certain Changes......................................... A-25
4.9 Buildings and Equipment............................................ A-26
4.10 Existing Contracts................................................. A-26
4.11 Performance of Contracts........................................... A-26
4.12 Contingent and Undisclosed Liabilities............................. A-26
4.13 Existing Insurance Policies........................................ A-27
4.14 Employee Benefit Plans............................................. A-27
4.15 No Violation of Law................................................ A-27
4.16 Brokers............................................................ A-27
4.17 Taxes.............................................................. A-27
4.18 Existing Real Estate............................................... A-28
4.19 Governmental Approvals............................................. A-28
4.20 No Pending Other Transactions...................................... A-28
4.21 Investments........................................................ A-29
4.22 Labor Matters...................................................... A-29
4.23 Indebtedness....................................................... A-29
4.24 Subsidiaries....................................................... A-29
4.25 Existing Permits................................................... A-29
4.26 Disclosure......................................................... A-29
4.27 Information Supplied............................................... A-29
4.28 Vote Required...................................................... A-30
4.29 Accounting Matters................................................. A-30
4.30 Opinion of Financial Advisor....................................... A-30
4.31 Environmental Protection........................................... A-30
4.32 Accounts........................................................... A-31
4.33 Customers.......................................................... A-31
ARTICLE V REPRESENTATIONS AND WARRANTIES OF WISCONSIN ENERGY
AND ACQUISITION
5.1 Organization....................................................... A-31
5.2 Capitalization..................................................... A-32
5.3 Authorization; Enforceability...................................... A-32
5.4 No Violation or Conflict........................................... A-32
5.5 Litigation......................................................... A-32
5.6 Wisconsin Energy SEC Reports....................................... A-32
5.7 Brokers............................................................ A-33
5.8 Governmental Approvals............................................. A-33
5.9 Disclosure......................................................... A-33
5.10 Information Supplied............................................... A-33
ARTICLE VI CONDUCT OF BUSINESS BY THE ESELCO COMPANIES PENDING
THE MERGER
6.1 Carry on in Regular Course......................................... A-33
6.2 Use of Assets...................................................... A-33
6.3 No Default......................................................... A-33
6.4 Existing Insurance Policies........................................ A-34
6.5 Employment Matters................................................. A-34
</TABLE>
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<TABLE>
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6.6 Contracts and Commitments......................................... A-34
6.7 Indebtedness; Investments......................................... A-34
6.8 Preservation of Relationships..................................... A-34
6.9 Compliance with Laws.............................................. A-34
6.10 Taxes............................................................. A-34
6.11 Amendments........................................................ A-34
6.12 Dividends; Redemptions; Issuance of Stock......................... A-34
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF WISCONSIN ENERGY
AND ACQUISITION
7.1 Compliance with Agreement......................................... A-34
7.2 Proceedings and Instruments Satisfactory.......................... A-35
7.3 No Litigation..................................................... A-35
7.4 Representations and Warranties of ESELCO.......................... A-35
7.5 No ESELCO Material Adverse Effect................................. A-35
7.6 Approval of ESELCO Stockholders; Certificate of Merger............ A-35
7.7 Deliveries at Closing............................................. A-35
7.8 Other Documents................................................... A-35
7.9 Governmental Approvals............................................ A-35
7.10 Listing........................................................... A-36
7.11 Tax Opinion....................................................... A-36
7.12 Accountant Letters................................................ A-36
7.13 Pooling Opinion................................................... A-36
7.14 Affiliate Letters................................................. A-36
7.15 Fractional Shares................................................. A-36
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ESELCO
8.1 Compliance with Agreement......................................... A-36
8.2 Proceedings and Instruments Satisfactory.......................... A-36
8.3 No Litigation..................................................... A-36
8.4 Representations and Warranties of Wisconsin Energy and A-37
Acquisition.......................................................
8.5 Approval of ESELCO Stockholders; Certificate of Merger............ A-37
8.6 Deliveries at Closing............................................. A-37
8.7 Other Documents................................................... A-37
8.8 Governmental Approvals............................................ A-37
8.9 Tax Opinion....................................................... A-37
8.10 Accountant Letters................................................ A-37
8.11 No Material Adverse Change........................................ A-37
8.12 Listing........................................................... A-38
ARTICLE IX TERMINATION; MISCELLANEOUS
9.1 Termination....................................................... A-38
9.2 Rights on Termination; Waiver..................................... A-38
9.3 Survival of Representations, Warranties and Covenants............. A-38
9.4 Entire Agreement; Amendment....................................... A-38
9.5 Expenses.......................................................... A-39
9.6 Governing Law..................................................... A-39
9.7 Assignment........................................................ A-39
9.8 Notices........................................................... A-39
9.9 Counterparts; Headings............................................ A-40
9.10 Interpretation.................................................... A-40
9.11 Severability...................................................... A-40
</TABLE>
A-5
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<TABLE>
<C> <S> <C>
9.12 Specific Performance............................................... A-40
9.13 No Reliance........................................................ A-40
9.14 Exhibits and Disclosure Schedule................................... A-40
9.15 Further Assurances................................................. A-40
SIGNATURES............................................................... A-41
EXHIBITS:
1. Form of Affiliate Letter........................................... A-42
2. Form of ESELCO Closing Certificate................................. *
3. Form of ESELCO Counsel Opinion..................................... *
4. Form of Plan of Merger............................................. A-45
5. Form of Wisconsin Energy Closing Certificate....................... *
6. Form of Wisconsin Energy Counsel Opinion........................... *
</TABLE>
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* Not included in Appendix A.
A-6
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION is made as of
this 13th day of May, 1997 as amended and restated as of July 11, 1997 by and
among WISCONSIN ENERGY CORPORATION, ESELCO, INC. AND ESL ACQUISITION, INC.
RECITALS
WHEREAS, the respective Boards of Directors of Wisconsin Energy, ESELCO and
Acquisition have: (a) determined that the merger of Acquisition with and into
ESELCO pursuant to, and subject to all of the terms and conditions of, this
Agreement is advisable, fair and in the best interests of Wisconsin Energy,
ESELCO and Acquisition and their respective shareholders; and (b) approved the
Merger, this Agreement and the transactions contemplated by this Agreement;
and
WHEREAS, the Board of Directors of ESELCO has directed that this Agreement
and the transactions described in this Agreement be submitted for approval at
the ESELCO Special Meeting.
NOW, THEREFORE, in consideration of the Recitals and of the mutual
covenants, conditions and agreements set forth herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, it is hereby agreed that:
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the meanings
specified:
1.1 Accounts. "Accounts" shall mean all accounts receivable, notes and
associated rights owned by any of the ESELCO Companies.
1.2 Acquisition. "Acquisition" shall mean ESL Acquisition, Inc., a Michigan
corporation and a wholly-owned subsidiary of Wisconsin Energy.
1.3 Affiliates. "Affiliates" shall mean all Persons who are affiliates of
ESELCO for purposes of Rule 145 under the Securities Act.
1.4 Affiliate Letter. "Affiliate Letter" shall mean a letter from each
Affiliate in substantially the form of Exhibit 1 attached to this Agreement.
1.5 Agreement. "Agreement" shall mean this Amended and Restated Agreement
and Plan of Reorganization, together with the Exhibits attached hereto and
together with the Disclosure Schedule, as the same may be amended from time to
time in accordance with the terms hereof.
1.6 Buildings. "Buildings" shall mean all buildings, fixtures, structures
and improvements used by any of the ESELCO Companies and located on the
Existing Real Estate.
1.7 Certificate of Merger. "Certificate of Merger" shall mean a Certificate
of Merger in a form approved for filing with the MDCI which shall have the
executed Plan of Merger attached thereto.
1.8 Closing. "Closing" shall mean the conference to be held at 10:00 A.M.,
Central Time, on the Closing Date at the offices of Quarles & Brady, 411 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202, or such other time and place as
the parties may mutually agree to in writing, at which the transactions
contemplated by this Agreement shall be consummated.
A-7
<PAGE>
1.9 Closing Date. "Closing Date" shall mean:
(a) December 30, 1997; or
(b) if all of the consents and approvals specified in Sections 7.9 and
8.8 of this Agreement have not been received on or before December 23,
1997, that date which is five (5) business days after receipt of the last
of such consents and approvals, subject in each case to the provisions of
Section 9.1(g) of this Agreement; or
(c) such other date as the parties may mutually agree to in writing.
1.10 Code. "Code" shall mean the Internal Revenue Code of 1986, as the same
may be in effect from time to time.
1.11 Confidentiality Agreement. "Confidentiality Agreement" shall mean the
letter agreement between Wisconsin Energy and ESELCO dated January 16, 1997 as
amended by this Agreement.
1.12 Contracts. "Contracts" shall mean all of the contracts, agreements and
leases, written or oral, to which any of the ESELCO Companies is a party or by
which any of the ESELCO Companies is bound.
1.13 Disclosure Schedule. "Disclosure Schedule" shall mean the Disclosure
Schedule dated May 13, 1997 delivered by ESELCO to Wisconsin Energy and as the
same may be amended from time to time after May 13, 1997 and prior to the
Closing Date in accordance with the terms of this Agreement.
1.14 Edison Sault. "Edison Sault" shall mean Edison Sault Electric Company,
a Michigan corporation and a wholly-owned subsidiary of ESELCO.
1.15 Employee Benefit Plans. "Employee Benefit Plans" shall mean any pension
plan, profit sharing plan, bonus plan, incentive compensation plan, stock
ownership plan, stock purchase plan, stock option plan, stock appreciation
plan, employee benefit plan, employee benefit policy, retirement plan, fringe
benefit program, insurance plan, severance plan, disability plan, health care
plan, sick leave plan, death benefit plan, or any other plan or program to
provide retirement income, fringe benefits or other benefits to former or
current employees of any of the ESELCO Companies.
1.16 Equipment. "Equipment" shall mean all machinery, toolings, equipment,
boilers, furniture, fixtures, motor vehicles, furnishings, molds, parts,
tools, dies, jigs, patterns, machine tools, office equipment, computers,
construction in progress and other items of tangible personal property owned
by any of the ESELCO Companies which are either presently used, or are used on
the Closing Date, by any of the ESELCO Companies in the conduct of its
business.
1.17 ERISA. "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may be in effect from time to time.
1.18 ESEG. "ESEG" shall mean ESEG, Inc., a Michigan corporation and a
wholly-owned subsidiary of ESELCO.
1.19 ESELCO. "ESELCO" shall mean ESELCO, Inc., a Michigan corporation.
1.20 ESELCO Closing Certificate. "ESELCO Closing Certificate" shall mean the
Closing Certificate of ESELCO in substantially the form of Exhibit 2 attached
to this Agreement.
1.21 ESELCO Common Stock. "ESELCO Common Stock" shall mean all of the issued
and outstanding shares of common stock, $0.01 par value, of ESELCO.
1.22 ESELCO Companies. "ESELCO Companies" shall mean ESELCO, Edison Sault,
ESEG and NTS.
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<PAGE>
1.23 ESELCO Counsel Opinion. "ESELCO Counsel Opinion" shall mean an opinion
of Kutak Rock in substantially the form of Exhibit 3 attached to this
Agreement.
1.24 ESELCO DRIP. "ESELCO DRIP" shall mean ESELCO's Dividend Reinvestment
and Common Stock Purchase Plan.
1.25 ESELCO Material Adverse Effect. "ESELCO Material Adverse Effect" shall
mean any event, condition or fact which is, or reasonably may be expected to
be, materially adverse to the financial condition, properties, business,
results of operations or prospects of the ESELCO Companies taken as a whole.
1.26 ESELCO Special Meeting. "ESELCO Special Meeting" shall mean a special
meeting of the ESELCO Stockholders for the purpose of approving the Merger,
this Agreement and the transactions contemplated by this Agreement and for
such other purposes as may be necessary or desirable.
1.27 ESELCO Stockholders. "ESELCO Stockholders" shall mean all Persons
owning shares of ESELCO Common Stock on the relevant date.
1.28 ESELCO SEC Reports. "ESELCO SEC Reports" shall mean:
(a) Reports on Form 10-Q for the quarters ended March 31, 1994, June 30,
1994, September 30, 1994, March 31, 1995, June 30, 1995, September 30,
1995, March 31, 1996, June 30, 1996, September 30, 1996 and March 31, 1997;
(b) Reports on Form 10-K for the years ended December 31, 1993, 1994,
1995 and 1996;
(c) Proxy Statements dated April 1, 1994, April 3, 1995, April 1, 1996
and March 28, 1997;
(d) Reports on Form 8-K dated January 23, 1997, March 25, 1997 and May
13, 1997;
(e) Form U-3A-2 for the years ended December 31, 1995 and 1996; and
(f) all other reports, registration statements, definitive proxy
statements, prospectuses, and amendments thereto filed by any of the ESELCO
Companies with the SEC after the date of this Agreement and prior to the
Effective Time of Merger.
1.29 Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as the same may be in effect from time to time.
1.30 Existing Contracts. "Existing Contracts" shall mean those Contracts
which are listed and briefly described on the Disclosure Schedule.
1.31 Existing Indebtedness. "Existing Indebtedness" shall mean all
Indebtedness of each of the ESELCO Companies, all of which is listed and
briefly described on the Disclosure Schedule.
1.32 Existing Insurance Policies. "Existing Insurance Policies" shall mean
all of the insurance policies currently in effect and owned by any of the
ESELCO Companies, all of which are listed and briefly described on the
Disclosure Schedule.
1.33 Existing Investments. "Existing Investments" shall mean all Investments
of each of the ESELCO Companies, all of which are listed and briefly described
on the Disclosure Schedule.
1.34 Existing Liens. "Existing Liens" shall mean all Liens affecting any of
the assets and properties of any of the ESELCO Companies on the date of this
Agreement, all of which are listed and briefly described on the Disclosure
Schedule.
1.35 Existing Litigation. "Existing Litigation" shall mean all pending or,
to the Knowledge of ESELCO, threatened suits, audit inquiries, charges,
workers compensation claims, product warranty claims, litigation,
A-9
<PAGE>
arbitrations, proceedings, governmental investigations, citations and actions
of any kind against any of the ESELCO Companies, all of which are listed and
briefly described on the Disclosure Schedule.
1.36 Existing Permits. "Existing Permits" shall mean all licenses, permits,
approvals, franchises, qualifications, certificates of convenience and
necessity, permissions, agreements, rate and other orders and governmental
authorizations required for the conduct of the business of any of the ESELCO
Companies, all of which are listed and briefly described on the Disclosure
Schedule.
1.37 Existing Plans. "Existing Plans" shall mean all Employee Benefit Plans
of each of the ESELCO Companies, all of which are listed and briefly described
on the Disclosure Schedule.
1.38 Existing Real Estate. "Existing Real Estate" shall mean those parcels
of real property described in the Disclosure Schedule which: (a) includes
those parcels owned in fee simple title by any of the ESELCO Companies; and
(b) excludes easements and any other real estate interests owned by any of the
ESELCO Companies relating to the distribution and transmission of electricity
in the ordinary course of business.
1.39 FERC. "FERC" shall mean the Federal Energy Regulatory Commission.
1.40 HSR Act. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as the same may be in effect from time to time.
1.41 Indebtedness. "Indebtedness" shall mean any liability or obligation of
any of the ESELCO Companies, whether primary or secondary or absolute or
contingent: (a) for borrowed money; or (b) evidenced by notes, bonds,
debentures or similar instruments; or (c) secured by Liens on any assets of
any of the ESELCO Companies.
1.42 Investment. "Investment" by any of the ESELCO Companies shall mean: (a)
any transfer or delivery of cash, stock or other property or thing of value in
exchange for indebtedness, stock or any other security of another Person; (b)
any loan or advance to, or capital contribution in, any other Person; (c) any
guaranty, creation or assumption of any liability or obligation of any other
Person; and (d) any investments in any fixed property or fixed assets other
than fixed properties and fixed assets acquired and used in the ordinary
course of the business.
1.43 Knowledge of ESELCO. "Knowledge of ESELCO" shall mean actual knowledge
of any one or more of the following named Persons and knowledge that any one
or more of the following named Persons should have acquired in the ordinary
course of performance of that Person's duties as a director, officer or
employee of any of the ESELCO Companies: Thomas S. Nurnberger, William R.
Gregory, Allan L. Grauer, James S. Clinton, David K. Easlick, Donald Sawruk,
David R. Hubbard, James L. Beedy, Steven L. Boeckman, Donald C. Wilson, Ernest
H. Maas, David H. Jirikovic and Paul A. Schemanski.
1.44 Law. "Law" shall mean any federal, state, local or other law, rule,
regulation or governmental requirement of any kind, and the rules, regulations
and orders promulgated thereunder by any regulatory agencies or other Persons.
1.45 Letter of Intent. "Letter of Intent" shall mean the Letter of Intent by
and between Wisconsin Energy and ESELCO dated March 24, 1997.
1.46 Lien. "Lien" shall mean, with respect to any asset: (a) any mortgage,
pledge, lien, covenant, lease or security interest; and (b) the interest of a
vendor or lessor under any conditional sale agreement, financing lease or
other title retention agreement relating to such asset.
1.47 MDCI. "MDCI" shall mean The Michigan Department of Consumer and
Industry Services-Corporation, Securities and Land Development Bureau.
1.48 MPSC. "MPSC" shall mean The Michigan Public Service Commission.
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<PAGE>
1.49 Merger. "Merger" shall mean the merger of Acquisition with and into
ESELCO pursuant to this Agreement.
1.50 NTS. "NTS" shall mean Northern Tree Service, Inc., a Michigan
corporation and a wholly-owned subsidiary of ESELCO.
1.51 Permitted Liens. "Permitted Liens" shall mean those of the Existing
Liens which are expressly noted as Permitted Liens on the Disclosure Schedule.
1.52 Person. "Person" shall mean a natural person, corporation, trust,
partnership, governmental entity, agency or branch or department thereof, or
any other legal entity.
1.53 Plan of Merger. "Plan of Merger" shall mean the Plan of Merger between
ESELCO and Acquisition in substantially the form of Exhibit 4 attached to this
Agreement.
1.54 Proxy Statement. "Proxy Statement" shall mean the proxy statement of
ESELCO to be filed with the SEC and to be distributed to the ESELCO
Stockholders in connection with the ESELCO Special Meeting and the approval of
the Merger by the ESELCO Stockholders, which shall also constitute the
prospectus of Wisconsin Energy filed as a part of the Registration Statement.
1.55 PUHCA. "PUHCA" shall mean the Public Utility Holding Company Act of
1935, as the same may be in effect from time to time.
1.56 Registration Statement. "Registration Statement" shall mean a
registration statement on Form S-4 to be filed under the Securities Act by
Wisconsin Energy in connection with the Merger for purposes of registering the
shares of Wisconsin Energy Common Stock to be issued in the Merger pursuant to
Article II of this Agreement.
1.57 SEC. "SEC" shall mean the Securities and Exchange Commission.
1.58 Securities Act. "Securities Act" shall mean the Securities Act of 1933,
as the same may be in effect from time to time.
1.59 Subsidiary. "Subsidiary" shall mean any corporation, at least a
majority of the outstanding capital stock of which (of any class or classes,
however designated, having ordinary voting power for the election of at least
a majority of the board of directors of such corporation) shall at the time be
owned by the relevant Person directly or through one or more corporations
which are themselves Subsidiaries.
1.60 Wisconsin Energy. "Wisconsin Energy" shall mean Wisconsin Energy
Corporation, a Wisconsin corporation.
1.61 Wisconsin Energy Closing Certificate. "Wisconsin Energy Closing
Certificate" shall mean the Closing Certificate of Wisconsin Energy in
substantially the form of Exhibit 5 attached to this Agreement.
1.62 Wisconsin Energy Counsel Opinion. "Wisconsin Energy Counsel Opinion"
shall mean the opinion of Quarles & Brady in substantially the form of Exhibit
6 attached to this Agreement.
1.63 Wisconsin Energy Common Stock. "Wisconsin Energy Common Stock" shall
mean shares of the common stock, $.01 par value, of Wisconsin Energy.
1.64 Wisconsin Energy SEC Reports. "Wisconsin Energy SEC Reports" shall
mean:
(a) Reports on Form 10-Q for the quarters ended March 31, 1994, June 30,
1994, September 30, 1994, March 31, 1995, June 30, 1995, September 30,
1995, March 31, 1996, June 30, 1996, September 30, 1996 and March 31, 1997;
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(b) Reports on Form 10-K for the years ended December 31, 1993, 1994,
1995 and 1996;
(c) Proxy Statements dated March 22, 1994, April 10, 1995, August 7,
1995, April 13, 1996 and March 14, 1997;
(d) Reports on Form 8-K dated February 1, 1994, May 3, 1995, September
25, 1995 and May 22, 1997; and
(e) all documents filed by Wisconsin Energy with the SEC after the date
of this Agreement and prior to the Effective Time of Merger pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.
1.65 Other Terms. The Following terms shall have the meanings specified in
the following noted Sections of this Agreement:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
1986 Fee Deferral Plan........................................... 3.15
1989 Fee Deferral Plan........................................... 3.15
Average Wisconsin Energy Price................................... 2.6
CERCLA........................................................... 4.31
Changeover Date.................................................. 3.15
Disclosure Schedule Change....................................... 3.4
Edison Sault Management Plan..................................... 3.15
Effective Time of Merger......................................... 2.2
Environmental Claim.............................................. 4.31
Environmental Hazardous Material................................. 4.31
Environmental Laws............................................... 4.31
Environmental Permits............................................ 4.31
Environmental Release............................................ 4.31
ESELCO Certificates.............................................. 2.8
ESELCO Director Plan............................................. 3.15
ESELCO Retiree Health Plan....................................... 3.15
Exchange Agent................................................... 2.8
Exchange Fund.................................................... 2.8
Extended Period.................................................. 3.15
Indemnified Parties.............................................. 3.14
Initial Termination Date......................................... 9.1
Exchange Ratio................................................... 2.6
Other Offer...................................................... 3.8
Other Transaction................................................ 3.8
Retirement Account Plan.......................................... 3.15
SERP............................................................. 3.15
Special Date..................................................... 3.8
Special Event.................................................... 3.8
Special Fee...................................................... 3.8
Surviving Corporation............................................ 2.1
Wisconsin Energy Directors' Plan................................. 3.15
</TABLE>
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ARTICLE II
THE MERGER
2.1 The Merger. This Agreement provides for the merger of Acquisition with
and into ESELCO, whereby each outstanding share of ESELCO Common Stock will be
converted into shares of Wisconsin Energy Common Stock as described in this
Agreement. As of the Effective Time of Merger, Acquisition will be merged with
and into ESELCO, which shall be the surviving corporation in the Merger (the
"Surviving Corporation") and shall continue to be governed by the Laws of the
State of Michigan, and the separate existence of Acquisition shall thereupon
cease. The Merger shall be pursuant to the provisions of, and shall be with
the effects provided in, the Michigan Business Corporation Act.
2.2 Effective Time of Merger. The consummation of the Merger shall be
effected as promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VII and Article VIII of this Agreement and
Acquisition and ESELCO will cause the Certificate of Merger and the Plan of
Merger to be executed, delivered and filed with the MDCI. The Merger shall
become effective at: (a) if the Closing occurs on or prior to December 30,
1997, 12:01 A.M. on January 1, 1998; or (b) if the Closing occurs after
December 30, 1997, the date and time of the filing of the Certificate of
Merger and the Plan of Merger with the MDCI. The date and time on which the
Merger shall become effective is referred to in this Agreement as the
"Effective Time of Merger".
2.3 Articles of Incorporation of Surviving Corporation. The Articles of
Incorporation of ESELCO as in effect immediately prior to the Effective Time
of Merger shall be the Articles of Incorporation of the Surviving Corporation
until amended in accordance with Law.
2.4 Bylaws of Surviving Corporation. The Bylaws of ESELCO as in effect
immediately prior to the Effective Time of Merger shall be the Bylaws of the
Surviving Corporation until amended in accordance with Law.
2.5 Directors and Officers of Surviving Corporation. The duly qualified and
acting directors and officers of Acquisition immediately prior to the
Effective Time of Merger shall be the directors and officers of the Surviving
Corporation, to hold office as provided in the Bylaws of the Surviving
Corporation.
2.6 Conversion of ESELCO Common Stock.
(a) Definitions. As used in this Agreement, the following terms shall
have the meanings specified:
(i) "Average Wisconsin Energy Price" shall mean the average of the
closing sale price per share of Wisconsin Energy Common Stock as
reported on the New York Stock Exchange - Composite Transactions on
each of the ten (10) consecutive trading days ending with the trading
day immediately preceding the Closing Date.
(ii) "Exchange Ratio" shall mean that number (carried to the fourth
decimal place) obtained by dividing: (A) $44.50; by (B) the Average
Wisconsin Energy Price.
(b) Conversion. At the Effective Time of Merger, and without any action
on the part of the holders thereof:
(i) Each share of ESELCO Common Stock issued and outstanding at the
Effective Time of Merger shall be converted into that number of shares
of Wisconsin Energy Common Stock as is equal to the Exchange Ratio on
the terms and conditions set forth in this Agreement; subject to the
provisions of Section 2.8(e) of this Agreement concerning cash being
paid for fractional shares.
(ii) Any shares of capital stock of ESELCO that are owned by any of
the ESELCO Companies at the Effective Time of Merger shall be cancelled
and retired and cease to exist and no Wisconsin Energy Common Stock or
other consideration shall be issued or delivered in exchange therefor.
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2.7 Conversion of Acquisition Common Stock. At the Effective Time of Merger,
and without any action on the part of the holders thereof, each share of
common stock of Acquisition issued and outstanding at the Effective Time of
Merger shall be converted into one (1) share of ESELCO Common Stock.
2.8 Exchange of ESELCO Certificates.
(a) Exchange Agent. As of the Effective Time of Merger, Wisconsin Energy
shall act as the exchange agent for, or shall deposit, or shall cause to be
deposited, with a bank or trust company designated by Wisconsin Energy (in
either case, the "Exchange Agent"), for the benefit of the holders of
shares of ESELCO Common Stock, for exchange in accordance with this Article
II of this Agreement through the Exchange Agent, certificates representing
the shares of Wisconsin Energy Common Stock (such certificates for shares
of Wisconsin Energy Common Stock, together with any dividends or
distributions with respect thereto and together with any cash for
fractional share interests made pursuant to Section 2.8(e) of this
Agreement, being hereinafter referred to as the "Exchange Fund") issuable
pursuant to Section 2.6 of this Agreement in exchange for outstanding
shares of ESELCO Common Stock.
(b) Exchange Procedures.
(i) As soon as reasonably practicable after the Effective Time of
Merger, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective
Time of Merger represented outstanding shares of ESELCO Common Stock
(the "ESELCO Certificates"): (A) a letter of transmittal which shall
specify that delivery shall be effected, and risk of loss and title to
the ESELCO Certificates shall pass, only upon delivery of the ESELCO
Certificates to the Exchange Agent and which shall be in such form and
have such other provisions as Wisconsin Energy may reasonably specify;
and (B) instructions to effect the surrender of the ESELCO Certificates
in exchange for certificates representing shares of Wisconsin Energy
Common Stock.
(ii) Upon surrender of an ESELCO Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed,
and with such other documents as the Exchange Agent may reasonably
require, the holder of such ESELCO Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of
whole shares of Wisconsin Energy Common Stock to which such holder is
entitled in respect of such ESELCO Certificate pursuant to the
provisions of this Article II of this Agreement plus any cash in lieu
of any fractional share interest in accordance with Section 2.8(e) of
this Agreement, and the ESELCO Certificate so surrendered shall
forthwith be cancelled; provided, however, that fractional share
interests of any one holder shall be aggregated to maximize the number
of whole shares of Wisconsin Energy Common Stock to be issued and
minimize the fractional interests to be paid in cash as provided in
Section 2.8(e) of this Agreement.
(iii) In the event of a transfer of ownership of shares of ESELCO
Common Stock which is not registered in the transfer records of ESELCO,
a certificate representing the proper number of shares of Wisconsin
Energy Common Stock may be issued to the transferee if the ESELCO
Certificate which represented such shares of ESELCO Common Stock is
presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid.
(iv) Until surrendered as contemplated by this Section 2.8 of this
Agreement, each ESELCO Certificate shall be deemed at all times after
the Effective Time of Merger to represent only the right to receive
upon surrender a certificate representing shares of Wisconsin Energy
Common Stock and cash in lieu of any fractional share interest as
contemplated by Section 2.8(e) of this Agreement.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time of Merger
with respect to Wisconsin Energy Common Stock with a record date after the
Effective Time of Merger shall be paid to the holder of any unsurrendered
ESELCO Certificate with respect to the shares of Wisconsin Energy Common
Stock represented thereby, and no cash payment in lieu of a fractional
share shall be paid to any such holder pursuant to Section 2.8(e) of this
Agreement, until the holder of such ESELCO Certificate shall surrender such
ESELCO Certificate. Subject to the effect of any applicable Law, following
surrender of any such ESELCO Certificate, there shall be paid to the
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holder of the certificate representing whole shares of Wisconsin Energy
Common Stock issued in exchange therefor, without interest: (i) promptly,
the amount of any cash payable with respect to a fractional share interest
to which such holder is entitled pursuant to Section 2.8(e) of this
Agreement and the amount of dividends or other distributions with a record
date after the Effective Time of Merger theretofore paid with respect to
such whole shares of Wisconsin Energy Common Stock; and (ii) at the
appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time of Merger but prior to
surrender and a payment date occurring after surrender payable with respect
to such whole shares of Wisconsin Energy Common Stock.
(d) No Further Rights in ESELCO Common Stock. All shares of Wisconsin
Energy Common Stock issued upon conversion of the ESELCO Common Stock in
accordance with the terms of this Agreement (and any cash paid pursuant to
Section 2.8(e) of this Agreement) shall be deemed to have been issued (and
paid) in full satisfaction of all rights pertaining to the ESELCO Common
Stock.
(e) No Fractional Shares. No fractional shares of Wisconsin Energy Common
Stock shall be issued in the Merger. All fractional share interests of a
holder of more than one ESELCO Certificate at the Effective Time of Merger
shall be aggregated. If a fractional share interest results after such
aggregation, each holder of a fractional share interest shall be paid an
amount in cash equal to the product obtained by multiplying such fractional
share interest by the Average Wisconsin Energy Price. As soon as
practicable after the determination of the amount of cash, if any, to be
paid to holders of fractional share interests, the Exchange Agent shall
notify Wisconsin Energy and Wisconsin Energy shall make available such
amounts to such holders subject to and in accordance with the terms of
Section 2.8(c) of this Agreement.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the ESELCO Stockholders as of a date which is six
months after the Effective Time of Merger shall be delivered to Wisconsin
Energy, upon demand, and any ESELCO Stockholders who have not theretofore
complied with this Article II of this Agreement shall thereafter look only
to Wisconsin Energy for payment of their claim for shares of Wisconsin
Energy Common Stock, any cash in lieu of fractional share interests and any
dividends or distributions with respect to Wisconsin Energy Common Stock.
(g) No Liability. Neither the Exchange Agent nor any party to this
Agreement shall be liable to any ESELCO Stockholder for any shares of
ESELCO Common Stock or Wisconsin Energy Common Stock (or dividends or
distributions with respect thereto) or cash delivered to a public official
pursuant to any abandoned property, escheat or similar Law.
(h) Withholding Rights. Wisconsin Energy shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this
Agreement to any ESELCO Stockholder such amounts as Wisconsin Energy is
required to deduct and withhold with respect to the making of such payment
under the Code, or any provision of state, local or foreign tax Law. To the
extent that amounts are so withheld by Wisconsin Energy, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to the ESELCO Stockholder in respect of which such deduction and
withholding was made by Wisconsin Energy.
(i) Book Entry. Notwithstanding any other provision of this Agreement,
the letter of transmittal referred to in Section 2.8(b) of this Agreement
may, at the option of Wisconsin Energy, provide for the ability of a holder
of one or more ESELCO Certificates to elect that Wisconsin Energy Common
Stock to be received in exchange for the ESELCO Common Stock formerly
represented by such surrendered ESELCO Certificates be issued in
uncertificated form or to elect that such Wisconsin Energy Common Stock be
credited to an account established under the dividend reinvestment and
stock purchase plan of Wisconsin Energy.
2.9 Stock Transfer Books. At the Effective Time of Merger, the stock
transfer books of ESELCO shall be closed and there shall be no further
registration of transfers of shares of ESELCO Common Stock thereafter on the
records of ESELCO. From and after the Effective Time of Merger, the holders of
ESELCO Certificates
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<PAGE>
outstanding immediately prior to the Effective Time of Merger shall cease to
have any rights with respect to such shares of ESELCO Common Stock except as
otherwise provided in this Agreement or by Law.
2.10 Reorganization; Pooling. The parties intend that this Agreement be a
plan of reorganization within the meaning of Section 368(a) of the Code and
that the Merger be a tax free reorganization under Section 368(a) of the Code
and that the Merger qualify for pooling of interests accounting treatment.
2.11 Dissenters' Rights. The parties are proceeding on the basis that the
ESELCO Stockholders shall have no dissenters' or appraisal rights in
connection with the Merger and the transactions described in this Agreement
based on Section 450.1762(2)(b) of the Michigan Business Corporation Act.
ARTICLE III
OTHER AGREEMENTS
3.1 Proxy Statement and Registration Statement. Wisconsin Energy and ESELCO
will prepare and file with the SEC the Registration Statement and the Proxy
Statement as soon as reasonably practicable after the date of this Agreement.
Wisconsin Energy and ESELCO shall use reasonable efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as practicable after such filing. Wisconsin Energy and ESELCO shall
also take such action as may be reasonably required to cause the shares of
Wisconsin Energy Common Stock issuable pursuant to the Merger to be registered
or to obtain an exemption from registration under applicable state "blue sky"
or securities Laws; provided, however, that Wisconsin Energy shall not be
required to qualify as a foreign corporation or to file any general consent to
service of process under the Laws of any jurisdiction or to comply with any
other requirements deemed by Wisconsin Energy to be unduly burdensome. Each
party to this Agreement will furnish to the other parties all information
concerning itself as each such other party or its counsel may reasonably
request and which is required or customary for inclusion in the Proxy
Statement and the Registration Statement.
3.2 Approval of ESELCO Stockholders. ESELCO shall as soon as reasonably
practicable: (a) take all steps necessary duly to call, give notice of,
convene and hold the ESELCO Special Meeting; (b) distribute the Proxy
Statement, which shall also constitute the prospectus of Wisconsin Energy
included in the Registration Statement, to the ESELCO Stockholders in
accordance with applicable Federal and state Law and with its Articles of
Incorporation and Bylaws; (c) subject to the provisions of Section 3.8(d) of
this Agreement, recommend to the ESELCO Stockholders the approval of this
Agreement and the transactions contemplated by this Agreement and such other
matters as may be submitted to the ESELCO Stockholders in connection with this
Agreement; and (d) cooperate and consult with Wisconsin Energy with respect to
each of the foregoing matters.
3.3 Access.
(a) Access. Upon reasonable notice, ESELCO shall, and shall cause Edison
Sault, ESEG and NTS to, afford to the agents, accountants, attorneys and
representatives of Wisconsin Energy reasonable access to all of its books,
records, financial information, facilities, key personnel and other
documents and materials; provided that such access shall be upon reasonable
notice and during normal business hours of the ESELCO Companies.
(b) Confidentiality Agreement. ESELCO and Wisconsin Energy agree that the
provisions of the Confidentiality Agreement shall remain in full force and
effect; provided that: (i) the phrase "three years from the date hereof" in
the second full paragraph on page 2 of the Confidentiality Agreement is
amended to read as follows: "beginning on January 16, 1997 and ending on
that date which is the later of January 16, 1999 or that date which is one
year after the termination of the Amended and Restated Agreement and Plan
of Reorganization between ESELCO and Wisconsin Energy"; and (ii) at the
Effective Time of Merger, the Confidentiality Agreement shall be deemed to
have terminated without further action by the parties.
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3.4 Disclosure Schedule.
(a) Disclosure Schedule. On May 13, 1997, ESELCO delivered to Wisconsin
Energy the Disclosure Schedule, which was accompanied by a certificate
signed by the President and Chief Executive Officer and the Secretary of
ESELCO stating the Disclosure Schedule was delivered pursuant to this
Agreement and was the Disclosure Schedule referred to in this Agreement.
The Disclosure Schedule is deemed to constitute an integral part of this
Agreement and to modify the representations, warranties, covenants or
agreements of ESELCO contained in this Agreement.
(b) Updates. Prior to the Closing Date, ESELCO shall update the
Disclosure Schedule on a monthly basis by written notice to Wisconsin
Energy to reflect any matters which have occurred from and after the date
of this Agreement which, if existing on the date of this Agreement, would
have been required to be described in the Disclosure Schedule. If requested
by Wisconsin Energy within 14 calendar days after receipt of an update to
the Disclosure Schedule, ESELCO shall meet and discuss with Wisconsin
Energy any change in the Disclosure Schedule made by ESELCO which, in the
reasonable judgment of Wisconsin Energy, has or may have an ESELCO Material
Adverse Effect or which may be materially adverse in any manner to
Wisconsin Energy (a "Disclosure Schedule Change"). If the parties cannot
resolve any differences regarding a Disclosure Schedule Change within a
reasonable period of time (not to exceed 30 calendar days after receipt of
an update to the Disclosure Schedule) Wisconsin Energy may terminate this
Agreement. If Wisconsin Energy does not terminate this Agreement pursuant
to this Section 3.4(b) of this Agreement, the relevant Disclosure Schedule
Changes shall be deemed to be accepted by Wisconsin Energy and Wisconsin
Energy shall no longer have any right to terminate this Agreement based on
such Disclosure Schedule Changes except to the extent otherwise provided in
Section 7.5 of this Agreement with respect to such Disclosure Schedule
Change.
3.5 Duties Concerning Representations. Each party to this Agreement shall:
(a) to the extent within its control, use reasonable efforts to cause all of
its representations and warranties contained in this Agreement to be true and
correct in all respects at the Effective Time of Merger with the same force
and effect as if such representations and warranties had been made at and as
of the Effective Time of Merger; and (b) use reasonable efforts to obtain any
third party consents or approvals required by this Agreement and to cause all
of the conditions precedent set forth in Articles VII and VIII of this
Agreement to be satisfied.
3.6 Deliveries of Information; Consultation. From time to time prior to the
Effective Time of Merger:
(a) Deliveries by ESELCO. ESELCO shall furnish promptly to Wisconsin
Energy: (i) a copy of each report, schedule and other document filed by it
or received by it pursuant to the requirements of federal or state
securities Laws or any other applicable Laws promptly after such documents
are available; (ii) the monthly consolidated and consolidating financial
statements of the ESELCO Companies (as prepared by ESELCO in accordance
with its normal accounting procedures) promptly after such financial
statements are available; (iii) a summary of any action taken by the Board
of Directors, or any committee thereof, of any of the ESELCO Companies; and
(iv) all other information concerning the business, properties and
personnel of any of the ESELCO Companies as Wisconsin Energy may reasonably
request.
(b) Deliveries by Wisconsin Energy. Wisconsin Energy shall promptly
furnish to ESELCO a copy of each report, schedule and other document filed
by Wisconsin Energy with the SEC pursuant to the requirements of federal
securities Laws promptly after such documents are available.
(c) Consultation. ESELCO shall, and shall cause Edison Sault, ESEG and
NTS to, confer and consult with representatives of Wisconsin Energy and its
Subsidiaries on a regular and frequent basis to report on operational
matters, environmental remediations and other environmental matters and the
general status of ongoing business operations of the ESELCO Companies.
(d) Regulatory Matters. ESELCO shall, and shall cause Edison Sault, ESEG
and NTS to, discuss with Wisconsin Energy any changes in the rates,
charges, standards of service or accounting of any of the ESELCO Companies
from those in effect on the date of this Agreement and consult with
Wisconsin Energy
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prior to making any filing (or amendment thereto), or effecting any
agreement, commitment, arrangement or consent, whether written or oral,
formal or informal, with respect thereto.
(e) Franchises, etc. ESELCO shall, and shall cause Edison Sault, ESEG and
NTS to, use all reasonable efforts to maintain in effect and renew all
existing franchises, certificates of convenience and necessity and other
permits, as the case may be, pursuant to which any of the ESELCO Companies
operates in its service territories. ESELCO shall notify Wisconsin Energy
promptly in the event that it becomes aware of: (i) any problem, complaint
or proceeding which could result in the termination or non-renewal of any
such franchise, certificate of convenience and necessity or permit; or (ii)
any significant complaint to the MPSC or any of the ESELCO Companies by a
customer of any of the ESELCO Companies or by any other Person concerning
the rates, billings, service or any other matter relating to the business
of any of the ESELCO Companies.
(f) Litigation. Each party to this Agreement shall provide prompt notice
to the other parties of any litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind which may be
commenced, threatened or proposed by any Person concerning the legality,
validity or propriety of the transactions contemplated by this Agreement.
If any such litigation is commenced against any party to this Agreement,
the parties shall cooperate in all respects in connection with such
litigation and Wisconsin Energy shall have the right to assume the defense
thereof at its cost and expense and, if Wisconsin Energy does assume such
defense, it shall confer regularly with ESELCO and shall not settle any
such litigation without the prior consent of ESELCO, which consent shall
not be unreasonably withheld.
(g) Delivery of ESELCO Stockholder List. ESELCO shall: (a) deliver to
Wisconsin Energy a list of all outstanding options to acquire any shares of
ESELCO Common Stock, the names of the Persons holding such options and the
terms and conditions of each such option; (b) deliver to Wisconsin Energy a
list of all outstanding restricted shares of ESELCO Common Stock, the names
of the Persons holding such shares and the terms and conditions of each
such arrangement; and (c) after the approval of this Agreement by the
ESELCO Stockholders at the ESELCO Special Meeting, arrange to have its
transfer agent deliver to Wisconsin Energy or its designee a true and
complete list setting forth the names and addresses of the ESELCO
Stockholders, their holdings of stock as of the latest practicable date,
and such other shareholder information as Wisconsin Energy may request.
3.7 Affiliates; Accounting and Tax Treatment. ESELCO shall advise the
Affiliates of the resale restrictions imposed by applicable securities Laws
and required to cause the Merger to qualify for pooling-of-interests
accounting treatment, and shall obtain from each Affiliate an executed
Affiliate Letter. ESELCO shall obtain an executed Affiliate Letter from any
Person who becomes an Affiliate of ESELCO after the date of this Agreement and
on or prior to the Effective Time of Merger. ESELCO and Wisconsin Energy will
each use its respective reasonable best efforts to cause the Merger to qualify
for pooling-of-interests accounting treatment and as a reorganization under
Section 368(a) of the Code.
3.8 Other Transactions.
(a) Definitions. As used in this Agreement, the following terms shall
have the meanings specified:
(i) "Other Offer" shall mean any inquiry, proposal or offer relating
in any manner to an Other Transaction.
(ii) "Other Transaction" shall mean any of the following on or prior
to the Special Date, other than the Merger as contemplated by this
Agreement: (A) a merger, consolidation, share exchange, exchange of
securities, reorganization, business combination or other similar
transaction involving any of the ESELCO Companies; (B) a sale, transfer
or other disposition of all or a significant portion of the assets of
any of the ESELCO Companies in a single transaction or series of
related transactions; (C) a sale of, or tender offer or exchange offer
for, or acquisition by any Person or group of beneficial owners of, a
substantial interest in the outstanding capital stock of any of the
ESELCO Companies in a
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single transaction or series of related transactions; or (D) a public
announcement of a proposal, plan, intention or agreement to do any of
the foregoing.
(iii) "Special Date" shall mean that date which is the later of: (A)
January 16, 1999; or (B) six (6) months after the date of termination
of this Agreement.
(iv) "Special Event" shall mean any of the following to occur on or
prior to the Special Date: (A) a Person unrelated to Wisconsin Energy
has consummated, or has publicly announced or proposed (and
subsequently consummates after the Special Date), an Other Transaction;
or (B) any of the ESELCO Companies has entered into an agreement with
respect to an Other Transaction; or (C) ESELCO shall have terminated
this Agreement for the purpose of pursuing an Other Offer or Other
Transaction.
(b) Termination of Discussions. ESELCO shall immediately cease and cause
to be terminated all existing discussions and negotiations, if any, with
any parties conducted prior to the date of this Agreement with respect to
any Other Transaction, except that ESELCO may notify such other parties
that the discussions and negotiations are terminated.
(c) Non Solicitation. ESELCO shall not, and shall not permit its
Subsidiaries or officers, directors, employees, agents or other
representatives of any of the ESELCO Companies (including, without
limitation, any investment banker, attorney or accountant retained or
engaged by any of the ESELCO Companies) to, solicit, initiate, facilitate,
encourage, negotiate with respect to, discuss or agree to, any Other Offer
or any Other Transaction, except to the extent required by the fiduciary
duties of ESELCO's officers and Board of Directors under applicable Law if
so advised by a written opinion of outside counsel. ESELCO shall notify
Wisconsin Energy orally and in writing within twenty-four (24) hours
following receipt by the Chairman of the Board or President of ESELCO of
any Other Offer, including the terms and conditions of any such Other Offer
and the Person making such Other Offer, except to the extent that ESELCO
may be prohibited from so doing by a Contract entered into prior to March
24, 1997. ESELCO shall give Wisconsin Energy five (5) calendar days prior
notice and an opportunity to negotiate with ESELCO before entering into,
executing or agreeing to any Other Offer or Other Transaction. Nothing in
this Section 3.8 of this Agreement shall prohibit ESELCO from taking and
disclosing to the ESELCO Stockholders a position contemplated by Rule 14e-
2(a) under the Exchange Act with respect to an Other Transaction by means
of a tender offer.
(d) Termination. ESELCO may, by notice to Wisconsin Energy at any time
prior to the Effective Time of Merger, terminate this Agreement if ESELCO
enters into, executes or agrees to an Other Offer or Other Transaction
following a determination by the Board of Directors of ESELCO on the
written advice of counsel that such action is required by its fiduciary
duties under applicable Law and compliance by ESELCO with the provisions of
Section 3.8(c) of this Agreement.
(e) Special Fee. In order to induce Wisconsin Energy to enter into this
Agreement and to compensate Wisconsin Energy for the time and expenses
incurred in connection with this Agreement and the Merger and the losses
suffered by Wisconsin Energy from foregone opportunities, ESELCO shall pay
a "Special Fee" equal to $2,000,000 to Wisconsin Energy in immediately
available funds within five (5) business days after the occurrence of a
Special Event.
(f) Termination of Section 3.8(e). There shall be no Special Fee payable
as a result of a Special Event which occurs after this Agreement is
terminated:
(i) by Wisconsin Energy and ESELCO pursuant to Section 9.1(a) of this
Agreement; or
(ii) by Wisconsin Energy pursuant to Section 9.1(b) of this Agreement
based on a failure of either or both of the conditions specified in
Section 7.4 or 7.5 of this Agreement except if such failure of
condition results from any wilful or intentional acts of any of the
ESELCO Companies; or
(iii) by Wisconsin Energy pursuant to Section 9.1(f) of this
Agreement.
3.9 Letter of ESELCO's Accountants. ESELCO shall use its reasonable best
efforts to cause to be delivered to Wisconsin Energy a letter of Arthur
Andersen LLP, ESELCO's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become
effective and addressed to
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Wisconsin Energy, in form and substance reasonably satisfactory to Wisconsin
Energy and customary in scope and substance for cold comfort letters delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement.
3.10 Letter of Wisconsin Energy's Accountants. Wisconsin Energy shall use
its reasonable best efforts to cause to be delivered to ESELCO a letter of
Price Waterhouse LLP, Wisconsin Energy's independent auditors, dated a date
within two business days before the date on which the Registration Statement
shall become effective and addressed to ESELCO, in form and substance
reasonably satisfactory to ESELCO and customary in scope and substance for
cold comfort letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement.
3.11 Legal Conditions to Merger. Each party to this Agreement will: (a) take
all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger (including
making all filings and requests in connection with approvals of or filings
with any governmental entity as described in Sections 7.9 and 8.8 of this
Agreement and furnishing all information required in connection therewith);
(b) promptly cooperate with and furnish information to the other parties in
connection with any such requirements imposed upon any of them in connection
with the Merger; and (c) take all reasonable actions necessary to obtain (and
will cooperate with the other parties in obtaining) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity or other public or private Person, required to be obtained or made by
the parties to this Agreement in connection with the Merger or the taking of
any action contemplated thereby or by this Agreement.
3.12 Stock Exchange Listing. Wisconsin Energy shall use its reasonable best
efforts to cause the shares of Wisconsin Energy Common Stock to be issued in
the Merger to be approved for listing on the New York Stock Exchange, subject
to official notice of issuance.
3.13 Public Announcements. Subject to each party's disclosure obligations
imposed by Law, ESELCO, Acquisition and Wisconsin Energy will cooperate with
each other in the development and distribution of all news releases and other
public information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and, except as may be required by Law, shall
not issue any public announcement or statement with respect thereto prior to
consultation with the other parties.
3.14 Indemnification and Insurance.
(a) Indemnification. From and after the Effective Time of Merger,
Wisconsin Energy shall cause ESELCO (and successors to ESELCO) to indemnify
and hold harmless each present and former employee, agent, director or
officer of any of the ESELCO Companies and the heirs, successors and
assigns of such Persons (the "Indemnified Parties") against any amounts
incurred by such Indemnified Parties, including without limitation, losses,
claims, damages, liabilities, costs, expenses (including reasonable
attorneys fees incurred in defense or otherwise), judgments and amounts
paid in settlement, in connection with any claim, action, suit, proceeding
or investigation arising out of or relating to the transactions described
in this Agreement and any which arise out of or relate to an Indemnified
Party having served as a committee member, director, officer, employee or
agent of any of the ESELCO Companies, or as a trustee or fiduciary of any
Employee Benefit Plans or otherwise on behalf of any of the ESELCO
Companies, whether asserted or commenced prior to or after the Effective
Time of Merger. Such indemnification shall be in accordance with, and
substantially equivalent to, the indemnification provided from time to time
by Subsidiaries of Wisconsin Energy to employees, agents, directors and
officer of Subsidiaries of Wisconsin Energy.
(b) Insurance. For at least three (3) years from and after the Effective
Time of Merger, Wisconsin Energy shall maintain, or shall cause to be
maintained, in effect directors and officers insurance covering those
Persons covered by ESELCO's directors and officers insurance as of the date
of this Agreement. This directors and officers insurance shall be not less
in terms of coverage and amount as the insurance that ESELCO has in effect
covering officers and directors on the date of this Agreement.
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3.15 Employment Matters.
(a) Edison Sault Management Pension Plan. Within a reasonable period of
time after the Effective Time of Merger, Wisconsin Energy shall cause the
Pension Plan for Management Employees of Edison Sault (the "Edison Sault
Management Plan") to be merged into the Wisconsin Electric Power Company
Retirement Account Plan (the "Retirement Account Plan") and the Retirement
Account Plan to be amended to provide that employees of Edison Sault who
were covered under the Edison Sault Management Plan and who became covered
under the Retirement Account Plan by reason of such merger and who
subsequently terminate on or prior to December 31, 2010 with a 100% fully
vested interest shall be entitled to an accrued pension benefit not less
than what they would have received had the provisions of the Edison Sault
Management Plan as in existence as of the Effective Time of Merger
continued to apply to them (except that Wisconsin Energy reserves the right
to provide all or part of such accrued pensions benefits by means of a non-
qualified pension plan to the extent necessary to maintain, in the
reasonable judgment of Wisconsin Energy, the tax qualified status of the
Retirement Account Plan).
(b) Edison Sault Employee Incentive Investment and Stock Ownership Plan.
Within a reasonable period of time after the Effective Time of Merger,
Wisconsin Energy shall cause the Employee Incentive Investment and Stock
Ownership Plan of Edison Sault to be merged into the Wisconsin Electric
Power Company Employees Savings Plan and shall extend such Savings Plan to
the employees of the ESELCO Companies.
(c) Special Early Retirement Window Program. Prior to or after the
Effective Time of Merger, but prior to the merger of any defined benefit
pension plan of Edison Sault which is used in connection with a special
voluntary early window program, Edison Sault may proceed with a special
voluntary early retirement window program in accordance with the program
described in the Disclosure Schedule.
(d) Severance Agreements. After the Effective Time of Merger, Wisconsin
Energy shall cause Edison Sault to honor all obligations which may be
incurred by Edison Sault under the nine Executive Severance Agreements
identified on the Disclosure Schedule, subject to the terms thereof, which
would cause such obligations to expire regarding any individual who elected
a special early retirement benefit under the program described in Section
3.15(c) of this Agreement.
(e) Company Cars. After the Effective Time of Merger, Wisconsin Energy
will cause the ESELCO Companies to continue a company car policy with
respect to those employees who are determined from time-to-time to have an
operational need therefor and regarding the other individuals who are
currently provided with company cars as of the Effective Time of Merger, to
allow them to either continue to use the same until the end of the useful
life thereof, with an option at the end of such useful life to buy the same
at the lower of book or market value, or to elect to discontinue use of the
same and receive such increase in compensation as is determined to be
appropriate in the sole discretion of the employer.
(f) Retiree Health Care Plan. After the Effective Time of Merger,
Wisconsin Energy will cause the retiree health care program then in effect
at the ESELCO Companies (the "ESELCO Retiree Health Plan") to be continued,
subject to and in accordance with its terms (including any reserved right
to amend or terminate the same), with respect to individuals who were
already retired at such time and with respect to those who retire or
otherwise terminate from the service of the ESELCO Companies in such manner
as to entitle them to benefit from such program, until at least one year
from the Effective Time of Merger (the "Changeover Date"), with such
individuals (both those already retired and those who subsequently retire)
to pay forty-five percent (45%) of the cost thereof, except for the classes
of individuals identified in the Disclosure Schedule who will only be
obligated to pay forty percent (40%). From the Changeover Date until
December 31, 2004 (the "Extended Period"), Wisconsin Energy will cause the
ESELCO Companies to continue the same program of benefits and, at least for
purposes of measuring retiree contributions, at the same total premium
costs, with both such benefits and costs to be subject to change from time
to time as would occur pursuant to the underlying health insurance
contracts in effect immediately prior to the Changeover Date (whether or
not those insurance contracts are actually continued in force), and retiree
contributions shall be fifty percent (50%) of such costs. During the
Extended Period, Wisconsin Energy may in its discretion cause the ESELCO
Companies to provide such benefits either by a continuation of the
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health insurance contracts in effect immediately prior to the Changeover
Date under the ESELCO Retiree Health Plan, use of a self-insured
arrangement, or otherwise.
(g) Other Benefits. Within a reasonable period of time after the
Effective Time of Merger and subject to the collective bargaining
obligations of Edison Sault, Wisconsin Energy shall cause other benefit
plans and programs substantially similar to those in effect at Wisconsin
Electric Power Company for employees generally (including severance
benefits) to be extended to employees of the ESELCO Companies and shall
extend past service credit for purposes of eligibility to participate,
vesting and benefit accruals under such benefit plans and programs for
service with the ESELCO Companies before the Effective Time of Merger,
provided that such crediting of service shall not operate to duplicate any
benefit or the funding of any benefit, and provided further that any
vacation entitlements in existence at the Effective Time of Merger under
any policy of the ESELCO Companies with respect to officers shall not be
decreased after the Effective Time of Merger.
(h) Relocation Expenses for Transferred Management Employees. Wisconsin
Energy will cause the ESELCO Companies to establish a special relocation
expense reimbursement plan for such of the management employees of Edison
Sault as are requested to relocate as a result of the transactions
described in this Agreement substantially similar to such program as may
then be in effect at Wisconsin Electric Power Company.
(i) SERP. Edison Sault shall take all necessary actions to terminate the
Supplemental Executive Retirement Plan of Edison Sault Electric Company
(the "SERP"), as of the Effective Time of Merger and shall continue to
remain obligated to pay benefits in the amount earned under the SERP as of
the termination date to those participants who would be eligible to receive
benefits if their employment had been then terminated. Edison Sault shall
obtain the consent of each other current participant who may have earned
benefits under the SERP but who would not be eligible to receive such
benefits if his employment had terminated on the date of termination of the
SERP to receipt of an immediate single lump sum distribution of reasonably
equivalent actuarial value in lieu of and in complete satisfaction of any
other obligation to such individual under the SERP (with such lump sum to
be increased to take into account the tax impact thereof, assuming the
maximum combined federal, Michigan and employee Medicare tax rates in
effect as of the Effective Time of Merger, net of the federal income tax
benefit of the state tax, the intent of such increase being to leave each
such individual with an amount which, after payment of such taxes under the
assumption above, would be equal to such single lump sum distribution.
(j) Director's Retirement Plan. ESELCO shall take all necessary actions
to terminate the ESELCO, Inc. Director's Retirement Plan (the "ESELCO
Director Plan") as of the Effective Time of Merger. After the Effective
Time of Merger, Wisconsin Energy shall cause ESELCO to continue to honor
all obligations under the ESELCO Director Plan as in effect at such
termination.
(k) Director's Fee Deferral Plans. (i) With respect to the Edison Sault
Electric Company Director's Fee Deferral Plan effective as of October 1,
1989 (the "1989 Fee Deferral Plan"), ESELCO shall cause Edison Sault to
take all necessary actions to discontinue recognizing further fee deferrals
and to amend such Plan as of the Effective Time of Merger as follows:
(A) to provide that all future earnings on the deferred fee account
balances will be identical to the interest rates or other methods
allowed to participants under the Wisconsin Energy Directors' Deferred
Compensation Plan (the "Wisconsin Energy Directors' Plan") from time to
time;
(B) to eliminate Section B(17) of Article I and Section B(3) of Article
III; and
(C) to make the methods of payment identical to the methods allowed to
participants and beneficiaries under the Wisconsin Energy Directors'
Plan.
ESELCO shall also cause Edison Sault to take all necessary actions,
simultaneously with the foregoing amendments, to terminate the 1989 Fee
Deferral Plan as of the Effective Time of Merger. After the Effective Time of
Merger, Wisconsin Energy shall cause Edison Sault to continue to honor all
obligations under the 1989 Fee Deferral Plan, as so amended and as in effect
at such termination.
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(ii) With respect to the Edison Sault Electric Company ESELCO Director's Fee
Deferral Plan as of January 1, 1986 (the "1986 Fee Deferral Plan"), ESELCO
shall cause Edison Sault to take all necessary actions to discontinue
recognizing further fee deferrals and to amend such Plan as of the Effective
Time of Merger to eliminate Section B(17) of Article I and Section B(3) of
Article III. ESELCO shall also cause Edison Sault to take all necessary
actions, simultaneously with the foregoing amendments, to terminate the 1986
Fee Deferral Plan, as of the Effective Time of Merger. After the Effective
Time of Merger, Wisconsin Energy shall cause Edison Sault to continue to honor
all obligations under the 1986 Fee Deferral Plan, as so amended and as in
effect at such termination.
(l) Labor Agreements. Prior to and after the Effective Time of Merger,
Edison Sault shall, and after the Effective Time of Merger, Wisconsin
Energy shall cause Edison Sault to, continue to honor all collective
bargaining agreements to which it is a party, subject to the terms thereof,
it being acknowledged that the current collective bargaining agreements in
effect as of the date of execution of this Agreement expire on October 21,
1998.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ESELCO
ESELCO hereby represents and warrants to Wisconsin Energy and Acquisition
that, except as set forth in the Disclosure Schedule:
4.1 Organization; Business.
(a) Organization. Each of the ESELCO Companies is a corporation duly and
validly organized and existing and in good standing under the Laws of the
State of Michigan. Each of the ESELCO Companies is qualified to do business
as a foreign corporation and is in good standing in all other jurisdictions
where the ownership or leasing of property or the conduct of its business
requires qualification as a foreign corporation by it, except where the
failure to so qualify does not and will not have an ESELCO Material Adverse
Effect.
(b) Corporate Power and Authority. Each of the ESELCO Companies has full
corporate power and authority and all franchises, permits, licenses,
approvals, authorizations, registrations, certificates of convenience and
necessity, grants and orders necessary to carry on its business as it is
now conducted and to own, lease and operate its assets and properties.
(c) Regulation. ESELCO is an exempt holding company under Section 3(a)(1)
of PUHCA. Edison Sault is regulated as a public utility in the State of
Michigan and is not subject to regulation in any other state. ESELCO, ESEG
and NTS are not regulated as public utilities or subject to such regulation
by any state.
(d) Business of ESELCO. The only business conducted by ESELCO is the
ownership of the capital stock of, and providing services to and guarantees
for, Edison Sault, ESEG and NTS.
(e) Business of Edison Sault. The only business conducted by Edison Sault
is the generation, distribution, transmission and sale of electricity, and
service incidental thereto, to approximately 22,000 residential, commercial
and industrial customers in the Eastern portion of the Upper Peninsula of
the State of Michigan. Edison Sault conducts its business within its
service areas pursuant to rate schedules and applicable rules and
regulations of Edison Sault duly authorized and approved and filed with the
MPSC.
(f) Assets of Edison Sault. Edison Sault owns or has the right to use all
property, real or personal, tangible or intangible, which it uses in the
operation of its business and to permit it to render electric utility
services within the service areas in which it carries on its business as it
is now being conducted.
(g) Business of ESEG. ESEG is currently inactive but, upon appropriate
FERC approval, the only business conducted by ESEG will be the ownership of
submarine cables under the Straits of Mackinac which are leased to Edison
Sault.
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(h) Business of NTS. The only businesses conducted by NTS are the
provision of tree removal and tree trimming services and the ownership of a
radio tower near Engadine, Michigan.
(i) Articles of Incorporation and Bylaws. Copies of the Articles of
Incorporation and Bylaws of each of the ESELCO Companies, as amended,
certified by the Secretary of ESELCO as of the date of this Agreement, are
being delivered by ESELCO to Wisconsin Energy contemporaneously with the
execution and delivery of this Agreement and such copies are complete and
correct copies of such documents in effect as of the date of this
Agreement.
4.2 Capitalization.
(a) Capitalization of ESELCO. The entire authorized capital stock of
ESELCO consists of: (i) 3,000,000 shares of Common Stock (which will be
increased to 9,840,000 shares under an amendment to ESELCO's Articles of
Incorporation to be voted upon at ESELCO's 1997 Annual Meeting of
Stockholders), $0.01 par value, of which 1,593,180 shares will be issued
and outstanding following payment of ESELCO's 3% stock dividend which was
declared on March 13, 1997 and is payable on May 15, 1997, and none of such
shares are held by any of the ESELCO Companies; and (ii) 160,000 shares of
Preferred Stock, $0.01 par value, none of which are issued and outstanding.
(b) Capitalization of Edison Sault. The entire authorized capital stock
of Edison Sault consists of: (i) 3,000,000 shares of Common Stock, $1.00
par value, of which 673,929 shares are issued and outstanding, all of which
are owned by ESELCO; and (ii) 160,000 shares of Preferred Stock, $25.00 par
value, none of which are issued and outstanding.
(c) Capitalization of ESEG. The entire authorized capital stock of ESEG
consists of 100 shares of Common Stock, $0.01 par value, of which 100
shares are issued and outstanding, all of which are owned by ESELCO.
(d) Capitalization of NTS. The entire authorized capital stock of NTS
consists of 100 shares of Common Stock, $0.01 par value, of which 100
shares are issued and outstanding, all of which are owned by ESELCO.
(e) Outstanding Capital Stock. All of the outstanding capital stock of
each of the ESELCO Companies is duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights. There are no options,
warrants, conversion rights or other rights to subscribe for or purchase,
or other contracts with respect to, any capital stock of any of the ESELCO
Companies.
(f) ESELCO DRIP. The ESELCO DRIP has been suspended in accordance with
its terms by ESELCO effective as of May 15, 1997 and will be terminated at
the Effective Time of Merger. All shares of ESELCO Common Stock held in the
ESELCO DRIP have been or will be properly allocated to the accounts of
Persons who were participants in the ESELCO DRIP, are recorded in book-
entry form and, subject to earlier withdrawal in accordance with the terms
of the ESELCO DRIP, will be held in the ESELCO DRIP until the Effective
Time of Merger. All shares of ESELCO Common Stock held in the ESELCO DRIP
at the Effective Time of Merger shall be converted into shares of Wisconsin
Energy Common Stock as provided in Section 2.6 of this Agreement. If
Wisconsin Energy provides such an election pursuant to Section 2.8(i) of
this Agreement, participants in the ESELCO DRIP who elect to have such
Wisconsin Energy Common Stock credited to accounts established for them
under Wisconsin Energy's dividend reinvestment and stock purchase Plan
shall have their ESELCO DRIP shares converted into the number of whole
shares and any fractional share of Wisconsin Energy Common Stock resulting
from the application of the Exchange Ratio, instead of having any such
fractional share paid in cash as provided in Section 2.8(e) of this
Agreement.
4.3 Authorization; Enforceability. The execution, delivery and performance
of this Agreement and all of the documents and instruments required by this
Agreement to be executed and delivered by ESELCO are within the corporate
power of ESELCO and: (a) have been duly authorized by the unanimous vote of
the Board of Directors of ESELCO; and (b) upon the approval of the ESELCO
Stockholders, shall be duly authorized by all necessary corporate action. This
Agreement is, and the other documents and instruments required by this
Agreement to be executed and delivered by ESELCO will be, when executed and
delivered by ESELCO, the valid and binding
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obligations of ESELCO, enforceable against ESELCO in accordance with their
respective terms, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws
generally affecting the rights of creditors and subject to general equity
principles.
4.4 No Violation or Conflict. Subject to the receipt of the approvals and
consents described in Section 8.8 of this Agreement, the execution, delivery
and performance of this Agreement by ESELCO do not and will not conflict with
or violate any Law, the Articles of Incorporation or Bylaws of any of the
ESELCO Companies or any Existing Contract.
4.5 Title to Assets. Each of the ESELCO Companies owns good and valid title
to the assets and properties which it owns or purports to own, free and clear
of any and all Liens, except: (a) the Existing Liens on the date of this
Agreement; and (b) the Permitted Liens on the Closing Date.
4.6 Litigation. Except for the Existing Litigation: (a) there is no
litigation, arbitration, proceeding, governmental investigation, citation or
action of any kind pending or, to the Knowledge of ESELCO, proposed or
threatened, against or relating to any of the ESELCO Companies, nor, to the
Knowledge of ESELCO, is there any basis for any such action; and (b) there are
no actions, suits or proceedings pending or, to the Knowledge of ESELCO,
proposed or threatened, against any of the ESELCO Companies by any Person
which question the legality, validity or propriety of the transactions
contemplated by this Agreement.
4.7 ESELCO SEC Reports and Books and Records.
(a) ESELCO SEC Reports. The ESELCO SEC Reports: (i) include all reports,
definitive proxy statements and amendments thereto filed or required to be
filed by ESELCO with the SEC since January 1, 1994; and (ii) did not or
will not, as the case may be, contain as of their respective dates any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(b) Financial Statements. The audited consolidated financial statements
and unaudited consolidated interim financial statements of ESELCO included
in the ESELCO SEC Reports have been or will be, as the case may be,
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto and except with respect to unaudited interim statements as
permitted by Form 10-Q of the SEC) and fairly present the consolidated
financial position of the ESELCO Companies as of the dates thereof and the
results of their operations and changes in financial position for the
periods then ended, subject, in the case of the unaudited consolidated
interim financial statements, to normal year-end and audit adjustments and
any other adjustments described therein.
(c) Books and Records. The minute books of each of the ESELCO Companies
contain correct and complete records of all actions taken by the
stockholders and the Board of Directors (including committees of the Board)
of each of the ESELCO Companies, and all signatures contained therein are
the true signatures of the Persons whose signatures they purport to be. The
share transfer books of each of the ESELCO Companies are correct, complete
and current in all respects. The accounting books and records of each of
the ESELCO Companies: (i) are in all material respects correct and
complete; (ii) are current in a manner consistent with past practice; and
(iii) have recorded therein all the properties and assets and liabilities
of the ESELCO Companies. The accounting books and records of Edison Sault
have been kept and maintained in accordance with the Uniform System of
Accounts as prescribed by the MPSC. The Disclosure Schedule sets forth the
name of each bank in which each of the ESELCO Companies has an account or
safe deposit box or with which any of the ESELCO Companies has an
arrangement for safekeeping.
4.8 Absence of Certain Changes. Since December 31, 1996 there has not been
any:
(a) material adverse change in the financial condition, properties,
business or results of operations of the ESELCO Companies taken as a whole;
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(b) damage, destruction or loss (whether or not covered by insurance)
which has materially and adversely affected the financial condition,
properties, business or results of operations of the ESELCO Companies taken
as a whole;
(c) transactions by any of the ESELCO Companies outside the ordinary
course of business, except for the transactions contemplated by this
Agreement; or
(d) declaration or payment or setting aside the payment of any dividend
or any distribution in respect of the capital stock of any of the ESELCO
Companies or any direct or indirect redemption, purchase or other
acquisition of any such stock by any of the ESELCO Companies.
4.9 Buildings and Equipment. The Buildings and the Equipment: (a) are, taken
as a whole, in good operating condition and repair, reasonable wear and tear
excepted; (b) are adequately insured at normal competitive premium rates with
the self insured retentions specified on the Disclosure Schedule; (c) such
assets and their use conform in all respects to applicable Laws; and (d) no
notice of any violation of any building, zoning or other Law relating to such
assets or their use has been received by any of the ESELCO Companies.
4.10 Existing Contracts. The Existing Contracts are the only Contracts which
constitute:
(a) a lease of, or agreement to purchase or sell, any capital assets;
(b) any union labor contracts;
(c) any management, consulting, employment, personal service, agency or
other contract or contracts providing for employment or rendition of
services and which: (i) are in writing; or (ii) create other than an at
will employment relationship; or (iii) provide for any commission, bonus,
profit sharing, incentive, retirement, consulting or additional
compensation;
(d) any agreements or notes evidencing any Indebtedness;
(e) an agreement for the storage, transportation, treatment or disposal
of any hazardous waste or hazardous byproduct;
(f) a power of attorney (whether revocable or irrevocable) given to any
Person by any of the ESELCO Companies that is in force;
(g) an agreement by any of the ESELCO Companies not to compete in any
business or in any geographical area;
(h) an agreement restricting the right of any of the ESELCO Companies to
use or disclose any information in its possession;
(i) a partnership, joint venture or similar arrangement;
(j) a license;
(k) an agreement or arrangement with any Affiliate; or
(l) any other agreement which: (i) involves an amount in excess of
$10,000.00; or (ii) is not in the ordinary course of business.
4.11 Performance of Contracts. Each of the ESELCO Companies has fully
performed each term, covenant and condition of each Contract which is to be
performed by it at or before the date hereof. Each of the Contracts is in full
force and effect and constitutes the legal and binding obligation of the
relevant ESELCO Company and, to the Knowledge of ESELCO, constitutes the legal
and binding obligation of the other parties thereto.
4.12 Contingent and Undisclosed Liabilities. Except pursuant to the deposit
and collection of checks in the ordinary course of business, none of the
ESELCO Companies has guaranteed or become a surety or is otherwise
contingently liable for the obligation of any other Person. None of the ESELCO
Companies has any liabilities of any nature except for those which: (a) are
disclosed in the ESELCO SEC Reports or in the Disclosure Schedule or in this
Agreement; or (b) arise in the ordinary course of business since December 31,
1996 and are not required to be disclosed pursuant to this Agreement or the
Disclosure Schedule.
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4.13 Existing Insurance Policies. All real and personal property owned or
leased by the ESELCO Companies has been and is being insured against, and the
ESELCO Companies maintain liability insurance against, such insurable risks
and in such amounts as set forth in the Existing Insurance Policies. The
Existing Insurance Policies constitute all insurance coverage owned by the
ESELCO Companies and are in full force and effect and, to the Knowledge of
Eselco, none of the ESELCO Companies has received notice of and is not
otherwise aware of any cancellation or threat of cancellation of such
insurance. No property damage, personal injury or liability claims have been
made, or are pending, against any of the ESELCO Companies that are not covered
by insurance. Within the past two (2) years, no insurance company has canceled
any insurance (of any type) maintained by any of the ESELCO Companies. To the
Knowledge of ESELCO, the cost of any insurance currently maintained by the
ESELCO Companies will not increase upon renewal other than increases which
ESELCO reasonably believes are consistent with the general upward trend in the
cost of obtaining insurance.
4.14 Employee Benefit Plans.
(a) Existing Plans. Except for the Existing Plans, none of the ESELCO
Companies maintain, nor is bound by, any Employee Benefit Plan. All of the
Existing Plans are in compliance in all material respects with ERISA, the
Code and all other applicable Laws. All of the Existing Plans which are
intended to meet the requirements of Section 401(a) or 403(a) of the Code
have been determined to be "qualified" within the meaning of the Code, and
there are no facts which would adversely affect the qualified status of any
of such Existing Plans.
(b) Certain Matters. With respect to each Existing Plan which is subject
to either Title IV of ERISA or Section 412 of the Code, there is no amount
of unfunded benefit liabilities as defined in Section 4001(a)(18) of ERISA,
there has occurred no failure to meet the minimum funding standards of
Section 412 of the Code, there is no "accumulated funding deficiency"
within the meaning of Section 412 of the Code, no such Existing Plan has
terminated or has filed a Notice of Intent to terminate, the Pension
Benefit Guaranty Corporation has not instituted proceedings to terminate
any such Existing Plan and there is no outstanding liability under Section
4062 of ERISA.
(c) Prohibited Transactions; Reportable Events. No prohibited transaction
within the meaning of Section 4975 of the Code or Section 406 of ERISA or
reportable event as described in Section 4043 of ERISA has occurred with
respect to any of the Existing Plans.
(d) Other Liabilities. None of the ESELCO Companies has any direct,
indirect, actual or contingent liability with respect to any of the
Existing Plans other than to make payments to the Existing Plans or benefit
payments from the Existing Plans in accordance with the terms thereof.
(e) Multiemployer Plans. None of the ESELCO Companies is contributing to,
nor has any of the ESELCO Companies contributed to since September 2, 1974,
any "multiemployer plan" as defined in Section 4001(a)(3) of ERISA.
(f) Claims. There are no pending, or to the Knowledge of ESELCO,
threatened claims with respect to any of the Existing Plans, other than
claims for benefits arising in the ordinary course of business.
4.15 No Violation of Law. Neither any of the ESELCO Companies nor any of the
assets of any of the ESELCO Companies violate or conflict with any Law, or any
decree, judgment or order, or any zoning, building line restriction, planning,
use or other similar restriction.
4.16 Brokers. Except for fees to Pacific Economics Group, none of the ESELCO
Companies has incurred any brokers', finders' or any similar fee in connection
with the transactions contemplated by this Agreement.
4.17 Taxes.
(a) Tax Returns. Each of the ESELCO Companies has timely and properly
filed all federal, state, local and foreign tax returns (including but not
limited to income, single business, utility, franchise, sales, payroll,
employee withholding and social security and unemployment) which were
required to be filed. Each of the ESELCO Companies has paid or made
adequate provision, in reserves reflected in its financial statements
included in the ESELCO SEC Reports in accordance with generally accepted
accounting principles, for the
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payment of all taxes (including interest and penalties) and withholding
amounts owed by it or assessable against it. No tax deficiencies have been
proposed or assessed against any of the ESELCO Companies and there is no
basis in fact for the assessment of any tax or penalty tax against any of
the ESELCO Companies. No issue has been raised in any prior tax audit
which, by application of the same or similar principles, could reasonably
be expected upon a future tax audit to result in a proposed deficiency for
any period.
(b) Audits. The income tax returns of the ESELCO Companies have been
closed by audit by the Internal Revenue Service or by operation of the
applicable statute of limitations for all fiscal years through and
including December 31, 1992; the single business tax returns of the ESELCO
Companies have been closed by audit by the State of Michigan or by
operation of the applicable statute of limitations for all fiscal years
through and including December 31, 1994; and the sales and use tax returns
of the ESELCO Companies have been closed by audit by the State of Michigan
for all periods through and including April 30, 1996. None of the ESELCO
Companies has consented to any extension of the statute of limitation with
respect to any open tax returns.
(c) Tax Liens. There are no tax Liens upon any property or assets of any
of the ESELCO Companies except for Liens for current taxes not yet due and
payable.
(d) Delivery of Tax Returns. As soon as practicable after the date of
this Agreement, ESELCO will deliver to Wisconsin Energy correct and
complete copies of all tax returns and reports of each of the ESELCO
Companies filed for all periods not barred by the applicable statute of
limitations. No examination or audit of any tax return or report for any
period not barred by the applicable statute of limitations has occurred, no
such examination is in progress and, to the Knowledge of ESELCO, no such
examination or audit is planned.
(e) Employment Taxes. Each of the ESELCO Companies has properly withheld
and timely paid all withholding and employment taxes which it was required
to withhold and pay relating to salaries, compensation and other amounts
heretofore paid to its employees or other Persons. All Forms W-2 and 1099
required to be filed with respect thereto have been timely and properly
filed.
(f) Tax Sharing Agreements. None of the ESELCO Companies is a party to
any agreement relating to allocating or sharing any taxes.
(g) Excess Parachute Payments. None of the ESELCO Companies is a party to
any Contract that could result, on account of the Merger, separately or in
the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code.
(h) Liabilities of Other Persons. None of the ESELCO Companies has any
liability for taxes of any kind of any Person other than the ESELCO
Companies under any Contract, under Treasury Regulations Section 1.1502-6
(or any similar provision of Law) as a transferee or successor or
otherwise.
4.18 Existing Real Estate. The Existing Real Estate: (a) constitutes all
significant real property and improvements leased or owned by any of the
ESELCO Companies; (b) is not subject to any leases or tenancies of any kind;
(c) is not in the possession of any adverse possessors; (d) has direct access
to and from a public road or street; (e) is used in a manner which is
consistent with applicable Law; (f) is, and has been since the date of
possession thereof by the relevant ESELCO Company, in the peaceful possession
of the relevant ESELCO Company; and (g) is served by all water, sewer,
electrical, telephone, drainage and other utilities required for the normal
operations of the Buildings and the Existing Real Estate.
4.19 Governmental Approvals. No permission, approval, determination, consent
or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required in connection with the
execution, delivery and performance of this Agreement by ESELCO and the
consummation of the Merger, except for: (a) the approvals described in Section
8.8 of this Agreement; and (b) the filing of the Certificate of Merger as
described in this Agreement.
4.20 No Pending Other Transactions. Except for this Agreement, none of the
ESELCO Companies is a party to or bound by any agreement, undertaking or
commitment with respect to an Other Transaction.
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4.21 Investments. Except for the Existing Investments, none of the ESELCO
Companies owns, or has any right or obligation to acquire, any Investment.
4.22 Labor Matters.
(a) Employee Matters. There is no present or former employee of any of
the ESELCO Companies who has any claim against the ESELCO Companies,
(whether under Law, under any employee agreement or otherwise) on account
of or for: (i) overtime pay, other than overtime pay for the current
payroll period; (ii) wages or salaries, other than wages or salaries for
the current payroll period; or (iii) vacations, sick leave, time off or pay
in lieu of vacation, sick leave or time off, other than vacation, sick
leave or time off (or pay in lieu thereof) earned in the twelve-month
period immediately preceding the date of this Agreement or incurred in the
ordinary course of business and appearing as a liability on the most recent
financial statements included in the ESELCO SEC Reports.
(b) Employee Claims. There are no pending and unresolved claims by any
Person against any of the ESELCO Companies arising out of any statute,
ordinance or regulation relating to discrimination to employees or employee
practices or occupational or safety and health standards. There is no
pending or, to the Knowledge of ESELCO, threatened, nor has any of the
ESELCO Companies ever experienced any, labor dispute, strike or work
stoppage which affects or may affect the business of the ESELCO Companies
or which may or would interfere with the continued operation of any of the
ESELCO Companies.
(c) NLRB Matters. There is not now pending or, to the Knowledge of
ESELCO, threatened, any charge or complaint against any of the ESELCO
Companies by or before the National Labor Relations Board or any
representative thereof, or any comparable state agency or authority. No
union organizing activities are in process or contemplated and no petitions
have been filed for union organization or representation of employees of
any of the ESELCO Companies not presently organized, and none of the ESELCO
Companies has committed any unfair labor practices which have not
heretofore been corrected and fully remedied.
4.23 Indebtedness. Except for the Existing Indebtedness, none of the ESELCO
Companies has any Indebtedness.
4.24 Subsidiaries. The only Subsidiaries of ESELCO are Edison Sault, ESEG
and NTS. Each of Edison Sault, ESEG and NTS has no Subsidiaries.
4.25 Existing Permits. The Existing Permits constitute all licenses,
permits, approvals, franchises, qualifications, certificates of convenience
and necessity, permissions, agreements, rate orders and governmental
authorizations which the ESELCO Companies currently have and need for the
conduct of the business of the ESELCO Companies as currently conducted.
4.26 Disclosure. No statement of fact by ESELCO contained in this Agreement,
the Disclosure Schedule or the Proxy Statement, or provided for inclusion in
the Registration Statement, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein contained, in the light of the
circumstances under which they were made, not misleading as of the date to
which it speaks.
4.27 Information Supplied. None of the information supplied or to be
supplied by ESELCO for inclusion or incorporation by reference in: (a) the
Registration Statement will, at the time the Registration Statement is filed
with the SEC and at the time it becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; and (b) the Proxy Statement will, at the date mailed to the
ESELCO Stockholders and at the time of the ESELCO Special Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
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4.28 Vote Required. The affirmative vote of the holders of a simple majority
of the outstanding shares of ESELCO Common Stock is the only vote of the
holders of any class or series of capital stock or other securities of ESELCO
necessary to approve the Merger, this Agreement and the transactions
contemplated by this Agreement.
4.29 Accounting Matters. Neither the ESELCO Companies nor any of the
Affiliates has taken or agreed to take or will take any action that would
prevent Wisconsin Energy from accounting for the business combination to be
effected by the Merger as a pooling-of-interests.
4.30 Opinion of Financial Advisor. ESELCO has received the opinion of
Pacific Economics Group, dated the date of this Agreement, to the effect that
the consideration to be received in the Merger by the ESELCO Stockholders is
fair to the ESELCO Stockholders from a financial point of view, and a copy of
such opinion has been delivered to Wisconsin Energy.
4.31 Environmental Protection.
(a) Definitions. As used in this Section 4.31 of this Agreement:
(i) "Environmental Claim" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters,
directives, claims, Liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any Person alleging
potential liability (including, without limitation, potential liability
for enforcement, investigatory costs, cleanup costs, governmental
response costs, removal costs, remedial costs, natural resources
damages, property damages, personal injuries, or penalties) arising out
of, based on or resulting from: (A) the presence, or release into the
environment, of any Environmental Hazardous Materials at any location,
whether or not owned by any of the ESELCO Companies; or (B)
circumstances forming the basis of any violation or alleged violation,
of any Environmental Law; or (C) any and all claims by any Person
seeking damages, contribution, indemnification, cost, recovery,
compensation or injunctive relief resulting from the presence or
Environmental Release of any Environmental Hazardous Materials.
(ii) "Environmental Hazardous Materials" shall mean: (A) any
petroleum or petroleum products, radioactive materials, asbestos in any
form that is or could become friable, urea formaldehyde foam
insulation, and transformers or other equipment that contain dielectric
fluid containing levels of polychlorinated biphenyls (PCBs) and radon
gas; and (B) any chemicals, materials or substances which are now
defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," "extremely hazardous
wastes," "restricted hazardous wastes," "toxic substances," "toxic
pollutants," or words of similar import, under any Environmental Law;
and (C) any other chemical, material, substance or waste, exposure to
which is now prohibited, limited or regulated by any governmental
authority.
(iii) "Environmental Laws" shall mean all federal, state, local or
foreign statute, Law, rule, ordinance, code, policy, rule of common law
and regulations relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface
water, ground water, land surface or subsurface strata), including,
without limitation, Laws and regulations relating to Environmental
Releases or threatened Environmental Releases of Environmental
Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Environmental Hazardous Materials.
(iv) "Environmental Release" shall mean any release, spill, emission,
leaking, injection, deposit, disposal, discharge, dispersal, leaching
or migration into the atmosphere, soil, surface water, groundwater or
property.
(b) Environmental Laws. Each of the ESELCO Companies: (i) is in
compliance with all applicable Environmental Laws; and (ii) has not
received any communication (written or oral), from a governmental
authority, that alleges that it is not in compliance with applicable
Environmental Laws.
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(c) Environmental Permits. Each of the ESELCO Companies has obtained all
environmental, health and safety permits and governmental authorizations
(collectively, the "Environmental Permits") necessary for its operations,
and all such permits are in good standing and it is in compliance with all
terms and conditions of the Environmental Permits.
(d) Environmental Claims. There is no Environmental Claim pending or, to
the Knowledge of ESELCO, threatened, against any of the ESELCO Companies or
against any Person whose liability for any Environmental Claim any of the
ESELCO Companies has or may have retained or assumed either contractually
or by operation of Law, or against any real or personal property or
operations which any of the ESELCO Companies owns, leases or manages.
(e) Environmental Hazardous Materials. There have been no Environmental
Releases of any Environmental Hazardous Material by any of the ESELCO
Companies or by any Person on real property owned, used, leased or operated
by any of the ESELCO Companies.
(f) Owned Properties. No real property at any time owned, operated, used
or controlled by any of the ESELCO Companies is currently listed on the
National Priorities List or the Comprehensive Environmental Response,
Compensation and Liability Information System, both promulgated under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), or on any comparable state list, and none of
the ESELCO Companies has received any written notice from any Person under
or relating to CERCLA or any comparable state or local Law.
(g) Off-Site Properties. To the Knowledge of ESELCO, no off-site location
at which any of the ESELCO Companies has disposed or arranged for the
disposal of any waste is listed on the National Priorities List or on any
comparable state list and none of the ESELCO Companies has received any
written notice from any Person with respect to any off-site location, of
potential or actual liability or a written request for information from any
Person under or relating to CERCLA or any comparable state or local Law.
(h) Costs. The Disclosure Schedule includes an estimate by ESELCO of
future costs to the ESELCO Companies of compliance with, and environmental
cleanup and response under, Environmental Laws.
4.32 Accounts. All Accounts have arisen from bona fide transactions by the
ESELCO Companies in the ordinary course of business and, to the extent not
previously collected, are fully collectible, subject to reserves as set forth
in the financial statements included in the ESELCO SEC Reports, and no
significant portion of the Accounts is or will be on the Closing Date subject
to any counterclaim or set off.
4.33 Customers. Since January 1, 1996 there has been no termination,
cancellation or material curtailment of the business relationship of any of
the ESELCO Companies with any customer or group of affiliated customers whose
purchases individually or in the aggregate constituted more than five percent
(5%) of the consolidated revenues of the ESELCO Companies for the fiscal year
ended December 31, 1995, nor, to the Knowledge of ESELCO, any notice of intent
to so materially curtail.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
WISCONSIN ENERGY AND ACQUISITION
Wisconsin Energy and Acquisition hereby represent and warrant to ESELCO
that:
5.1 Organization.
(a) Organization. Each of Wisconsin Energy and Acquisition is a
corporation duly and validly organized and existing under the Laws of the
State of its incorporation and is qualified to do business as a foreign
corporation and is in good standing in all jurisdictions where the
ownership or leasing of property or the conduct of its business requires
qualification as a foreign corporation.
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(b) Corporate Power and Authority. Each of Wisconsin Energy and
Acquisition has full corporate power and authority and all franchises,
permits, licenses, approvals, authorizations, registrations, certificates
of convenience and necessity, grants and orders necessary to carry on its
business as it is now conducted and to own, lease and operate its assets
and properties.
5.2 Capitalization.
(a) Capitalization. The entire authorized capital stock of Wisconsin
Energy consists of: (i) 325,000,000 shares of Common Stock, $.01 par value,
of which 112,465,540 shares were issued and outstanding on May 1, 1997; and
(ii) 15,000,000 shares of Preferred Stock, $.01 par value, none of which
are issued and outstanding.
(b) Authorization. All of the shares of Wisconsin Energy Common Stock to
be issued pursuant to this Agreement will be, when issued: (i) duly
authorized, validly issued and fully paid; and (ii) nonassessable, except
as provided in Section 180.0622(2)(b) of the Wisconsin Business Corporation
Law as judicially interpreted.
5.3 Authorization; Enforceability. The execution, delivery and performance
of this Agreement by Wisconsin Energy and Acquisition and all of the documents
and instruments required by this Agreement to be executed and delivered by
Wisconsin Energy and Acquisition: (a) are within the corporate power of
Wisconsin Energy and Acquisition; (b) have been duly authorized by all
necessary corporate action by Wisconsin Energy and Acquisition; and (c) do not
require any approval of the shareholders of Wisconsin Energy. This Agreement
is, and the other documents and instruments required by this Agreement to be
executed and delivered by Wisconsin Energy and Acquisition will be, when
executed and delivered by Wisconsin Energy and Acquisition, the valid and
binding obligations of Wisconsin Energy and Acquisition, enforceable against
Wisconsin Energy and Acquisition in accordance with their respective terms,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar Laws generally affecting the
rights of creditors and subject to general equity principles.
5.4 No Violation or Conflict. Subject to the receipt of the approvals and
consents described in Section 7.9 of this Agreement, the execution, delivery
and performance of this Agreement by Wisconsin Energy and Acquisition do not
and will not conflict with or violate any Law, the Restated Articles of
Incorporation or Bylaws of Wisconsin Energy, the Articles of Incorporation or
Bylaws of Acquisition or any material contract or agreement to which Wisconsin
Energy or Acquisition is a party or by which either of them is bound.
5.5 Litigation. To the knowledge of Wisconsin Energy, there are no actions,
suits or proceedings against Wisconsin Energy or Acquisition, or both, by any
Person which question the validity, legality or propriety of the transactions
contemplated by this Agreement.
5.6 Wisconsin Energy SEC Reports.
(a) Wisconsin Energy SEC Reports. The Wisconsin Energy SEC Reports: (i)
include all reports, definitive proxy statements and amendments thereto
filed or required to be filed by Wisconsin Energy with the SEC since
January 1, 1994; and (ii) did not or will not, as the case may be, contain
as of their respective dates any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(b) Financial Statements. The audited consolidated financial statements
and unaudited consolidated interim financial statements of Wisconsin Energy
included in the Wisconsin Energy SEC Reports have been or will be, as the
case may be, prepared in accordance with generally accepted accounting
principles applied on a consistent basis (except as may be indicated
therein or in the notes thereto and except with respect to unaudited
statements as permitted by Form 10-Q of the SEC) and fairly present the
consolidated financial position of Wisconsin Energy as of the dates thereof
and the consolidated results of its operations and changes in financial
position for the periods then ended, subject, in the case of the unaudited
consolidated
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interim financial statements, to normal year-end and audit adjustments and
any other adjustments described therein.
(c) Certain Agreement. Wisconsin Energy notified ESELCO of the
termination of the Amended and Restated Agreement and Plan of
Reorganization by and among Wisconsin Energy, Northern States Power
Company, Northern Power Wisconsin Corp. and WEC Sub Corp. dated as of April
28, 1995 as amended and restated as of July 26, 1995.
5.7 Brokers. Except for fees to Barr Devlin Associates, neither Wisconsin
Energy nor Acquisition has incurred any brokers', finders' or any similar fee
in connection with the transactions contemplated by this Agreement.
5.8 Governmental Approvals. No permission, approval, determination, consent
or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required in connection with the
execution, delivery and performance of this Agreement by Wisconsin Energy and
Acquisition and the consummation of the Merger, except for: (a) the approvals
described in Section 7.9 of this Agreement; and (b) the filing of the
Certificate of Merger as described in this Agreement.
5.9 Disclosure. No statement of fact by Wisconsin Energy or Acquisition
contained in this Agreement or in any documents delivered by Wisconsin Energy
or Acquisition to ESELCO for use in the Proxy Statement or the Registration
Statement contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein contained, in the light of the circumstances
under which they were made, not misleading as of the date to which it speaks.
5.10 Information Supplied. None of the information supplied or to be
supplied by Wisconsin Energy for inclusion or incorporation by reference in:
(a) the Registration Statement will, at the time the Registration Statement is
filed with the SEC and at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; and (b) the Proxy Statement will, at the
date mailed to the ESELCO Stockholders and at the time of the ESELCO Special
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder, and the Registration Statement, including the Proxy Statement
insofar as it constitutes the prospectus of Wisconsin Energy, will comply as
to form in all material respects with the provisions of the Securities Act and
the rules and regulations thereunder.
ARTICLE VI
CONDUCT OF BUSINESS BY THE ESELCO COMPANIES
PENDING THE MERGER
Except with the written consent of Wisconsin Energy, from and after the date
of this Agreement and until the Effective Time of Merger, ESELCO shall, and
shall cause each of Edison Sault, ESEG and NTS to:
6.1 Carry on in Regular Course. Diligently carry on its business in the
regular course and substantially in the same manner as heretofore and shall
not make or institute any unusual or novel methods of purchase, sale, lease,
management, accounting or operation.
6.2 Use of Assets. Use, operate, maintain and repair all of its assets and
properties in a normal business manner.
6.3 No Default. Not do any act or omit to do any act, or permit any act or
omission to act, which will cause a breach of any of the Contracts.
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6.4 Existing Insurance Policies. Use reasonable efforts to maintain all of
the Existing Insurance Policies in full force and effect.
6.5 Employment Matters. Not: (a) except as described in the Disclosure
Schedule, grant any increase in the rate of pay of any of its employees; (b)
institute or amend any Employee Benefit Plan; or (c) enter into or modify any
written employment arrangement with any Person.
6.6 Contracts and Commitments. Not enter into any contract or commitment or
engage in any transaction not in the usual and ordinary course of business and
consistent with its normal business practices and, except as described in the
Disclosure Schedule, not purchase, lease, sell or dispose of any capital
asset.
6.7 Indebtedness; Investments. Not: (a) make any Investment; or (b) create,
incur or assume any Indebtedness, except for Indebtedness incurred in the
ordinary course of business by the ESELCO Companies as described in the
Disclosure Schedule.
6.8 Preservation of Relationships. Use its reasonable best efforts to
preserve its business organization intact, to retain the services of its
present officers and key employees and to preserve the goodwill of suppliers,
customers, creditors and others having business relationships with it.
6.9 Compliance with Laws. Comply in all respects with all applicable Laws.
6.10 Taxes. Timely and properly file all federal, state, local and foreign
tax returns which are required to be filed, and shall pay or make provision
for the payment of all taxes owed by it.
6.11 Amendments. Not amend its Articles of Incorporation or Bylaws, except
that ESELCO may amend its Articles of Incorporation to increase the authorized
number of shares of ESELCO Common Stock from 3,000,000 shares to 9,840,000.
6.12 Dividends; Redemptions; Issuance of Stock. Not:
(a) except for ESELCO's 3% stock dividend payable to ESELCO Stockholders
on May 15, 1997, issue any additional shares of stock of any class
(including any shares of preferred stock) or grant any warrants, options or
rights to subscribe for or acquire any additional shares of stock of any
class;
(b) declare or pay any dividend or make any capital or surplus
distributions of any nature, except for: (i) cash dividends by Edison
Sault, ESEG or NTS to ESELCO; and (ii) regular quarterly cash dividends by
ESELCO on the outstanding ESELCO Common Stock with usual record and payment
dates not exceeding, during any fiscal year of ESELCO, 106% of the cash
dividends paid by ESELCO on the ESELCO Common Stock during the immediately
preceding fiscal year of ESELCO; or
(c) directly or indirectly redeem purchase or otherwise acquire,
recapitalize or reclassify any of its capital stock or liquidate in whole
or in part.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF
WISCONSIN ENERGY AND ACQUISITION
Each and every obligation of Wisconsin Energy and Acquisition to be
performed on the Closing Date and at the Effective Time of Merger shall be
subject to the satisfaction prior to or at the Closing and as of the Effective
Time of Merger of the following express conditions precedent:
7.1 Compliance with Agreement. ESELCO shall have performed and complied in
all material respects with all of its obligations under this Agreement which
are to be performed or complied with by it prior to or on the Closing Date and
as of the Effective Time of Merger.
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7.2 Proceedings and Instruments Satisfactory. All proceedings, corporate or
other, to be taken in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to Wisconsin Energy, and ESELCO shall have
made available to Wisconsin Energy for examination the originals or true and
correct copies of all documents Wisconsin Energy may reasonably request in
connection with the transactions contemplated by this Agreement.
7.3 No Litigation. No suit, action or other proceeding shall be pending or
threatened before any court in which the consummation of the transactions
contemplated by this Agreement is restrained or enjoined or in which the
relief requested is to restrain, enjoin or prohibit the consummation of the
transactions contemplated by this Agreement.
7.4 Representations and Warranties of ESELCO. The representations and
warranties made by ESELCO in this Agreement shall be true and correct in all
material respects when made, as of the Closing Date and as of the Effective
Time of Merger with the same force and effect as though said representations
and warranties had been made on the Closing Date, subject to Section 3.4(b) of
this Agreement with respect to the Closing Date and the Effective Time of
Merger.
7.5 No ESELCO Material Adverse Effect. During the period from the date of
this Agreement to the Closing Date and as of the Effective Time of Merger
there shall not have occurred, and there shall not exist on the Closing Date
and as of the Effective Time of Merger, any ESELCO Material Adverse Effect,
whether or not previously disclosed pursuant to Section 3.4(b) of this
Agreement.
7.6 Approval of ESELCO Stockholders; Certificate of Merger. This Agreement,
the Merger and the transactions contemplated by this Agreement shall have
received the requisite approval and authorization of the ESELCO Stockholders.
The Certificate of Merger and the Plan of Merger shall have been executed and
delivered by ESELCO.
7.7 Deliveries at Closing. ESELCO shall have delivered to Wisconsin Energy
the following documents, each properly executed and dated the Closing Date:
(a) the ESELCO Closing Certificate; and (b) the ESELCO Counsel Opinion.
7.8 Other Documents. ESELCO shall have delivered to Wisconsin Energy such
certificates and documents of officers of ESELCO and public officials as shall
be reasonably requested by Wisconsin Energy to establish the existence of the
ESELCO Companies and the due authorization of this Agreement and the
transactions contemplated by this Agreement by ESELCO.
7.9 Governmental Approvals.
(a) Regulatory Approvals. There shall have been secured such permissions,
approvals, determinations, consents and waivers from all appropriate state
and federal regulatory authorities, including FERC and SEC, as may be
required by Law or by such Persons: (i) in order for Wisconsin Energy and
Acquisition to consummate the Merger and the transactions described in this
Agreement; and (ii) so that Wisconsin Energy is either an exempt holding
company under PUHCA or a registered holding company under PUHCA.
(b) Registration Statement. The Registration Statement shall have been
declared effective under the Securities Act and shall not be the subject of
any stop order or proceedings to effect a stop order. The Wisconsin Energy
Common Stock issuable pursuant to the Merger shall have been registered or
shall be exempt from registration under applicable state "blue sky" or
securities Laws.
(c) HSR Act. All necessary requirements of the HSR Act shall have been
complied with and any "waiting periods" applicable to the Merger and to the
transactions described in this Agreement which are imposed by the HSR Act
shall have expired prior to the Closing Date or shall have been terminated
by the appropriate agency.
(d) Effect of Approvals. No permission, approval, determination, consent
or waiver received pursuant to Sections 7.9(a), 7.9(b) or 7.9(c) of this
Agreement shall contain any condition applicable to the ESELCO
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Companies, Wisconsin Energy or Acquisition, or any one or more of them,
which is, in the reasonable judgment of Wisconsin Energy, materially
adverse in any manner to the ESELCO Companies, Wisconsin Energy or
Acquisition.
7.10 Listing. Wisconsin Energy shall have received notice from the New York
Stock Exchange that the shares of Wisconsin Energy Common Stock to be issued
pursuant to this Agreement are approved for listing on the New York Stock
Exchange subject to official notice of issuance.
7.11 Tax Opinion. Wisconsin Energy shall have received an opinion of Quarles
& Brady, counsel to Wisconsin Energy, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and that Wisconsin Energy, Acquisition and
ESELCO will each be a party to that reorganization within the meaning of
Section 368(b) of the Code, dated on or about the date that is two business
days prior to the date the Proxy Statement is first mailed to ESELCO
Stockholders, and such opinion shall not have been withdrawn or modified in
any material respect as of the Closing Date and the Effective Time of Merger.
7.12 Accountant Letters. Wisconsin Energy shall have received a copy of each
of the following letters from Arthur Andersen LLP, each of which shall be in
form and substance reasonably satisfactory to Wisconsin Energy and shall
contain information concerning the financial condition of ESELCO: (a) the
letter described in Section 3.9 of this Agreement; (b) a similar letter dated
the date of the mailing of the Proxy Statement; and (c) a similar letter dated
the Closing Date.
7.13 Pooling Opinion. Wisconsin Energy shall have received an opinion from
Price Waterhouse LLP to the effect that the Merger qualifies for pooling-of-
interests accounting treatment if consummated in accordance with this
Agreement.
7.14 Affiliate Letters. Wisconsin Energy shall have received an Affiliate
Letter from each Person who is an Affiliate.
7.15 Fractional Shares. The aggregate of the fractional share interests in
Wisconsin Energy Common Stock to be paid in cash pursuant to Section 2.8(e) of
this Agreement shall not be more than 5% of the maximum aggregate number of
shares of Wisconsin Energy Common Stock which could be issued as a result of
the Merger.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF ESELCO
Each and every obligation of ESELCO to be performed on the Closing Date and
at the Effective Time of Merger shall be subject to the satisfaction prior to
or at the Closing and as of the Effective Time of Merger of the following
express conditions precedent:
8.1 Compliance with Agreement. Wisconsin Energy and Acquisition shall have
performed and complied in all material respects with all of their obligations
under this Agreement which are to be performed or complied with by them prior
to or on the Closing Date and as of the Effective Time of Merger.
8.2 Proceedings and Instruments Satisfactory. All proceedings, corporate or
other, to be taken in connection with the transactions contemplated by this
Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to ESELCO, and Wisconsin Energy and
Acquisition shall have made available to ESELCO for examination the originals
or true and correct copies of all documents which ESELCO may reasonably
request in connection with the transactions contemplated by this Agreement.
8.3 No Litigation. No suit, action or other proceeding shall be pending
before any court in which the consummation of the transactions contemplated by
this Agreement is restrained or enjoined.
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8.4 Representations and Warranties of Wisconsin Energy and Acquisition. The
representations and warranties made by Wisconsin Energy and Acquisition in
this Agreement shall be true and correct in all material respects when made,
as of the Closing Date and as of the Effective Time of Merger with the same
force and effect as though such representations and warranties had been made
on the Closing Date.
8.5 Approval of ESELCO Stockholders; Certificate of Merger. This Agreement,
the Merger and the other transactions contemplated by this Agreement shall
have received the requisite approval and authorization of the ESELCO
Stockholders. The Certificate of Merger and the Plan of Merger shall have been
executed and delivered by Acquisition.
8.6 Deliveries at Closing. Wisconsin Energy and Acquisition shall have
delivered to ESELCO the following documents, each properly executed and dated
the Closing Date: (a) the Wisconsin Energy Closing Certificate; and (b) the
Wisconsin Energy Counsel Opinion.
8.7 Other Documents. Wisconsin Energy shall have delivered to ESELCO such
certificates and documents of officers of Wisconsin Energy and Acquisition and
of public officials as shall be reasonably requested by ESELCO to establish
the existence of Wisconsin Energy and Acquisition and the due authorization of
this Agreement and the transactions contemplated by this Agreement by
Wisconsin Energy and Acquisition.
8.8 Governmental Approvals.
(a) Regulatory Approvals. There shall have been secured such permissions,
approvals, determinations, consents and waivers from all appropriate state
and federal regulatory authorities, including FERC and SEC, as may be
required by Law or by such Persons in order for ESELCO to consummate the
Merger and the transactions described in this Agreement.
(b) Registration Statement. The Registration Statement shall have been
declared effective under the Securities Act and shall not be the subject of
any stop order or proceedings to effect a stop order. The Wisconsin Energy
Common Stock issuable pursuant to the Merger shall have been registered or
shall be exempt from registration under applicable state "blue sky" or
securities Laws.
(c) HSR Act. All necessary requirements of the HSR Act shall have been
complied with and any "waiting periods" applicable to the Merger and to the
transactions described in this Agreement which are imposed by the HSR Act
shall have expired prior to the Closing Date or shall have been terminated
by the appropriate agency.
8.9 Tax Opinion. ESELCO shall have received an opinion of Quarles & Brady,
counsel to Wisconsin Energy, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that Wisconsin Energy, Acquisition and ESELCO will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code, dated on or about the date that is two business days prior to the
date the Proxy Statement is first mailed to ESELCO Stockholders, and such
opinion shall not have been withdrawn or modified in any material respect as
of the Closing Date and the Effective Time of Merger.
8.10 Accountant Letters. ESELCO shall have received a copy of each of the
following letters from Price Waterhouse LLP, each of which shall be in form
and substance reasonably satisfactory to ESELCO and shall contain information
concerning the financial condition of Wisconsin Energy: (a) the letter
described in Section 3.10 of this Agreement; (b) a similar letter dated the
date of the mailing of the Proxy Statement; and (c) a similar letter dated the
Closing Date.
8.11 No Material Adverse Change. During the period from the date of this
Agreement to the Closing Date there shall not have occurred any event,
condition or fact which is continuing on the Closing Date and which is
materially adverse to the financial condition of Wisconsin Energy and the
Subsidiaries of Wisconsin Energy, taken as a whole.
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8.12 Listing. Wisconsin Energy shall have received notice from the New York
Stock Exchange that the shares of Wisconsin Energy Common Stock to be issued
pursuant to this Agreement are approved for listing on the New York Stock
Exchange subject to official notice of issuance.
ARTICLE IX
TERMINATION; MISCELLANEOUS
9.1 Termination. This Agreement may be terminated and the transactions
contemplated by this Agreement may be abandoned at any time prior to the
Closing (whether before or after approval of this Agreement by the ESELCO
Stockholders), as follows:
(a) by mutual written agreement of Wisconsin Energy and ESELCO;
(b) by Wisconsin Energy if any of the conditions set forth in Article VII
of this Agreement shall not have been fulfilled by the Closing;
(c) by ESELCO if any of the conditions set forth in Article VIII of this
Agreement shall not have been fulfilled by the Closing;
(d) by Wisconsin Energy pursuant to Section 3.4(b) of this Agreement;
(e) by ESELCO pursuant to Section 3.8(d) of this Agreement; or
(f) by either Wisconsin Energy or ESELCO if the Closing has not occurred
on or before December 31, 1998 (the "Initial Termination Date"), provided
however that if on the Initial Termination Date the conditions to the
Closing set forth in Sections 7.9 and 8.8 of this Agreement shall not have
been fulfilled, then the Initial Termination Date shall be extended to June
30, 1999.
9.2 Rights on Termination; Waiver. If this Agreement is terminated pursuant
to Section 9.1 of this Agreement, all further obligations of the parties under
or pursuant to this Agreement shall terminate without further liability of any
party (including its directors, officers, employees, agents, legal, accounting
or financial advisors or other representatives) to the others, provided that:
(a) the obligations of Wisconsin Energy and Acquisition contained in Sections
3.3(b), 3.13, 9.2, 9.4, 9.5, 9.8, 9.12 and 9.13 of this Agreement shall
survive any such termination; (b) the obligations of ESELCO contained in
Sections 3.8(e) (except as described in Section 3.8(f) of this Agreement),
3.13, 9.2, 9.4, 9.5, 9.7, 9.8, 9.12 and 9.13 of this Agreement shall survive
any such termination; and (c) each party to this Agreement shall retain any
and all remedies which it may have for breach of contract provided by Law
based on another party's willful failure to comply with the terms of this
Agreement. If any of the conditions set forth in Article VII of this Agreement
have not been satisfied, Wisconsin Energy may nevertheless elect to proceed
with the consummation of the transactions contemplated by this Agreement and
if any of the conditions set forth in Article VIII of this Agreement have not
been satisfied, ESELCO may nevertheless elect to proceed with the consummation
of the transactions contemplated by this Agreement. Any such election to
proceed shall be evidenced by a certificate signed on behalf of the waiving
party by an officer of that party.
9.3 Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants of the parties contained in this
Agreement (other than the covenants contained in Sections 2.8, 2.9, 2.10, 9.3,
9.4, 9.5, 9.8 and 9.15 of this Agreement) or made pursuant to this Agreement
shall terminate and be of no further force and effect at the Effective Time of
Merger and none of the parties shall have any liability or obligation with
respect thereto.
9.4 Entire Agreement; Amendment. This Agreement and the documents referred
to in this Agreement and required to be delivered pursuant to this Agreement
constitute the entire agreement among the parties pertaining to the subject
matter of this Agreement, and supersede the Letter of Intent and all prior and
contemporaneous agreements, understandings, negotiations and discussions of
the parties, whether oral or written, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter of this
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Agreement, except as specifically set forth in this Agreement. This Agreement
may be amended by the parties at any time before or after approval of this
Agreement by the ESELCO Stockholders, except that after such approval, no
amendment shall be made without the further approval of the ESELCO
Stockholders if any such amendment: (a) changes the Exchange Ratio; or (b)
materially adversely affects the rights of the ESELCO Stockholders. No
amendment, supplement, modification, waiver or termination of this Agreement
shall be binding unless executed in writing by the party to be bound thereby.
No waiver of any of the provisions of this Agreement shall be deemed or shall
constitute a waiver of any other provision of this Agreement, whether or not
similar, nor shall such waiver constitute a continuing waiver unless otherwise
expressly provided.
9.5 Expenses. (a) All costs and expenses incurred in connection with this
Agreement and the transactions contemplated by this Agreement shall be paid by
the party incurring such expenses, except that: (i) Wisconsin Energy shall pay
the filing fee relating to the filing required by the HSR Act; and (ii) those
expenses incurred in connection with printing the Proxy Statement and
Registration Statement, as well as the filing fee relating thereto, shall be
shared equally by ESELCO, on the one hand, and Wisconsin Energy, on the other
hand.
(b) The Disclosure Schedule includes an estimate by ESELCO of all costs
and expenses incurred or to be incurred by ESELCO in connection with the
transactions contemplated by this Agreement except for those costs shared
by ESELCO pursuant to Section 9.5(a) of this Agreement.
9.6 Governing Law. This Agreement shall be construed and interpreted
according to the Laws of the State of Michigan.
9.7 Assignment. Prior to the Effective Time of Merger, this Agreement shall
not be assigned:
(a) by ESELCO except with the prior written consent of Wisconsin Energy;
and
(b) by Wisconsin Energy or Acquisition, except: (i) with the prior
written consent of ESELCO; or (ii) to a Subsidiary of Wisconsin Energy; or
(iii) in connection with a sale or transfer of all or substantially all of
the assets of Wisconsin Energy or a reorganization, merger, tender offer,
consolidation or similar transaction affecting all or substantially all of
the outstanding equity interests of Wisconsin Energy.
9.8 Notices. All communications or notices required or permitted by this
Agreement shall be in writing and shall be deemed to have been given at the
earlier of the date when actually delivered to an officer of a party by
personal delivery or telephonic facsimile transmission or when deposited in
the United States mail, certified or registered mail, postage prepaid, return
receipt requested, and addressed as follows, unless and until any of such
parties notifies the others in accordance with this Section of a change of
address:
If to Wisconsin Energy or Acquisition: Wisconsin Energy Corporation
Attention: Calvin H. Baker
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
Fax No: 414-221-5068
with a copy to:
Quarles & Brady
Attention: Patrick M. Ryan
411 East Wisconsin Avenue
Milwaukee, WI 53202
Fax No: 414-271-3552
If to ESELCO: ESELCO, Inc.
Attention: William R. Gregory
725 East Portage Avenue
Sault Ste. Marie, MI 49733
Fax No: 906-632-8444
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<PAGE>
with a copy to:
Kutak Rock
Attention: Joe E. Armstrong
The Omaha Building
1650 Farnam Street
Omaha, Nebraska 68102-2186
Fax No: 402-346-1148
9.9 Counterparts; Headings. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute but one and the same Agreement. The Table of
Contents and Article and Section headings in this Agreement are inserted for
convenience of reference only and shall not constitute a part hereof.
9.10 Interpretation. Unless the context requires otherwise, all words used
in this Agreement in the singular number shall extend to and include the
plural, all words in the plural number shall extend to and include the
singular, and all words in any gender shall extend to and include all genders.
The language used in this Agreement shall be deemed to be language chosen by
the parties to this Agreement to express their mutual intent. In the event an
ambiguity or question of intent or interpretation arises concerning the
language of this Agreement, this Agreement shall be construed as if drafted
jointly by the parties to this Agreement and no presumption or burden of proof
will arise favoring or disfavoring any party to this Agreement by virtue of
the authorship of any of the provisions of this Agreement.
9.11 Severability. If any provision, clause, or part of this Agreement, or
the application thereof under certain circumstances, is held invalid, the
remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected thereby unless such
invalidity materially impairs the ability of the parties to consummate the
transactions contemplated by this Agreement.
9.12 Specific Performance. The parties agree that the assets and business of
the ESELCO Companies as a going concern constitute unique property. There is
no adequate remedy at Law for the damage which any party might sustain for
failure of the other parties to consummate the Merger and the transactions
contemplated by this Agreement, and accordingly, each party shall be entitled,
at its option, to the remedy of specific performance to enforce the Merger
pursuant to this Agreement.
9.13 No Reliance. Except for the parties to this Agreement and any assignees
permitted by Section 9.7 of this Agreement: (a) no Person is entitled to rely
on any of the representations, warranties and agreements of the parties
contained in this Agreement; and (b) the parties assume no liability to any
Person because of any reliance on the representations, warranties and
agreements of the parties contained in this Agreement.
9.14 Exhibits and Disclosure Schedule. If a document or matter is disclosed
in any Exhibit to this Agreement or in the Disclosure Schedule, it shall be
deemed to be disclosed for all purposes of this Agreement without the
necessity of specific repetition or cross-reference. All capitalized terms
used in any Exhibit to this Agreement or in the Disclosure Schedule shall have
the definitions specified in this Agreement.
9.15 Further Assurances. If, at any time after the Effective Time of Merger,
any further action is necessary or desirable to carry out the purposes of this
Agreement and to vest the Surviving Corporation with full right, title and
possession to all assets, properties, rights, privileges, powers and
franchises of either Acquisition or ESELCO, the officers of the Surviving
Corporation are fully authorized to take any such action in the name of
Acquisition or ESELCO.
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IN WITNESS WHEREOF, the parties have caused this Amended and Restated
Agreement and Plan of Reorganization to be duly executed as of the day and year
first above written.
Wisconsin Energy Corporation
/s/ Richard A. Abdoo
By __________________________________
Richard A. Abdoo,
Chairman of the Board, President
and Chief Executive Officer
Attest:
/s/ Thomas H. Fehring
-------------------------------------
Thomas H. Fehring,
Assistant Secretary
ESELCO, Inc.
/s/ William R. Gregory
-------------------------------------
William R. Gregory, President and
Chief Executive Officer
Attest:
/s/ Donald C. Wilson
-------------------------------------
Donald C. Wilson, Secretary
ESL Acquisition, Inc.
/s/ Richard A. Abdoo
By __________________________________
Richard A. Abdoo,
Chairman of the Board, President
and Chief Executive Officer
Attest:
/s/ Thomas H. Fehring
-------------------------------------
Thomas H. Fehring,
Assistant Secretary
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<PAGE>
EXHIBIT 1
AFFILIATE LETTER
, 19
-------------------------
Name of Affiliate
Wisconsin Energy Corporation
231 W. Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
Ladies and Gentlemen:
I have been advised that as of the date of the meeting of stockholders of
ESELCO, Inc. ("ESELCO") to vote on the transaction described below, and as of
the date hereof, I may be deemed an "affiliate" (as that term is defined for
purposes of Rule 145(c) and (d) under the Securities Act of 1933, as amended
(the "Act")) of ESELCO. Pursuant to the terms of the Amended and Restated
Agreement and Plan of Reorganization dated as of May 13, 1997 as amended and
restated as of July 11, 1997 (the "Reorganization Agreement") among ESELCO,
Wisconsin Energy Corporation ("Wisconsin Energy") and ESL Acquisition, Inc.
("Acquisition") Acquisition will be merged with and into ESELCO in a
transaction (the "Merger") in which I will receive shares of $.01 par value
common stock of Wisconsin Energy (the "Shares") in exchange for shares of
common stock of ESELCO which I own at the "Effective Time of Merger" (as that
term is defined in the Reorganization Agreement).
In connection with the Merger, I represent and warrant to, and agree with,
Wisconsin Energy that:
1. I have carefully read this Affiliate Letter and discussed its
requirements and other applicable limitations upon the sale, transfer or
other disposition of the Shares, to the extent I felt necessary, with my
counsel or counsel for ESELCO.
2. I have carefully read the Reorganization Agreement relating to the
Merger and discussed its requirements and its impact upon my ability to
sell, transfer or otherwise dispose of the Shares, to the extent I felt
necessary, with my counsel or counsel for ESELCO.
3. I have been informed by Wisconsin Energy that the distribution by me
of the Shares has not been registered under the Act and that the Shares
must be held by me indefinitely unless (i) such distribution of the Shares
has been registered under the Act, (ii) a sale of the Shares is made in
conformity with the volume and other limitations of Rule 145 promulgated by
the Securities and Exchange Commission (the "Commission") under the Act
(and otherwise in accordance with Rule 144 under the Act if I am an
affiliate of Wisconsin Energy and if so required at the time), or (iii)
some other exemption from registration is available with respect to any
such proposed sale, transfer or other disposition of the Shares in the
opinion of counsel satisfactory to Wisconsin Energy. I agree that I will
not make any sale, transfer or other disposition of the Shares in violation
of the Act or the rules and regulations of the Commission thereunder.
4. I understand that Wisconsin Energy is under no obligation to register
the sale, transfer or other disposition of the Shares by me or on my behalf
or to take any other action necessary in order to make compliance with an
exemption from registration available, except for Wisconsin Energy's
customary procedures in connection with sales of its stock in conformity
with Rule 145. By accepting this Affiliate Letter, Wisconsin Energy agrees
to exert its best efforts to timely file with the Commission all of the
reports it is required to file under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
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<PAGE>
Wisconsin Energy Corporation
, 199
Page 2
5. I also understand Wisconsin Energy may decline to register any
transfer of the Shares inconsistent with this Affiliate Letter, that stop
transfer instructions will be given to Wisconsin Energy's transfer agent(s)
with respect to the Shares and that there will be placed on the
certificates for the Shares, or any substitutions therefor, a legend
stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended (the "Act"), applies and may be sold or otherwise
transferred only in compliance with the limitations of such Rule 145,
or upon receipt by Wisconsin Energy Corporation of an opinion of
counsel acceptable to it that some other exemption from registration
under the Act is available, or pursuant to a registration statement
under the Act. The shares represented by this certificate may not be
sold or otherwise transferred prior to the publication by Wisconsin
Energy Corporation of post-transaction combined financial results
covering at least 30 days of operations subsequent to [insert date of
Effective Time of Merger under the Reorganization Agreement]."
By accepting this Affiliate Letter, Wisconsin Energy agrees that upon my
request and delivery to the transfer agent(s) of such legended certificates
and after passage of the period referred to in the second sentence of such
legend, it will instruct the transfer agent(s) to deliver to me substitute
certificates of Wisconsin Energy common stock with a legend consisting solely
of the first sentence of the legend set forth above.
6. I have no present plan or intention to sell, exchange or otherwise
dispose of the Shares to be received by me in the Merger.
7. I have not, within the 30 days prior to the date hereof, sold,
transferred, or otherwise disposed of, or reduced my risk relative to, any
shares of ESELCO or Wisconsin Energy capital stock beneficially owned by me
and, notwithstanding the other provisions hereof, I will not sell,
transfer, or otherwise dispose of, or reduce my risk relative to, any
Shares received by me in the Merger or any other shares of Wisconsin Energy
capital stock which I may beneficially own until after such time as
financial results covering at least 30 days of post-Merger combined
operations of Wisconsin Energy and ESELCO have been published by Wisconsin
Energy, in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the
Commission on Form 10-K, 10-Q or 8-K, or other public filing or
announcement which includes the combined financial results of operations. I
understand that, until such time, Wisconsin Energy may refuse to register
such transfer and that stop transfer instructions will be given to
Wisconsin Energy's transfer agent(s) with respect to the Shares or such
other shares of Wisconsin Energy capital stock.
It is understood and agreed that this Affiliate Letter shall terminate and
be of no further force and effect and the legend set forth in paragraph 5
above shall be removed by delivery of substitute certificates without such
legend, and the related stock transfer restrictions shall be lifted forthwith,
if the period of time specified in paragraph 7 above has passed and:
(a) my Shares shall have been registered under the Act for sale, transfer
or other disposition by me or on my behalf; or
(b) I am not at the time (and, if clause (ii) below applies, I have not
been for at least the preceding three months) an affiliate of Wisconsin
Energy and have beneficially owned the Shares for at least (i) one (1) year
(or such other period as may be prescribed by the Act, and the rules
promulgated thereunder) and Wisconsin Energy has filed with the Commission
all of the reports it is required to file under the Exchange Act, during
the preceding twelve (12) months, or (ii) two (2) years (or such other
period as may be prescribed by the Act and the rules thereunder) if the
aforementioned condition as to filing reports with the Commission has not
been met; or
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Wisconsin Energy Corporation
, 199
Page 3
(c) Wisconsin Energy shall have received a letter from the staff of the
Commission, or an opinion of Quarles & Brady or other counsel acceptable to
Wisconsin Energy, to the effect that the stock transfer restrictions and
the legend are not required.
Very truly yours,
_____________________________________
Wisconsin Energy Corporation
By: _________________________________
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<PAGE>
EXHIBIT 4
PLAN OF MERGER
OF
ESL ACQUISITION, INC.
INTO
ESELCO, INC.
THIS PLAN OF MERGER (the "Plan of Merger") is made as of this day of
, 199 by and between ESL ACQUISITION, INC., a Michigan corporation
("Acquisition") and ESELCO, INC., a Michigan corporation ("ESELCO").
RECITALS
WHEREAS, ESELCO, Acquisition and Wisconsin Energy Corporation, a Wisconsin
corporation ("Wisconsin Energy"), are parties to an Amended and Restated
Agreement and Plan of Reorganization, dated as of May 13, 1997 as amended and
restated on July 11, 1997 (the "Reorganization Agreement"), providing for,
among other things, the merger of Acquisition with and into ESELCO (the
"Merger");
WHEREAS, the respective Boards of Directors of ESELCO and Acquisition have
determined that the Merger is advisable, fair and in the best interests of
ESELCO and Acquisition and their respective shareholders, and, by resolutions
duly adopted, have approved the Merger, the Reorganization Agreement,
including this Plan of Merger, and the transactions contemplated thereby;
WHEREAS, the shareholders of ESELCO and Acquisition, by resolutions duly
adopted, have approved the Merger, the Reorganization Agreement, including
this Plan of Merger, and the transactions contemplated thereby; and
WHEREAS, Acquisition is a wholly owned subsidiary of Wisconsin Energy and no
approval of the Merger by the shareholders of Wisconsin Energy is required by
law or otherwise.
NOW, THEREFORE, in consideration of the Recitals and of the mutual
agreements and covenants set forth in this Plan of Merger and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, ESELCO and Acquisition hereby agree as follows:
ARTICLE I
CORPORATE EXISTENCE OF THE SURVIVING CORPORATION
At the Effective Time of Merger, Acquisition shall be merged with and into
ESELCO which shall be the surviving corporation. The corporate identity,
existence, purposes, powers, franchises, privileges, assets, properties and
rights of ESELCO (hereinafter sometimes referred to as the "Surviving
Corporation") shall continue unaffected and unimpaired by the Merger and the
corporate identity, existence, purposes, powers, franchises, privileges,
assets, properties and rights of Acquisition shall be merged into the
Surviving Corporation and the Surviving Corporation shall be fully vested
therewith. The separate existence of Acquisition, except insofar as otherwise
specifically provided by law, shall cease at the Effective Time of Merger
whereupon Acquisition and the Surviving Corporation shall be and become one
single corporation.
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ARTICLE II
ARTICLES OF INCORPORATION OF SURVIVING CORPORATION
The Articles of Incorporation of ESELCO as in effect immediately prior to
the Effective Time of Merger shall be the Articles of Incorporation of the
Surviving Corporation until amended in accordance with law.
ARTICLE III
BYLAWS OF SURVIVING CORPORATION
The Bylaws of ESELCO as in effect immediately prior to the Effective Time of
Merger shall be the Bylaws of the Surviving Corporation until amended in
accordance with law.
ARTICLE IV
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
The duly qualified and acting directors and officers of Acquisition
immediately prior to the Effective Time of Merger shall be the directors and
officers of the Surviving Corporation, to hold office as provided in the
Bylaws of the Surviving Corporation.
ARTICLE V
CONVERSION OF ESELCO STOCK
(a) At the Effective Time of Merger, and without any action on the part of
the holders thereof:
(i) Each share of Common Stock of ESELCO outstanding at the Effective
Time of Merger shall be converted into shares of Common Stock of
Wisconsin Energy on the terms and conditions set forth in the
Reorganization Agreement.
(ii) Any shares of capital stock of ESELCO that are owned by ESELCO,
Edison Sault Electric Company, ESEG, Inc. or Northern Tree Service, Inc. at
the Effective Time of Merger shall be cancelled and retired and cease to
exist and no Common Stock of Wisconsin Energy or other consideration shall
be issued or delivered in exchange therefor.
(b) No fractional shares of Common Stock of Wisconsin Energy shall be issued
in the Merger. All fractional share interests of a holder of more than one
certificate representing shares of Common Stock of Acquisition at the
Effective Time of Merger shall be aggregated. If a fractional share interest
results after such aggregation, each holder of a fractional share interest
shall be paid an amount in cash equal to the product obtained by multiplying
such fractional share interest by $ .
(c) There are no shares of Preferred Stock of ESELCO issued and outstanding
and there will be no shares of Preferred Stock of ESELCO issued and
outstanding as of the Effective Time of Merger.
ARTICLE VI
CONVERSION OF ACQUISITION STOCK
At the Effective Time of Merger, and without any action on the part of the
holders thereof, each share of Common Stock of Acquisition outstanding at the
Effective Time of Merger shall be converted into one (1) share of Common Stock
of ESELCO on the terms and conditions set forth in the Reorganization
Agreement.
A-46
<PAGE>
ARTICLE VII
EFFECT OF THE MERGER
At the Effective Time of Merger, the effect of the Merger shall be as
provided in the Michigan Business Corporation Act.
ARTICLE VIII
EFFECTIVE TIME OF MERGER
The Effective Time of Merger shall be .
ARTICLE IX
CONDITIONS AND TERMINATION
The conditions specified in Articles VII and VIII of the Reorganization
Agreement shall constitute conditions precedent to the obligations of ESELCO
and Acquisition as therein provided and if by reason of the provisions of
Articles VII and VIII of the Reorganization Agreement, either ESELCO or
Acquisition is not obligated to consummate the Merger contemplated by this
Plan of Merger, then the party not obligated may terminate this Plan of Merger
prior to the Effective Time of Merger by delivery to the other party of
written notice of termination prior to the Effective Time of Merger, and
thereupon this Plan of Merger shall be terminated without further liability of
either party in favor of the other except as provided in the Reorganization
Agreement.
ARTICLE X
REORGANIZATION
The parties intend that this Plan of Merger be a plan of reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and that the Merger be a tax free reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended.
A-47
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have caused this Plan of
Merger to be executed on its behalf on the day and year first above written.
ESELCO, INC.
(Corporate Seal) By: _________________________________
Name: _______________________________
Title: ______________________________
Attest:
-------------------------------------
Name ________________________________
Title: ______________________________
ESL ACQUISITION, INC.
(Corporate Seal) By: _________________________________
Name: _______________________________
Title: ______________________________
Attest:
-------------------------------------
Name: _______________________________
Title: ______________________________
A-48
<PAGE>
APPENDIX B
PACIFIC ECONOMICS GROUP
Charles J. Cicchetti, Ph.D. 735 South Figueroa Street
Jeffrey A. Dubin, Ph.D. Citicorp Plaza, Suite 704
Colin M. Long, J.D. Los Angeles, CA 90017
R. Douglas Rivers, Ph.D. 213-486-0005
fax 213-486-5185
May 13, 1997
The Board of Directors
ESELCO, Inc.
725 East Portage Avenue
Sault Ste. Marie, MI 49783
Dear Members of the Board:
We understand that Wisconsin Energy Corporation (WEC), ESL Acquisition, Inc.,
a Michigan corporation and wholly-owned subsidiary of WEC, and ESELCO, Inc.
(ESELCO) have entered into an Agreement and Plan of Reorganization dated as of
May 13, 1997 (the "Reorganization Agreement") whereby ESL Acquisition, Inc.
will be merged (the "Merger") with and into ESELCO, which shall be the
surviving corporation in the Merger. Each outstanding share of ESELCO common
stock will be converted into shares of Wisconsin Energy Corporation common
stock as determined by an Exchange Ratio obtained by dividing $44.50 by the
average Wisconsin Energy price. The average Wisconsin Energy price means the
average of the closing sale price per share of Wisconsin Energy common stock as
reported on the New York Stock Exchange-Composite Transactions on each of the
ten (10) consecutive trading days ending with the trading day immediately
preceding the Closing Date.
You have requested our opinion as to the fairness, from a financial point of
view, to holders of ESELCO common stock of the Exchange Ratio. In connection
with our opinion, we have:
(i) Reviewed WEC's and ESELCO's Annual Reports, Forms 10-K and related
financial information for the two years ending December 31, 1996; and Forms
10-Q and related unaudited financial information for the quarterly periods
ended September 30, 1996;
(ii) Reviewed certain other filings made with the SEC by WEC and ESELCO,
including proxy statements, Forms 8-K and registration statements;
(iii) Reviewed certain information, including earnings, dividends, assets
and prospects of WEC and ESELCO, furnished to us by WEC and ESELCO,
respectively;
(iv) Reviewed various forecasted financial information, income
statements, and cash flow statements provided by ESELCO;
(v) Conducted discussions with senior management of WEC and ESELCO
concerning their respective businesses, regulatory environments, prospects
and strategic objectives and possible operating and administrative
synergies which might be realized subsequent to the merger;
(vi) Reviewed the historical market prices and trading activity for WEC
and ESELCO common stock;
(vii) Compared the results from operations of WEC and ESELCO with other
companies determined by us to be comparable;
B-1
<PAGE>
(viii) Compared the proposed financial terms of the Merger distribution
and the Reorganization Agreement with the terms offered in certain other
relevant mergers and acquisitions;
(ix) Compared the relative value of WEC and ESELCO stock using various
relevant valuation methodologies;
(x) Considered the pro forma effect of the Merger in terms of net income
available to stock holders, dividends per common share, book value per
common share and capitalization;
(xi) Reviewed the Reorganization Agreement;
(xii) Reviewed other relevant financial and econometric analyses and
considered all other matters we considered relevant and necessary for
preparing our opinion.
In rendering our opinion, we have relied upon the accuracy and completeness
of the information listed above. We have not assumed any responsibility for
independently verifying this information or independently valuing or
appraising any of the assets or liabilities of ESELCO or WEC. We have assumed
that the financial forecasts provided to us have been reasonably prepared in
accordance with accepted industry standards and reflect the best currently
available estimates and judgments of ESELCO's management as to its future
expected financial performance. We assume no responsibility for and express no
view as to these forecasts or the assumptions upon which they are based.
Our opinion is necessarily based on numerous macroeconomic, monetary, market
and other conditions in effect on the date hereof. Further our opinion is
necessarily based on the information made available to us in effect on the
date hereof.
In rendering our opinion, we have assumed that the Merger will be
consummated under the terms described in the Reorganization Agreement without
any waiver of any material term or condition by ESELCO. We further assume that
obtaining any required regulatory approvals will not have a material adverse
effect on ESELCO or WEC.
Pacific Economics Group, LLC is acting as financial advisor to ESELCO in
connection with the Merger and will receive a fee for our services, none of
which is contingent upon the closing of the Merger. PEG is not affiliated with
ESELCO or WEC. PEG has previously provided consulting and expert testimony to
both ESELCO and WEC for which it received customary compensation. PEG's
previous work for WEC is unrelated to this merger. PEG has not received any
compensation or consideration from WEC with respect to this merger or for any
on-going or future assignments. Additionally, ESELCO has agreed to indemnify
us for certain liabilities that may arise out of our rendering this opinion.
Our engagement and the opinion we express herein are for the benefit of
ESELCO's Board of Directors and our opinion is rendered to ESELCO's Board in
connection with its consideration of this Merger. This opinion is not intended
to and does not constitute a recommendation to any ESELCO common stock holder
as to whether such stockholder should vote for the Merger. This letter may not
be disclosed or otherwise referred to without our prior consent, except for
publication in connection with the Proxy Statement/Prospectus which will be
distributed to holders of ESELCO common stock in connection with the approval
of the Merger and except as may otherwise be required by law or by a court of
competent jurisdiction.
Based on and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Exchange Ratio is fair to the holders of ESELCO common stock
from a financial point of view.
Very truly yours,
Pacific Economics Group
By /s/ Charles J. Cicchetti
------------------------------------
Charles J. Cicchetti
Co-Founding Member
B-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Wisconsin Energy is incorporated under the Wisconsin Business Corporation
Law (the "WBCL").
Under Section 180.0851(1) of the WBCL, Wisconsin Energy is required to
indemnify a director or officer, to the extent such person is successful on
the merits or otherwise in the defense of a proceeding, for all reasonable
expenses incurred in the proceeding if such person was a party because he or
she was a director or officer of Wisconsin Energy. In all other cases,
Wisconsin Energy is required by Section 180.0851(2) to indemnify a director or
officer against liability incurred in a proceeding to which such person was a
party because he or she was a director or officer of Wisconsin Energy, unless
it is determined that he or she breached or failed to perform a duty owed to
Wisconsin Energy and the breach or failure to perform constitutes: (i) a
willful failure to deal fairly with Wisconsin Energy or its shareholders in
connection with a matter in which the director or officer has a material
conflict of interest; (ii) a violation of criminal law, unless the director or
officer had reasonable cause to believe his or her conduct was lawful or no
reasonable cause to believe his or her conduct was unlawful; (iii) a
transaction from which the director or officer derived an improper personal
profit; or (iv) willful misconduct. Section 180.0858(1) provides that, subject
to certain limitations, the mandatory indemnification provisions do not
preclude any additional right to indemnification or allowance of expenses that
a director or officer may have under Wisconsin Energy's Restated Articles of
Incorporation, Bylaws, any written agreement or a resolution of the Board of
Directors or shareholders.
Section 180.0859 of the WBCL provides that it is the public policy of the
State of Wisconsin to require or permit indemnification, allowance of expenses
and insurance to the extent required or permitted under Sections 180.0850 to
180.0858 of the WBCL, for any liability incurred in connection with a
proceeding involving a federal or state statute, rule or regulation regulating
the offer, sale or purchase of securities.
Section 180.0828 of the WBCL provides that, with certain exceptions, a
director is not liable to a corporation, its shareholders, or any person
asserting rights on behalf of the corporation or its shareholders, for
damages, settlements, fees, fines, penalties or other monetary liabilities
arising from a breach of, or failure to perform, any duty resulting solely
from his or her status as a director, unless the person asserting liability
proves that the breach or failure to perform constitutes any of the four
exceptions to mandatory indemnification under Section 180.0851(1) referred to
above.
Under Section 180.0833 of the WBCL, directors of Wisconsin Energy against
whom claims are asserted with respect to the declaration of improper dividends
or distributions to shareholders or certain other improper acts which they
approved are entitled to contribution from other directors who approved such
actions and from shareholders who knowingly accepted an improper dividend or
distribution, as provided therein.
Articles V and VI of Wisconsin Energy's Bylaws provides that Wisconsin
Energy will indemnify to the fullest extent permitted by law any person who is
or was a party or threatened to be made a party to any legal proceeding by
reason of the fact that such person is or was a director or officer of
Wisconsin Energy, or is or was serving at the request of Wisconsin Energy as a
director or officer of another enterprise, against expenses (including
attorney fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such legal proceeding.
Wisconsin Energy's Restated Articles of Incorporation and Bylaws do not limit
the indemnification to which directors and officers are entitled under the
WBCL.
Officers and directors of Wisconsin Energy are covered by insurance policies
purchased by Wisconsin Energy under which they are insured (subject to
exceptions and limitations specified in the policies) against expenses and
liabilities arising out of actions, suits or proceedings to which they are
parties by reason of being or having been such directors or officers.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed with or incorporated by reference in this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S> <C>
(2) - (1) Amended and Restated Agreement and Plan of Reorganization,
dated as of May 13, 1997, as amended and restated as of July
11, 1997, by and among Wisconsin Energy Corporation ("Wiscon-
sin Energy"), ESL Acquisition, Inc. ("Acquisition") and
ESELCO, Inc. ("ESELCO"), including the related Plan of Merger
between Acquisition and ESELCO. (Incorporated herein by ref-
erence to Appendix A to the Proxy Statement/Prospectus con-
tained in this Registration Statement.)
(2) - (2)* Letter Agreement, dated January 16, 1997, between Wisconsin
Energy and ESELCO.
(3) - (1) Restated Articles of Incorporation of Wisconsin Energy, as
amended and restated effective June 12, 1995. (Exhibit (3)-1
to Wisconsin Energy's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, File No. 1-9057.)
(3) - (2) Bylaws of Wisconsin Energy, as amended and restated July 26,
1995. (Exhibit (3)-2 to Form S-4, No. 33-61619.)
(4) - (1) Reference is made to the Restated Articles of Incorporation
of Wisconsin Energy. (Exhibit (3)-(1) above.)
(4) - (2) Reference is made to the Bylaws of Wisconsin Energy. (Exhibit
(3)-(2) above.)
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE OR
SUPPLEMENTAL
INDENTURE COMPANY DATE EXHIBIT # UNDER FILE NO.
------------- ------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
(4) - (3) Mortgage and Wisconsin Electric 10/28/38 B-1 2-4340
Deed of Trust Power Company ("WE")
(4) Second WE 6/1/46 7-C 2-6422
(5) Third WE 3/1/49 7-C 2-8456
(6) Fourth WE 6/1/50 7-D 2-8456
(7) Fifth WE 5/1/52 4-G 2-9588
(8) Sixth WE 5/1/54 4-H 2-10846
(9) Seventh WE 4/15/56 4-I 2-12400
(10) Eighth WE 4/1/58 2-I 2-13937
(11) Ninth WE 11/15/60 2-J 2-17087
(12) Tenth WE 11/1/66 2-K 2-25593
(13) Eleventh WE 11/15/67 2-L 2-27504
(14) Twelfth WE 5/15/68 2-M 2-28799
(15) Thirteenth WE 5/15/69 2-N 2-32629
(16) Fourteenth WE 11/1/69 2-O 2-34942
(17) Fifteenth WE 7/15/76 2-P 2-54211
(18) Sixteenth WE 1/1/78 2-Q 2-61220
(19) Seventeenth WE 5/1/78 2-R 2-61220
(20) Eighteenth WE 5/15/78 2-S 2-61220
(21) Nineteenth WE 8/1/79 (a)2(a) 1-1245 (9/30/79
WE Form 10-Q)
(22) Twentieth WE 11/15/79 (a)2(a) 1-1245 (12/31/79
WE Form 10-K)
(23) Twenty-First WE 4/15/80 (4)-21 2-69488
(24) Twenty-Second WE 12/1/80 (4)-1 1-1245 (12/31/80
WE Form 10-K)
(25) Twenty-Third WE 9/15/85 (4)-1 1-1245 (9/30/85
WE Form 10-Q)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE OR
SUPPLEMENTAL INDENTURE COMPANY DATE EXHIBIT # UNDER FILE NO.
------------------------- ------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
(26) Twenty-Fourth WE 9/15/85 (4)-1 1-1245 (9/30/85
WE Form 10-Q)
(27) Twenty-Fifth WE 12/15/86 (4)-25 1-1245 (12/31/86
WE Form 10-K)
(28) Twenty-Sixth WE 1/15/88 4 1-1245 (1/26/88
WE Form 8-K)
(29) Twenty-Seventh WE 4/15/88 4 1-1245 (3/31/88
WE Form 10-Q)
(30) Twenty-Eighth WE 9/1/89 4 1-1245 (9/30/89
WE Form 10-Q)
(31) Twenty-Ninth WE 10/1/91 4-1 1-1245 (12/31/91
WE Form 10-K)
(32) Thirtieth WE 12/1/91 4-2 1-1245 (12/31/91
WE Form 10-K)
(33) Thirty-First WE 8/1/92 4-1 1-1245 (6/30/92
WE Form 10-Q)
(34) Thirty-Second WE 8/1/92 4-2 1-1245 (6/30/92
WE Form 10-Q)
(35) Thirty-Third WE 10/1/92 4-1 1-1245 (9/30/92
WE Form 10-Q)
(36) Thirty-Fourth WE 11/1/92 4-2 1-1245 (9/30/92
WE Form 10-Q)
(37) Thirty-Fifth WE 12/15/92 4-1 1-1245 (12/31/92
WE Form 10-K)
(38) Thirty-Sixth WE 1/15/93 4-2 1-1245 (12/31/92
WE Form 10-K)
(39) Thirty-Seventh WE 3/15/93 4-3 1-1245 (12/31/92
WE Form 10-K)
(40) Thirty-Eighth WE 8/1/93 (4)-1 1-1245 (6/30/93
WE Form 10-Q)
(41) Thirty-Ninth WE 9/15/93 (4)-1 1-1245 (9/30/93
WE Form 10-Q)
(42) Fortieth WE 1/1/96 (4)-1 1-1245 (1/1/96
WE Form 8-K)
(43) Indenture for WE 12/1/95 (4)-1 1-1245 (12/31/95
Debt Securities WE Form 10-K)
(the "Indenture")
(44) Securities Resolution WE 12/5/95 (4)-2 1-1245 (12/31/95
No. 1 under the Indenture WE Form 10-K)
(45) Securities Resolution WE 11/12/96 4.44 1-1245 (12/31/96
No. 2 under the Indenture WE Form 10-K)
</TABLE>
All agreements and instruments with respect to long-term debt not exceeding
10 percent of the total assets of the Registrant and its subsidiaries on a
consolidated basis have been omitted as permitted by related instructions. The
Registrant agrees pursuant to Item 601(b)(4) of Regulation S-K to furnish to
the Securities and Exchange Commission, upon request, a copy of all such
agreements and instruments.
<TABLE>
<C> <S> <C>
(5) - (1)* Opinion of Quarles & Brady as to the legality of the secu-
rities being registered.
(8) - (1)* Opinion of Quarles & Brady as to the tax consequences of
the transaction.
(23) - (1)* Consent of Price Waterhouse LLP, Wisconsin Energy's inde-
pendent accountants (and related report).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
(23) - (2)* Consent of Arthur Andersen LLP, ESELCO's independent public
accountants.
(23) - (3)* Consent of Quarles & Brady, contained in their opinion
filed as Exhibit (5) - (1).
(23) - (4)* Consent of Quarles & Brady, contained in their opinion
filed as Exhibit (8) - (1).
(23) - (5)* Consent of Pacific Economics Group, financial advisor to
ESELCO.
(24) - (1)* Power of Attorney, contained in the signature page of the
Registration Statement.
(99) - (1)* Form of proxy to be used in connection with the Special
Meeting of Shareholders of ESELCO.
</TABLE>
- --------
*Filed herewith.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referred
to in Item 20 of this registration statement, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, State of
Wisconsin, on August 27, 1997.
WISCONSIN ENERGY CORPORATION
By /s/ R. A. Abdoo
-----------------------------------
R. A. Abdoo, Chairman of the
Board,
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes R. A. Abdoo or
C. H. Baker, or either of them, as attorneys-in-fact with full power of
substitution, to execute in the name and on behalf of such person,
individually, and in each capacity stated below or otherwise, and to file, any
and all pre-effective or post-effective amendments to this registration
statement.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.*
SIGNATURE AND TITLE
/s/ R. A. Abdoo
- -------------------------------------
R. A. Abdoo, Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer
and Director)
/s/ C. H. Baker
- -------------------------------------
C. H. Baker, Treasurer and Chief
Financial Officer (Principal
Financial Officer)
/s/ A. K. Klisurich
- -------------------------------------
A. K. Klisurich, Controller
(Principal Accounting Officer)
/s/ J. F. Ahearne /s/ R. R. Grigg
- ------------------------------------- -------------------------------------
J. F. Ahearne, Director
R. R. Grigg, Director
/s/ J. F. Bergstrom /s/ G. B. Johnson
- ------------------------------------- -------------------------------------
J. F. Bergstrom, Director
G. B. Johnson, Director
/s/ R. A. Cornog /s/ F. P. Stratton, Jr.
- ------------------------------------- -------------------------------------
R. A. Cornog, Director
F. P. Stratton, Jr., Director
- --------
* Each of the above signatures is affixed as of August 27, 1997.
II-5
<PAGE>
EXHIBIT (2)-(2)
ESELCO
725 East Portage Avenue/Sault Ste. Marie, MI 49783
Telephone 906/632-2221
January 16, 1997
Mr. David K. Porter
Senior Vice President
Wisconsin Energy Corporation
231 West Michigan
P.O. Box 2949
Milwaukee, WI 53201
Dear Mr. Porter:
In connection with your consideration of a possible transaction with
ESELCO, Inc. you have requested information concerning ESELCO, Inc. and its
subsidiaries ("ESELCO"). In consideration for and as a condition to your being
furnished such information, you agree to treat the information concerning ESELCO
(whether prepared by ESELCO, its advisors or otherwise) which is furnished to
you by or on behalf of ESELCO for purposes of evaluating the possible
transaction contemplated by this letter agreement (herein collectively referred
to as the "Evaluation Material") in accordance with the provisions of this
letter agreement and to take or abstain from taking certain other actions herein
set forth. The term "Evaluation Material" does not include information which
(i)is already in your possession, provided that such information is not subject
to another confidentiality agreement with an obligation of secrecy to ESELCO, or
another party, (ii)is or becomes generally available to the public other than as
a result of a disclosure by you or your directors, officers, employees, agents
or advisors or (iii)becomes available to you on a non-confidential basis from a
source other than ESELCO, or its advisors, provided that you have no knowledge
that such source is not bound by a confidentiality agreement with or other
obligation of secrecy to ESELCO or another party.
You hereby agree that the Evaluation Material will be used solely for the
purpose of evaluating a possible transaction between ESELCO and you, and that
(subject to the next paragraph of this letter) such information will be kept
confidential by you and your advisors; provided however, that (i)any of such
information may be disclosed to your directors, officers, employees, attorney,
financing sources and representatives of your advisors who need to know such
information for the purpose of evaluating any such possible transaction between
ESELCO and you (it being understood that such directors, officers, employees,
attorneys, financing sources and representatives shall be informed by you of the
confidential nature of such information and shall be directed by you to treat
such information confidentially) and (ii)any disclosure of such information may
be made to which ESELCO consents in writing.
In addition, without the prior written consent of the other party, you and
ESELCO will not, and will direct such directors, officers, employees, attorneys,
financing sources and representatives not to disclose to any person either the
fact that discussions or negotiations are taking place concerning a possible
transaction between ESELCO and you or any of the terms, conditions or other
facts with respect to any such possible transaction, including the status
thereof. The foregoing does not prohibit disclosure of the status of any
discussions between you and us which either believes, based upon advice of
counsel, to be required by law to disclosed, but, in such
<PAGE>
event, each of us will consult with the other and its counsel in advance of such
disclosure about the need for, and the exact text of, any such disclosure.
Further, for period of one (1) year following the date of confirmation by you,
as indicated on the signature page of this letter agreement, you will not, as a
result of knowledge obtained from the Evaluation Material or otherwise in
connection with a possible transaction, and will direct such directors,
officers, employees, attorneys, financing sources and representatives not to
recruit employees of ESELCO for employment, induce agents or employees of ESELCO
to terminate their employment with ESELCO.
In further consideration of being furnished the Evaluation Material and in
view of the fact that the Evaluation Material consists of confidential and non-
public information, you covenant and agree that, during a period of three (3)
years from the date hereof, without the prior written consent of ESELCO, you
will not, and will cause each of your affiliates not to, singly or as part of a
"partnership, limited partnership, syndicate or other group" (as those terms are
used within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended, which meanings shall apply for all purposes of this letter
agreement), directly or indirectly, through one or more intermediaries or
otherwise:
(i) acquire, offer or propose to acquire, or agree to acquire, by
purchase or otherwise, any assets, securities or interests or any direct or
indirect rights or options to acquire (through purchase, exchange,
conversion of otherwise) any interests in ESELCO;
(ii) participate in or encourage the formation of any group which
owns or seeks to offer to acquire beneficial ownership of interests or
securities in ESELCO or rights to acquire such interests or securities in
ESELCO or which seeks or offers to affect control of ESELCO or for the
purpose of circumventing any provisions of this letter agreement; or
(iii) otherwise act, along or in concert with others (including by
providing financing for another party), to seek to offer to control or
influence, in any manner, the management of ESELCO.
Although ESELCO has endeavored to include in the Evaluation Material
information known to it which it believes to be relevant for the purpose of your
investigation, you understand that, except as may be set forth in subsequent
written agreements, neither ESELCO nor any of its representatives or advisors
have made or make any representations or warranties as to the accuracy or
completeness of the Evaluation Material. You agree that, except as may be set
forth in subsequent written agreements, neither ESELCO nor its representatives
or advisors shall have any liability to you or any of your representatives or
advisors resulting from the use of the Evaluation Material.
In the event that you do not proceed with the transaction which is the
subject of this letter agreement within a reasonable time, you shall promptly
either redeliver to ESELCO all written Evaluation Material and any other written
material containing or reflecting any information in the Evaluation Material
(whether prepared by ESELCO, its advisors or otherwise) and will not retain any
copies, extracts or other reproductions in whole or in part of such written
material or destroy such material and certify such destruction to ESELCO. All
documents, memoranda, notes and other writings whatsoever prepared by you or
your advisors based on the information in the Evaluation Material shall be
destroyed.
In the event that you are requested or required (by interrogatory, request
for information or documents, subpoena, deposition, civil investigative demand
or other process) to disclose any Evaluation Material, it is agreed that you
will provide ESELCO with prompt notice of any such request or requirement so
that ESELCO may seek an appropriate protective order or waive compliance with
the provisions of this letter agreement. If, failing the entry of a protective
order or the receipt of a waiver hereunder, you are, in the opinion or your
counsel, compelled to disclose Evaluation Material, you may disclose only that
portion of the Evaluation Material which your counsel advises you that you are
compelled to disclose. In any event, you will not oppose
2
<PAGE>
action by ESELCO to obtain an appropriate protective order or other reliable
assurance that confidential treatment will be accorded the Evaluation Material.
Nothing in this letter agreement shall obligate either you or ESELCO to
proceed with any transaction and either you or ESELCO may terminate discussions
or negotiations for any reason without obligation to the other, except as
specified in this letter agreement.
Because an award of money damages would be inadequate for any breach of
this letter agreement by you or your directors, officers, employees, attorney,
financing sources or other representatives and any such breach would cause
ESELCO irreparable harm, you also agree that, in the event of any breach or
threatened breach of this letter agreement, ESELCO will also be entitled,
without the requirement of posting a bond or other security, to equitable
relief, including injunctive relief and specific performance. Such remedies will
not be the exclusive remedies for any breach of this letter agreement but will
be in addition to all other remedies available at law or equity to ESELCO.
The invalidity or unenforceability of any provision of this letter
agreement will not affect the validity or enforceability of any other provisions
of this letter agreement, which will remain in full force and effect. If any of
the covenants or provisions of this letter agreement are determined by a court
of competent jurisdiction to be unenforceable by reason of its extent, duration,
scope or otherwise, then you and ESELCO contemplate that the court making such
determination will reduce the extent, duration, scope or other provisions and
enforce them in their reduced form for all purposes contemplated by this letter
agreement.
Very truly yours,
ESELCO, INC.
By: /s/ William R. Gregory
----------------------
Title: President
-------------------
Date: January 16, 1997
--------------------------
Confirmed and Agreed to:
Wisconsin Energy Corporation
By: /s/ David K. Porter
------------------------
Title: Senior Vice President
---------------------
Dated: January 16, 1997
--------------------
3
<PAGE>
EXHIBIT (5)-(1)
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-4497
August 27, 1997
Wisconsin Energy Corporation
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
Ladies and Gentlemen:
We are providing this opinion in connection with the Registration Statement
of Wisconsin Energy Corporation ("Wisconsin Energy") on Form S-4 (the
"Registration Statement") filed under the Securities Act of 1933, as amended
(the "Act"), with respect to the proposed issuance of up to 3,250,000 shares of
Wisconsin Energy Common Stock, $.01 par value (the "Shares"), to the
stockholders of ESELCO, Inc. ("ESELCO") in the statutory merger of ESL
Acquisition, Inc. ("Acquisition"), a wholly-owned subsidiary of Wisconsin
Energy, with and into ESELCO (the "Merger"), pursuant to the Amended and
Restated Agreement and Plan of Reorganization, dated as of May13, 1997, as
amended and restated as of July 11, 1997, by and among Wisconsin Energy, ESELCO
and Acquisition, including the related Plan of Merger between Acquisition and
ESELCO (together, the "Reorganization Agreement").
We have examined: (i) Wisconsin Energy's Restated Articles of Incorporation
and Bylaws, as amended to date; (ii) the Reorganization Agreement, which is
attached as an appendix to the Proxy Statement/Prospectus contained in the
Registration Statement; (iii) the Registration Statement; (iv) corporate
proceedings of Wisconsin Energy and Acquisition relating to the Reorganization
Agreement and the transactions contemplated thereby; and (v) such other
documents as we have deemed necessary in order to render this opinion. Based on
the foregoing, it is our opinion that:
1. Wisconsin Energy is a corporation duly incorporated and validly
existing under the laws of the State of Wisconsin.
2. When (a) the Registration Statement shall have become effective under
the Act, (b) the Reorganization Agreement shall have been duly
approved by the shareholders of ESELCO as contemplated therein and in
the Registration Statement, (c) the parties shall have received all
necessary regulatory approvals required to consummate the Merger, (d)
the Merger shall have been duly consummated in accordance with the
terms of the Reorganization Agreement and the laws of the States of
Michigan and Wisconsin, and (e) up to 3,250,000 Shares have been
issued in accordance with the provisions of the Reorganization
Agreement, such Shares will have been validly issued and will be fully
paid and nonassessable by Wisconsin Energy, subject to the personal
liability imposed on shareholders by Section 180.0622(2)(b) of the
Wisconsin Business Corporation Law, as judicially interpreted, for
debts owing to employees for services performed, but not exceeding six
months service in any one case. Although Section 180.0622(2)(b)
provides that such personal liability of shareholders shall be "to an
amount equal to the par value of shares owned by them respectively,
and to the consideration for which their shares without par value was
issued," the Wisconsin Supreme Court, by a split decision without a
written opinion, has affirmed a judgment holding shareholders of a
corporation liable under the substantially identical predecessor
statute in effect prior to January1, 1991 (Section 180.40(6)) for
unpaid employee wages to an amount equal to the consideration for
which their par value shares were issued rather than the shares' lower
stated par value. Local 257 of Hotel and Restaurant Employees and
Bartenders International Union v. Wilson Street East Dinner Playhouse,
Inc., 126 Wis.E2d 284,
<PAGE>
Wisconsin Energy Corporation
August 27, 1997
Page 2
375 N.W.2d 664 (1985) (affirming the 1983 decision of the Circuit Court for
Dane County, Wisconsin, in Case No. 82-CV-0023).
We have not passed upon the actions of the Board of Directors of ESELCO to
authorize the consummation of the Merger, and have assumed that all necessary
action has been taken.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Opinions" in
the Proxy Statement/Prospectus constituting a part thereof. In giving our
consent, we do not admit that we are "experts" within the meaning of Section 11
of the Act, or that we are within the category of persons whose consent is
required by Section 7 of the Act or the rules and regulations of the Securities
and Exchange Commission thereunder.
Larry J. Martin, a partner in our firm, serves as General Counsel of
Wisconsin Energy and certain of its subsidiaries.
Very truly yours,
/s/ Quarles & Brady
QUARLES & BRADY
2
<PAGE>
EXHIBIT (8)-(1)
Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-4497
August 27, 1997
Wisconsin Energy Corporation
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
ESL Acquisition, Inc.
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
ESELCO, Inc.
725 East Portage Avenue
Sault Ste. Marie, MI 49783
Re: Opinion with Respect to the Merger of ESL Acquisition, Inc., a
Subsidiary of Wisconsin Energy Corporation, with and into ESELCO,
Inc.
Ladies and Gentlemen:
You have requested our opinion regarding the discussions of the material
U.S. federal income tax consequences under the captions "Summary -- The
Merger -- Certain Federal Income Tax Consequences" and "The Merger -- Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus") included in the Registration Statement of Wisconsin
Energy Corporation, a Wisconsin corporation ("Wisconsin Energy"), on Form S-4
(the "Registration Statement") filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"). The
Registration Statement relates to the proposed merger (the "Merger") of ESL
Acquisition, Inc. ("Acquisition"), a Michigan corporation and a wholly-owned
subsidiary of Wisconsin Energy, with and into ESELCO, Inc., a Michigan
corporation ("ESELCO"), pursuant to the Amended and Restated Agreement and Plan
of Reorganization, dated as of May 13, 1997, as amended and restated as of July
11, 1997, by and among Wisconsin Energy, ESELCO and Acquisition, including the
related Plan of Merger between Acquisition and ESELCO (together, the
"Reorganization Agreement"). This opinion is delivered in accordance with the
requirements of Item 601(b)(8) of Regulation S-K under the Act.
In rendering our opinion, we have reviewed the Registration Statement, the
Reorganization Agreement and such other materials as we have deemed necessary or
appropriate as a basis for our opinion. We have assumed that the Merger will be
consummated in accordance with the Reorganization Agreement. We have also relied
upon the accuracy and completeness of the representations contained in separate
letters received by us from Wisconsin Energy and ESELCO, and have assumed that
such representations will be accurate and complete as of the effective time of
the Merger, which representations we have neither investigated nor verified. In
addition, we have considered
<PAGE>
Wisconsin Energy Corporation
ESL Acquisition, Inc.
ESELCO, Inc.
August 27, 1997
Page 2
the applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations, pertinent judicial authorities, and rulings of
the Internal Revenue Service (the "I.R.S.").
Based upon the foregoing, it is our opinion that (i) the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code; (ii) Wisconsin Energy, Acquisition and ESELCO
will each be a party to that reorganization within the meaning of Section 368(b)
of the Code and (iii) the statements made under the captions "Summary -- The
Merger -- Certain Federal Income Tax Consequences" and "The Merger -- Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus, to the
extent that they constitute matters of law or legal conclusions, are correct in
all material respects. There can be no assurance that contrary positions may not
be asserted by the I.R.S.
This opinion is being furnished in connection with the Registration
Statement. You may rely upon and refer to the foregoing opinion in the
Registration Statement. Any variation or difference in the facts from those set
forth or assumed either herein or in the Registration Statement may affect the
conclusions stated herein. No person other than Wisconsin Energy, Acquisition,
ESELCO and the shareholders of ESELCO may rely on this opinion./1/ No person may
rely on this opinion for any purpose other than for determining the federal
income tax consequences of the Merger.
We hereby consent to the use of our name under the captions "Summary -- The
Merger -- Certain Federal Income Tax Consequences" and "The Merger -- Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus and to the
filing of this opinion as an exhibit to the Registration Statement. In giving
this consent, we do not admit that we are "experts" within the meaning of
Section 11 of the Act or that we are within the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Larry J. Martin, a partner in our firm, serves as General Counsel of
Wisconsin Energy and certain of its subsidiaries.
Very truly yours,
/s/ Quarles & Brady
QUARLES & BRADY
- ----------------------
/1/ We are aware that Wisconsin Energy is considering the possible merger
of ESELCO with and into Wisconsin Energy subsequent to both the Merger and the
receipt by Wisconsin Energy of a private letter ruling from the Internal
Revenue Service to the effect that the merger of ESELCO into Wisconsin Energy
will not adversely affect the treatment of the Merger for federal income tax
purposes. For federal income tax purposes, the I.R.S. may ignore the existence
of Acquisition and treat the combination of the Merger and the subsequent
merger of ESELCO into Wisconsin Energy as if ESELCO had merged directly into
Wisconsin Energy. If the existence of Acquisition were ignored by the I.R.S.,
Acquisition would not be treated as a party to the reorganization within the
meaning of (SS) 368(b) of the Code but, for federal income tax purposes, that
would not have an adverse effect on either (i) the treatment of the Merger and
the subsequent merger of ESELCO into Wisconsin Energy or (ii) this opinion.
<PAGE>
EXHIBIT (23)-(1)
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus constituting part of this Registration Statement on Form
S-4 of Wisconsin Energy Corporation of our report dated January 29, 1997
appearing in Wisconsin Energy Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996. We also consent to the references to us under the
headings "Summary--Selected Financial Data--Wisconsin Energy" and "Experts" in
such Proxy Statement/Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Financial Data--
Wisconsin Energy."
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
August 27, 1997
<PAGE>
EXHIBIT (23)-(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
dated February 6, 1997 and to all references to our firm included in and
incorporated by reference in this Registration Statement.
ARTHUR ANDERSEN LLP
Detroit, Michigan
August 27, 1997
<PAGE>
EXHIBIT (23)-(5)
CONSENT OF PACIFIC ECONOMICS GROUP
----------------------------------
We hereby consent to the use of our opinion in the Proxy
Statement/Prospectus included in this Registration Statement and to all
references to our firm included in or made a part of this Registration
Statement.
PACIFIC ECONOMICS GROUP
By: /s/ Charles J. Cicchetti
------------------------
Charles J. Cicchetti
Co-Founding Member
Los Angeles, California
August 27, 1997
<PAGE>
Exhibit (99)-(1)
ESELCO, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
ON OCTOBER 7, 1997
The undersigned hereby appoints Allan L. Grauer, James S. Clinton and David K.
Easlick and each of them, proxies, with full power of substitution, and hereby
authorizes them to represent and to vote all shares of stock which the
undersigned is entitled to vote, with all powers the undersigned would possess
if personally present, at the Special Meeting of Shareholders of ESELCO, Inc.
("ESELCO") to be held at the Ramada Inn Conference Center, 3290 I-97 Business
Spur, Sault Ste. Marie, Michigan on October 7, 1997 at 10:00 a.m. (Eastern
Daylight Time), or at any adjournment thereof, as follows, hereby revoking any
proxy previously given.
1. [ ] FOR [ ] AGAINST [ ] ABSTAIN with respect to approval of the Amended and
Restated Agreement and Plan of Reorganization, including the related Plan
of Merger, providing for the merger of ESL Acquisition, Inc., a wholly-
owned subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy"), with
and into ESELCO, pursuant to which the outstanding shares of ESELCO Common
Stock will be converted into shares of Wisconsin Energy Common Stock; and
2. In their discretion on such other matters as may properly come before the
meeting or any adjournment thereof;
all as described and set forth in the Notice and Proxy Statement/Prospectus
relating to the meeting, receipt of which are hereby acknowledged.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
(Continued and to be signed on reverse side)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER SPECIFIED HEREIN
BY THE UNDERSIGNED STOCKHOLDER, IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL 1.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. Please note any change of address
Dated: ___________________________, 1997
____________________________________________
(Please sign exactly as name appears at left.)
______________________________________________
(If stock is owned by more than one person, all
owners should sign. Persons signing as
executors, administrators, trustees or in
similar capacities should so indicate. If a
corporation, please sign in full corporate name
by President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
