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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant X
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Filed by a Party other than the Registrant
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Check the appropriate box:
Preliminary Proxy Statement
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Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
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X Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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WISCONSIN ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
X No fee required
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: (Set forth the amount on which
the filing fee is calculated and state how it was determined.)
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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Fee paid previously with preliminary materials.
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--- Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Wisconsin Energy Corporation
231 W. Michigan
P.O. Box 2949
Milwaukee, WI 53201
INSTRUCTIONS FOR VOTING YOUR PROXY
April 3, 1998
Dear Wisconsin Energy Corporation Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of Stockholders on
Tuesday, May 19, 1998, at 10:00 a.m., at the Paper Valley Hotel & Conference
Center, 333 West College Avenue, Appleton, Wisconsin. The hotel is located in
downtown Appleton. Free parking will be available. Light refreshments will
be served before the meeting.
The meeting gives us an opportunity to vote on the proposals described in the
accompanying Notice and Proxy Statement. A report on the business and affairs
of Wisconsin Energy and our expectations for the future will also be
discussed.
The proxy card attached below lists the matters that require your vote.
Please sign and promptly return this card in the postage-paid envelope
provided to ensure that your vote will be counted. You may cancel your proxy
before the meeting and vote in person if you wish.
The proxy card also provides a separate box for you to indicate if you plan to
attend the Annual Meeting. Place a mark in this box ONLY if you plan to
attend the meeting in Appleton
Last year, we changed our practice for distributing the Summary Annual Report
by making its distribution optional. Because of the favorable comments
received about this approach, we again have provided your with a choice of
whether your would like to receive a copy.
Full financial statements and the Chairman's Letter, which provides an
overview of our financial operations, are included in the enclosed materials.
However, if you would like to receive a copy of the Summary Annual Report,
please check the appropriate box below. We will mail the Summary Annual
Report to you in late April.
If you receive more than one proxy card because you have multiple accounts,
please sign and return all of your proxies, but mark only one card if you plan
to attend the annual meeting or would like to receive a Summary Annual Report
in order to avoid duplication.
I appreciate your interest in Wisconsin Energy and hope to see you at the
meeting. If you have any questions about the Annual Meeting, or any other
matter, please call our toll-free Stockholder Hotline at 1-800-558-9663.
Sincerely,
/s/ Thomas H. Fehring
Thomas H. Fehring
Corporate Secretary
PLEASE DETACH PROXY CARD HERE THANK YOU FOR YOUR VOTE
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[ X ] Please mark
votes as in
this example
______________________________________________________________________________
The Board of Directors recommends a vote FOR proposals 1, 2 and 3
______________________________________________________________________________
For Withheld
All From All
1. Elect
Robert A. Cornog, [ ] [ ]
Richard R. Grigg and
Frederick P. Stratton, Jr.
as directors
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For, except vote withheld from the above nominee(s):
For Withheld
2. Elect John N. MacDonough [ ] [ ]
For Against Abstain
3. Approve Appointment of Auditors [ ] [ ] [ ]
Where no voting instructions are given, the shares represented by this Proxy
will be VOTED FOR Proposals 1, 2 and 3.
I PLAN TO ATTEND MEETING
If you check this box to the right an [ ]
admission card will be sent to you
I would like to receive a Summary Annual Report [ ]
I have made comments on this card or an attachment [ ]
Your comments are welcome:
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Please sign exactly as name(s) appears hereon. Joint owners should each sign
personally. When signing as executor, administrator, corporation officer,
attorney, agent, trustee, guardian or in other representative capacity, please
state your full title as such.
Signature: ________________________________________ Date: __________
Signature: ________________________________________ Date: __________
(If Held Jointly)
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WISCONSIN ENERGY CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
MAY 19, 1998
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This PROXY is solicited by the Board of Directors for use at the Annual
Meeting of Stockholders on May 19, 1998. Your shares of stock will P
be voted as you specify below. R
O
By signing this PROXY, you revoke all prior proxies and appoint X
Richard A. Abdoo and Thomas H. Fehring, or either of them, as Y
proxies, with the power to appoint substitutes, to vote your shares
on the matters shown below and on any other mattes which may come
before the Annual Meeting of Stockholders and all adjournments of
the Meeting.
1. Elect Robert A. Cornog, Richard R. Grigg, and Frederick P. Stratton, Jr.
as Directors;
2. Elect John N. MacDonough as Director; and
3. Approve appointment of PRICE WATERHOUSE LLP as Independent Public
Accountant, as described in the Notice and Proxy Statement relating to the
Annual Meeting, receipt of which is hereby acknowledged.
If you hold shares in Wisconsin Energy Corporation's Stock Plus Investment
Plan or Wisconsin Electric Power Company's Employee Retirement Savings Plan,
this proxy constitutes voting instructions for any shares so held by the
undersigned.
SEE REVERSE SIDE. If you wish to vote in accordance with the Board of
Director's recommendations, just sign and date on the reverse side; you need
not mark any voting boxes. If no choice is specified, your proxy will be voted
"for" Proposals 1, 2 and 3.
SEE REVERSE
SIDE
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April 3, 1998
Dear Wisconsin Energy Stockholder:
Last year was tough for our company and for you, our stockholders. It was
difficult for our employees and, at times, confusing for our customers.
We learned that maintaining our historical position as an industry leader is
difficult, but the challenges of 1997 taught us some important lessons and
intensified our resolve to be one of the nation's premier energy companies.
To continue to move in that direction, we are keeping our focus on achieving
operational excellence at Wisconsin Electric (WE). The first lesson we
learned was to solidify our primary business by investing in projects to
enhance our ability to provide reliable and low-cost service. The second was
to implement additional measures to strengthen relationships with customers.
The third is to work more closely together as a team of employees to execute
the strategies that will improve value for our stockholders.
OUR FINANCIAL PERFORMANCE
Our earnings for 1997 were 54 cents per share of common stock, compared with
$1.97 per share in 1996. Several important factors led to the decrease. In
the second quarter, we took a charge of 17 cents per share for the canceled
merger with Northern States Power Co. Although we decided to cancel the
merger, we gained some valuable knowledge about what it takes to complete
such a transaction that could serve us well in the future.
Another significant charge occurred in the fourth quarter when we took a
charge of 16 cents per share to recognize the current market value for
valuation of equipment originally purchased for a cogeneration project in
Kimberly, Wis. Other factors that had a negative affect on our results were:
the extended outage at WE's Point Beach Nuclear Plant, which led to
significant increases in fuel and purchased power expenses; higher operating
expenses at Point Beach to improve equipment, processes and performance; and
a rate decrease ordered by the Public Service Commission of Wisconsin (PSCW)
in February 1997.
Our stock price began 1997 at 26-7/8. Most utilities showed little
appreciation in stock price until year end because of uncertainty concerning
electric industry reregulation. Another factor for nuclear utilities was the
increased rigor needed to address regulatory requirements. The improvements
made in our plant operations and procedures were well received by the Nuclear
Regulatory Commission and helped improve our stock price, which closed the
year at 28-3/4. Combined with a quarterly dividend increase to 38.5 cents per
share, or $1.54 on an annualized basis, the compound total return to
stockholders for the year, assuming reinvested dividends, was 13.55 percent.
Though we had successes in many aspects of our business last year, our most
important measure is the value we provide to our stockholders. In 1997, our
return was not up to our expectations nor industry averages. In 1998, we
believe we are in a better position to improve our return and to grow value
for WEC stockholders.
In late 1997, the PSCW authorized an interim rate increase of $154 million.
This includes a 10.7 percent increase in electric prices for all Wisconsin
customer classes, a 6.3 percent rise in Milwaukee steam prices and a 5.5
percent boost in natural gas prices. We expect the PSCW to rule on a
permanent increase soon.
OUR UTILITY OPERATIONS
Our total number of electric customers grew to 978,835 in 1997, a 1 percent
increase from 1996. Sales were up about 0.4 percent.
While Point Beach's two units experienced lengthy outages in 1997, we made
significant improvements in how we operate the plant as well as in plant
systems and equipment. The NRC has recognized those improvements, expressed
renewed confidence in plant operations and removed a declining trend letter
that had been issued early in 1997. In February 1998, Unit 1 began a
scheduled refueling outage. We expect both units to be available to meet the
higher demand for electricity this summer.
While our nuclear staff worked to restore operations to our historical high
level of excellence in 1997, our fossil operations' employees rose to the
challenge of compensating for the reduced output at Point Beach by setting
records for generation at four plants. Fossil operations also achieved
several other successes: Pleasant Prairie Power Plant ranked as the sixth
lowest-cost energy producer in the United States; we added the Milwaukee
County Power Plant to our portfolio of generating assets; and we began buying
power on our contract with a cogeneration plant in Whitewater, Wis.
We successfully met our customers' electric demand when supply throughout the
region was extremely tight. The response of our employees and the cooperation
of our customers was impressive and effective. Only customers who have
special rates allowing us to curtail power were taken out of service for
brief periods when demand could have exceeded supply. No firm-load customers
were ever interrupted to balance load and supply. Unfortunately,
some customers experienced storm-related outages during that time, which
created some confusion for them concerning the power supply situation.
Several significant developments will help ensure an adequate supply of power
in 1998. Most important are: the full operation of Point Beach, which
provides about 1,000 megawatts of capacity; arrangements to transfer 400 mw
of power from neighboring systems; and the 236-mw facility owned by an
independent power producer in Whitewater will be available throughout the
summer.
Longer term, we are soliciting proposals to contract 250 mw of power from an
independent supplier that would locate a facility in eastern Wisconsin. WE
will purchase the plant's capacity for a period of three to eight years.
After the contract expires, the facility becomes what is known as a merchant
plant, which will obtain future revenues through competitive purchase
contracts with utilities and other wholesale market participants. We support
the regulatory and legislative changes needed for development of merchant
plants, and we will encourage changes that allow our nonutility affiliates to
participate fully in this future market.
Another development to help maintain electric reliability in the region
occurred when we joined eight other transmission owners in filing a proposal
with the Federal Energy Regulatory Commission to form an independent system
operator (ISO). ISO members would retain ownership of their systems but
control of the operations would be conducted by an independent entity. The
Midwest ISO, now numbering 10 members, would join transmission systems
covering parts of eight states. The ISO would enhance reliability and
provide the added benefit of lower costs to customers because a regional
system would eliminate redundant transmission fees.
Power supply is not the only area where we are solidifying our business. In
our gas operations, we began the largest expansion project in recent history
by adding 832 square miles of service territory in northern Wisconsin. When
completed later in 1998, we will have more than 350 miles of new gas main in
the area and a connection with Great Lakes Pipeline in Michigan's Upper
Peninsula. This expansion gives us the potential of adding about 4,500
customers over the next few years. In 1997, our number of gas customers
increased 2.6 percent to 376,732. Our therms delivered, including customer-
owned transport gas, increased 4.7 percent.
Our Steam Services extension on Milwaukee's west side added a major new
customer and creates opportunities to add others. Steam Services also
expanded through the acquisition of the steam facilities serving the Milwaukee
County medical complex. Our sales increased 17 percent in 1997, and our total
revenues for Steam Services were about $22 million.
In our customer operations, our award-winning contact center managed nearly 2
million customer interactions in 1997. We continue to seek improvement in
this area, which was hampered at times because of some significant storms that
taxed our ability to respond as quickly as we would like.
In business development, we worked with several key accounts to help them
expand and improve their efficient use of power. Despite the power supply
challenges of 1997 that redirected some of their efforts, our account managers
still completed several projects that will improve our customers'
competitiveness and our revenue stream for years to come.
OUR NONUTILITY OPERATIONS
Although our utility operations are receiving our primary attention, we
continue to deliberately expand our nonutility operations.
Wispark, our real estate development subsidiary, is now the largest developer
in Wisconsin. Wispark's earnings for 1997 were $6.9 million.
Wisvest, our unregulated energy services subsidiary, is successfully competing
for customers seeking integrated energy solutions. Power production,
cogeneration, district thermal and cooling facilities, waste-to-energy
conversions, and commercial and industrial refrigeration systems are among its
current activities. In 1997, Wisvest formed Griffin Energy Marketing, a
subsidiary that provides electric power marketing and risk management services
in the wholesale and retail electricity markets.
In addition, Wisvest is continuing to grow its Blackhawk Energy Services, a
joint venture with Kaztex Energy Management, formed in 1995. Blackhawk is a
full-service, independent agent providing management and delivery of natural
gas and electric energy to commercial and industrial companies in Illinois.
Blackhawk pools its members' energy requirements to increase buying power
through bulk purchases.
Minergy, our recycling and renewable energy subsidiary, now owns and operates
five recycling facilities. Minergy's patented technologies recycle high-
volume wastes, such as paper and municipal sludge, and fly ash into various
construction materials. In 1998, we began operating the Fox Valley Glass
Aggregate Plant in Neenah, Wis. This is the world's first plant to convert
sludge from area paper companies into a glass aggregate product. The process
produces 1.4 billion pounds of steam per year, which is sold for process use
and could be used to generate electricity in the future. Minergy purchased
two plants in the Netherlands in 1997 - the Provag Aggregate Plant in
Geertruidenberg, which has the capacity to process 140,000 tons of ash per
year, and the VIT Treatment Plant in Hengelo, which has the capacity to
process 120,000 tons of municipal sludge per year. Growth in this area is
expected to continue because of the strong strategic advantage Minergy's
technologies provide and the increased environmental pressures to recycle and
use renewable energy resources.
Although Wispark, Wisvest and Minergy are helping grow revenue, the valuation
of holdings for Witech, our venture capital subsidiary, decreased by $6.6
million, a negative impact of 6 cents per share on our earnings. Other than
Witech, our nonutility subsidiaries added 4 cents per share to earnings.
OUR STRATEGY FOR PROFITABLE GROWTH
Because of the challenges we met in our operations in 1997, we are keeping our
1998 strategy focused on achieving the operational and financial excellence
that has been a hallmark at our companies for more than 100 years. We view
1997 as an aberration, but we also see it as an opportunity to help sharpen
our approach as well as our resolve to build on our strong fundamentals.
Over the next year, we will continue our progress toward restoring operational
excellence at Point Beach, strengthen our organization, expand our power
production and transfer capability and plan the initiatives that will ensure
our long-term success. We also will continue to expand the nonutility
businesses that can contribute to improved earnings.
OUR TEAM FOR FUTURE SUCCESS
Our strategy hinges upon our team of employees. We strive for stability in
our work force to help focus on excellence in our day-to-day operations. We
have provided financial planning seminars so employees can have better
understanding of personal finances that can give them additional confidence
about their future. We also have taken steps to realign our pay structure to
better match the marketplace, ensuring that we provide fair and equitable pay
to our entire work force. We continue to strengthen the relationship between
our management team's pay and performance.
We also have strengthened the management team itself. We have added Mike
Sellman, Rick White and Larry Salustro to our company. Sellman, senior vice
president and chief nuclear officer, delivers years of experience as a
recognized leader in the industry and will take our operations to higher
levels of excellence. White, vice president of communications and community
relations, brings prior experience from the telecommunications and utility
industries. Salustro, vice president of legal, regulatory and governmental
affairs, adds experience gained while working at one of the nation's premier
telecommunications companies. The addition of these three leaders will
improve our results in these areas of growing importance.
The hub of our operations, the Public Service Building (PSB) in downtown
Milwaukee, recently completed a three-year renovation that gives it status as
a national historical landmark. But more important, it emphasizes the
commitment we have to our employees and the community. The renovation gives
us lower operating and maintenance expenses, particularly in energy costs for
the building, which is 92 years old. The more flexible office space creates
greater efficiency and allows 150 more employees to be located in the PSB.
The improvements also bring the building into compliance with modern building
codes and regulations for safety and access, such as the Americans with
Disabilities Act.
Our companies value work force diversity, including gender, race and age. We
were recognized for our diversity efforts in 1997 through an Edison Electric
Institute award for diversity training programs and policies. We also
received an award from the Human Resource Management Association for
excellence in our diversity initiatives. Making diversity and cross-cultural
sensitivity a corporate priority is resulting in a stronger, more team-
oriented work force. We extend this concept into our purchases. Expenditures
with businesses owned by minorities and women increased 50 percent over 1996
levels, representing about 6.5 percent of our non-fuel corporate purchases in
1997. Such practices and other policies and programs led to U.S. Equal
Employment Opportunity Commission (EEOC) recognition. An EEOC task force
chose WE as one of six private sector companies offering the best EEO
programs.
Another initiative to strengthen our team is the expansion of joint
governance, which makes unions and management partners in achieving common
goals. Joint governance now extends into each of the company's business
units, which creates an environment for healthy dialogue to meet challenges
and seize opportunities.
Our approach to achieving mutual goals includes not only our employees but
also our contractors and suppliers. By taking a total lifecycle approach for
materials and services, we have formed strategic alliances that have resulted
in significant savings in total lifecycle costs for our purchases. We also
are working with our suppliers to ensure they are addressing Year 2000 issues
that could have an impact on the goods and services they provide. We are
working to address Year 2000 so we can continue to provide the same great
level of electrical, gas and steam service before and after the new
millennium.
OUR OUTLOOK
As 1998 begins, our operations are getting stronger. Operations are the key
to success in the coming year and years ahead. We have other reasons for
optimism about the year ahead. We recently received an interim rate increase
in our utility operations that will improve our earnings potential. We have a
strong economy in the area we serve, and we are working on the technology and
the relationships necessary to better meet needs of customers throughout our
region.
Although our immediate focus is short term and within the area we now serve,
we still believe that opportunities to acquire customers through mergers and
acquisitions are viable. An example of a strategic combination is our
proposed acquisition of ESELCO Inc., which will be completed later this year,
pending final regulatory approvals. ESELCO's primary subsidiary, Edison Sault
Electric Co., provides low-cost, reliable power to 22,000 customers in
Michigan's Upper Peninsula. In an increasingly competitive, national
marketplace where consolidations make strong economic sense, we will consider
future strategic combinations, provided they are in the best interest of our
stockholders and customers.
We also pursue the interests of our stockholders and customers in the
regulatory arena. We joined organizations from the Midwest, Mid-Atlantic and
Great Lakes regions to form the Alliance for Constructive Air Policy. The
group includes companies from the utility sector and other industries as well
as labor organizations that are working with the Environmental Protection
Agency and key policymakers to find cost-effective, equitable solutions for
reducing ozone pollution in key regions.
The true test of any organization is how it bounces back from adversity. We
are actively working to improve our operations, seek opportunities for growth
and participate in the regulatory process to benefit our stockholders and
customers. We've had our share of adversity in the past year. Our employees
are showing their resilience. I'm confident our results in 1998 will prove
our resilience to our stockholders, and our high-quality, cost-effective and
reliable service will prove it to our customers.
Sincerely,
/s/Richard A. Abdoo
Richard A. Abdoo
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 3, 1998
To the Stockholders of Wisconsin Energy Corporation:
The 1998 Annual Meeting of Stockholders will be held in Appleton, Wisconsin as
follows:
Tuesday, May 19, 1998
10:00 a.m., Central Time
Paper Valley Hotel & Conference Center
333 West College Avenue
Appleton, Wisconsin 54913
The change in location is being made this year so stockholders living in the
northern half of our service territory will have a more convenient opportunity
to attend the meeting. It is expected that the 1999 Annual Meeting will be
held in Milwaukee.
During the meeting, stockholders will be asked to:
* elect three directors for terms expiring at the 2001 Annual
Meeting of Stockholders,
* elect one director for a term expiring at the 2000 Annual
Meeting of Stockholders,
* approve the appointment of the independent public accountant
for 1998, and
* consider any other matters which may properly come before the
meeting.
The Chairman will also briefly review company operations and answer questions
from stockholders.
Stockholders of record at the close of business on March 12, 1998 will be
entitled to vote.
The following pages provide additional details about the meeting as well as
other useful information.
By Order of the Board of Directors
/s/Thomas H. Fehring
Thomas H. Fehring
Corporate Secretary
PROXY STATEMENT
This proxy statement is being furnished to stockholders beginning on or about
April 3, 1998, in connection with the solicitation of proxies by the Wisconsin
Energy Corporation ("WEC") Board of Directors to be used at the Annual Meeting
of Stockholders on May 19, 1998, at the Paper Valley Hotel & Conference
Center, 333 West College Avenue, Appleton, Wisconsin, and at all adjournments
of the meeting, for the purposes listed in the preceding Notice of Annual
Meeting of Stockholders.
PROPOSAL 1: ELECTION OF DIRECTORS - TERMS EXPIRING IN YEAR 2001
and
PROPOSAL 2: ELECTION OF DIRECTOR - TERM EXPIRING IN YEAR 2000
The WEC Bylaws provide that the directors be divided into three classes, as
nearly equal in size as possible. The term of one class expires each year.
The terms of Directors Robert A. Cornog, Richard R. Grigg and Frederick P.
Stratton, Jr. expire at the 1998 Annual Meeting.
ROBERT A. CORNOG, RICHARD R. GRIGG and FREDERICK P. STRATTON, JR. have been
nominated by the Board to serve for terms expiring at the 2001 Annual Meeting
of Stockholders or until they are reelected or until their respective
successors are duly elected and qualified.
The Board also identified an additional, qualified director nominee. JOHN N.
MACDONOUGH, Chairman and CEO of Miller Brewing Company, was nominated by the
Board to serve as a director. To preserve the balance of the class structure,
it is proposed that Mr. MacDonough serve a term expiring at the 2000 Annual
Meeting or until he is reelected or his successor is duly elected and
qualified. Pursuant to authority granted to the Board under the Bylaws, the
number of directors constituting the whole Board was increased to eight
effective May 19, 1998 contingent upon the election of Mr. MacDonough.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR DIRECTOR
NOMINEES ROBERT A. CORNOG, RICHARD R. GRIGG AND FREDERICK P. STRATTON, JR.,
(PROPOSAL #1) AND FOR DIRECTOR NOMINEE JOHN N. MACDONOUGH (PROPOSAL #2).
Each nominee has consented to being nominated and to serve if elected. If any
nominee becomes unable to serve for any reason, which event is not
anticipated, the proxies will be voted for a substitute nominee selected by
the WEC Board upon the recommendation of the Nominating and Board Affairs
Committee.
Biographical data regarding each nominee and director is shown below. Ages
are as of December 31, 1997.
NOMINEES FOR TERMS EXPIRING IN YEAR 2001
ROBERT A. CORNOG. Age 57. Chairman of the Board, President and Chief
Executive Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is
a developer, manufacturer and distributor of professional hand and power
tools, diagnostic and shop equipment, and tool storage products. Director of
WEC since 1993. Director of Wisconsin Electric Power Company ("Wisconsin
Electric" or "WE"), WEC's principal subsidiary, since 1994. Director of Snap-
on Incorporated and Johnson Controls, Inc.
RICHARD R. GRIGG. Age 49. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since January 1995; Chief Nuclear
Officer of Wisconsin Electric from December 1996 to March 1998. President and
Chief Operating Officer of Wisconsin Natural Gas Company ("Wisconsin Natural"
or "WN") during 1995. Wisconsin Natural was WEC's gas utility subsidiary; WN
merged into Wisconsin Electric effective January 1, 1996. Group Executive and
Vice President of Wisconsin Electric from June to December 1994. Vice
President of Wisconsin Electric from 1990 to 1994. Director of WEC since
1995. Director of Wisconsin Electric since 1994. Director of Wisconsin
Natural during 1995.
FREDERICK P. STRATTON, JR. Age 58. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines.
Director of WEC since 1987. Director of Wisconsin Electric since 1986.
Director of Briggs & Stratton Corporation, Banc One Corporation, Midwest
Express Holdings, Inc. and Weyco Group, Inc.
NOMINEE FOR TERM EXPIRING IN YEAR 2000
JOHN N. MACDONOUGH. Age 54. Chairman and Chief Executive Officer of the
Miller Brewing Company, a manufacturer and brewer of malt beverages, since
1993. Director of M&I Marshall & Ilsley Bank, The Milwaukee Brewers, The
Green Bay Packers and Ugly Duckling Corporation of Phoenix, Arizona.
DIRECTORS CONTINUING IN OFFICE-TERMS EXPIRING IN YEAR 2000
JOHN F. BERGSTROM. Age 51. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997; President and Chief Executive Officer of
Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and
operates numerous automobile sales and leasing businesses. Director of WEC
since 1987. Director of Wisconsin Electric since 1985. Director of Bergstrom
Corporation, First National Bank-Fox Valley, Kimberly-Clark Corporation,
Midwest Express Holdings, Inc., Universal Foods Corporation and The Green Bay
Packers.
GENEVA B. JOHNSON. Age 68. Corporate Director. Former President and Chief
Executive Officer of Family Service America, an organization representing
private agencies in the United States and Canada that provide human service
programs, from 1983 to 1994. Director of WEC and Wisconsin Electric since
1988. Director of Firstar Bank Milwaukee, N.A.
DIRECTORS CONTINUING IN OFFICE-TERMS EXPIRING IN YEAR 1999
RICHARD A. ABDOO. Age 53. Chairman of the Board, President and Chief
Executive Officer of WEC since 1991. Chairman of the Board and Chief
Executive Officer of Wisconsin Electric since 1990. Director of WEC since
1988. Director of Wisconsin Electric since 1989. Chairman of the Board and
Chief Executive Officer of Wisconsin Natural from 1990 to 1995. Director of
Wisconsin Natural from 1989 to 1995. Director of Marshall & Ilsley
Corporation, Sundstrand Corporation and United Wisconsin Services, Inc.
JOHN F. AHEARNE. Age 63. Director of the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that publishes AMERICAN
SCIENTIST, provides grants to graduate students and conducts national meetings
on major scientific issues, since 1989. Adjunct Scholar of Resources for the
Future, an economic research, non-profit institute, since 1993. Lecturer and
Adjunct Professor, Duke University, since 1995. Vice President and Senior
Fellow of Resources for the Future from 1984 to 1993. Commissioner of the
United States Nuclear Regulatory Commission from 1978 to 1983, serving as its
Chairman from 1979 to 1981. Member, National Academy of Engineering.
Director of WEC and Wisconsin Electric since 1994.
PROPOSAL 3: APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANT
The Board of Directors has appointed the firm of Price Waterhouse LLP ("PW")
or its successor as independent public accountant to audit the books, records
and accounts of WEC and its subsidiaries for the year 1998. PW and Coopers &
Lybrand LLP have announced their intent to merge. If the merger is
consummated, the successor to PW will serve as WEC's independent public
accountant. PW has assured WEC that the merger will not adversely impact any
audits conducted for WEC.
PW has acted as independent public accountant for WEC or its predecessors
continuously since 1932. Representatives of the firm will attend the Annual
Meeting to make any statement they may consider appropriate and to respond to
questions that may be directed to them.
If (i) the foregoing proposal is not approved by the stockholders, or (ii) PW
shall become incapable of accepting or continuing the appointment, or (iii)
the employment of PW is otherwise discontinued, the Audit Committee will
recommend and the Board of Directors will appoint another independent public
accountant.
The Board of Directors recommends that you vote FOR the proposal to approve
the appointment of Price Waterhouse LLP as independent public accountant.
OTHER MATTERS
The Board of Directors is not aware of any other matters that may properly
come before the meeting. The WEC Bylaws set forth the requirements that must
be followed should a stockholder wish to propose any floor nominations for
director or floor proposals. The Bylaws state, among other things, that
notice and certain other documentation must be provided to WEC at least 70
days and not more than 100 days before the annual meeting. If any other
matters do properly come before the meeting, the persons named as the proxies
in the accompanying form of proxy will vote the proxy in accordance with their
best judgment.
VOTING OF SHARES
STOCKHOLDERS OF RECORD. Common stockholders of record at the close of
business on March 12, 1998, are entitled to vote on matters presented at the
Annual Meeting. On that date, there were 112,865,844 shares of WEC common
stock outstanding. Each outstanding share is entitled to one vote upon each
matter presented. A majority of the votes entitled to be cast by the shares
entitled to vote, represented in person or by proxy, shall constitute a
quorum. Abstentions and shares which are the subject of broker non-votes will
count toward establishing a quorum. A list of stockholders of record entitled
to vote at the meeting will be available for inspection by stockholders at
WEC's principal business office at 231 West Michigan Street, Milwaukee,
Wisconsin, prior to the meeting. The list will also be available on the day
of the meeting at the Paper Valley Hotel & Conference Center.
Stockholders whose shares are held in the name of a broker, bank or other
holder of record are invited to attend the meeting, but may not vote at the
meeting unless they have first obtained a proxy, executed in the stockholder's
favor, from the holder of record.
VOTING BY PROXY. You may vote in person or by properly executed proxy. By
completing and returning the form of proxy, you authorize Richard A. Abdoo and
Thomas H. Fehring to vote your shares on your behalf. All completed proxy
forms returned will be voted as you direct. If no direction is given, the
proxies will be voted FOR director nominees Robert A. Cornog, Richard R.
Grigg, Frederick P. Stratton, Jr. and John N. MacDonough and FOR the proposal
to approve the appointment of Price Waterhouse LLP as WEC's independent public
accountant. You may revoke your proxy by voting in person at the meeting, by
written notice to WEC's Corporate Secretary, or by delivering a later-dated
proxy, in each case prior to the closing of the polls. Attendance at the
meeting will not in itself constitute revocation of a proxy.
If you are a participant in WEC's Stock Plus Investment Plan ("Stock Plus") or
own shares through investments in the WEC Common Stock Fund of Wisconsin
Electric's Employee Retirement Savings Plan (the "401(k) plan"), your proxy
will serve as voting instructions for your shares held in those plans. Shares
will be voted by the administrator for Stock Plus and the trustee for the
401(k) plan as you direct. If a proxy is not returned for shares held in
Stock Plus, shares will not be voted by the administrator. If a proxy is not
returned for shares held in the 401(k) plan, the trustee will vote those
shares in the same proportion that all shares in the plan fund for which
voting instructions have been received are voted.
SOLICITATION OF PROXIES. WEC will bear the cost of the solicitation of
proxies. Proxies may be solicited by employees of WEC or its subsidiaries by
mail, by telephone, personally or by other communications, without
compensation apart from their normal salaries. It is not anticipated that any
other persons will be engaged to solicit proxies or that compensation will be
paid for that purpose. However, WEC may seek the services of an outside proxy
solicitor in the event such services become necessary.
VOTING REQUIREMENTS AND PROCEDURES. The voting requirements and procedures
described below are based upon the provisions of the Wisconsin Business
Corporation Law, WEC's charter documents and any other requirements applicable
to the matters to be voted upon.
Directors will be elected by a plurality of the votes cast by the shares
entitled to vote, as long as a quorum is present. "Plurality" means that the
individuals who receive the largest number of votes are elected as directors
up to the maximum number of directors to be chosen in each election.
Therefore, any shares not voted, whether by withheld authority, broker non-
vote or otherwise, have no effect in the election of directors.
With respect to appointment of the independent public accountant, if a quorum
is present, the affirmative vote of a majority of the votes cast will be
required. Abstentions and broker non-votes will have no effect on the outcome
of the voting.
The voted proxies will be tabulated by Boston EquiServe Limited Partnership,
which will also serve as inspector of election.
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE GUIDELINES. The Board periodically reviews trends in
corporate governance to ensure that it is providing effective governance over
the affairs of the corporation. WEC's Corporate Governance Guidelines, a
framework from which the Board conducts its business, have not been modified
since provided to stockholders in last year's proxy statement. A copy is
available upon request to the Corporate Secretary.
EVALUATION OF THE CHIEF EXECUTIVE OFFICER (CEO). The Board annually evaluates
the performance of the CEO. As part of this practice, the Compensation
Committee annually requests that independent directors provide written
feedback to the Compensation Committee chair. Feedback is requested on the
CEO's performance relating to: leadership and vision, financial stewardship,
strategy development, management development, effective communication to
constituencies, and effective representation of the corporation in community
and industry affairs, as well as other areas. The Compensation Committee
chair shares the feedback with the CEO to review his performance for the year.
The feedback is also used by the committee to determine appropriate
compensation for the CEO. This procedure allows the Board to consistently
evaluate the CEO and to more effectively communicate the Board's expectations
to him. The evaluation also provides the CEO with information to enable him
to more effectively focus on key business initiatives.
SELF-EVALUATION OF THE BOARD. The Board also annually evaluates its
collective performance. Each director is asked to rate the performance of the
Board on such things as: providing appropriate oversight over key affairs of
the corporation (including its long-range goals, financial performance and
strategic plans), providing necessary and timely advice and counsel to the
CEO, communicating the Board's expectations and concerns to the CEO, having in
place effective processes to aid in its deliberations, monitoring of the
issues and trends affecting the corporation, and operating in a manner that
ensures open communication, objective and constructive participation and
timely resolution of issues.
The Nominating and Board Affairs Committee uses the results of this process as
part of its annual review of the Corporate Governance Guidelines and to foster
continuous improvement of the Board's activities. Assessments of the
performance of individual directors are already conducted by the committee in
its process to recommend director nominees to stockholders.
COMMITTEES OF THE BOARD OF DIRECTORS. Committees play a significant role in
the corporate governance practices of the Board. Members and principal duties
and responsibilities of the Board's standing committees are shown below.
Except for the Executive and Nuclear Oversight Committees, the committees of
the Board are comprised solely of outside, independent directors. Committees
may also include one or more non-directors who serve as ad hoc members due to
their considerable expertise in a particular field.
Members of the AUDIT COMMITTEE are Mr. Stratton (chair), Mr. Bergstrom and
Mrs. Johnson. The committee oversees the financial reporting and internal
controls of WEC; evaluates, reviews and approves the services of the
independent public accountant; recommends to the Board the independent public
accountant to be selected; recommends and reviews special audits or studies
the committee considers necessary or desirable; and reviews reports regarding
compliance with WEC's Code of Business Conduct. Both the independent public
accountant and the internal auditor may meet alone with the committee and are
expected to contact it on matters requiring its attention.
Members of the COMPENSATION COMMITTEE are Mr. Cornog (chair), Dr. Ahearne and
Mr. Bergstrom. The committee considers succession planning issues and
provides a competitive, performance-based executive compensation program that
enables WEC to attract and retain key individuals and to motivate them to
achieve WEC's short- and long-term goals. The committee also provides a
competitive director compensation program based on many of the same criteria.
Members of the EXECUTIVE COMMITTEE are Mr. Abdoo (chair), Mr. Grigg and the
chairs of the other standing committees. The committee may exercise all of
the powers vested in the Board except action regarding dividends or other
distributions to stockholders, the filling of vacancies on the Board and other
powers which by law may not be delegated to a committee.
Members of the NOMINATING AND BOARD AFFAIRS COMMITTEE are Mrs. Johnson
(chair), Mr. Cornog and Mr. Stratton. The committee (i) establishes and
reviews corporate governance guidelines to ensure the Board is effectively
performing its fiduciary responsibilities to stockholders and (ii) recommends
candidates to be named as nominees of the Board for election as directors.
Stockholders may propose director candidates for consideration by the
committee.
Members of the NUCLEAR OVERSIGHT COMMITTEE are Dr. Ahearne (chair), Mr. Cornog
and Mr. Grigg. Ad hoc members of the committee include three consultants who
have expertise in nuclear power plant operations: Dr. Thomas E. Murley,
former director of the Nuclear Regulatory Commission's Office of Nuclear
Reactor Regulation; Dr. C. Frederick Sears, formerly responsible for
overseeing Northeast Utilities' nuclear and environmental functions; and Mr.
Hal B. Tucker, formerly responsible for overseeing Duke Power Company's
nuclear operations. The committee advises and assists the Board in its
responsibilities relating to overseeing the nuclear operations of WEC and its
subsidiaries. The Nuclear Oversight Committee may be requested by the Board
to investigate any nuclear related activity of WEC and its subsidiaries.
MEETINGS OF THE BOARD AND ITS COMMITTEES. The Board held 12 meetings during
1997. The number of committee meetings held in 1997 were: Audit, 3;
Compensation, 2; Executive, 0; Nominating and Board Affairs, 1; Nuclear
Oversight, 4. The average attendance of all directors was 98%.
COMPENSATION OF THE BOARD OF DIRECTORS. In order to more closely link
directors' pay to performance and to further align the Board's interests with
stockholders, a portion of directors' fees is paid in WEC common stock.
Directors can elect to receive the fee in common stock or defer the fee in the
WEC phantom common stock account under the Directors' Deferred Compensation
Plan.
During 1997, each nonemployee director received an annual retainer fee of
$18,000 (one-half in WEC common stock and the other half in cash) plus an
attendance fee of $1,250 for each Board or committee meeting attended. In
addition, a per diem fee of $1,000 for travel on company business is paid for
each day on which a Board or committee meeting is not also held. Nonemployee
directors are also paid $300 for each signed, written unanimous consent in
lieu of a meeting. Nonemployee chairs of the committees of the Board received
a quarterly committee chair retainer of $1,250. Employee directors receive no
directors' fees.
Although certain WEC directors also serve on Wisconsin Electric's board and
compensation committee, only single fees are paid for meetings held by both
boards or committees on the same day. In these cases, fees are allocated
between WEC and Wisconsin Electric based on services rendered.
Nonemployee directors may defer fees as long as they serve on the Board of WEC
and/or its subsidiaries pursuant to the Directors' Deferred Compensation Plan.
Under the plan, fees may be deferred into an account which accrues interest
semiannually at the prime rate or into a WEC phantom common stock account, the
value of which will appreciate or depreciate based on the market performance
of WEC stock, as well as through the accumulation of any reinvested dividends.
Deferral amounts are credited to accounts in the name of each participating
director on the books of WEC, are unsecured and are payable only in cash
following termination of the director's service to WEC and its subsidiaries.
The deferred amounts will be paid out of the general corporate assets or the
trust described under "Retirement Plans" in this proxy statement.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES. The Compensation Committee, which is
comprised entirely of independent non-employee directors, is responsible for
making decisions regarding succession planning and executive compensation.
The committee seeks to provide a competitive, performance-based executive
compensation program that enables WEC to attract and retain key individuals
and motivate them to achieve WEC's short- and long-term goals.
The committee believes that a substantial portion of overall executive
compensation should be at risk. Compensation plans for executives have been
designed so that compensation will vary from year to year dependent on
achievement of individual and corporate goals that are aligned with the
interests of WEC's stockholders and customers.
The committee employs a nationally recognized compensation consultant, Towers
Perrin, to advise it on matters relating to the administration and design of
WEC's executive compensation program. The consultant provides the committee
with information regarding competitive compensation levels, practices and
trends.
To be fully informed of competitive compensation for WEC's executive officer
positions, the committee relies on (i) an analysis of compensation practices
for the companies included in the industry peer group historically used to
compare investment performance in the proxy statement, (ii) a broader analysis
of compensation data from a survey of approximately 85 utilities conducted by
the Edison Electric Institute, a consortium of utilities, and (iii) a survey
of compensation practices in general industry. The committee does not
mathematically average the data from these analyses but, rather, considers
them three separate views of the external market.
The committee also applies subjective judgment in evaluating the relative
importance of the many factors that are the basis for determining the various
elements of compensation.
ELEMENTS OF COMPENSATION. WEC's executive compensation program primarily
consists of three elements: base salary, annual incentive compensation and
long-term incentive compensation.
OVERVIEW OF COMPENSATION IN 1997. As noted above, the committee seeks to tie
its compensation program to performance. Although there were numerous
operational accomplishments during 1997, WEC's performance in a number of
important areas fell significantly short of expectations. As a result, annual
incentive awards to most executive officers for 1997 were lower than in
previous years. Specific values of 1997 compensation for the Chief Executive
Officer and the four other most highly compensated officers are included in
the Summary Compensation Table. The committee's basis for determining
appropriate levels of executive compensation for 1997 base salary, annual
incentive compensation and long-term incentive compensation is described
below.
BASE SALARY. To determine appropriate executive base salaries, the committee
considered factors such as individual experience, performance and potential,
changes in duties and responsibilities, customer satisfaction, the reputation
of WEC's utility operations, competitiveness of utility service rates and
impact of cost-control achievements. In addition, the committee reviewed
executive compensation practices for comparable positions at industry peer
group companies. In general, base salaries are targeted at or near the 50th
percentile of the industry peer group.
Base salaries for a calendar year are generally determined in advance of the
calendar year. The base salaries for 1997 as listed in the Summary
Compensation Table were determined in November 1996 and were effective as of
January 1, 1997.
ANNUAL INCENTIVE COMPENSATION. The committee administers WEC's Short-Term
Performance Plan, which provides annual cash incentive opportunities to
executive officers and other key employees. This annual incentive plan is
designed to promote the achievement of shareholder- and customer-focused
objectives of WEC and its subsidiaries while recognizing individual and team
performance of participants.
Annual incentive compensation awards are targeted at approximately the 50th
percentile of general industry pay practices. In 1997, target incentive
awards were set for participants that ranged from 15% to 55% of base salary.
Each participant is eligible to receive an award if pre-established corporate
performance goals are met. Awards may be increased by up to 100% of targeted
amounts or reduced to zero based on individual and team performance.
Performance goals for 1997 for most executives were weighted as 50% financial,
40% operational, and 10% related to improving customer satisfaction.
Financial goals focused on achievement of target earnings per share.
Operational goals were specific to the corporation's business processes and,
among other things, related to development of new energy services, employee
training and development, environmental stewardship, safety of operations,
power plant availability, and corporate strategic planning. Customer
satisfaction was measured by surveys to determine the perceived value of the
company's products and services relative to those provided by competitors.
The performance goals for WEC Chief Executive Officer Abdoo were weighted as
80% financial, 12.5% operational and 7.5% toward improving customer
satisfaction. The performance of Mr. Grigg, who served as WEC Vice President
and WE President, Chief Operating Officer and Chief Nuclear Officer, was
weighted as 20% financial, 75% operational and 5% related to improving
customer satisfaction.
Although the corporation did well in achieving a number of operational goals
during 1997, it did not meet its financial and customer satisfaction goals.
As a result, the committee awarded participants with an award solely based on
operational performance. Operational accomplishments included, among others:
* progress made toward the turnaround of the company's nuclear
operations,
* the interim rate relief obtained for 1998,
* record generation at the company's fossil plants in support
of increased system requirements,
* growth in nonutility operations, and
* the recognition received for diversity initiatives and
customer call center operations.
Additional awards were provided to Mr. Grigg to recognize significant
improvement in nuclear operations in 1997 as part of the company's efforts to
achieve a high level of nuclear operational excellence. In 1996, the annual
incentive awards for Mr. Grigg and certain other employees in WE's Nuclear
Power Business Unit were reduced to reflect poor nuclear performance results.
The committee retained the right to provide these individuals with an award of
up to 150% of the amount that was withheld as an incentive to achieve certain
critical nuclear performance goals. As WE's Chief Nuclear Officer, Mr. Grigg
was successful in leading the effort to improve nuclear operations during the
year. This effort, which included a conservative decision-making philosophy
with a focus on operational safety, culminated in the Nuclear Regulatory
Commission removing a "declining trend letter" in January 1998. The
commission specifically noted Mr. Grigg's role in this turnaround. The
committee granted Mr. Grigg and the other nuclear employees an award of 125%
of the amount withheld. The committee also approved a bonus of $50,000 in
recognition of Mr. Grigg's outstanding overall performance in leading WEC's
nuclear operations. Mr. Grigg's total annual incentive award is shown in the
Summary Compensation Table.
LONG-TERM INCENTIVE COMPENSATION. The committee administers WEC's 1993
Omnibus Stock Incentive Plan, a long-term incentive plan designed to link the
interests of executives and other key employees to long-term shareholder
value. The long-term incentive plan allows WEC to grant stock options, stock
appreciation rights, stock awards and performance units to participants.
Equity interests in WEC common stock provide an incentive to improve the
performance and value of the company in exchange for a share in the
appreciation of the value of WEC common stock. Long-term incentive awards are
targeted at the 50th percentile of general industry grant practices.
The committee is presently reviewing the long-term incentive program to ensure
that it is effective in focusing WEC executives to achieve the corporation's
long-term objectives. Action with respect to long-term incentive plan awards
has been deferred. No awards were granted to executive officers, including
the CEO, during fiscal year 1997.
The committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the long-term incentive plan, the committee has
implemented stock ownership guidelines for participants. Guidelines for
executive officers range from 100% to 300% of base salary.
CHIEF EXECUTIVE OFFICER COMPENSATION. Performance and compensation of the
Chief Executive Officer are of particular importance to the committee.
Mr. Abdoo's performance was evaluated by the committee and compensation was
determined in accordance with the executive compensation policies described
above.
As part of WEC's corporate governance initiatives, the Compensation Committee
chair requested that non-employee directors provide a written evaluation of
the CEO's performance. The directors' written feedback was discussed by
committee members as part of its compensation determinations and has been
shared with the CEO.
Mr. Abdoo's base salary of $585,000, which approximates the 50th percentile of
the data reviewed by the committee, was determined in November 1996 and was
effective as of January 1, 1997. In determining this salary, the committee
considered many factors including, among others:
* an analysis of his current salary compared to the competitive median for
this position,
* his responsibilities and how he has discharged them,
* his overall performance and leadership in guiding an organization that is
able to provide quality services to its customers at competitive prices,
* the regional competitiveness of utility rates for 1996 and the outlook of
electric and gas rates for 1997,
* the impact of reengineering and cost control achievements of the companies
during 1996,
* his vision in positioning the company to take advantage of a deregulated
utility environment,
* his reputation among CEO's in the utility industry,
* his efforts relating to labor/management relations, and
* his contributions toward the goals of the nonutility companies.
The committee, as is customary, reviewed Mr. Abdoo's base salary in January
1998. Since Mr. Abdoo's base salary continues to approximate the 50th
percentile of the data reviewed by the committee, his salary was determined to
be appropriate.
With respect to annual incentive compensation for 1997, the Compensation
Committee reviewed Mr. Abdoo's performance against 1997 objectives. Although
financial and customer satisfaction objectives, which constitute 87.5% of
Mr. Abdoo's performance goals, were not met, Mr. Abdoo led the company to
achieve numerous operational goals in a particularly challenging year. The
committee specifically noted the role of the CEO in several operational
accomplishments, including:
* his frequent dialogue with nuclear regulators on the company's progress to
turn around its nuclear operations,
* the successful operation of the company's fossil plants to meet increased
regional demands,
* continued growth in the organization's customer base,
* improved quality in key customer service areas as evidenced by receipt of
the Utility Call Center of the Year award,
* growth of the company's nonutility operations,
* expanded environmental initiatives,
* his support of the use of state-of-the-art technologies, and
* his consistent support of equal opportunity, diversity, cross-cultural
sensitivity and strong labor-management relationships; an award was
received from the Human Resource Management Association in recognition of
diversity initiatives.
The committee believes that the leadership provided and decisions made by
Mr. Abdoo in 1997 have set the stage for improved 1998 performance. Although
the CEO earned a 1997 annual incentive award for achievement of operational
performance goals, the committee accepted Mr. Abdoo's request that his award
be reduced to zero in light of the company's overall performance in 1997.
COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION. Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
chief executive officer and the other proxy-named executive officers.
Qualifying performance-based compensation will not be subject to the deduction
limit if certain requirements are met. The committee will continue to review
these tax regulations as they apply to WEC's executive compensation program.
It is the committee's intent to preserve the deductibility of executive
compensation to the extent reasonably practicable and to the extent consistent
with its other compensation objectives.
Respectfully submitted to WEC's stockholders by the Compensation Committee of
the Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
EXECUTIVE OFFICERS' COMPENSATION
This table shows, for the last three fiscal years, compensation awarded to,
earned by or paid to WEC's Chief Executive Officer and each of WEC's other
four most highly-compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
--------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options/SARs Compensation
$ $ $ (#)(1) ($)(2)
- - -------------------------------- ---- -------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
RICHARD A. ABDOO
Chairman of the Board, President 1997 585,000 0 9,974 0 70,312
and Chief Executive Officer 1996 560,000 306,472 8,953 38,000 113,297
1995 496,000 232,000 8,321 38,000 83,858
- - -------------------------------- ---- -------- -------- ------------ --------- --------
RICHARD R. GRIGG
Vice President of WEC; President, 1997 320,000 137,927(3) 6,176 0 33,881
Chief Operating Officer and Chief 1996 295,000 62,835 5,206 19,000 43,412
Nuclear Officer of WE 1995 237,500 63,788 3,084 19,000 42,125
- - -------------------------------- ---- -------- -------- ------------ --------- --------
KRISTINE M. KRAUSE
Vice President-Fossil Operations 1997 205,000 26,454 0 0 19,770
of WE 1996 190,000 68,750 0 9,500 23,239
1995 160,000 48,904 0 9,500 16,532
- - -------------------------------- ---- -------- -------- ------------ --------- --------
CALVIN H. BAKER
Treasurer and Chief Financial 1997 190,000 32,666 1,889 0 16,046
Officer of WEC; 1996 170,000 70,298 1,420 9,500 21,996
Vice President-Finance and 1995 145,000 35,235 1,286 7,600 16,249
Chief Financial Officer of WE
- - -------------------------------- ---- -------- -------- ----------- -------- --------
DAVID K. PORTER
Senior Vice President of WE 1997 190,000 29,871 0 0 14,801
1996 190,000 63,449 0 7,600 23,994
1995 190,000 46,170 0 7,600 21,766
- - -------------------------------- ---- -------- -------- ----------- -------- --------
</TABLE>
(1) 1996 and 1995 grants of options were in combination with contingent
dividend awards. These awards will be paid if total shareholder return
(appreciation in the value of WEC common stock plus reinvested dividends) over
a four-year period beginning on the grant date equals or exceeds the median
return earned by the companies included in the Peer Group Index in the
"Performance Graph" section of this proxy statement. There will be no payout
if WEC's total shareholder return is negative over the course of such period.
If payable, each participant shall receive an amount equal to the actual
dividends paid on WEC common stock for the four-year period multiplied by the
number of performance units awarded to such participant. No stock
appreciation rights ("SARs") were awarded during any of the fiscal years
indicated.
(2) All Other Compensation for 1997 for Mr. Abdoo, Mr. Grigg, Ms. Krause,
Mr. Baker and Mr. Porter, respectively, includes: (i) employer matching of
contributions by each named executive into the 401(k) plan in the amount of
$4,750 for each named executive officer, (ii) "make whole" payments under the
Executive Deferred Compensation Plan with respect to matching in the 401(k)
plan on deferred salary or salary received but not otherwise eligible for
matching in the amounts of $21,994, $7,535, $5,362, $3,348 and $2,853,
respectively, and (iii) $43,568, $21,596, $9,658, $7,948 and $7,198,
respectively, which represents the present value of interest projected to
accrue for the executive's benefit on the current year's insurance premiums
paid by the company under a split-dollar life insurance program. For 1997,
the method of reporting insurance premiums was changed from reporting the full
dollar value of premiums to more accurately reflect the benefit received.
(3) The majority of Mr. Grigg's bonus award reflects his performance in
connection with overseeing the company's nuclear operations.
No stock options were exercised by the named executive officers in 1997. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the
exercise price and the year-end market price multiplied by the number of
shares underlying the option.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION SAR VALUES
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs Options/SARs
at Fiscal Year-End at Fiscal Year-End
(#) ($)
Name Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Abdoo 22,500 101,000 30,938 122,031
Richard R. Grigg 6,500 44,500 8,938 49,394
Kristine M. Krause 1,250 25,500 1,719 30,992
Calvin H. Baker 3,000 20,100 4,125 24,213
David K. Porter 6,500 18,200 8,938 20,532
</TABLE>
SEVERANCE POLICY. In connection with the Agreement and Plan of Merger between
WEC and Northern States Power Company (approved by WEC's stockholders on
September 13, 1995), the Board adopted a Senior Executive Severance Policy
("Severance Policy"). The Severance Policy was adopted to encourage certain
executive officers and other key employees, whose expertise has been critical
to WEC's success, to remain with WEC. Although the merger agreement has been
terminated, the Severance Policy provides for payment of severance to
participants whose employment is terminated under certain circumstances (e.g.,
terminations by WEC that are other than for cause, disability or retirement;
terminations resulting from certain sales of a business by WEC; and
terminations resulting from reductions in participants' salaries,
responsibilities or benefits) at any time before April 28, 2000.
The severance benefits under the Severance Policy consist of: (i) three years'
salary and annual incentive compensation; (ii) payment of the actuarial
equivalent of the additional retirement benefits the participant would have
earned if he or she had remained employed for three more years; (iii)
continued medical, dental and life insurance coverage for three years; (iv)
outplacement services or the use of office space and support; and (v)
financial planning counseling.
RETIREMENT PLANS
In 1997, WE maintained a defined benefit pension plan of the cash balance type
for most employees, including WEC executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, without any deduction for Social Security or other
offset, with a Social Security integrated benefit formula based on percentages
of final average compensation for up to 30 years of credited service and
additional (lower) percentages of compensation in excess of 30 years, up to a
maximum of 10 years. In addition, individuals participating in the plan as of
December 31, 1995 received a special one-time transition credit amount equal
to a specified percentage varying with age multiplied by credited service and
1994 base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit were also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to
5% of base pay (including certain incentive payments, pre-tax deferrals and
other items), plus an interest credit on all prior accruals equal to 4% plus
75% of the annual time-weighted trust investment return for the year in excess
of 4%.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form. Individuals who were
participants in the plan on December 31, 1995 are in no event to receive any
less than what would have been provided under the prior formula, had it
continued, if they terminate on or before January 1, 2011, and do not elect to
commence benefits before the earlier of age 55 and completion of 10 years'
service, or age 65.
All of the individuals listed in the Summary Compensation Table are
"grandfathered" under the prior plan benefit formula. Since their estimated
benefits under that formula are higher than under the cash balance plan
formula, utilizing current assumptions, their benefits would currently be
determined by the prior plan benefit formula. The following table shows
estimated annual benefits payable in life annuity form on normal retirement
for persons in various compensation and years of service classifications
during 1997, based on the grandfathered continuation of the prior plan formula
(including supplemental amounts providing additional benefits described below
in the "Other Retirement Benefits" section):
PENSION PLAN TABLE
Years of Service
--------------------------------------------------------------
Remuneration 15 20 25 30 35 40
- - ---------- ------- ------- ------- ------- ------- -------
$ 50,000 $10,838 $14,450 $18,063 $21,676 $23,763 $25,850
100,000 23,774 31,699 39,624 47,549 52,073 56,598
150,000 36,713 48,950 61,188 73,426 80,388 87,350
200,000 49,649 66,199 82,749 99,299 108,698 118,098
250,000 62,586 83,448 104,310 125,172 137,009 148,847
300,000 75,524 100,699 125,874 151,049 165,323 179,598
400,000 101,399 135,199 168,999 202,799 221,948 241,098
500,000 127,274 169,699 212,124 254,549 278,573 302,598
600,000 153,149 204,199 255,249 306,299 335,198 364,098
700,000 179,024 238,699 298,374 358,049 391,823 425,598
800,000 204,899 273,199 341,499 409,799 448,448 487,098
900,000 230,774 307,699 384,624 461,549 505,073 548,598
1,000,000 256,649 342,199 427,749 513,299 561,698 610,098
1,100,000 282,524 376,699 470,874 565,049 618,323 671,598
1,200,000 308,399 411,199 513,999 616,799 674,948 733,098
The compensation for the individuals listed in the Summary Compensation Table
in the columns labeled "Salary" and "Bonus" is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans, with the exception of the $50,000 bonus for nuclear
performance awarded to Mr. Grigg. Mr. Abdoo, Mr. Grigg, Ms. Krause, Mr. Baker
and Mr. Porter currently have 22, 27, 19, 6 and 28 credited years of service,
respectively.
OTHER RETIREMENT BENEFITS. Designated officers of WEC and WE participate in
the Supplemental Executive Retirement Plan ("SERP"). The SERP provides
monthly supplemental pension benefits to participants, which will be paid out
of unsecured corporate assets, or the grantor trust described below, as
follows: (a) an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be
if calculated without regard to any limitation imposed by the Internal Revenue
Code on pension benefits or covered compensation; (b) an amount calculated so
as to provide participants with a supplemental lifetime annuity, estimated to
amount to between 8% and 10% of final average compensation depending on which
pension payment option is selected; and (c) an amount for certain participants
equal to the difference between the actual pension benefit payable under the
pension retirement plan and what the pension benefit would be if calculated
under the prior benefit formula in effect on December 31, 1988. Except for a
"change in control" of WEC, as defined in the SERP, no payments are made until
after the participant's retirement or death.
WEC and WE have entered into agreements with Mr. Abdoo and Mr. Baker,
respectively, who cannot accumulate by normal retirement age the maximum
number of years of credited service under the pension plan formula in effect
immediately before the change to the cash balance formula. According to
Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive supplemental
retirement payments which will make his total retirement benefits at age 58 or
older substantially the same as those payable to employees who are age 60 or
older, who are in the same compensation bracket and who became plan
participants at the age of 25. According to Mr. Baker's agreement, Mr. Baker
at retirement will receive supplemental retirement payments which will make
his total retirement benefits at age 60 or older substantially the same as
those payable to employees who are in the same compensation bracket and who
became plan participants at the age of 25.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's and
Mr. Baker's agreements. The plans and agreements provide for optional lump
sum payments and, in the instance of a change in control, mandatory lump sum
payouts without regard to whether the executive's employment has terminated.
In each case, the interest rate benchmark formula for calculating the lump sum
amount is the five-year U. S. Treasury Note yield as of the last business day
of the month prior to date of payment.
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table lists the beneficial ownership of WEC common stock
(including phantom common stock) of each director, nominee and the executive
officers listed in the Summary Compensation Table as of February 27, 1998.
Included are shares owned by each individual's spouse, minor children or any
other relative sharing the same residence, as well as shares held in a
fiduciary capacity or held in WEC's Stock Plus and Wisconsin Electric's 401(k)
plan.
Number of Number of
Name Shares (1) Name Shares (1)
- - ------------------ ---------- -------------------------- ----------
Richard A. Abdoo 27,782 Geneva B. Johnson 3,548
John F. Ahearne 1,145 Kristine M. Krause 6,013
Calvin H. Baker 7,422 John N. MacDonough 100
John F. Bergstrom 5,999 David K. Porter 11,277
Robert A. Cornog 5,159 Frederick P. Stratton, Jr. 7,614
Richard R. Grigg 5,322
All above-named individuals and other executive officers as a group
(14 persons) 99,455 (2)
(1) Includes share units held in the WEC phantom common stock account under
WEC's Directors' Deferred Compensation Plan or Executive Deferred Compensation
Plan as follows: Mr. Abdoo (9,160), Mr. Baker (3,441), Mr. Bergstrom (2,999),
Mr. Cornog (1,782), Mr. Grigg (581), Mrs. Johnson (994), Ms. Krause (194),
Mr. Porter (354), and Mr. Stratton (2,214). Share units are intended to
reflect the performance of WEC common stock and are payable in cash.
(2) Amount is less than 1% of total WEC common stock outstanding.
Each person has sole voting and investment power as to all shares listed for
such person (other than phantom shares) except that the following persons have
shared voting and/or investment power as to the indicated number of shares so
listed: Mr. Baker (314), Mr. Cornog (150), Ms. Krause (2,098), Mr. Stratton
(3,000) and all above-named directors and officers and other executive
officers as a group (6,006).
Information on beneficially owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as required for purposes of this proxy
statement. It is not necessarily to be construed as an admission of
beneficial ownership for other purposes.
PERFORMANCE GRAPH
The following graph shows a comparison of the cumulative total return,
including reinvested dividends, over five years had $100 been invested at the
close of business on December 31, 1992 in each of (i) WEC common stock, (ii)
the Standard & Poor's ("S&P") 500 Index, (iii) a Peer Group Index and (iv) the
Edison Electric Institute 100 Index of Investor-Owned Electrics ("EEI 100").
Peer return is weighted by market capitalization at the beginning of each
period for which a return is indicated.
In view of the number of completed and pending mergers involving peer group
companies, the potential for further industry consolidation and changes in
lines of business of certain of the peer group companies, the Peer Group Index
no longer provides an accurate measure of WEC peer performance. Although
cumulative returns are shown for both indices on the following graph, the EEI
100 will replace the Peer Group Index in future comparisons. The EEI 100 is a
published industry index comprised of investor-owned utilities providing
primarily electric and natural gas services. The EEI 100 is considered to be
a broad measure of industry performance.
The companies in the Peer Group Index are: Baltimore Gas & Electric Company,
Boston Edison Company, Cinergy Corp., DPL Inc., DQE Inc., Enova Corporation,
Florida Progress Corporation, New Century Energies, New England Electric
System, NIPSCO Industries, Inc., Northern States Power Company, Pinnacle West
Capital Corporation, Potomac Electric Power Company, SCANA Corporation, TECO
Energy, Inc., Union Electric Company, WPS Resources Corporation and WPL
Holdings, Inc. The Cincinnati Gas & Electric Company, Public Service Company
of Colorado, and San Diego Gas & Electric Company merged with companies not in
the peer group and subsequently were replaced by their parent companies:
Cinergy Corp., New Century Energies and Enova Corporation, respectively, as
members of WEC's Peer Group Index. WEC is not in the Peer Group Index.
Additional, more detailed information about earnings is included in the
Appendix to this proxy statement.
[PERFORMANCE GRAPH APPEARS HERE]
FIVE-YEAR CUMULATIVE TOTAL RETURN
Value of Investment at Year-End
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
- - ---------- -------- -------- -------- -------- -------- --------
WEC $100 $109 $108 $135 $125 $142
S&P 500 $100 $110 $112 $153 $189 $252
Peer Group $100 $114 $106 $143 $148 $186
EEI 100 $100 $111 $98 $129 $130 $166
1999 ANNUAL MEETING
DIRECTOR CANDIDATES. The Nominating and Board Affairs Committee and WEC Board
have approved director candidate selection criteria which are designed to
provide the Board with a diversity of experience to allow it to effectively
meet the many challenges WEC faces in today's changing environment.
Stockholders wishing to propose director candidates for consideration and
recommendation by the Nominating and Board Affairs Committee for election at
the 1999 Annual Meeting must submit the name(s) and qualifications of any
proposed candidate(s) to WEC's Corporate Secretary not later than August 19,
1998. The Bylaws state that directors shall be stockholders of WEC.
STOCKHOLDER PROPOSALS. Stockholders wishing to submit written proposals for
inclusion in the proxy statement for the 1999 Annual Meeting must send the
proposals to WEC's Corporate Secretary so as to be received on or before
December 4, 1998.
NOMINATIONS OR PROPOSALS FROM THE FLOOR. Stockholders wishing to propose any
floor nominations for director or floor proposals at the 1999 Annual Meeting
must provide notice and submit certain other documentation as required by
WEC's Bylaws to WEC's Corporate Secretary to be received at least 70 days and
not more than 100 days prior to the scheduled date of the 1999 Annual Meeting.
AVAILABILITY OF FORM 10-K
A copy (without exhibits) of WEC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 as filed with the Securities and Exchange
Commission is available without charge to any stockholder of record or
beneficial owner of WEC common stock by writing to the Corporate Secretary,
Thomas H. Fehring, 231 West Michigan Street, P. O. Box 2949, Milwaukee,
Wisconsin 53201. In lieu of providing all stockholders with an Annual Report,
the WEC consolidated financial statements and certain other information found
in the Form 10-K is included in Appendix A to this proxy statement.
Wisconsin Energy Corporation
APPENDIX A
ANNUAL FINANCIAL STATEMENTS
and REVIEW of OPERATIONS
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
===============================================================================================
Financial (Thousands of Dollars except for per share amounts)
----------------------------- ------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 60,716* $ 218,135 $ 234,034 $ 180,868** $ 190,135
Earnings per share of common
stock ($; basic and diluted) 0.54* 1.97 2.13 1.67** 1.80
Dividends per share
of common stock ($) 1.535 1.5075 1.455 1.39625 1.34125
Operating revenues
Electric $1,412,115 $1,393,270 $1,437,480 $1,403,562 $1,347,844
Gas 355,172 364,875 318,262 324,349 331,301
Steam 22,315 15,675 14,742 14,281 14,090
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,789,602 $1,773,820 $1,770,484 $1,742,192 $1,693,235
========== ========== ========== ========== ==========
At December 31
Total assets $5,037,684 $4,810,838 $4,560,735 $4,408,259 $4,270,592
Long-term debt and preferred
stock - redemption required $1,532,405 $1,416,067 $1,367,644 $1,283,686 $1,300,781
-----------------------------------------------------------------------------------------------
Sales and Customers - Utility 1997 1996 1995 1994 1993
----------------------------- ---------- ---------- ---------- ---------- ----------
Electric
Megawatt-hours sold 27,671,946 27,560,428 27,283,869 26,911,363 25,685,436
Customers (end of year) 978,835 968,735 955,616 944,855 932,285
Gas
Therms delivered (Thousands) 980,730 936,894 886,729 811,219 809,348
Customers (end of year) 376,732 367,275 357,030 347,080 336,571
Steam
Pounds sold (Millions) 3,161 2,705 2,532 2,395 2,376
Customers (end of year) 474 465 473 471 459
===============================================================================================
<CAPTION>
CONSOLIDATED QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
---------------------------------------------------
March June
Three Months Ended 1997 1996 1997* 1996
------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating revenues $ 510,383 $ 495,457 $ 403,214 $ 401,686
Operating income 65,637 85,145 31,716 68,382
Net income 45,069 62,804 (10,632) 45,554
Earnings per share of common
stock ($; basic and diluted) 0.40 0.57 (0.09) 0.41
-----------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------
September December
Three Months Ended 1997 1996 1997* 1996
------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating revenues $ 400,614 $ 398,801 $ 475,391 $ 477,876
Operating income 46,441 76,693 55,665 75,624
Net income 23,975 53,430 2,304 56,347
Earnings per share of common
stock ($; basic and diluted) 0.21 0.48 0.02 0.51
===============================================================================================
<FN>
Quarterly results of operations are not directly comparable because of seasonal and other factors.
See Management's Discussion and Analysis of Financial Condition and Results of Operations.
* Includes May 1997 nonrecurring $30.7 million charge ($18.8 million net of tax or $.17 per share)
to write-off deferred merger costs related to the terminated merger agreement with Northern States
Power Company and the December 1997 $30.0 million write-down ($.16 per share) of equipment purchased
for the Kimberly Cogeneration Project.
** Includes 1994 nonrecurring $73.9 million charge ($45 million net of tax or $.42 per share) for Wisconsin
Electric Power Company's restructuring program.
/TABLE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation ("WEC" or the "Company") is a holding company
whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an
electric, gas and steam utility. As of December 31, 1997, approximately 93%
of WEC's consolidated total assets were attributable to WE. The following
discussion and analysis of financial condition and results of operations
includes both WEC and WE unless otherwise stated.
WISCONSIN NATURAL GAS COMPANY: On January 1, 1996, WEC merged its natural
gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE to form
a single combined utility subsidiary. The accounting treatment for this
merger was similar to that which would result from a pooling of interests.
Where applicable, references to WE include WN's gas operations prior to the
merger.
CAUTIONARY FACTORS: A number of forward-looking statements are included in
this document. When used, the terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "project" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are
subject to certain risks, uncertainties and assumptions which could cause
actual results to differ materially from those that are described, including
the items described below under "Factors Affecting Results of Operations" and
under "Cautionary Factors."
RESULTS OF OPERATIONS
See "Note L - Information By Segments of Business" in the Notes To Financial
Statements for additional information related to WEC's and WE's results of
operations.
EARNINGS
1997 COMPARED TO 1996: Compared to 1996's consolidated net income of
$218 million and earnings per share of $1.97, WEC's consolidated net income
and earnings per share were $61 million and $0.54 per share, respectively,
during 1997. WE's earnings decreased from $210 million in 1996 to $69 million
in 1997. As described below, 1997 earnings decreased primarily due to
(1) significantly higher fuel and purchased power expenses, (2) increased
other operation and maintenance expenses, (3) higher depreciation expense,
(4) a write-off in the second quarter of 1997 of deferred costs related to
WEC's terminated merger agreement with Northern States Power Company, a
Minnesota corporation ("NSP"), (5) an impairment charge in the fourth quarter
of 1997 for the write-down to fair value of WE's Kimberly cogeneration
equipment, and (6) retail electric and gas rate decreases that became
effective in February 1997.
1996 COMPARED TO 1995: WEC's consolidated net income and earnings per
share of common stock decreased in 1996 compared to 1995. WEC's consolidated
net income and earnings per share were $234 million and $2.13 per share,
respectively, during 1995. During 1996, WE's earnings decreased $29 million
from $239 million in 1995. As described below, WEC's and WE's 1996 earnings
decreased primarily because 1996 retail electric and gas rate decreases more
than offset the favorable impact of increases in electric sales and gas
deliveries and decreases in certain operating expenses.
ELECTRIC REVENUES, GROSS MARGINS AND SALES
The table that follows in this section summarizes electric operating revenues,
gross margins, megawatt-hour sales and average electric customers for each of
the three years ended December 31, 1997.
1997 COMPARED TO 1996: Primarily due to a fuel surcharge in WE's Wisconsin
electric retail jurisdiction, effective May 24, 1997, total electric operating
revenues increased by $18.8 million during 1997 compared to 1996. Revenues
from the fuel surcharge offset the impact on electric operating revenues of a
Wisconsin retail electric rate decrease, effective February 18, 1997, of
$7.4 million or 0.6% on an annualized basis.
The gross margin on electric operating revenues (total electric operating
revenues less fuel and purchased power expenses) decreased by $93.9 million
primarily due to significantly higher fuel and purchased power expenses during
1997. Fuel and purchased power expenses increased by $112.8 million during
1997 compared to 1996 as a result of (1) ongoing extended outages at Point
Beach Nuclear Plant ("Point Beach"), (2) an extended maintenance outage at Oak
Creek Power Plant ("Oak Creek") that was concluded in June 1997, (3) delayed
commercial operation of contractual generating capacity from LSP-Whitewater
Limited Partnership ("LS Power"), and (4) higher costs per megawatt-hour of
power purchases due to regional generation outages. During 1997, WE replaced
its lost generating capacity with higher cost generation and with a 218%
increase in megawatt-hours of power purchases. Partially offsetting the
increased 1997 fuel and purchased power expenses, WE recorded $24.1 million of
revenues as a result of the fuel surcharge: $15.1 million of 1997 collections
and an additional $9.3 million accrued in December 1997 that are expected to
be recovered during the first quarter of 1998. For further information
concerning the 1997 fuel surcharge and the extended outages at Point Beach,
see "Rates and Regulatory Matters" and "Nuclear Matters," respectively, below
under "Factors Affecting Results of Operations."
<TABLE>
<CAPTION>
=========================================================================================================
% Change % Change
1996 1995
Electric Operations 1997 1996 to 1997 1995 to 1996
------------------------------ ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Electric Gross Margin ($000's)
Operating Revenues
Residential $ 487,219 $ 494,142 (1.4%) $ 507,416 (2.6%)
Small Commercial/Industrial 430,193 421,511 2.1% 423,039 (0.4%)
Large Commercial/Industrial 402,684 383,047 5.1% 401,794 (4.7%)
Other-Retail/Municipal 55,246 56,318 (1.9%) 69,318 (18.8%)
Resale-Utilities 24,538 26,372 (7.0%) 24,811 6.3%
Other Operating Revenues 12,235 11,880 3.0% 11,102 7.0%
---------- ---------- ----------
Total Operating Revenues 1,412,115 1,393,270 1.4% 1,437,480 (3.1%)
Fuel & Purchased Power
Fuel 311,966 295,651 5.5% 303,553 (2.6%)
Purchased Power 132,689 36,216 266.4% 41,834 (13.4%)
---------- ---------- ----------
Total Fuel & Purchased Power 444,655 331,867 34.0% 345,387 (3.9%)
---------- ---------- ----------
Gross Margin $ 967,460 $1,061,403 (8.9%) $1,092,093 (2.8%)
========== ========== ==========
Sales (Mwh)
Residential 6,863,569 6,998,769 (1.9%) 7,042,691 (0.6%)
Small Commercial/Industrial 7,433,087 7,204,694 3.2% 7,047,277 2.2%
Large Commercial/Industrial 11,021,476 10,785,505 2.2% 10,639,782 1.4%
Other-Retail/Municipal 1,412,623 1,476,999 (4.4%) 1,550,937 (4.8%)
Resale-Utilities 941,191 1,094,461 (14.0%) 1,003,182 9.1%
---------- ---------- ----------
Total Electric Sales 27,671,946 27,560,428 0.4% 27,283,869 1.0%
========== ========== ==========
Average Customers
Residential 876,776 867,917 1.0% 857,924 1.2%
Small Commercial/Industrial 93,259 91,565 1.9% 90,386 1.3%
Large Commercial/Industrial 714 706 1.1% 679 4.0%
Other-Retail/Municipal 1,811 1,812 0.0% 1,809 0.2%
Resale-Utilities 33 20 65.0% 12 66.7%
---------- ---------- ----------
Total Average Customers 972,593 962,020 1.1% 950,810 1.2%
========== ========== ==========
=========================================================================================================
</TABLE>
Total electric sales increased by 111,000 megawatt-hours ("Mwh") during 1997
compared to 1996. Increased 1997 sales to small commercial/industrial and to
large commercial/industrial customers were offset by decreased sales to
customers in the residential, the other-retail/municipal and the resale-
utilities customer classes.
Total 1997 electric sales were positively impacted by growth in the number of
customers in the residential, the small commercial/industrial and especially
in the large commercial/industrial customer classes and by increased use per
customer by small and by large commercial/industrial customers. Cooler
weather during the summer of 1997 compared to the summer of 1996, however,
primarily contributed to lower use per residential customer and to the
decrease in 1997 residential electric sales. Electric energy sales to the
Empire and Tilden ore mines ("Mines"), WE's two largest retail electric
customers, decreased by 5.4% to 2,242,000 Mwh in 1997 compared to
2,369,000 Mwh in 1996. Excluding the Mines, total electric sales increased
1.0% and sales to the remaining large commercial/industrial customers
increased 4.3% between the comparative periods.
1997 sales in the other-retail/municipal customer class decreased compared to
1996 primarily due to the continued phase out in 1997 of firm requirements
contracts totaling 12.5 megawatts ("MW") with two wholesale customers and a
reduction of 30 MW in contractual requirements nominations during 1997 by
Wisconsin Public Power Inc. ("WPPI"), WE's largest municipal wholesale
customer. This customer has been reducing its purchases from WE over the past
few years subsequent to acquiring generating capacity and expanding use of its
existing generating facilities. Sales for resale to other utilities, the
resale-utilities customer class, decreased primarily as a result of reduced
opportunity sales caused by the Point Beach and Oak Creek outages mentioned
above.
1996 COMPARED TO 1995: Primarily as a result of annualized retail electric
rate decreases, effective January 1, 1996, of $33.4 million or 2.8% in
Wisconsin and $1.1 million or 3.3% in Michigan, total electric operating
revenues decreased by $44.2 million during 1996 compared to 1995. Also
contributing to the 1996 decrease in electric operating revenues were the
effects of renegotiated contracts with various wholesale customers and with
the Mines, as well as continued reductions in sales to WE's largest municipal
and utility wholesale customers. The renegotiated wholesale and mine
contracts contain discounts from previous rates charged to these customers in
exchange for contract extensions. An increase in total 1996 electric
kilowatt-hour sales was not sufficient to offset the impact on electric
operating revenues of the rate decreases, the renegotiated contracts and the
reduced sales to the wholesale customers.
Between the comparative periods, the gross margin on electric operating
revenues decreased by $30.7 million. The lower 1996 electric operating
revenues more than offset lower net 1996 fuel and purchased power expenses.
Fuel expenses declined in 1996 primarily due to lower average coal costs per
ton consumed. Between the comparative periods, purchased power expense
decreased as WE substituted lower cost generation for power purchases.
Residential sales declined during 1996 compared to 1995 because an increase in
the average number of residential customers during 1996 was more than offset
by a decrease in the average electric usage per residential customer as a
result of cooler weather during the summer of 1996. Small commercial/
industrial sales increased during 1996 compared to 1995 as a result of a 1996
increase in the average number of small commercial/industrial customers.
Electric energy sales to the Mines increased by 3.2% or 73,000 Mwh in 1996
from 2,296,000 Mwh in 1995. Excluding the Mines, total electric sales
increased 0.8% and sales to the remaining large commercial/industrial
customers increased 0.9% between the comparative periods.
Sales to the other-retail/municipal customer class decreased in 1996 compared
to 1995 largely due to ongoing reductions in sales to WPPI as noted above.
Sales of electric energy to other utilities (the resale-utilities customer
class), representing 4.0% of total 1996 electric energy sales, increased in
1996 in part due to increased availability during 1996 of WE's lowest cost
generating units and in part due to greater native load demand as a result of
the hot weather during the summer of 1995. These factors allowed for higher
comparative opportunity sales by WE to other utilities in 1996. During 1996,
a continued reduction in purchases of electricity by Upper Peninsula Power
Company, an independent investor-owned utility, somewhat offset the increase
in resale sales to other utilities during 1996. WE expects this customer to
significantly reduce its purchases of electric energy from WE when a 65 MW
agreement with WE expires at the end of 1997.
GAS REVENUES, GROSS MARGINS AND THERM DELIVERIES
The table that follows in this section summarizes gas operating revenues,
gross margins, therm deliveries and average gas customers for each of the
three years ended December 31, 1997.
1997 COMPARED TO 1996: Total gas operating revenues decreased by
$9.7 million during 1997 compared to 1996. The gross margin on gas operating
revenues (total gas operating revenues less cost of gas sold) decreased by
$9.3 million between the comparative periods. Total gas operating revenues
and gross margin declined primarily due to an annualized gas retail rate
decrease, effective February 18, 1997, of $6.4 million or 2.0% and to
decreased therm deliveries to residential and commercial/industrial customers.
These customers are more sensitive to weather variations as a result of
heating requirements and contribute higher margins to earnings than other
customer classes. Other operating revenues reflect adjustments for over and
under collection of gas costs included in operating revenues from gas sales.
Cost of gas sold was unchanged between the comparative periods. An 8.4%
increase in 1997 in the per unit cost of purchased gas was offset by a 7.9%
decrease in total gas purchases during 1997. WE arranges for its own gas
supply contracts with terms of various lengths. Changes in the cost of
natural gas purchased at market prices are included in customer rates through
the purchased gas adjustment mechanism and do not affect gross margin. See
"Rates and Regulatory Matters" below in "Factors Affecting Results of
Operations" for additional information concerning the purchased gas adjustment
mechanism.
Total natural gas therm deliveries increased by 46,782,000 therms in 1997
compared to 1996. Decreased deliveries to the residential, the commercial/
industrial and the interruptible customer classes during 1997 were more than
offset by increased interdepartmental deliveries to WE-owned gas-fired
generating facilities and increased deliveries of transported - customer owned
gas.
<TABLE>
<CAPTION>
=========================================================================================================
% Change % Change
1996 1995
Gas Operations 1997 1996 to 1997 1995 to 1996
------------------------------ ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Gas Gross Margin ($000's)
Operating Revenues
Residential $ 221,968 $ 218,811 1.4% $ 194,226 12.7%
Commercial/Industrial 113,609 108,100 5.1% 94,482 14.4%
Interruptible 8,970 11,531 (22.2%) 7,712 49.5%
Interdepartmental 3,096 3,050 1.5% 5,052 (39.6%)
---------- ---------- ----------
Total Gas Sales 347,643 341,492 1.8% 301,472 13.3%
Transported Customer Owned Gas 11,295 11,006 2.6% 12,161 (9.5%)
Transported - Interdepartmental 2,105 725 190.3% 782 (7.3%)
Other Operating Revenues (5,871) 11,652 (150.4%) 3,847 202.9%
---------- ---------- ----------
Total Operating Revenues 355,172 364,875 (2.7%) 318,262 14.6%
Cost of Gas Sold 233,877 234,254 (0.2%) 188,764 24.1%
---------- ---------- ----------
Gross Margin $ 121,295 $ 130,621 (7.1%) $ 129,498 0.9%
========== ========== ==========
Therms Delivered (000's)
Residential 347,859 371,990 (6.5%) 345,140 7.8%
Commercial/Industrial 211,453 225,169 (6.1%) 207,358 8.6%
Interruptible 24,532 35,869 (31.6%) 29,397 22.0%
Interdepartmental 9,696 11,280 (14.0%) 21,250 (46.9%)
---------- ---------- ----------
Total Gas Sales 593,540 644,308 (7.9%) 603,145 6.8%
Transported Customer Owned Gas 313,466 268,163 16.9% 261,361 2.6%
Transported - Interdepartmental 76,670 24,423 213.9% 22,223 9.9%
---------- ---------- ----------
Total Gas Delivered 983,676 936,894 5.0% 886,729 5.7%
========== ========== ==========
Average Customers
Residential 339,002 330,153 2.7% 321,643 2.7%
Commercial/Industrial 30,594 29,936 2.2% 29,230 2.4%
Interruptible 170 190 (10.5%) 203 (6.4%)
Interdepartmental 2 4 (50.0%) - -
---------- ---------- ----------
Total Sales Customers 369,768 360,283 2.6% 351,076 2.6%
Transportation 254 230 10.4% 209 10.1%
Transportation - Interdepartmental 5 4 25.0% 6 (33.3%)
---------- ---------- ----------
Total Average Customers 370,027 360,517 2.6% 351,291 2.6%
========== ========== ==========
=========================================================================================================
</TABLE>
Despite an increase in the average number of residential and commercial/
industrial customers during 1997 compared to 1996, deliveries to these two
customer classes decreased between the comparative periods primarily due to
warmer weather during the 1997 heating seasons compared to the same periods
during 1996. Therm deliveries to interruptible customers decreased during
1997 compared to 1996 due to a decrease in the average number of interruptible
customers and in the average therm use per interruptible customer during 1997.
Deliveries of transported - customer owned gas increased by 45,303,000 therms
during 1997 compared to 1996 due to an increase in the average number of
transport customers and to an increase in the average therm use per transport
customer. During 1997, a number of sales customers switched to become
transportation customers. Also, increased deliveries of transported -
customer owned gas in 1997 reflect start-up of commercial operations of LS
Power's gas-fired cogeneration facility, located within WE's gas service
territory, in September 1997.
WE delivers natural gas to WE generating facilities, including the Concord and
Paris Generating Stations ("Concord" and "Paris"), at rates approved by the
Public Service Commission of Wisconsin ("PSCW"). Due to the Point Beach and
Oak Creek outages noted above, WE substituted generation at Concord and Paris,
natural gas-fired peak generating plants, resulting in a 142% or 50,663,000
therm increase in total 1997 interdepartmental deliveries compared to 1996.
Excluding interdepartmental deliveries, total 1997 therm deliveries decreased
0.8% compared to 1996.
1996 COMPARED TO 1995: Despite an annualized $8.3 million or 2.6%
Wisconsin retail gas rate decrease, effective January 1, 1996, total gas
operating revenues increased by $46.6 million and the gross margin on gas
operating revenues increased by $1.1 million during 1996 compared to 1995. An
increase in total therm deliveries during 1996 more than offset the impact of
the rate decrease on gas operating revenues and on gross margin.
Gross margin was higher in 1996 because the increased therm deliveries were
primarily to residential and commercial customers, who contribute higher
margins to earnings than other customer classes. The cost of gas sold
increased in 1996 compared to 1995 due to a higher 1996 per unit cost of
purchased gas and to a higher volume of gas purchases in 1996. Changes in the
cost of natural gas do not affect gross margin.
Total natural gas therm deliveries increased by 50,165,000 therms in 1996
compared to 1995. Residential and commercial/industrial sales increased in
1996 in part due to colder weather during the 1996 heating seasons and in part
due to an increase in 1996 in the average number of customers in these two
customer classes.
Total interdepartmental therm deliveries decreased 17.9% or by 7,770,000
therms during 1996 compared to 1995. These therm deliveries to WE electric
generating facilities, primarily Concord and Paris, decreased in 1996 as a
result of the significantly cooler summer weather in 1996 compared to 1995
discussed above in "Electric Revenues, Gross Margins and Sales." Excluding
interdepartmental deliveries, total 1996 therm deliveries increased 6.9%
compared to 1995.
For further information concerning WE's 1996 and 1997 rate orders, see "Rates
and Regulatory Matters" below under "Factors Affecting Results of Operations."
OPERATING EXPENSES
1997 COMPARED TO 1996: During 1997, other operation and maintenance
expenses increased 9.6% or by $47.6 million compared to 1996, including a
$33.3 million increase in non-fuel nuclear expenses, an $8.1 million increase
in transmission system expenses and a $10.8 million increase in administrative
and general expenses. Non-fuel nuclear expenses increased during 1997 due to
extended and unscheduled generating unit outages at Point Beach and due to
efforts by WE's nuclear operations to strengthen plant performance and address
concerns identified by the United States Nuclear Regulatory Commission
("NRC"). During 1997, transmission expenses increased due to significantly
higher 1997 power purchases, and administrative and general expenses increased
primarily due to higher salaries and outside services employed. An
$11.3 million decrease in customer service expenses during 1997, primarily due
to reduced conservation expenses, partially offset the higher 1997 other
operation and maintenance expenses. Depreciation expense increased 17.2% or
by $35.0 million between the comparative periods primarily due to higher
depreciable plant balances in 1997 and to higher depreciation rates included
in the PSCW's 1997 rate order. Total operating income taxes decreased 54.4%
or by $68.8 million in 1997 as a result of lower taxable income.
As of December 31, 1997, WE has deferred $18 million of nuclear non-fuel
operation and maintenance costs under authority granted by the PSCW in July
1997. The PSCW has not yet decided how these costs will be treated for rate
making purposes. For further information concerning WE's deferred nuclear
non-fuel operation and maintenance costs, see "Note F - Nuclear Operations" in
the Notes to Financial Statements.
1996 COMPARED TO 1995: During 1996, other operation expenses decreased
0.9% or by $3.7 million compared to 1995, primarily due to lower capitalized
conservation, property insurance and pension and benefit expenses, partially
offset by increased uncollectible expenses. Maintenance expense decreased
8.3% or by $9.4 million in 1996 compared to 1995, primarily as a result of a
decrease in costs associated with maintenance of WE's fossil power plants. WE
attributes the decrease in maintenance to an extended outage at WE's Pleasant
Prairie Power Plant ("Pleasant Prairie") in 1995 as well as to continued
efforts to reduce operating and maintenance costs. Depreciation expense
increased 10.3% or by $18.9 million between the same comparative periods
primarily due to increased nuclear decommissioning expenses and to a lesser
extent to higher depreciable plant balances in 1996. During 1996, operating
taxes other than income taxes increased 4.1% or by $3.1 million compared to
1995 due to tax adjustments related to prior periods. Total operating income
taxes decreased 10.2% or by $14.4 million in 1996 compared to 1995 as a result
of lower taxable income.
OTHER ITEMS
1997 COMPARED TO 1996: In the second quarter of 1997, WEC recorded a
$30.7 million charge ($18.8 million net of tax or approximately 17 cents per
share) to write off deferred merger costs related to the terminated merger
agreement with NSP, of which approximately $21.9 million was attributable to
WE. During 1997, WEC also recorded $1.3 million of merger expenses related to
the pending acquisition by WEC of ESELCO, Inc. For further information
concerning the terminated merger with NSP and the pending acquisition of
ESELCO, Inc., see "Note B - Mergers" in the Notes to Financial Statements.
Compared to 1996, WEC's miscellaneous net other income and deductions
decreased $45 million during 1997 of which $33.9 million was attributable to
WE. Based upon the results of a discounted cash flow analysis for a pending
project that would utilize WE's Kimberly cogeneration equipment, WE recorded a
$30.0 million impairment charge ($18.4 million net of tax or 16 cents per
share) in December 1997 for the equipment. For further information concerning
the Kimberly cogeneration equipment, see "Note M -Commitments and
Contingencies" in the Notes to Financial Statements. During 1997,
miscellaneous net other income and deductions also decreased due to increased
1997 charitable contributions by WE and due to fair market valuation
adjustments of non-utility investments.
Interest income increased 34.8% or by $6.3 million during 1997 compared to
1996 primarily due to increased earnings on WE's decommissioning trust fund.
Interest charges on long-term debt increased 6.9% or by $7.1 million between
the comparative periods as a result of increased average outstanding long-term
debt, primarily at WE, during 1997.
1996 COMPARED TO 1995: Excluding the annual $10.9 million impact of a 1996
change in accounting for capitalized conservation expenditures at WE,
miscellaneous net other income and deductions increased $14.9 million in 1996
compared to 1995. The change in accounting more than offset a 1996 increase
in non-utility miscellaneous net other income and deductions of $13.4 million
compared to 1995. This $13.4 million increase was primarily due to fair
market valuation adjustments of non-utility investments and the gain recorded
on sales of non-utility property and investments.
Other interest charges decreased by $5.0 million in 1996 compared to 1995 due
to lower average outstanding short-term debt balances during 1996, primarily
at WE.
FACTORS AFFECTING RESULTS OF OPERATIONS
MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and NSP agreed to terminate the Agreement and Plan of Merger which
provided for a business combination of WEC and NSP to form Primergy
Corporation. As a result, WEC recorded a $30.7 million charge in the second
quarter of 1997 ($18.8 million net of tax or approximately 17 cents per share)
to write off deferred transaction costs and costs to achieve the merger, of
which approximately $21.9 million was attributable to WE.
ESELCO, INC.: On May 13, 1997, WEC and ESELCO, Inc., parent company of
Edison Sault Electric Company ("Edison Sault"), entered into an Agreement and
Plan of Reorganization setting forth the terms of the proposed acquisition of
ESELCO, Inc. by WEC. On October 7, 1997, the shareholders of ESELCO, Inc.
voted to approve the proposed transaction. During 1997, WEC recorded
$1.3 million of related merger expenses. WEC expects to complete the proposed
acquisition as soon as practicable during 1998 upon receipt of all appropriate
regulatory approvals and upon fulfillment of other customary conditions. For
additional information concerning the proposed acquisition, see "Electric
Sales and Gas Deliveries Outlook" below. Unless otherwise noted, information
and descriptions contained in this document do not consider the impact of the
proposed acquisition of ESELCO, Inc.
For further information concerning the terminated merger with NSP and the
pending acquisition of ESELCO, Inc., see "Note B - Mergers" in the Notes to
Financial Statements.
NUCLEAR MATTERS
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 megawatt
electric generating units at Point Beach. During 1997, 1996 and 1995, Point
Beach provided 6%, 24% and 25% of WE's net electric energy supply,
respectively. The NRC licenses for Point Beach expire in October 2010 for
Unit 1 and in March 2013 for Unit 2.
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. The NRC issues trend letters to provide early notification of
declining performance and to allow a utility, under the watchfulness of the
NRC, to take early corrective actions. During 1997, WE undertook a
comprehensive effort to address NRC concerns and to take advantage of industry
best practices to further strengthen performance at the plant. On January 21,
1998, the NRC rescinded its declining trend letter and informed WE "that the
corrective actions [being taken by WE] have been effective in addressing [the
NRC's] concerns and that the adverse trends in performance at Point Beach have
been arrested."
WE returned Point Beach Unit 2 to service in August 1997 following an extended
outage that began in October 1996 to replace the unit's steam generators.
Unit 2 was taken out of service from mid-November 1997 through early February
1998 and has experienced several other unplanned shutdowns in the past six
months to address various equipment issues. WE plans to begin its first
18-month fuel cycle with Unit 2's September 1998 refueling outage. For
additional information concerning the Unit 2 steam generator replacement, see
"Investing Activities" below in "Liquidity and Capital Resources."
Point Beach Unit 1 was taken out of service in February 1997 due to equipment
problems. WE decided to keep Unit 1 out of service to allow Point Beach staff
to focus their attention on the work necessary to bring Unit 2 back to
service. During the summer of 1997, WE replaced two low pressure turbines in
Unit 1 which increased its dependable generating capability from 500 to 510
megawatts. WE returned Unit 1 to service from December 1997 through
mid-February 1998, when it began a scheduled refueling outage that is expected
to be completed in May 1998.
Additional unplanned shutdowns of Units 1 or 2 may be necessary as WE
continues to thoroughly review facility design, to improve adherence to NRC
requirements, and to complete regulatory commitments. WE expects the
reliability of the units to improve toward historical levels as these efforts
progress. Projected fuel costs, filed by WE with the PSCW as part of the 1998
Test Year data, reflect anticipated lower availability of Point Beach during
this period of time. For additional information concerning the 1998 Test
Year, see "Rates and Regulatory Matters" below.
In early October 1996, the NRC requested all nuclear reactor licensees in the
United States to describe the processes used to ensure the adequacy and
integrity of the licensees' design bases for their plants and to ensure the
plants continue to be operated and maintained in accordance with the design
bases. WE responded to the NRC in February 1997. Currently, the NRC is
performing engineering inspections of various nuclear generating stations in
the United States, with a focus on design and design basis. The NRC may
perform such an inspection of Point Beach in the future but has not scheduled
one to date.
See "Note F - Nuclear Operations" in the Notes to Financial Statements for
information concerning WE's deferral during 1997 of approximately $18 million
of nuclear non-fuel O&M costs in excess of those included in 1997 rates.
SPENT FUEL STORAGE AND DISPOSAL: WE currently has sufficient space in the
spent fuel pool at Point Beach to complete the fall 1998 Unit 2 and spring
1999 Unit 1 refueling outages before the pool is full in its current
configuration. In response to reduced spent fuel pool storage capacity, WE
completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for the temporary dry storage of spent fuel at Point Beach.
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to the ISFSI. To date, WE has loaded two such casks and currently
has two additional casks available for loading at Point Beach. WE estimates
that, with implementation of 18-month fuel cycles, the remaining 10 authorized
casks, and the remaining space in the spent fuel pool in its current
configuration, it has sufficient temporary storage to complete the scheduled
fall 2003 Unit 1 refueling outage.
As a result of the ignition of hydrogen gas during welding operations
associated with loading a third cask at Point Beach in May 1996, WE
discontinued cask loading until plans to prevent recurrence of such an event
were developed and accepted by the NRC and until such plans are implemented.
In September 1997, the NRC formally accepted WE's corrective actions and
closed a confirmatory action letter concerning the hydrogen gas ignition which
had halted cask loading.
In May 1997, the NRC sent WE another confirmatory action letter regarding
concerns about the welding process for the casks being used at Point Beach as
well as at two unaffiliated utilities. The letter prohibits the loading of
additional casks until modified welding procedures are accepted by the NRC.
In August 1997, WE submitted a response to the NRC describing modifications to
the welding procedures which address the NRC's concerns and documenting the
conclusion that the two casks already loaded with spent fuel at Point Beach
have not experienced weld problems. The NRC has since required that WE and
the other users develop an ultrasonic inspection technique for the lid welds
prior to lifting the May 1997 confirmatory action letter. WE expects to
qualify this inspection technique by May 1998. WE hopes to be able to resume
cask loading and to load two additional casks with spent fuel during the
summer of 1998. WE is also evaluating alternative on-site temporary spent
fuel storage options.
Temporary spent fuel storage alternatives are necessary at Point Beach until
the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel under a contract with WE mandated by the
Nuclear Waste Policy Act of 1982, as amended in 1987 ("Waste Act"). The DOE
has indicated that it does not expect a permanent spent fuel repository to be
available until at least 2010. In July 1996, the United States Court of
Appeals for the District of Colombia circuit ("D.C. Appeals Court") ruled that
the DOE had an unconditional obligation under the Waste Act to begin accepting
spent fuel by January 31, 1998. However, in December 1996, the DOE notified
owners of commercial nuclear plants that it would not be able to meet its
statutory obligation. In November 1997, the D.C. Appeals Court ruled that
utilities should seek damages per the provisions of the standard contract.
The DOE has indicated that it intends to pay such damages out of the Nuclear
Waste Fund ("Waste Fund") and then simply offset such payments by increasing
fees paid into the Waste Fund by the contracting utilities for construction of
a permanent spent fuel repository. In January 1998, the DOE denied a petition
of 27 utilities, including WE, to suspend and place in escrow future payments
to the Waste Fund until the DOE complies with its reciprocal obligation to
dispose of spent fuel. On January 31, 1998, the DOE breached its contract
with WE by failing to begin removing spent fuel from Point Beach. In February
1998, WE joined other utilities in a motion to enforce the mandate of the D.C.
Appeals Court in which the utilities seek an order (1) compelling the DOE to
submit a detailed program for disposing of spent fuel from utilities,
(2) declaring that the utilities are relieved of their obligation to pay fees
into the Waste Fund and are authorized to place such fees into escrow until
the DOE commences with disposing of the spent fuel pursuant to its obligations
under the Waste Act, and (3) precluding the DOE from using any fees paid into
the Waste Fund to reimburse the utilities for any damages they have incurred
as a result of DOE's breach of its obligations under the Waste Act. At this
time, WE is unable to predict when the DOE will actually begin accepting spent
nuclear fuel.
During 1997, the United States Senate and the United States House of
Representatives each passed the Nuclear Waste Policy Act of 1997. The
legislation would require the DOE to establish a temporary spent fuel
repository in the State of Nevada until the permanent repository is available
and to begin taking ownership from utilities and removing spent fuel as
required by the Waste Act. Reconciliation of Senate and House versions of the
bill are not yet resolved. President Clinton has threatened to veto any
legislation that reaches his desk. The matter is pending.
ELECTRIC SYSTEM RELIABILITY MATTERS
WE experienced electricity supply shortages during the summer of 1997. While
the circumstances on its system that contributed to these shortages are not
expected to occur again during this year, WE is currently involved in the
following actions to mitigate the risk of recurrence and to improve electric
reliability in the region.
ADDITIONAL 250 MW OF CAPACITY: In the fourth quarter of 1997, WE issued a
request for proposal for contracts for 250 MW of generation capacity to be
built in eastern Wisconsin with an in-service date of June 1, 1999, if
possible, but no later than June 1, 2000. In the request, WE proposed
contracting for the power for three to eight years but will not own or operate
the facility. WE anticipates that capacity proposed in the bidding process
will largely be in the form of natural gas-fired facilities, but other types
of facilities are also being considered. This new generation capacity, to be
built in eastern Wisconsin, is expected to economically improve reliability in
eastern Wisconsin. WE has received significant interest in the proposal.
COMBUSTION TURBINE INLET COOLERS: On February 18, 1998, the PSCW approved
WE's application for authority to install inlet coolers at Concord and gave
conditional approval for Paris subject to approval by the WDNR. WE
anticipates WDNR approval in April 1998. WE expects that the inlet coolers,
which are planned to be operational by the summer of 1999 or sooner, will
boost generating capacity of these two WE plants by a combined total of
approximately 110 MW. WE estimates that the inlet coolers for the two plants
will cost a total of approximately $24 million during the 1998-1999 biennial
period. The costs of these projects are included in anticipated construction
expenditures described below in "Capital Requirements 1998-2002" under
"Liquidity and Capital Resources."
ELECTRIC TRANSMISSION PROJECTS: In October 1997, WE announced three
projects designed to increase the electric import capability into eastern
Wisconsin and to improve electric system reliability. If approved by the
PSCW, the Plains-Morgan 345 kV upgrade project would allow for an additional
80 MW of generating capacity in the Upper Peninsula of Michigan to be
available to eastern Wisconsin, the Southern Interface project would increase
the transfer capability between northern Illinois and eastern Wisconsin by
1,000 MW and the Oak Creek-KK Substation project would improve reliability in
the metropolitan Milwaukee area. Applications for the three projects are
scheduled to be filed with the PSCW in 1998. WE anticipates that these
projects will cost a combined total of approximately $81 million over the next
several years. The costs of these projects are included in anticipated
construction expenditures described below in "Capital Requirements 1998-2002"
under "Liquidity and Capital Resources."
MIDWEST ISO: WE is currently participating in the formation of a regional
independent system operator ("ISO") to promote reliability in the Midwest (the
"Midwest ISO"). WE, along with eight other utilities, filed a proposal with
the Federal Energy Regulatory Commission ("FERC") to establish the Midwest ISO
on January 15, 1998. Since the filing with FERC, a tenth utility has joined
the Midwest ISO group. The Midwest ISO would operate member electric
transmission systems within the region as a single system. Regional oversight
is required to maintain reliability because the system is being used
increasingly for broad, regional transactions. In addition to reliability
benefits, a regional ISO helps to ensure open and equal access to the electric
transmission system and broadens the energy market by eliminating redundant
transmission fees. As a net buyer of electric energy, WE expects the Midwest
ISO to result in lower energy costs for its customers as well as in improved
regional reliability.
REPORT TO THE GOVERNOR OF WISCONSIN: The first three of WE's actions
outlined above are part of a joint plan, addressing electric system
reliability within the state and region, which was submitted to the Governor
of the State of Wisconsin during 1997 by WE along with ten other
organizations. The recommendations in this plan included a combination of
improved regional electric transmission, increased generating capacity and a
streamlined regulatory process for construction of new electric generation and
transmission facilities. The report emphasized that unexpected events such as
power plant outages in the upper midwest, significant regional transmission
limitations or very hot weather dictate the need to reevaluate regional system
reliability. In the report, WE and three other investor owned utilities from
Wisconsin outlined a plan to allow the development of merchant plants,
including plants built by utility affiliates, as an accelerated and cost-
effective way to obtain new electric generation after the year 2000. The plan
also identified the necessity to have a regional transmission operator.
On March 12, 1998, the Governor of the State of Wisconsin announced that
specific electric industry reliability legislation will be submitted to the
Legislature for consideration in the spring 1998 session. The Governor's
proposal (1) includes provisions for regulatory streamlining, (2) supports a
regional ISO with a date certain of June 2000, after which a State ISO could
be developed or transmission divestiture could be required, (3) allows
merchant plants to be built, (4) allows utility affiliates to build merchant
plants if the PSCW finds this is not anti-competitive, and (5) if such
non-utility plants are built in the midwest, provides that they would not
count towards the Wisconsin public utility holding company asset cap. The
Governor's proposal also will require that 50 MW of renewable energy sources
be constructed or procured by Wisconsin investor-owned utilities by
December 31, 2000.
INDUSTRY RESTRUCTURING AND COMPETITION
Driven by a combination of market forces, regulatory and legislative
initiatives, and technological changes, the electric industry continues a
trend towards restructuring and increased competition. To date, competitive
forces have been most prominent in the wholesale power market but are expected
to continue to develop in the electric retail markets. Present regulatory
restructuring initiatives in various midwestern states target electric retail
customer choice by the years 2000 through 2005. Also, there are currently
pilot electric retail customer choice programs occurring in the States of
Illinois and Michigan, and Illinois has passed legislation introducing retail
electric choice for large customers in 1999 and for all customers by May 2002.
While the Company cannot predict the ultimate timing or impact of a
restructured electric industry, WE has been advocating restructuring of the
electric utility industry and believes that, as a low-cost energy provider, it
is well positioned to compete in a deregulated and competitive market. Among
others, the following electric and gas industry restructuring initiatives are
underway in regulatory jurisdictions where WE currently does business.
PSCW INVESTIGATION INTO THE STRUCTURE OF THE ELECTRIC UTILITY INDUSTRY: In
December 1995, the PSCW announced a process to transform the electric industry
in Wisconsin to a competitive model supportive of retail choice by the year
2001. During 1997, Wisconsin retail customers under PSCW jurisdiction
accounted for 87.9% and 81.4% of WE's total electric operating revenues and
sales, respectively. Progress on the workplan was slow, and the PSCW
concluded that electric power shortages experienced during the summer of 1997
highlighted the need to address infrastructure issues.
In October 1997, the PSCW expressed a desire to work on infrastructure issues
and to develop a robust competitive electric wholesale market. The PSCW also
expressed its belief that the question of whether to implement electric retail
competition in Wisconsin ultimately should be decided by the Wisconsin
Legislature rather than by the PSCW. The PSCW agreed to pursue the following
priority infrastructure issues as prerequisites to other restructuring work:
* Improvements to existing and addition of new electric transmission lines in
the State of Wisconsin.
* Additions of new generating capacity in the State of Wisconsin.
* Modifications to State of Wisconsin statutes to allow merchant generating
plants to be built in Wisconsin without prior PSCW determination of need as
one means of ensuring adequate generation.
* Development of an ISO for either the electric transmission system in the
State of Wisconsin or in the region.
The PSCW reopened its docket on ISOs with a prehearing conference in
mid-December 1997. The schedule calls for hearings in March and April 1998
with a decision expected in May 1998.
With an order issued in December 1997, the PSCW completed work on its
recommended "Public Benefits" plan to protect low-income utility customers,
conservation programs and the environment under a deregulated electric
industry. To implement and fund this plan, legislative approval is required.
On March 2, 1998, Wisconsin State Representative Antonio Riley introduced
legislation that would create a low-income Public Benefits Board with annual
funding of $105 million. WE has supported the development of such an approach
to public benefits to ensure that WE is not competitively disadvantaged by
being required to continue to provide these benefits.
The PSCW plan would shift funding and administration of the benefits currently
provided under bundled utility service. All electricity and natural gas
providers would be assessed a fee, based upon the volume of their sales, to
collect the necessary funds. Based upon a British Thermal Unit equivalency
between natural gas and electricity, the plan is fuel neutral. The majority
of funds would be collected by reallocating existing charges. The PSCW
determined that the effort will call for a combined annual budget of
approximately $150 million. The Wisconsin Legislature has not acted on the
PSCW proposal to date.
MPSC ELECTRIC UTILITY INDUSTRY INVESTIGATION: In the State of Michigan,
restructuring proposals are being considered by policy makers on several
fronts. The Michigan Public Service Commission ("MPSC") has issued several
orders that phase in competition through the year 2002. The Michigan
Legislature is also working on a plan to restructure the electric industry.
In June 1997, the MPSC issued an order that initiated the framework for
electric industry restructuring and would phase in competition for all
Michigan retail electric customers by the year 2002. In response to the June
1997 order, WE sent a proposal to the MPSC in July 1997 to conduct a one time
bidding for customer choice in its service territory for 12.5% of its Michigan
load on September 1, 1999, followed by full customer choice in the year 2002.
The MPSC has not acted on WE's proposal.
In October 1997 and January 1998, the MPSC issued additional orders that
continued the process of establishing the framework to introduce competition
into the Michigan electric market. The October 1997 orders dealt with
determination of the rates and conditions of service for those customers
choosing direct access and suspended the direct access bidding schedule
included in the June 1997 order. In the January 1998 orders, the MPSC
concluded that statewide uniform timing was not necessary for direct access
and established a schedule for customers of Consumers Energy and Detroit
Edison, the two major investor owned utilities with service territories in
Michigan's Lower Peninsula. Several parties, including Consumers Energy and
Detroit Edison, have petitioned for rehearing of the MPSC's orders.
The MPSC established no customer choice schedule for other utilities who
provide electric service in Michigan. During 1998, WE anticipates that the
MPSC will move forward on developing a schedule for introducing full customer
choice in Michigan's Upper Peninsula by the year 2002.
FERC OPEN ACCESS TRANSMISSION PROCEEDINGS: As a result of the Energy
Policy Act of 1992, the FERC issued two orders in April 1996 relating to open
access transmission service, stranded costs, standards of conduct and open
access same-time information systems. The ruling is intended to create a more
competitive wholesale electric power market.
The first order, Order No. 888, required public utilities owning, controlling
or operating transmission lines to file non-discriminatory open access tariffs
that offer others the same transmission service provided to themselves and
requires the use of the tariffs for their own wholesale energy sales and
purchases. Order No. 888 also provides for the recovery of "stranded costs"
that were prudently incurred to serve power customers and that could go
unrecovered if wholesale customers use open access to move to another electric
energy supplier. In its open access ruling, the FERC encouraged utilities to
consider ISOs such as the Midwest ISO noted above as a tool to meet the
demands of a competitive market for electric energy.
The second order, Order No. 889, works to ensure that transmission owners and
their affiliates do not have an unfair competitive advantage in using
transmission to sell power. Order No. 889 establishes Standards of Conduct
and requires that a public utility's merchant function rely on the same
electronic information network that its transmission customers rely on to
obtain information about its transmission system when buying or selling power.
FERC reaffirmed and clarified these orders with the issuance of Orders No.
888-A and 889-A in March 1997 and Orders No. 888-B and 889-B in November 1997.
In April 1997, WE submitted a revised transmission tariff in compliance with
FERC's orders on rehearing of its Order No. 888. In compliance with a further
rehearing, WE filed a similar revision in December 1997 in compliance with
Order No. 888-B. To date, FERC has not acted upon either submittal. On
January 16, 1998, WE submitted revised Standards of Conduct for functional
unbundling as directed by the FERC order addressing an earlier WE filing of
such Standards of Conduct. The FERC has not yet acted on WE's latest filing.
Order Nos. 888 and 889 have been appealed by many parties to the U.S. Court of
Appeals for the Second Circuit.
WE has long advocated open access to electric transmission facilities as a
necessary step in the competitive restructuring of the electric utility
industry. WE does not believe that the FERC rulings or judicial review of
these orders will have a detrimental effect on its liquidity, financial
position or results of operations.
WHOLESALE COMPETITION: Wholesale sales of electric energy accounted for
4.8%, 5.0% and 5.6% of WE's total electric operating revenues in 1997, 1996
and 1995, respectively. WE attributes the decrease over this three year
period in part to the increasingly competitive market for electric wholesale
customers, to renegotiated power sales contracts with municipal and rural
electric wholesale customers in 1995 and 1996, and to the unbundling of
transmission services for some customers. The renegotiated contracts
contained discounts from previous rates charged to these customers. In
addition, certain customers have chosen to obtain their power supplies from
other suppliers.
One wholesale customer, with a partial requirements demand of 9 MW in 1997,
will cease being WE's customer effective in May 1998 but will continue to
receive transmission service until new transmission lines are constructed to
connect the customer with its new supplier. A contract with a second 105 MW
wholesale customer during 1997 includes minimum takes of 75 MW as of May 1998
and 90 MW, 60 MW and 30 MW in each subsequent contract year. A third
wholesale customer with a 50 MW demand may become a partial requirements
customer beginning in October 2000. WE expects to continue to provide
transmission service to these customers.
PSCW NATURAL GAS UTILITY INDUSTRY INVESTIGATION: The PSCW continued a
generic investigation of the natural gas industry in the State of Wisconsin
and addressed the extent to which traditional regulation should be replaced
with a different approach. On July 1, 1997, WE filed a modified dollar for
dollar gas cost recovery mechanism ("GCRM") in accordance with a November 1996
PSCW order. Purchased gas adjustment mechanisms have been evaluated by the
PSCW as a part of the PSCW's generic investigation. The GCRM will include
after the fact prudence reviews by the PSCW. WE will be able to assess its
level of gas price risk once the PSCW approves the GCRM. The matter is
pending with anticipated implementation in the fourth quarter of 1998. WE
does not expect that a major portion of gas costs that are currently passed
through to customers will be subject to price risk under this GCRM.
The PSCW has also issued Standards of Conduct applicable to opportunity sales.
Opportunity sales are described as the sales of underutilized capacity and
supply entitlements that become periodically available because of the variable
daily and seasonal needs of customers. These Standards of Conduct are
intended to ensure that all interested market participants have an opportunity
to purchase released capacity and supply and that the releasing utility
receives the highest price for the sale, given the specific circumstances.
Additional restrictions become applicable if a gas utility has a marketing
affiliate.
RATES AND REGULATORY MATTERS
The table below summarizes the projected annual revenue impact of recent rate
changes authorized by regulatory commissions for the electric, natural gas and
steam utilities of the Company based upon the sales projections utilized by
those commissions in setting rates. The PSCW regulates Wisconsin retail
electric, steam and natural gas rates in the State of Wisconsin, while the
FERC regulates wholesale power and electric transmission and gas
transportation service rates. The MPSC regulates retail electric rates in the
State of Michigan.
==============================================================================
Revenue Percent
Increase Change in Effective
Service (Decrease) Rates Date
- - ------------------------- ------------ --------- ---------
(Millions) (%)
Retail electric, WI * $ 134.9 10.7 01/01/98
Retail gas * 18.5 5.5 01/01/98
Steam heating * 0.8 6.3 01/01/98
Retail electric, WI ** 27.2 2.2 05/23/97
Retail electric, WI (7.4) (0.6) 02/18/97
Retail gas (6.4) (2.0) 02/18/97
Steam heating 0.1 .5 02/18/97
Retail electric, WI (33.4) (2.8) 01/01/96
Retail electric, MI (1.1) (3.3) 01/01/96
Retail gas (8.3) (2.6) 01/01/96
Steam heating (0.8) (5.1) 01/01/96
==============================================================================
* Interim PSCW order subject to refund.
** Fuel surcharge which ends April 30, 1998 or when an order is issued for the
1998 test year, whichever comes first. Reflecting the combined effect of
two PSCW orders, this surcharge was initially ordered on May 23, 1997 and
was amended by the PSCW on December 23, 1997.
The PSCW has discontinued the practice of conducting annual rate case
proceedings, replacing it with a new schedule which calls for future rate
cases to be conducted once every two years. WE did not seek an increase in
rates for 1995. Discussion of rate changes for the 1998, 1997 and 1996 test
years follow.
1998 TEST YEAR: On September 22, 1997, WE filed testimony and exhibits
with the PSCW related to the 1998 test year showing a $220.4 million revenue
deficiency for its Wisconsin utility operations based upon a regulatory return
on equity of 12.5%, up from 11.8% authorized since February 13, 1997. The
dollar impacts and percentage increases on an annualized basis requested for
Wisconsin retail services were $192.7 million or 15.3% for electric
operations, $26.5 million or 7.9% for gas operations and $1.2 million or 9.0%
for City of Milwaukee steam operations. WE asked the PSCW for an interim
increase in the amount of $200 million, effective January 1, 1998 and subject
to refund, in the event that the PSCW was unable to issue a final order by
that date.
On December 23, 1997, the PSCW issued an order authorizing interim rate
increases, effective January 1, 1998 and subject to refund pending a final
order, in the amount of $154 million. The dollar impacts and percentage
increases of the interim order on an annualized basis for Wisconsin retail
services are $134.9 million or 10.7% for electric operations, $18.5 million or
5.5% for gas operations and $827,000 or 6.3% for the City of Milwaukee steam
operations. The PSCW held additional public hearings on WE's September 22,
1997 filing during the first quarter of 1998. WE expects the PSCW to issue a
final order during the second quarter of 1998.
The primary factors influencing the requested rate increases for 1998 include:
* Increased costs related to the construction, operation and maintenance of
generation, transmission and distribution facilities to assure reliability
of electric service.
* Increased costs associated with the need to implement technological
solutions to make computer systems compatible with the year 2000 and to
meet customer expectations.
* Increased payroll and benefits due to (1) additional personnel to fill
vacant positions that occurred while WEC and NSP were pursuing the Primergy
merger and (2) increased staff to support key areas such as nuclear
operations, customer service and information services.
* Increased fuel and purchased power costs.
* Increased cost of capital.
See "Year 2000 Computer Software and Hardware Issues" below for further
information concerning the estimated costs to examine and modify existing
software application and operational programs and hardware that is date
sensitive and may not be Year 2000 compliant.
WE expects to add approximately 640 additional employees during 1998 compared
to 4,666 total employees at year-end 1997. Approximately half of these new
employees will replace contract employees working at WE during 1997, including
210 from Upper Peninsula Power Company ("UPPCo"), an unaffiliated investor
owned utility, who operated Presque Isle Power Plant under contract since WE
acquired the plant from UPPCo in 1987.
1997 TEST YEAR: In an order dated February 13, 1997, the PSCW directed WE
to implement rate decreases for Wisconsin retail electric and gas customers of
$7.4 million or 0.6% and $6.4 million or 2.0%, respectively, on an annualized
basis, and a steam rate increase of $0.1 million or 0.5% on an annualized
basis. The order was effective February 18, 1997 and was based upon a
regulatory return on common equity of 11.8%. The PSCW had determined that it
required a special full review of WE's rates for the 1997 test year in
connection with consideration of the application for approval of the proposed
merger of WEC and NSP.
1996 TEST YEAR: In a letter order dated September 11, 1995, the PSCW
directed WE to implement rate decreases for Wisconsin retail electric, gas and
steam customers of $33.4 million or 2.8%, $8.3 million or 2.6% and
$0.8 million or 5.1%, respectively, on an annualized basis effective
January 1, 1996. Also effective January 1, 1996, the MPSC authorized WE to
implement a rate decrease for Michigan non-mine retail electric customers of
$1.1 million or 3.3% on an annualized basis. The Mines are separately
regulated by the MPSC.
FUEL COST ADJUSTMENT PROCEDURE: Under the Wisconsin retail electric fuel
cost adjustment procedure, retail electric rates may be adjusted, on a
prospective basis, if cumulative fuel and purchased power costs, when compared
to the costs projected in the retail electric rate proceeding, deviate from a
prescribed range and are expected to continue to be above or below the
authorized annual range of 3%.
Extended outages at Point Beach, an extended maintenance outage at Oak Creek
that was concluded in June 1997, delayed commercial operation of LS Power's
cogeneration facility, and higher than projected costs per Mwh of power
purchases due to regional generation outages resulted in increased fuel and
purchased power costs at WE during 1997. WE estimates that such costs were
approximately $116.5 million higher than those included in 1997 base electric
rates in all jurisdictions.
On December 23, 1997, the PSCW issued a combined final order on two 1997 WE
filings under Wisconsin's fuel cost adjustment procedure, authorizing WE to
recover $27.2 million of additional 1997 fuel and purchased power costs from
Wisconsin retail electric customers during the 1997-1998 biennial period. WE
estimates that of the $116.5 million of additional 1997 fuel and purchased
power costs, it will recover a total of $28.6 million in all jurisdictions,
leaving $87.9 million unrecovered.
In December 1995, the MPSC approved the suspension of the Power Supply Cost
Recovery Clause (fuel adjustment procedure) for a five-year period for
Michigan retail electric customers.
NUCLEAR OPERATION AND MAINTENANCE COST DEFERRAL: See "Note F - Nuclear
Operations" in the Notes to Financial Statements for information regarding
approval by the PSCW during 1997 for WE to defer certain excess non-fuel
nuclear operation and maintenance costs. The PSCW has not yet decided how the
deferred costs will be treated for rate making purposes.
PURCHASED GAS ADJUSTMENT MECHANISM: In the case of natural gas costs,
differences between the test year estimate and the actual cost of purchased
gas are accounted for through a purchased gas adjustment clause. See
"Industry Restructuring and Competition" above for information concerning a
PSCW order changing the purchased gas adjustment mechanism in 1998.
YEAR 2000 COMPUTER SOFTWARE AND HARDWARE ISSUES
Like many other companies, the Company expects to incur significant costs to
examine and modify existing software application and operational programs as
well as hardware that is date sensitive and may not be Year 2000 compliant.
These programs and hardware use two-character digits such as '00' to define
the applicable year rather than four-character digits such as '2000'. As a
result, the programs and systems may not properly recognize calendar dates
beginning in the year 2000, and the computers may either process data
incorrectly or shut down altogether. During 1997, WE developed a plan,
currently estimated to cost a total of approximately $30 million during 1998
and 1999, to address its Year 2000 compliance issues. If not addressed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company. In its 1998 Test Year data filed with the PSCW, WE
has requested recovery in rates in the Wisconsin jurisdiction during the 1998-
1999 biennial period of approximately $13 million per year for Year 2000
compliance examination and modification costs attributable to the Wisconsin
retail jurisdiction. WEC is still evaluating its non-utility subsidiaries for
Year 2000 compliance issues and is currently unable to quantify related costs.
ENVIRONMENTAL MATTERS
CLEAN AIR ACT: The 1990 Amendments to the Clean Air Act mandate
significant nation-wide reductions in sulphur dioxide ("SO2") and nitrogen
oxide ("NOx") emissions to address acid rain and ground level ozone control
requirements.
WE has completed the installation of continuous emission monitors at all of
its facilities and installed low NOx burners on boilers at Oak Creek Power
Plant Units 7 and 8 and at Valley Power Plant. These actions, along with the
burning of low sulfur coal meet the requirements that became effective
January 1, 1995.
WE elected to voluntarily bring the Valley and Port Washington Power Plants
under jurisdiction of the NOx requirements of the Clean Air Act amendments of
1990, five years earlier than mandated. This was possible because these units
already meet the current NOx emissions standards.
WE projects a surplus of SO2 emission allowances during Phase I and a small
shortfall during Phase II, which begins in the year 2000. WE has received
additional allowances as a result of energy conservation programs. As an
integral component of its least-cost plan, WE is active in SO2 allowance
trading. Revenue from the sale of allowances is being used to offset future
potential rate increases.
Combustion tuning for NOx reductions at various power plants will be required
to meet the second phase of reduction requirements that become effective
January 1, 2000. Costs for combustion tuning work are expected to be minimal.
NATIONAL AMBIENT AIR QUALITY STANDARDS: On July 18, 1997, the United
States Environmental Protection Agency ("EPA") issued final regulations
significantly tightening the National Ambient Air Quality Standards ("NAAQS")
for ozone and particulate matter. Although specific emission control
requirements are still in the process of development, WE believes that the
revised standards may require significant reductions in SO2 and NOx emissions
from coal-fired generating facilities. WE expects that compliance with the
ozone attainment standards will be implemented in stages from the year 2004
through the year 2012 and that compliance with the particulate matter
attainment standards will be implemented in stages beginning after the year
2010 and extending into the year 2017. WE is currently unable to determine
the impact of the revised air quality standards on its future liquidity,
financial condition or results of operation.
In November 1997, the EPA proposed strict uniform NOx emission reductions by
the year 2002 for the State of Wisconsin and 21 other eastern and midwestern
states as part of a regional effort to reduce the amount of ozone forming
chemicals that cross state lines. The EPA proposed NOx emission reductions of
85% below 1990 levels. WE estimates that it would cost a total of
$250 million to $500 million or $30 to $50 million per year beginning as early
as the year 2000 to comply with the EPA's ozone transport proposal. In
February 1998, WE joined the Alliance for Constructive Air Policy ("ACAP")
which is developing a cost effective, equitable alternative to the EPA's
proposal for reducing ozone pollution in key regions of the country. WE
currently expects ACAP and other supporters of an alternative to submit a
proposal to the EPA by the summer of 1998 that includes an initial guaranteed
reduction in NOx emissions by the year 2004 with further reductions required
no later than the year 2007 at levels based upon additional modeling and
analysis. WE expects that total costs under ACAP's anticipated proposal will
be significantly less than costs to comply with the EPA's ozone transport
proposal. WE believes that compliance with the NOx emission reductions
included in the EPA's November 1997 ozone transport proposal may mitigate
costs to comply with the EPA's July 1997 NAAQS.
MANUFACTURED GAS PLANT SITES: WE is reviewing and addressing environmental
conditions at a number of former manufactured gas plant sites. See "Note M -
Commitments and Contingencies" in the Notes to Financial Statements for
additional information.
ASH LANDFILL SITES: WE aggressively seeks environmentally acceptable,
beneficial uses for its combustion byproducts. However, ash materials have
been, and to some degree, continue to be disposed in company-owned, licensed
landfills. Some early designed and constructed landfills may allow the
release of low levels of constituents resulting in the need for various levels
of remediation. Where WE has become aware of these conditions, efforts have
been expended to define the nature and extent of any release, and work has
been performed to address these conditions. These costs are included in the
environmental operating and maintenance costs of WE.
LS POWER GENERATION FACILITY
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with an
unaffiliated independent power producer, LS Power. The contract, for 236
megawatts of firm capacity from LS Power's gas-fired cogeneration facility
located in Whitewater, Wisconsin, includes no minimum energy purchase
requirements. WE treats this power purchase contract as a capital lease. See
"Note H - Long-Term Debt" in the Notes to Financial Statements for additional
information about WE's long-term power purchase agreement with LS Power. The
LS Power facility is a gas transport customer in WE's service territory.
COAL TRANSPORTATION MATTERS
During 1997, coal deliveries to certain WE electric generating facilities, as
well as to the electric generating facilities of many other utilities, had
been impaired by massive congestion problems on the Union Pacific Railroad
("UP"). As a result of the merger of UP with the Southern Pacific Railroad, a
backlog of coal deliveries had caused stockpiles to decline at some of WE's
power plants and forced WE to seek alternative coal delivery routes. WE's
coal inventories have now returned to acceptable levels, but UP is still
struggling to maintain deliveries. During the fall of 1997, WE completed
construction of a rail spur at Pleasant Prairie, which burns over 40% of WE's
annual coal requirements. The new rail spur, connecting to the rail line of a
UP competitor, provides WE with another means of delivery to Pleasant Prairie
and significantly reduces WE's risk of future impaired coal delivery due to
problems at UP.
ELECTRIC SALES AND GAS DELIVERIES OUTLOOK
Assuming moderate growth in the economy of its service territory and normal
weather, WE presently anticipates total electric kilowatt-hour sales to grow
at a compound annual rate of 2.2% over the five-year period ending
December 31, 2002. WE forecasts total therm deliveries of natural gas to grow
at a compound annual rate of approximately 2.1% over the same five-year
period. These forecasts are subject to a number of variables, including among
others the economy, weather and the restructuring of the electric and gas
utility industries, which may affect the actual growth in sales. See
"Cautionary Factors" below.
PROPOSED ACQUISITION OF ESELCO, INC.: See "Mergers" above in "Factors
Affecting Results of Operations" for information concerning the proposed
acquisition by WEC of ESELCO, Inc. ESELCO, Inc. is parent company of Edison
Sault, an electric utility which serves approximately 22,000 residential,
commercial and industrial customers located in Michigan's eastern Upper
Peninsula.
NEW GAS SERVICE PROPOSAL: In July 1997, the PSCW approved WE's application
to expand natural gas service to more than 4,500 potential customers in
northeastern Wisconsin. The project will involve the installation of more
than 350 miles of new gas main. Approval of a portion of the project by the
FERC is pending. WE expects to connect the first applicable customers in
1998. The cost of this project is included in anticipated construction
expenditures shown below under "Capital Requirements 1998-2002" in "Liquidity
and Capital Resources."
EFFECTS OF WEATHER
By the nature of its utility business segments, WEC's and WE's earnings are
sensitive to weather variations from period to period. Variations in winter
weather affect heating load for both the gas and electric utility. Variations
in summer weather affect cooling load for the electric utility as well as
therm deliveries to gas-fired electric generating customers. The table below
summarizes weather in WE's service territory as measured by degree days for
each of the three years ended December 31, 1997.
==============================================================================
% Change % Change
1996 1995
Degree Days 1997 1996 to 1997 1995 to 1996
---------------------- ------ ------ -------- ------ --------
Heating (7,014 Normal) 7,101 7,469 (4.9%) 6,833 9.3%
Cooling (665 Normal) 407 608 (33.1%) 952 (36.1%)
==============================================================================
EFFECTS OF INFLATION
With expectations of low-to-moderate inflation, the Company does not believe
the impact of inflation will have a material effect on its future results of
operations.
MARKET RISKS
The Company is potentially exposed to market risk due to changes in interest
rates, the return on marketable securities and the market price of electricity
as well as to changes in fuel costs incurred to generate electricity and the
cost of gas for its gas operations. Exposure to interest rate changes relates
to WEC's and WE's long-term debt and preferred equity obligations, while
exposure to fluctuations in the return on marketable securities relates to
WE's debt and equity security investments in the Nuclear Decommissioning Trust
Fund ("Fund"). Exposure to electricity market price risk relates to forward
activities taken to manage the supply of and demand for electric energy, and
exposure to fuel and gas cost variations relates to the supply of and demand
for coal, uranium, natural gas and fuel oil. WEC and WE do not utilize
derivative financial instruments for trading or speculative purposes.
However, WISVEST Corporation recently formed Griffin Energy LLC, which began
marketing energy related services and limited trading of electricity in 1998,
and WE is currently evaluating its commodity risk management process. For
both entities, the Company is evaluating to what extent they will use
derivative financial and commodity instruments in the normal course of their
future business.
For additional information concerning risk factors, including market risks, at
WE and WEC, see "Cautionary Factors" below.
MARKETABLE SECURITIES RETURN RISK: At December 31, 1997, WE had $404
million of available for sale debt and equity security investments in the Fund
at fair value. For additional information concerning the Fund, see "Note F -
Nuclear Operations" in the Notes to Financial Statements.
INTEREST RATE RISK: The table that follows provides information about
financial instruments that are held by the Company at December 31, 1997 and
that are sensitive to changes in interest rates. For the debt, the table
presents principal cash flows that exist by maturity date and the related
average interest rate. The average interest rate on the variable rate long-
term debt was estimated based upon a weighted average interest rate during a
recent 52 week period.
For additional information concerning the Company's long-term debt and
preferred stock, see "Note H -Long-Term Debt" and "Note G - Preferred Stock",
respectively, in the Notes to Financial Statements.
<TABLE>
<CAPTION>
==========================================================================================================================
Expected Maturity Date Fair Value
------------------------------------------------------------- as of
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
---- ---- ---- ---- ---- ---------- ----- --------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Long-Term Debt
WE $61.9 $92.9 $1.9 $1.9 $1.9 $1,045.1 $1,205.6 $1,245.2
Average Interest Rate 7.2% 7.3% 7.3% 7.3% 7.3% 7.3%
WEC * $70.5 $94.6 $30.6 $18.7 $15.0 $1,070.0 $1,299.4 $1,339.0
Average Interest Rate 7.2% 7.2% 7.3% 7.3% 7.3% 7.3%
Variable Rate Long-Term Debt
WEC * and WE - - - - - $165.4 $165.4 $165.4
Average Interest Rate 3.7%
Preferred Stock Not Subject
to Mandatory Redemption
WEC * and WE - - - - - $30.4 $30.4 $17.8
Average Dividend Rate 4.0%
==========================================================================================================================
* WEC includes the holding company as well as all subsidiaries.
</TABLE>
COMMODITY PRICE RISK: In the normal course of business, WE utilizes
contracts of various durations for the forward sale and purchase of
electricity to effectively manage utilization of its available generating
capacity. Such contracts include forward contracts for wholesale sales of
generating capacity and energy during periods when WE's available power
resources are expected to exceed the requirements of its native load customers
and may also include forward contracts for the purchase of power during
periods when the anticipated market price of electric energy is below WE's
expected incremental power production cost. WE manages its fuel and gas
supply costs through a portfolio of short and long-term procurement contracts
with various suppliers. To a certain extent, the Wisconsin electric retail
fuel cost adjustment procedure may mitigate some of the risk of fuel cost
price fluctuations. Currently, the purchased gas adjustment mechanism in
Wisconsin mitigates the risk of gas cost variations. For additional
information concerning the fuel cost adjustment procedure and the purchased
gas adjustment mechanism, see "Rates and Regulatory Matters" above in "Factors
Affecting Results of Operations."
NEW ACCOUNTING PRONOUNCEMENTS
See "Note A - Summary of Significant Accounting Policies" in the Notes to
Financial Statements for information concerning new pronouncements adopted
during 1997.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("FAS 129"). FAS 128
establishes standards for computing and presenting earnings per share. FAS
129 establishes disclosure standards about an entity's capital structure. The
Company adopted both standards in 1997. Adoption did not have an effect on
the Company's liquidity, net income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed
Statement of Financial Accounting Standards, Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets ("Proposed
FAS"). The Proposed FAS, if issued, would require WE to recognize as a
liability the present value of the estimated future total costs associated
with closure or removal of certain long-lived assets and to correspondingly
capitalize those costs. The capitalized costs would be depreciated to expense
over the useful life of the asset. During 1997, FASB began redeliberating the
Proposed FAS, but has not yet determined when or whether the proposed
statement would become effective.
This Proposed FAS would apply to decommissioning costs for Point Beach and
would result in WE recording a decommissioning liability and corresponding
asset as required by the pronouncement. Currently, nuclear decommissioning
costs are accrued as depreciation expense over the expected service lives of
the two units at Point Beach based upon an external sinking fund method. Any
changes in depreciation expense due to differing assumptions between the
Proposed FAS and those currently required by the PSCW are not expected to be
material and would most likely be deferrable and recoverable in rates. For
additional information on the costs of decommissioning Point Beach, see
"Note F - Nuclear Operations" in the Notes to Financial Statements.
REGULATORY ACCOUNTING: WEC's principal subsidiary, WE, operates under
electric utility rates which are subject to the approval of the PSCW, MPSC and
FERC, and natural gas and steam utility rates that are subject to the approval
of the PSCW (see "Rates and Regulatory Matters" above). Such rates are
designed to recover the cost of service and provide a reasonable return to
investors. Developing competitive pressures in the utility industry may
result in future utility rates which are based upon factors other than the
traditional original cost of investment. In such a situation, continued
deferral of certain regulatory asset and liability amounts on the utility's
books may no longer be appropriate as allowed under Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation. At this time, the Company is unable to predict whether any
adjustments to regulatory assets and liabilities will occur in the future.
See "Note A - Summary of Significant Accounting Policies" in the Notes to
Financial Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING ACTIVITIES
WEC invested a net total of $1.1 billion in its businesses during the three
years ended December 31, 1997 of which $943 million was at WE. Investments
during this three-year period included $1 billion for construction of or
investment in new or improved facilities or projects. During the three years
ended December 31, 1997, $829 million of construction expenditures was for
utility projects and $177 million was for non-utility projects. Additional
investments during this three-year period included $56 million for the
acquisition of nuclear fuel and $64 million for the eventual decommissioning
of Point Beach. WEC's non-utility subsidiaries received net proceeds of
$31 million during this three-year period on the disposition of various
investments as part of other investing activities.
POINT BEACH UNIT 2 STEAM GENERATORS: In October 1992, WE filed an
application with the PSCW for replacement of the Point Beach Unit 2 steam
generators, allowing for the unit's operation until the expiration of its
operating license in 2013. In an Interim Order in February 1995, the PSCW
deferred the decision on steam generator replacement but directed WE to make
suitable arrangements with the fabricator of the new steam generators to allow
the fabrication, delivery and replacement to proceed promptly if authorized by
the PSCW. In May 1996, WE received a written order from the PSCW approving
replacement of the steam generators at an estimated cost of $96 million.
Replacement of the Unit 2 steam generators was completed in January 1997.
Capital expenditures of $6.5 million, $47.6 million and $23.1 million were
made during 1997, 1996 and 1995, respectively, for replacement of the Unit 2
steam generators.
PARIS GENERATING STATION: During 1995, WE placed in service four units, or
approximately 300 megawatts of capacity, at Paris. This natural gas-fired
combustion turbine facility, located near Union Grove, Wisconsin, is designed
to meet peak demand requirements. Capital expenditures of $6 million and
$10 million were made during 1996 and 1995, respectively. Capital costs for
the Paris facility totaled approximately $102 million.
CONCORD GENERATING STATION: During 1994, WE placed in service the last two
units, or approximately 150 megawatts of capacity, at Concord. This four unit
300 megawatt natural gas-fired combustion turbine facility, located near
Watertown, Wisconsin, is designed to meet peak demand requirements. The first
two units were completed in 1993. Capital expenditures of $3 million were
made during 1995 for construction of this facility. Total capital costs for
the Concord facility were approximately $100 million.
MILWAUKEE COUNTY POWER PLANT: The Company's 11 MW Milwaukee County Power
Plant supplies electricity, steam and chilled water to the hospitals and other
member institutions of the Milwaukee Regional Medical Center, as well as to
other large customers located on land known as the Milwaukee County Grounds.
In December 1995, WE acquired the electric generation and distribution
facilities in the first phase of the acquisition. The capital cost for the
electric facilities was $7 million. These facilities and the new customers
associated with them were integrated into WE's current electric utility
operations. In December 1996, WEC acquired the steam and chilled water
production and distribution facilities to complete the second phase of the
purchase. Two outstanding contingencies were met prior to closing the
purchase. The PSCW approved the purchase of the steam facilities, and the
five largest customers signed steam and chilled water service agreements which
obligate them to purchase their present and future heating and cooling
requirements from WEC for a period of ten years. The capital cost for the
steam facilities was approximately $21 million. WE has integrated these
facilities and the associated customers into its steam utility operations.
The capital cost for the chilled water facilities was approximately
$19 million. A separate subsidiary of WEC operates the chilled water
facilities as a non-regulated business.
NON-UTILITY INVESTMENTS: WEC's net non-utility assets amounted to
approximately $370 million at December 31, 1997. Primary additions during
1997 included $26 million of investments in land and buildings by WISPARK
Corporation, $27 million of construction expenditures by Minergy Corp.
("Minergy") for a glass aggregate plant and $35 million of energy related
investments by WISVEST Corporation. WEC currently anticipates making
additional non-utility investments from time to time. For additional
information, see "Capital Requirements 1998-2002" below and "Note L -
Information by Segments of Business" in WEC's Notes to Financial Statements.
MINERGY GLASS AGGREGATE PLANT: Minergy, a non-utility WEC subsidiary,
plans to place into operation a $45 million facility in Neenah, Wisconsin that
would recycle paper sludge from area paper mills into two usable products:
glass aggregate and steam. The glass aggregate will be sold into existing
construction and aggregate markets and the steam will be sold to a local paper
mill. The plant will result in substantial environmental and economic
benefits to the area by providing an alternative to landfilling paper sludge.
Minergy commenced construction in July 1996, with commercial operation
scheduled for April 1998. The project is being financed during construction
through short-term borrowings. Capital expenditures of $27.1 million and
$14.6 million were made during 1997 and 1996, respectively, for this facility.
CASH PROVIDED BY OPERATING AND FINANCING ACTIVITIES
During the three years ended December 31, 1997, total cash provided by
operating activities at both WEC and WE were $1.3 billion. During this
period, internal sources of funds, after the payment of dividends, provided
71% of WEC's and 77% of WE's capital requirements.
Financing activities during the three-year period ended December 31, 1997
included the issuance of $520 million of long-term debt by WEC of which
$448 million was issued by WE. The proceeds of these new debt issues were
used to retire or refinance higher coupon debt in the amount of $366 million
at WEC and $358 million at WE and for other general corporate purposes. WEC
increased its short-term debt by $68 million and added $105 million of common
equity from the issuance of new shares through the Company's stock plans
during the three years ended December 31, 1997. No preferred stock was
issued. Dividends on WEC's common stock were $173 million, $167 million and
$160 million during 1997, 1996 and 1995, respectively. WE paid dividends to
WEC of $214 million, $168 million and $160 million during 1997, 1996 and 1995,
respectively, and received a total of $130 million in capital contributions
from WEC during this three-year period.
In October 1997, Wisconsin Michigan Investment Corporation ("WMIC"), a
non-utility subsidiary of WEC, issued $15 million of 6.40% medium-term notes
due 2001 and $12 million of 6.33% medium-term notes due 2002. In November
1997, WMIC issued $20 million of 6.22% medium-term notes due 2000. Proceeds
were added to WMIC's general funds and will be used to finance various non-
utility projects.
In December 1996, WE and WISVEST Corporation, another non-utility subsidiary
of WEC, issued promissory notes in the amount of $12.05 and $10.95 million,
respectively, due 2006. The notes were issued as part of the transaction to
acquire the steam and chilled water facilities from Milwaukee County. The
notes have been discounted to reflect the difference between the effective
interest rate of 6.36% and the stated rate of 1.93%.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. In December 1995, WE issued $100 million of unsecured One Hundred Year
6 7/8% Debentures due 2095. Proceeds of both issues were added to WE's
general funds and were applied to the repayment of short-term borrowings.
In August 1995, WE called for optional redemption $98.35 million aggregate
principal amount of fixed rate tax exempt bonds issued by three political
jurisdictions on WE's behalf that were secured by issues of WE's First
Mortgage Bonds with terms corresponding to the tax exempt bonds called for
redemption. During September and October 1995, the three political
jurisdictions issued $98.35 million aggregate principal amount of new tax
exempt bonds on behalf of WE, collateralized by unsecured variable rate
promissory notes issued by WE, maturing between March 1, 2006 and September 1,
2030, with terms corresponding to the respective issues of the refunding tax
exempt bonds. The proceeds were used to finance the optional redemptions.
The WE First Mortgage Bonds, which collateralized the redeemed tax exempt
bonds, have been canceled.
See "Note A - Summary of Significant Accounting Policies" in WEC's Notes to
Financial Statements for a discussion of various limitations on the ability of
WE to transfer funds to WEC.
CAPITAL STRUCTURE
WEC's and WE's capitalization at December 31 were:
==============================================================================
WEC WE
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
Common Equity 48.6% 53.3% 48.5% 51.6%
Preferred Stock 0.8 0.8 0.9 0.9
Long-Term Debt
(including current maturities) 42.3 44.0 43.7 46.1
Short-Term Debt 8.3 1.9 6.9 1.4
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
==============================================================================
Primarily due to decreased earnings during 1997 compared to 1996 and to the
maturity in 1997 of $140 million of WE First Mortgage Bonds, the Company
increased its short-term debt during 1997 to finance the payment of dividends
and the maturity of the long-term debt. As a result, common equity as a
percent of total capitalization decreased in 1997 while short-term debt as a
percent of total capitalization increased. Long-term debt as a percent of
total capitalization was relatively unchanged between the comparative periods
primarily due to a long-term power purchase contract that was recorded as a
capital lease obligation in 1997.
Compared to the utility industry in general, the Company has historically
maintained an above average ratio of common equity to total capitalization and
low debt and preferred stock ratios. This conservative capital structure,
along with strong bond ratings, has provided, and should continue to provide,
the Company with access to the capital markets when necessary to finance the
anticipated growth in the Company's utility business. WE currently has senior
secured debt ratings of AA+ by Standard & Poor's Corporation ("S&P") and Duff
& Phelps Inc. ("D&P") and Aa2 by Moody's Investors Service ("Moody's"). In
addition, WE currently has unsecured debt ratings of AA by S&P and D&P and Aa3
by Moody's. In October 1997, Fitch Investors Service ("Fitch") lowered their
ratings on WE's approximately $900 million of outstanding first mortgage bonds
from AA+ to AA and their ratings on WE's $31 million of outstanding preferred
stock from AA to AA-. Fitch's report stated, however, that despite the
downgrade, WE's quality and competitive position remain superior to most
electric utilities.
At year-end 1997, WEC had $199.5 million of unused lines of bank credit and
approximately $19.6 million of cash and cash equivalents of which WE had
$134.3 million of unused lines of bank credit and $10.1 million of cash and
cash equivalents.
CAPITAL REQUIREMENTS 1998-2002
CONSTRUCTION EXPENDITURES: The Company's construction expenditures for the
period 1998-2002 are estimated to be $1.9 billion. Of this amount,
approximately $1.6 billion represents utility construction expenditures.
Utility construction expenditures during 1998 are estimated to be
$367 million, including recurring additions and/or improvements of generation,
transmission and distribution facilities to assure reliability of electric
service; anticipated expenditures associated with the installation of more
than 350 miles of new gas main which will expand gas service to more than
4,500 potential gas customers; as well as costs associated with technological
solutions to make computer systems Year 2000 compliant and to meet customer
expectations. For information concerning anticipated electric reliability
projects, the new gas service proposal and Year 2000 compliance issues, see
"Electric System Reliability Matters", "Electric Sales and Gas Deliveries
Outlook", and "Year 2000 Computer Software and Hardware Issues", respectively,
above in "Factors Affecting Results of Operations."
Estimated property additions for the Company's principal non-utility lines of
business are estimated to be $325 million during the period 1998-2002, with
$112 million anticipated during 1998. Principal non-utility lines of business
in which these property additions are expected include real estate investment
and development and investments in recycling technology and energy related
entities.
RETIREMENT OF LONG-TERM DEBT SECURITIES: The Company's capital
requirements for maturing long-term debt and sinking funds total $71 million
in 1998 and $230 million for the period 1998-2002. Included in the above
amounts are WE's requirements of $62 million and $161 million, respectively.
See "Note H - Long-Term Debt" in the Notes to Financial Statements for
additional information.
DECOMMISSIONING TRUST PAYMENTS: Based upon a site specific decommissioning
study completed in 1994, WE's estimated contributions to the Nuclear
Decommissioning Trust Fund for the period 1998-2002 are $192 million of which
$34 million is for 1998. Contributions to the Fund include both the annual
payments to external trust funds and the income earned on the external trust
funds. WE expects to complete a new site specific decommissioning study
during 1998, which could result in changes to future contributions to the
Fund. See "Note F - Nuclear Operations" in the Notes to Financial Statements
for additional information.
CAPITAL RESOURCES
The Company expects internal sources of funds from operations to provide
approximately 60% of the capital requirements for 1998, with internal sources
of funds from operations providing 75% of the capital requirements at WE.
Remaining cash requirements at WEC and at WE during 1998 are expected to be
met through short-term borrowings and/or the issuance of intermediate or long-
term debt. Beyond 1998, capital requirements will be met principally through
internally generated funds supplemented, when required, by debt and equity
financing. The specific form, amount and timing of securities which may be
issued have not yet been determined and will depend, to a large extent, on
market conditions and other factors.
On July 1, 1997, WEC resumed the purchase of existing shares on the open
market for the Company's stock plans. Prior to July 1, 1997, WEC had issued
1,187,050 new shares of common stock during 1997 which were purchased by
participants in the Company's stock plans with cash investments and reinvested
dividends aggregating approximately $30 million. During the fourth quarter of
1997, WE received a $100 million capital contribution from WEC.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of WEC or WE. Such statements
are based upon management's current expectations and are subject to risks and
uncertainties that could cause WEC's or WE's actual results to differ
materially from those contemplated in the statements. Readers are cautioned
not to place undue reliance on these forward-looking statements. When used in
written documents or oral presentations, the terms "anticipate", "believe",
"estimate", "expect", "objective", "plan", "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause WEC's or WE's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of WE's generating
facilities including Point Beach; unscheduled generation outages,
maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel,
purchased power or gas supply costs or availability due to higher demand,
shortages, transportation problems or other developments; nonperformance by
electric energy or natural gas suppliers under existing power purchase or
gas supply contracts; nuclear or environmental incidents; resolution of
spent nuclear fuel storage and disposal issues; electric transmission or
gas pipeline system constraints; unanticipated organizational structure or
key personnel changes; collective bargaining agreements with union
employees or work stoppages; inflation rates; or demographic and economic
factors affecting utility service territories or operating environment.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; the Nuclear Regulatory Commission's evolving regulations
related to Point Beach Nuclear Plant; or the siting approval process for
new generating and transmission facilities.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of WE to transfer funds to WEC in
the form of cash dividends, loans or advances.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Unanticipated developments while implementing the modifications necessary
to mitigate Year 2000 compliance problems, including the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the indirect impacts of third parties with
whom the company does business and who do not mitigate their Year 2000
compliance problems, and similar uncertainties.
* Changes in social attitudes regarding the utility and power industries.
* Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; or environmental and energy regulations.
* Other business or investment considerations that may be disclosed from time
to time in WEC's or WE's SEC filings or in other publicly disseminated
written documents.
WEC and WE undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,412,115 $1,393,270 $1,437,480
Gas 355,172 364,875 318,262
Steam 22,315 15,675 14,742
---------- ---------- ----------
Total Operating Revenues 1,789,602 1,773,820 1,770,484
Operating Expenses
Fuel (Note H) 311,966 295,651 303,553
Purchased power (Note H) 132,689 36,216 41,834
Cost of gas sold 233,877 234,254 188,764
Other operation expenses 407,114 391,520 395,242
Maintenance 135,096 103,046 112,400
Depreciation (Note C) 237,698 202,796 183,876
Taxes other than income taxes 73,914 77,866 74,765
Federal income tax (Note D) 40,221 105,656 119,939
State income tax (Note D) 10,558 24,976 28,405
Deferred income taxes - net (Note D) 7,937 (1,575) (2,833)
Investment tax credit - net (Note D) (927) (2,430) (4,482)
---------- ---------- ----------
Total Operating Expenses 1,590,143 1,467,976 1,441,463
Operating Income 199,459 305,844 329,021
Other Income and Deductions
Interest income 24,497 18,177 17,143
Allowance for other funds used during
construction (Note E) 3,349 3,036 3,650
Merger expenses (Note B) (31,934) - -
Miscellaneous - net (Note M) (47,507) (2,468) (6,497)
Federal income tax (Note D) 23,773 1,939 2,882
State income tax (Note D) 3,011 (642) (357)
---------- ---------- ----------
Total Other Income and Deductions (24,811) 20,042 16,821
Income Before Interest Charges
and Preferred Dividend 174,648 325,886 345,842
Interest Charges
Long-term debt 110,138 103,045 101,806
Other interest 9,552 9,032 14,002
Allowance for borrowed funds used
during construction (Note E) (6,961) (5,529) (5,203)
---------- ---------- ----------
Total Interest Charges 112,729 106,548 110,605
Preferred Dividend Requirement
of Subsidiary 1,203 1,203 1,203
---------- ---------- ----------
Net Income $ 60,716 $ 218,135 $ 234,034
========== ========== ==========
Average Number of Shares of
Common Stock Outstanding (Thousands) 112,570 110,983 109,850
========== ========== ==========
Earnings Per Share of Common Stock
(Basic and Diluted) $0.54 $1.97 $2.13
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
/TABLE
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
<CAPTION>
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,991,330 $4,725,832
Gas 521,814 503,041
Steam 62,156 60,480
---------- ----------
5,575,300 5,289,353
Accumulated provision for depreciation (2,700,839) (2,441,950)
---------- ----------
2,874,461 2,847,403
Leased facilities - net (Note H) 138,687 -
Construction work in progress 81,612 135,040
Nuclear fuel - net (Note H) 90,219 75,476
---------- ----------
Net Utility Plant 3,184,979 3,057,919
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 404,240 322,085
Conservation investments (Note A) 69,510 92,705
Non-utility property - net 222,035 173,525
Other 129,572 127,908
---------- ----------
Total Other Property and Investments 825,357 716,223
Current Assets
Cash and cash equivalents 19,607 10,748
Accounts receivable, net of allowance for
doubtful accounts - $15,641 and $13,264 145,737 151,473
Accrued utility revenues 141,273 155,838
Fossil fuel (at average cost) 124,045 113,516
Materials and supplies (at average cost) 73,159 70,900
Prepayments 62,479 59,624
Other 7,017 3,759
---------- ----------
Total Current Assets 573,317 565,858
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 172,546 153,806
Deferred regulatory assets (Note A) 215,200 193,756
Other 66,285 123,276
---------- ----------
Total Deferred Charges and Other Assets 454,031 470,838
---------- ----------
Total Assets $5,037,684 $4,810,838
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
<CAPTION>
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,862,932 $1,945,344
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,532,405 1,416,067
---------- ----------
Total Capitalization 3,425,787 3,391,861
Current Liabilities
Long-term debt due currently (Note H) 90,004 190,204
Notes payable (Note I) 319,953 69,265
Accounts payable 148,588 148,429
Payroll and vacation accrued 25,392 24,007
Taxes accrued - income and other 41,495 37,362
Interest accrued 20,334 22,828
Other 63,832 34,923
---------- ----------
Total Current Liabilities 709,598 527,018
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 525,666 511,399
Accumulated deferred investment tax credits 86,871 87,798
Deferred regulatory liabilities (Note A) 173,688 175,943
Other 116,074 116,819
---------- ----------
Total Deferred Credits and Other
Liabilities 902,299 891,959
Commitments and Contingencies (Note M)
---------- ----------
Total Capitalization and Liabilities $5,037,684 $4,810,838
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
<CAPTION>
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $ 60,716 $218,135 $234,034
Reconciliation to cash
Depreciation 237,698 202,796 183,876
Nuclear fuel expense - amortization 5,426 21,887 22,324
Conservation expense - amortization 22,498 22,498 21,870
Debt premium, discount & expense - amortization 7,930 9,809 12,690
Deferred income taxes - net 7,937 (1,575) (2,833)
Investment tax credit - net (927) (2,430) (4,482)
Allowance for other funds used
during construction (3,349) (3,036) (3,650)
Write-off of merger costs 30,684 - -
Write-down of equipment 30,000 - -
Change in - Accounts receivable 5,736 (1,324) (35,492)
Inventories (12,788) (30,703) 5,233
Accounts payable 159 39,921 16,713
Other current assets 8,452 (15,190) (7,652)
Other current liabilities 31,933 295 20,769
Other (39,143) 3,716 (36,508)
-------- -------- --------
Cash Provided by Operating Activities 392,962 464,799 426,892
Investing Activities
Construction expenditures (345,908) (389,194) (271,688)
Allowance for borrowed funds used
during construction (6,961) (5,529) (5,203)
Nuclear fuel (6,352) (26,053) (23,454)
Nuclear decommissioning trust (27,248) (26,309) (10,861)
Conservation investments - net 696 319 2,130
Other 24,835 15,347 (581)
-------- -------- --------
Cash Used in Investing Activities (360,938) (431,419) (309,657)
Financing Activities
Sale of - Common stock 29,586 23,180 52,353
Long-term debt 47,000 238,809 234,453
Retirement of - Preferred stock - (1) -
Long-term debt (177,725) (53,356) (134,567)
Change in short-term debt 250,688 (87,654) (95,136)
Dividends on stock - Common (172,714) (167,236) (159,688)
-------- -------- --------
Cash Used in Financing Activities (23,165) (46,258) (102,585)
-------- -------- --------
Change in Cash and Cash Equivalents $ 8,859 ($12,878) $ 14,650
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $111,383 $ 94,964 $ 99,924
Income taxes 42,859 103,916 146,979
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
<CAPTION>
1997 1996
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $.01 par value; authorized 325,000,000 shares;
outstanding - 112,865,844 and 111,678,795 shares $ 1,129 $ 1,117
Other paid in capital 729,654 700,080
Retained earnings 1,132,149 1,244,147
---------- ----------
Total Common Stock Equity 1,862,932 1,945,344
Preferred Stock - Wisconsin Electric Power Company, Cumulative
Six Per Cent. Preferred Stock - $100 par value;
authorized 45,000 shares; outstanding - 44,498 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds
Series Due 1997 1996 Series Due 1997 1996
------ --- -------- -------- ------ --- -------- --------
Wisconsin Electric Power Company
5-7/8% 1997 $ - $130,000 6.85 % 2021 9,000 9,000
6-5/8% 1997 - 10,000 7-3/4% 2023 100,000 100,000
5-1/8% 1998 60,000 60,000 7.05 % 2024 60,000 60,000
6-1/2% 1999 40,000 40,000 9-1/8% 2024 3,443 3,443
6-5/8% 1999 51,000 51,000 8-3/8% 2026 100,000 100,000
7-1/4% 2004 140,000 140,000 7.70 % 2027 200,000 200,000
7-1/8% 2016 100,000 100,000 -------- --------
863,443 1,003,443
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/8% Series due 1997 - 25,000
6-5/8% Series due 2006 200,000 200,000
9.47 % Series due 2006 6,300 7,000
8-1/4% Series due 2022 25,000 25,000
6-7/8% Series due 2095 100,000 100,000
Notes (secured)
Wisvest Corporation - Due 2006 (Note H) 9,853 10,948
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
Due 2006 (Note H) 10,847 12,052
Wisconsin Michigan Investment Corporation - 6.83% due 1997 - 5,000
5.80% due 1998 7,000 7,000
6.49% due 2000 7,000 7,000
6.22% due 2000 20,000 -
6.40% due 2001 15,000 -
6.33% due 2002 12,000 -
6.66% due 2003 10,600 10,600
6.85% due 2005 10,000 10,000
WMF Corp. - 9.1% due 2001 2,400 2,875
Obligations under capital leases - Wisconsin Electric Power Company 182,450 42,962
Unamortized discount - net (24,834) (27,959)
Long-term debt due currently (90,004) (190,204)
---------- ----------
Total Long-Term Debt (Note H) 1,532,405 1,416,067
---------- ----------
Total Capitalization $3,425,787 $3,391,861
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
<CAPTION>
Common Stock
-------------------------
$.01 Par Other Paid Retained
Shares Value In Capital Earnings Total
------ -----------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1994 108,939,769 $1,089 $624,568 $1,118,909 $1,744,566
Net income 234,034 234,034
Common stock cash dividends
$1.455 per share (159,688) (159,688)
Sale of common stock 1,879,568 19 52,341 (7) 52,353
----------- -------- ---------- ----------- -----------
Balance - December 31, 1995 110,819,337 1,108 676,909 1,193,248 1,871,265
Net income 218,135 218,135
Common stock cash dividends
$1.5075 per share (167,236) (167,236)
Sale of common stock 859,458 9 23,171 23,180
----------- -------- ---------- ----------- -----------
Balance - December 31, 1996 111,678,795 1,117 700,080 1,244,147 1,945,344
Net income 60,716 60,716
Common stock cash dividends
$1.535 per share (172,714) (172,714)
Sale of common stock 1,187,049 12 29,574 29,586
----------- -------- ---------- ----------- -----------
Balance - December 31, 1997 112,865,844 $1,129 $729,654 $1,132,149 $1,862,932
=========== ======== ========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("WEC" or the "Company"); its utility subsidiary,
Wisconsin Electric Power Company ("WE"); and its non-utility subsidiaries,
Wisconsin Michigan Investment Corporation ("WMIC"); Badger Service Company;
WISPARK Corporation; WISVEST Corporation; WITECH Corporation; Minergy Corp.;
Custometrics, LLC; WEC International Inc.; and other non-utility companies.
The accounting records of the Company's utility subsidiary are kept as
prescribed by the Federal Energy Regulatory Commission ("FERC"), modified for
requirements of the Public Service Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUES: Utility revenues are recognized on the accrual basis and include
estimated amounts for service rendered but not billed.
FUEL: The cost of fuel is expensed in the period consumed.
PROPERTY: Property is recorded at cost. Additions to and significant
replacements of utility property are charged to utility plant at cost; minor
items are charged to maintenance expense. Cost includes material, labor and
allowance for funds used during construction (see Note E). The cost of
depreciable utility property, together with removal cost less salvage, is
charged to accumulated provision for depreciation when property is retired.
REGULATORY ASSETS AND LIABILITIES: Pursuant to Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types of
Regulation, WE capitalizes, as regulatory assets, incurred costs which are
expected to be recovered in future utility rates. WE also records, as
regulatory liabilities, the current recovery in utility rates of costs which
are expected to be paid in the future.
The following deferred regulatory assets and liabilities are reflected in the
Consolidated Balance Sheet.
==============================================================================
December 31
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $151,157 $154,532
Department of Energy assessments 28,575 29,022
Deferred nuclear costs 17,681 -
Other 17,787 10,202
-------- --------
Total Deferred Regulatory Assets $215,200 $193,756
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $148,292 $155,720
Tax and interest refunds 13,943 14,080
Other 11,453 6,143
-------- --------
Total Deferred Regulatory Liabilities $173,688 $175,943
======== ========
==============================================================================
WE directs a variety of demand-side management programs to help foster energy
conservation by its customers. As authorized by the PSCW, WE capitalized
certain conservation program costs prior to 1995. Utility rates approved by
the PSCW provide for a current return on these conservation investments. As
of December 31, 1997 and 1996, there were $69.5 million and $92.7 million of
conservation investments, respectively, on the Consolidated Balance Sheet in
other property and investments. Through 1995, conservation investments were
charged to operating expense over a ten-year amortization period. Beginning
in 1996, the capitalized conservation balance is charged to operating expense
on a straight line basis over a five-year amortization period.
As a result of a December 1997 combined final order by the PSCW on two 1997 WE
fuel filings, WE recorded approximately $9.3 million of accrued utility
revenues in December 1997 for the anticipated 1998 recovery of 1997 fuel and
purchased power costs through a temporary fuel surcharge. The exact amount
that will be recovered through the temporary fuel surcharge depends upon the
timing of issuance of the PSCW's 1998 Rate Order.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity. During 1997, WE
recorded a $140 million non-cash capital lease transaction for a long-term
power purchase contract (see Note H).
RESTRICTIONS: Various financing arrangements and regulatory requirements
impose certain restrictions on the ability of WEC's utility subsidiary to
transfer funds to WEC in the form of cash dividends, loans or advances. Under
Wisconsin law, WE is prohibited from loaning funds, either directly or
indirectly, to WEC. The Company does not believe that such restrictions will
affect its operations.
NEW PRONOUNCEMENTS: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("FAS") No. 130, Reporting
Comprehensive Income ("FAS 130"), FAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("FAS 131") and FAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits ("FAS 132").
FAS 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. FAS 131 requires that public business enterprises report in
complete sets of financial statements and condensed financial statements of
interim periods certain information about operating segments, their products
and services, the geographic areas in which they operate, and their major
customers. FAS 132 revises the disclosure requirements for pensions and other
postretirement benefit plans. The Company will adopt all three disclosure-
only pronouncements in 1998.
B - MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and Northern States Power Company, a Minnesota corporation ("NSP"), agreed
to terminate by mutual written consent an Agreement and Plan of Merger which
provided for a business combination of WEC and NSP to form Primergy
Corporation. The Board of Directors of WEC concluded that continuing the
proposed business combination, given the current regulatory climate, was not
in the best interest of WEC's shareholders, customers and employees. As a
result, WEC recorded a $30.7 million charge in the second quarter of 1997
($18.8 million net of tax or approximately 17 cents per share) to write off
deferred transaction costs and costs to achieve the merger.
ESELCO, INC.: On May 13, 1997, WEC and ESELCO, Inc., parent company of
Edison Sault Electric Company ("Edison Sault"), entered into an Agreement and
Plan of Reorganization setting forth the terms of the proposed acquisition of
ESELCO, Inc. by WEC ("Agreement"). All outstanding shares of ESELCO, Inc.
common stock would be converted into shares of WEC common stock based upon a
value of $44.50 for each share of ESELCO, Inc. common stock in a transaction
proposed to be structured as a tax-free reorganization and accounted for as a
pooling of interests. The total purchase price would be approximately
$71 million. The exact number of shares of WEC common stock to be issued for
each ESELCO, Inc. share would be determined by dividing $44.50 by the average
closing price of WEC common stock during the ten business days prior to
closing. On October 7, 1997, the shareholders of ESELCO, Inc. voted to
approve the proposed transaction. During 1997, WEC recorded approximately
$1.3 million of related merger expenses. WEC expects to complete the proposed
acquisition as soon as practicable during 1998 upon receipt of all appropriate
regulatory approvals and upon fulfillment of other customary conditions.
Edison Sault is an electric utility which serves approximately 22,000
residential, commercial and industrial customers in Michigan's eastern Upper
Peninsula. WEC expects to operate Edison Sault as a separate utility
subsidiary. ESELCO, Inc. is traded under the symbol EDSE on the NASDAQ
National Market.
C - DEPRECIATION
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the PSCW and include
estimates for salvage and removal costs. Depreciation as a percent of average
depreciable utility plant was 4.5% in 1997, 4.1% in 1996 and 3.8% in 1995.
Nuclear plant decommissioning is accrued as depreciation expense (see Note F).
D - INCOME TAXES
Comprehensive interperiod income tax allocation is used for federal and state
temporary differences. The federal investment tax credit is accounted for on
the deferred basis and is reflected in income ratably over the life of the
related property.
The following table is a summary of income tax expense and a reconciliation of
total income tax expense with the tax expected at the federal statutory rate.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Current tax expense $ 23,995 $129,335 $145,819
Investment tax credit-net (927) (2,430) (4,482)
Deferred tax expense 7,937 (1,575) (2,833)
-------- -------- --------
Total Tax Expense $ 31,005 $125,330 $138,504
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $ 92,924 $344,668 $373,741
======== ======== ========
Expected tax at federal
statutory rate $ 32,523 $120,634 $130,809
State income tax net of
federal tax benefit 6,176 17,671 18,934
Investment tax credit
restored (4,487) (4,509) (4,482)
Low-income housing credits (2,831) (2,930) (2,606)
Other (no item over
5% of expected tax) (376) (5,536) (4,151)
-------- -------- --------
Total Tax Expense $ 31,005 $125,330 $138,504
======== ======== ========
==============================================================================
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and liabilities
to recognize the expected future tax consequences of events that have been
reflected in the Company's financial statements or tax returns and the
adjustment of deferred tax balances to reflect tax rate changes. Following is
a summary of deferred income taxes under FAS 109.
==============================================================================
December 31
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 43,405 $ 41,066
Construction advances 49,202 45,906
Other 79,939 66,834
-------- --------
Total Deferred Income Tax Assets $172,546 $153,806
======== ========
Deferred Income Tax Liabilities
Property related $514,792 $484,199
Conservation investments 7,878 16,827
Other 2,996 10,373
-------- --------
Total Deferred Income Tax Liabilities $525,666 $511,399
======== ========
==============================================================================
As detailed in Note A, WE has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues.
E - ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION ("AFUDC")
AFUDC is included in utility plant accounts and represents the cost of
borrowed funds used during plant construction and a return on stockholders'
capital used for construction purposes. Allowance for borrowed funds also
includes interest capitalized on qualifying assets of non-utility
subsidiaries. On the income statement, the cost of borrowed funds (before
income taxes) is a reduction of interest expense and the return on
stockholders' capital is an item of noncash other income.
As approved by the PSCW, AFUDC was capitalized during the following periods on
50% of construction work in progress ("CWIP") at the following rates:
* February 18, 1997 - December 31, 1997 10.29%
* January 1, 1996 - February 17, 1997 10.17%
Prior to 1996, utility rates approved by the PSCW provided for a current
return on investment for selected long-term projects included in CWIP. AFUDC
was capitalized on the remaining CWIP at a rate of 10.83% in 1995.
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 megawatt
electric generating units at Point Beach Nuclear Plant ("Point Beach").
During 1997, 1996 and 1995, Point Beach provided 6%, 24% and 25% of WE's net
electric energy supply, respectively. Point Beach's Nuclear Regulatory
Commission ("NRC") licenses expire in October 2010 for Unit 1 and March 2013
for Unit 2.
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. The NRC issues trend letters to provide early notification of
declining performance and to allow a utility, under the watchfulness of the
NRC, to take early corrective actions. During 1997, WE undertook a
comprehensive effort to address NRC concerns and to take advantage of industry
best practices to further strengthen performance at the plant. On January 21,
1998, the NRC rescinded its declining trend letter and informed WE "that
corrective actions [being taken by WE] have been effective in addressing [the
NRC's] concerns and that the adverse trends in performance at Point Beach have
been arrested."
WE returned Point Beach Unit 2 to service in August 1997 following an extended
outage that began in October 1996 to replace the unit's steam generators.
Unit 2 was taken out of service from mid-November 1997 through early February
1998 and has experienced several other unplanned shutdowns in the past six
months to address various equipment issues. Point Beach Unit 1 was taken out
of service in February 1997 due to equipment problems. WE decided to keep
Unit 1 out of service to allow Point Beach staff to focus their attention on
the work necessary to bring Unit 2 back to service. During the summer of
1997, WE replaced two low pressure turbines in Unit 1 which increased its
dependable generating capability from 500 to 510 megawatts. WE returned Unit
1 to service from December 1997 through mid-February 1998, when it began a
scheduled refueling outage that is expected to be completed in May 1998.
WE requested that the PSCW allow deferred accounting treatment for certain
nuclear non-fuel operation and maintenance costs in excess of those included
in 1997 rates. In July 1997, the PSCW approved WE's request but has not yet
decided how the deferrable costs will be treated for rate making purposes.
During 1997, WE incurred $40 million of deferrable nuclear costs of which
$35 million was attributable to the Wisconsin electric retail jurisdiction.
WE has argued in its 1998 Test Year rate proceedings to recover all
$35 million over a five year period beginning in 1998. However, PSCW staff
testimony in the 1998 Wisconsin retail rate proceeding recommends recovery of
approximately $18 million of these costs over a five year period. As a
result, WE has deferred $18 million as of December 31, 1997 in Deferred
Charges and Other Assets - Deferred Regulatory Assets (See Note A).
SPENT FUEL STORAGE AND DISPOSAL: WE currently has sufficient space in the
spent fuel pool at Point Beach to complete the fall 1998 Unit 2 and spring
1999 Unit 1 refueling outages before the pool is full in its current
configuration. In response to reduced spent fuel pool storage capacity, WE
completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for the temporary dry storage of spent fuel at Point Beach.
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to the ISFSI. To date, WE has loaded two such casks. WE estimates
that with implementation of 18-month fuel cycles, the remaining 10 authorized
casks and the remaining space in the spent fuel pool in its current
configuration, it has sufficient temporary storage to complete the scheduled
fall 2003 Unit 1 refueling outage. WE is presently evaluating other dry
storage alternatives and future storage cask needs and expects to initiate
authorization requests with the PSCW as required to address such future needs.
In May 1997, the NRC sent WE a confirmatory action letter regarding concerns
about the welding process for the casks being used at Point Beach as well as
at two unaffiliated utilities. The letter prohibits the loading of additional
casks until modified welding procedures are accepted by the NRC. The NRC has
required that WE and the other users develop an ultrasonic inspection
technique for the lid welds prior to lifting the May 1997 confirmatory action
letter. WE expects to qualify this inspection technique by May 1998 and hopes
to be able to resume cask loading during the summer of 1998.
Temporary spent fuel storage alternatives are necessary at Point Beach until
the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel under a contract with WE mandated by the
Nuclear Waste Policy Act of 1982, as amended in 1987 ("Waste Act"). The
estimated cost of disposal of spent fuel, based on the contract with the DOE,
is included in nuclear fuel expense. The DOE has indicated that it does not
expect a permanent spent fuel repository to be available until at least 2010.
In July 1996, the United States Court of Appeals for the District of Colombia
circuit ruled that the DOE had an unconditional obligation under the Waste Act
to begin accepting spent fuel by January 31, 1998. However, in December 1996,
the DOE notified owners of commercial nuclear plants that it would not be able
to meet its statutory obligation. On January 31, 1998, the DOE breached its
contract with WE by failing to begin removing spent fuel from Point Beach. At
this time, WE is unable to predict when the DOE will actually begin accepting
spent nuclear fuel.
NUCLEAR INSURANCE: The Price-Anderson Act (the "Act") as amended and
extended to August 1, 2002, currently limits the total public liability for
damages arising from a nuclear incident at a nuclear power plant to
approximately $8.9 billion, of which $200 million is covered by liability
insurance purchased from private sources, and $8.7 billion is covered by an
industry retrospective loss sharing plan whereby in the event of a nuclear
incident resulting in damages exceeding the private insurance coverage, each
owner of a nuclear plant would be assessed a deferred premium of up to
$79.3 million per reactor (WE owns two) with a limit of $10 million per
reactor within one calendar year. As the owner of Point Beach Nuclear Plant,
WE would be obligated to pay its proportionate share of any such assessment.
WE participated in an industry-wide insurance program, with an aggregate limit
of $200 million which covered radiation injury claims of nuclear workers first
employed after 1987. This program was replaced with a new program (which has
no retrospective assessment provisions) at the end of 1997. However, the
discovery period for claims covered under the former program remains open
until the end of 2007 for those few former insureds who no longer need to
participate in the new, replacement program. If claims in excess of the funds
available under the old program develop, WE would be assessed up to a maximum
of approximately $3.1 million per reactor.
WE, through its membership in Nuclear Electric Insurance Limited ("NEIL"),
carries decontamination, property damage and decommissioning shortfall
insurance covering losses of up to $1.5 billion (subject to a $1 million
deductible for each loss) at WE's Point Beach Nuclear Plant. Under policies
issued by NEIL, the insured member is liable for a retrospective premium
adjustment in the event of catastrophic losses exceeding the full financial
resources of NEIL. WE's maximum retrospective liability under its policies is
$12.6 million.
WE also maintains insurance with NEIL covering business interruption and extra
expenses during any prolonged accidental outage (in excess of 23 weeks) at the
Point Beach plant, where such outage is caused by accidental property damage
from radioactive contamination or other risks of direct physical loss. WE's
maximum retrospective liability under this policy is $4.9 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect WE from material
adverse impact.
NUCLEAR DECOMMISSIONING: WE expects to operate the two units at Point
Beach to the expiration of their current operating licenses. The estimated
cost to decommission the plant in 1997 dollars is $404 million based upon a
site specific decommissioning cost study completed in 1994. Assuming plant
shutdown at the expiration of the current operating licenses, prompt
dismantlement and annual escalation of costs at specific inflation factors
established by the PSCW, it is projected that approximately $1.7 billion will
be spent over a twenty-year period, beginning in 2010, to decommission the
plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund will
provide sufficient funds at the time of decommissioning. WE believes it is
probable that any shortfall in funding would be recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, WE's debt and equity
security investments in the Fund are classified as available for sale. Gains
and losses on the Fund were determined on the basis of specific
identification; net unrealized holding gains on the Fund were recorded as part
of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31. The Fund balance is stated at fair value.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 11,402 $ 15,418 $ 3,456
Earnings 15,846 10,891 7,405
-------- -------- --------
Depreciation Expense $ 27,248 $ 26,309 $ 10,861
======== ======== ========
Total costs accrued to date $288,977 $261,729
Unrealized gain 115,263 60,356
-------- --------
Accumulated Provision for Depreciation $404,240 $322,085
======== ========
==============================================================================
DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992
establishes a Uranium Enrichment Decontamination and Decommissioning Fund
("D&D Fund") for the DOE's nuclear fuel enrichment facilities. Deposits to
the D&D Fund are derived in part from special assessments on utilities using
enrichment services. As of December 31, 1997, WE has on its books a remaining
estimated liability equal to the projected special assessments of
$24.1 million. A corresponding deferred regulatory asset is detailed in
Note A.
Effective in 1997, the PSCW had disallowed the recovery of D&D Fund
assessments in Wisconsin utility retail rates as a result of a decision by the
U.S. Court of Federal Claims in a case involving Yankee Atomic Electric
Company ("Yankee Atomic") in which the court ruled that the assessments were
unlawful. The PSCW had stated that it would be appropriate that WE be
reimbursed if the Yankee Atomic decision was overturned or modified. On
May 6, 1997, the U.S. Court of Appeals for the Federal Circuit issued a
decision reversing the decision of the Court of Federal Claims and upheld the
assessments. The amount of the assessments related to the PSCW's rate
jurisdiction were approximately 85% of the assessments or $2.6 million in 1997
and will remain as a deferred regulatory asset pending the outcome of the 1998
Rate Order in which WE submitted the assessments for amortization and rate
recovery. The portion of allowable costs will be amortized to nuclear fuel
expense and included in utility rates over the next 10 years.
G - PREFERRED STOCK
Preferred stock authorized but unissued is: WEC, $.01 par value, 15,000,000
shares and WE, cumulative, $25 par value, 5,000,000 shares.
The 3.60% series preferred stock is redeemable in whole or in part at the
option of WE at $101 per share plus any accrued dividends.
The fair value of WE's preferred stock was $17.8 million and $16.1 million at
December 31, 1997 and 1996, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: Long-term debt premium or
discount and expense of issuance are amortized by the straight line method
over the lives of the debt issues and included as interest expense.
Unamortized amounts pertaining to reacquired debt are written off currently,
when acquired for sinking fund purposes, or amortized in accordance with PSCW
orders, when acquired for early retirement.
The maturities and sinking fund requirements through 2002 for the aggregate
amount of long-term debt outstanding (excluding obligations under capital
lease) at December 31, 1997 are shown below.
==============================================================================
(Thousands of Dollars)
1998 $ 70,520
1999 94,570
2000 30,625
2001 18,685
2002 15,000
==============================================================================
Sinking fund requirements for the years 1998 through 2002, included in the
table above, are $17.4 million. Substantially all utility plant is subject to
the mortgage.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. Proceeds of the issue were added to WE's general funds and were applied
to the repayment of short-term borrowings.
In December 1996, WE and WISVEST Corporation issued promissory notes in the
amount of $12.05 million and $10.95 million, respectively, due 2006. The
notes were issued as part of the transaction to acquire the steam and chilled
water facilities from Milwaukee County. The notes have been discounted to
reflect the difference between the effective interest rate of 6.36% and the
stated rate of 1.93%. This discount will be amortized over the life of the
notes using the effective interest method.
In October 1997, WMIC issued $15 million of 6.40% medium-term notes due 2001
and $12 million of 6.33% medium-term notes due 2002. In November 1997, WMIC
issued $20 million of 6.22% medium-term notes due 2000. Proceeds of the
issues were added to WMIC's general funds and will be used to finance non-
utility projects.
At December 31, 1997, the interest rate for the $67 million variable rate note
due 2016 was 3.70% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 4.20%.
OBLIGATIONS UNDER CAPITAL LEASE: WE has a nuclear fuel leasing arrangement
with Wisconsin Electric Fuel Trust ("Trust") which is treated as a capital
lease. The nuclear fuel is leased and amortized to fuel expense for a period
of 60 months or until the removal of the fuel from the reactor, if earlier.
Lease payments include charges for the cost of fuel burned, financing costs
and management fees. In the event WE or the Trust terminates the lease, the
Trust would recover its unamortized cost of nuclear fuel from WE. Under the
lease terms, WE is in effect the ultimate guarantor of the Trust's commercial
paper and line of credit borrowings financing the investment in nuclear fuel.
Interest expense on the nuclear fuel lease, included in fuel expense, were
$868,000, $2,332,000 and $2,401,000 during 1997, 1996 and 1995, respectively.
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with an
unaffiliated independent power producer, LSP-Whitewater Limited Partnership
("LS Power"). The contract, for 236 megawatts of firm capacity from
LS Power's gas-fired cogeneration facility located in Whitewater, Wisconsin,
includes no minimum energy purchase requirements. The contract expires in
2022, at which time WE may renew for another ten years or purchase the
generating facility at fair value. WE treats this contract as a capital
lease. The leased facility and corresponding obligation under capital lease
were recorded at the estimated fair value of the plant's electric generating
facilities. The leased facility is being amortized on a straight line basis
over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September 1997,
imputed interest costs on the purchase power obligation were approximately
$6.5 million and total amortization costs of Utility Plant Under Capital
Leases was $1.6 million. The long-term power purchase contract is treated as
an operating lease for rate-making purposes. As a result, the difference
between the minimum lease payments and the sum of the imputed interest and
amortization costs are recorded as a deferred regulatory asset. Due to the
timing of the minimum lease payments, WE expects the regulatory asset to
increase to approximately $78 million by the year 2009 and the total
obligation under capital lease to increase to $160 million by the year 2005
before each begins to unwind over the remaining life of the contract. The
minimum lease payments are classified as purchased power expense on the income
statement. Interest expense on the purchase power obligation, included in
purchased power expense, was $5,614,000 during 1997.
Provided below is a summary of WE's nuclear fuel and property under capital
leases at December 31.
==============================================================================
1997 1996
-------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 95,464 $100,952
Accumulated provision for amortization (59,783) (61,408)
In process/stock 54,538 35,932
-------- --------
Total Nuclear Fuel $ 90,219 $ 75,476
======== ========
Utility Plant Under Capital Leases
Long-term purchase power commitments $140,312 $ -
Accumulated provision for amortization (1,625) -
-------- --------
Net Utility Plant - Leased Facilities $138,687 $ -
======== ========
==============================================================================
Future minimum lease payments under the capital leases and the present value
of the net minimum lease payments as of December 31, 1997 are as follows:
==============================================================================
Nuclear Purchase Power
Fuel Lease Commitment Total
------------- -------------- -------------
(Thousands of Dollars)
1998 $ 18,315 $ 23,272 $ 41,587
1999 12,655 24,123 36,778
2000 8,311 25,031 33,342
2001 2,302 25,968 28,270
2002 150 26,961 27,111
Later Years - 588,145 588,145
-------- -------- --------
Total Minimum Lease Payments 41,733 713,500 755,233
Less: Estimated Executory Costs - (142,930) (142,930)
-------- -------- --------
Net Minimum Lease Payments 41,733 570,570 612,303
Less: Interest (3,020) (426,833) (429,853)
-------- -------- --------
Present Value of
Net Minimum Lease Payments 38,713 143,737 182,450
Less: Due Currently (19,484) - (19,484)
-------- -------- --------
$ 19,229 $143,737 $162,966
======== ======== ========
==============================================================================
FAIR VALUE: The fair value of the Company's long-term debt was
$1.7 billion and $1.6 billion at December 31, 1997 and 1996, respectively.
The fair value of WE's first mortgage bonds and debentures is estimated based
upon the market value of the same or similar issues. Book value approximates
fair value for the Company's unsecured notes. The fair value of WE's nuclear
fuel and long-term purchase power commitment capital leases are the market
value of the Trust's commercial paper and the estimated fair value of the
lessor's related electric generating facilities, respectively.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
==============================================================================
1997 1996
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $127,815 6.40% $ 34,370 6.30%
Commercial paper 192,138 5.84% 34,895 5.59%
-------- --------
$319,953 $ 69,265
======== ========
==============================================================================
Unused lines of credit for short-term borrowing amounted to $199.5 million at
December 31, 1997. In support of various informal lines of credit from banks,
WEC subsidiaries have agreed to maintain unrestricted compensating balances or
to pay commitment fees; neither the compensating balances nor the commitment
fees are significant.
J - PENSION PLANS
Prior to 1996, WE had several defined benefit noncontributory pension plans
covering all eligible employees. Pension benefits were based on years of
service and the employee's compensation. Effective January 1, 1996, plans
covering all employees were converted to a single defined benefit
noncontributory cash balance plan. Under the cash balance plan, pension
benefits are determined by a combination of annual plan wages, a credit based
upon WE's annual financial performance and individual account-based interest
credits. Lump sum payout at termination of employment or retirement is
available. Each employee's opening account balance was based on accrued
pension benefits as of December 31, 1994 and converted to a lump-sum amount
determined under the prior plan's provisions. The lump-sum amount was
credited for an additional transition credit based on age and/or years of
service. The cash balance plan includes a grandfather clause, where employees
who retire during the 15 years following January 1, 1996 receive the greater
of pension benefits calculated under their original pension plan or under the
cash balance plan.
The majority of the plans' assets are equity securities; other assets include
corporate and government bonds and real estate. The plans are funded to meet
the requirements of the Employee Retirement Income Security Act of 1974.
In the opinion of the Company, current pension trust assets and amounts which
are expected to be paid to the trusts in the future will be adequate to meet
pension payment obligations to current and future retirees.
==============================================================================
Pension Cost calculated per FAS 87 * 1997 1996 1995
- - ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31
Cost of pension benefits earned by
employees $ 9,216 $ 9,912 $ 8,985
Interest cost on projected benefit
obligation 45,613 41,454 41,586
Actual return on plan assets (114,294) (85,141) (136,243)
Net amortization and deferral 63,347 34,600 88,493
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 3,882 $ 825 $ 2,821
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $611,796 $560,801
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 10,897 14,741
-------- --------
Total obligation $622,693 $575,542
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31
Pension assets at fair market value $761,881 $687,482
Projected benefit obligation
at present value (649,256) (601,213)
Unrecognized transition asset (17,150) (19,566)
Unrecognized prior service cost 34,344 36,027
Unrecognized net gain (123,094) (96,344)
-------- --------
Projected status of plans $ 6,725 $ 6,386
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 4.75
5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
==============================================================================
* Statement of Financial Accounting Standards No. 87, Employers' Accounting
for Pensions ("FAS 87").
K - BENEFITS OTHER THAN PENSIONS
POSTRETIREMENT BENEFITS: Effective in 1993, the Company adopted
prospectively Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions ("FAS 106") and
elected the 20 year option for amortization of the previously unrecognized
accumulated postretirement benefit obligation.
WE sponsors defined benefit postretirement plans that cover both salaried and
nonsalaried employees who retire at age 55 or older with at least 10 years of
service. The postretirement medical plan provides coverage to retirees and
their dependents. Retirees contribute to the medical plan. The group life
insurance benefit is reduced upon retirement.
Employees' Benefit Trusts ("Benefit Trusts") are used to fund a major portion
of postretirement benefits. The funding policy for the Benefit Trusts is to
maximize tax deductibility. The majority of the Benefit Trusts' assets are
mutual funds.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1997 1996 1995
- - ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31
Cost of postretirement benefits
earned by employees $ 1,911 $ 2,436 $ 2,276
Interest cost on projected
benefit obligation 10,343 10,456 10,458
Actual return on plan assets (10,786) (5,938) (12,598)
Net amortization and deferral 10,952 6,745 13,951
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 12,420 $ 13,699 $ 14,087
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31
Accumulated Postretirement
Benefit Obligation
Retirees ($94,011) ($92,417)
Fully eligible active plan participants (11,654) (9,938)
Other active plan participants (42,516) (40,428)
-------- --------
Total obligation (148,181) (142,783)
Postretirement assets at
fair market value 59,841 49,424
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (88,340) (93,359)
Unrecognized transition obligation 68,825 78,239
Unrecognized prior service cost (938) (1,038)
Unrecognized net gain (14,458) (14,583)
-------- --------
Accrued Postretirement Benefit Obligation ($34,911) ($30,741)
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 4.75
5.0 5.0
Expected long-term rate of return
on postretirement assets 9.0 9.0 9.0
Health care cost trend rate 7.5 declining to
5.0 in year 2002
==============================================================================
Changes in health care cost trend rates will affect the amounts reported. For
example, a 1% increase in rates would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $9.7 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by approximately $0.9 million.
OMNIBUS STOCK INCENTIVE PLAN: A stockholder-approved Omnibus Stock
Incentive Plan ("Plan") enables the Company to provide a long-term incentive,
through equity interests in WEC, to selected officers and key employees. The
Plan provides for the granting of stock options, stock appreciation rights
("SARs"), stock awards and performance units over a period of no more than ten
years. Awards under the Plan may be paid in common stock, cash or a
combination thereof. Four million shares of common stock have been reserved
under the Plan. The exercise price of a stock option will not be less than
100% of the common stock's fair market value on the grant date and options may
not be exercised within six months of the grant date.
Effective for 1996, WEC has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("FAS 123"), and will continue to apply the intrinsic value
method of accounting for awards under the Plan as required by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If
WEC had adopted the optional FAS 123 accounting method for Plan awards as of
the beginning of 1995, the effect on net income and earnings per share for
1997, 1996 and 1995 would have been immaterial.
Each stock option includes performance units based on contingent dividends for
four years from the date of grant. Payment of these dividends depends on the
achievement of certain performance goals. No SARs or stock awards have been
granted and no performance units have been earned to date.
The following is a summary of stock options issued through December 31, 1997
under the Plan.
<TABLE>
<CAPTION>
=========================================================================================================
1997 1996 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 523,900 $28.038 335,500 $28.832 145,500 $27.061
Granted 40,000 $27.653 210,900 $26.813 190,000 $30.188
Forfeited (32,900) $28.085 (22,500) $28.400 - -
--------- --------- ---------
Outstanding at December 31 531,000 $28.006 523,900 $28.038 335,500 $28.832
========= ========= =========
=========================================================================================================
</TABLE>
As of December 31, 1997, the 531,000 options outstanding under the Plan are
exercisable at per share prices of between $26.813 and $30.188 with a weighted
average remaining contractual life of 8.2 years. These options are
exercisable four years after the grant date with an exercise period of ten
years from the grant date.
The earliest year in which any of the options could be exercised was 1997. As
of December 31, 1997, the 51,750 exercisable options outstanding under the
Plan are exercisable at a per share price of $27.375 with a weighted average
remaining contractual life of 6.0 years.
L - INFORMATION BY SEGMENTS OF BUSINESS
WEC is a holding company with subsidiaries in utility and non-utility
businesses. The Company's principal business segments include electric, gas
and steam utility operations. The electric utility generates, transmits,
distributes and sells electric energy in southeastern (including metropolitan
Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. The gas utility purchases, distributes and sells natural gas to
retail customers and transports customer-owned gas in three service areas in
southeastern, east central and western Wisconsin that are largely within the
electric service area. The steam utility produces, distributes and sells
steam to space heating and processing customers in the Milwaukee area.
Principal non-utility lines of business include real estate investment and
development, venture capital investments in Wisconsin and the Upper Peninsula
of Michigan, and investments in recycling technology and energy related
entities. The following summarizes the business segments of the Company.
==============================================================================
Year ended December 31 1997 1996 1995
- - ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,412,115 $1,393,270 $1,437,480
Operating income before income taxes 219,010 380,376 419,271
Depreciation 213,785 183,159 164,789
Construction expenditures 236,384 272,838 223,723
Gas Operations
Operating revenues 355,172 364,875 318,262
Operating income before income taxes 32,978 47,720 47,022
Depreciation 21,421 18,246 17,722
Construction expenditures 22,977 22,851 24,851
Steam Operations
Operating revenues 22,315 15,675 14,742
Operating income before income taxes 5,260 4,375 3,757
Depreciation 2,492 1,391 1,365
Construction expenditures 1,006 21,651 206
Consolidated
Operating revenues 1,789,602 1,773,820 1,770,484
Operating income before income taxes 257,248 432,471 470,050
Depreciation 237,698 202,796 183,876
Construction expenditures
(including non-utility) 345,908 389,194 271,688
Other Information
Non-utility Net Income*
Real estate activities $ 6,966 $ 8,820 $ 3,583
Other** (8,692) (797) (9,013)
At December 31
- - --------------
Net Identifiable Assets
Electric $3,900,889 $3,646,997 $3,449,822
Gas 392,865 400,582 376,536
Steam 45,131 46,499 25,214
Non-utility
Real estate activities 211,359 200,603 175,746
Other** 154,822 89,358 55,661
---------- ---------- ----------
Total Identifiable Assets 4,705,066 4,384,039 4,082,979
Other corporate assets *** 332,618 426,799 477,756
---------- ---------- ----------
Total Consolidated Assets $5,037,684 $4,810,838 $4,560,735
========== ========== ==========
==============================================================================
* Excludes merger expenses.
** Primarily venture capital, recycling technology and energy related
activities.
*** Primarily other property and investments, materials and supplies and
deferred charges.
M - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a 220 megawatt cogeneration facility in Kimberly, Wisconsin, WE
purchased three combustion turbines, three heat recovery boilers and a steam
turbine (the "Equipment"). Since 1994, WE has continued to carry the
Equipment at a cost of approximately $66.3 million and has entertained
numerous proposals and projects for which the Equipment could be used. During
1997, WE continued to review its options for use or sale of the Equipment. In
the fourth quarter of 1997, WE entered into the final phase of negotiating an
agreement for a joint independent power project involving the Equipment.
Under the provisions of FAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed, WE refined its cash flow
projection for the Equipment based upon the latest proposal. As measured by
expected gross cash flows to be earned under this project, WE determined that
an impairment existed. As a result, WE recorded a $30.0 million impairment
charge in the fourth quarter of 1997 which is included in the Miscellaneous -
Net Other Income and Deductions line of the income statement. Based upon the
estimated discounted cash flows of the project, WE determined that a net
current investment at fair value of $36.3 million should remain on its balance
sheet for the Equipment in Other Deferred Charges and Other Assets.
MANUFACTURED GAS PLANT SITES: WE continues a voluntary program to
investigate the remediation of 11 former manufactured gas plant ("MGP") sites.
WE currently estimates that future costs to be incurred for detailed site
investigation and remediation is $25 million to $40 million over the next ten
years. Actual costs are uncertain pending the results of further site
specific investigations and the selection of site specific remediation. In
WE's February 13, 1997 rate order, the PSCW amplified its position on the
recovery of MGP remediation costs. It reiterated its position that such costs
should be deferred and amortized and recovered, without carrying costs, in
future rate cases. Since the timing and recovery of MGP remediation costs
will be affected by the biennial rate case cycle, the timing and magnitude of
remediation expenditures, and their recovery may be affected.
Plans for the construction and financing of future additions to utility plant
can be found elsewhere in this report in Management's Discussion and Analysis
of Financial Condition and Results of Operations - "Liquidity and Capital
Resources - Capital Requirements 1998-2002."<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements appearing on pages A-23
through A-40 of this report present fairly, in all material respects, the
financial position of Wisconsin Energy Corporation and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
- - ---------------------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 28, 1998
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1997, based on the number of Wisconsin Energy Corporation
stockholder accounts, there were 96,289 registered stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New York Stock
Exchange. The ticker symbol is WEC. Daily trading prices and volume can be
found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WiscEn or WiscEngy.
DIVIDENDS AND COMMON STOCK PRICES
DIVIDEND POLICY OF WEC: Cash dividends on WEC common stock, as declared by
the Board of Directors, are normally paid on or about the first day of March,
June, September and December.
RANGE OF WEC COMMON STOCK PRICES AND DIVIDENDS:
============================================================================
1997 | 1996
- - ------------------------------------------|---------------------------------
Quarter High Low Dividend | High Low Dividend
- - ------------------------------------------|---------------------------------
First $27-7/8 $23-1/4 $ .38 | $32 $27-1/4 $ .3675
Second 25-5/8 23 .385 | 28-7/8 26 .38
Third 26-1/4 23-1/2 .385 | 29-1/8 26-3/8 .38
Fourth 29-1/16 24-1/8 .385 | 28-3/8 26-1/8 .38
------ | -------
Year $29-1/16 $23 $1.535 | $32 $26 $1.5075
====== | =======
============================================================================
WE COMMON STOCK DIVIDENDS: Cash dividends declared on Wisconsin Electric
Power Company's common stock during the two most recent fiscal years are set
forth below. Dividends were paid to WE's sole common stockholder, WEC.
==============================================================================
Quarter Total Dividend
------- ----------------------------------
1997 1996
------------ ------------
First $ 80,726,000 $ 40,455,444
Second 44,322,000 42,478,000
Third 44,322,000 42,478,000
Fourth 44,322,000 42,478,000
------------ ------------
Total $213,692,000 $167,889,444
============ ============
==============================================================================
BUSINESS OF THE COMPANY
Wisconsin Energy Corporation is a holding company with subsidiaries in utility
and non-utility businesses. Its principal subsidiary is Wisconsin Electric
Power Company.
WE engages in the generation, transmission, distribution and sale of electric
energy in an area of about 12,000 square miles in southeastern Wisconsin, the
east central and northern portions of Wisconsin, and the Upper Peninsula of
Michigan. The total area's estimated population is approximately 2.3 million,
which includes metropolitan Milwaukee. WE also purchases natural gas,
transports gas to Wisconsin through pipeline companies and distributes and
sells it in a territory of about 2,800 square miles in the area west and
southwest of Milwaukee, the Appleton area, and the Prairie du Chien area. WE
also provides steam service for heating and manufacturing processes to about
500 customers in the Milwaukee area.
Wispark Corporation; Witech Corporation; Wisvest Corporation; Minergy Corp.;
Badger Service Company; Custometrics, LLC; Wisconsin Michigan Investment
Corporation; and WEC International Inc. are subsidiaries devoted primarily to
stimulating economic growth in the Wisconsin Electric service area and to
capitalizing on diversified investment opportunities for stockholders.
DIRECTORS AND OFFICERS
DIRECTORS
The information under "Proposal 1: Election of Directors-Terms Expiring in
Year 2001" and "Proposal 2: Election of Director-Term Expiring in Year 2000"
in WEC's definitive proxy statement dated April 3, 1998, attached hereto, is
incorporated herein by reference.
OFFICERS (Figures in parenthesis indicate age and years of service with WEC
and/or its subsidiaries as of December 31, 1997.)
Officers of Wisconsin Energy Corporation
Richard A. Abdoo (53;22) Thomas H. Fehring (50;27)
Chairman of the Board, President Corporate Secretary
and Chief Executive Officer
Anne K. Klisurich (50;25)
Francis Brzezinski (46;8) Controller
Vice President
Gordon A. Willis (59;36)
Richard R. Grigg (49;27) Assistant Treasurer
Vice President
Joyce Feaster (35;13)
Calvin H. Baker (54;6) Assistant Corporate Secretary
Treasurer and Chief Financial Officer
Officers of Wisconsin Electric Power Company
Richard A. Abdoo (53;22) Richard J. White (48;0)
Chairman of the Board and Chief Vice President-Communications &
Executive Officer Community Relations
Richard R. Grigg (49;27) Thomas H. Fehring (50;27)
President and Chief Operating Officer Corporate Secretary
David K. Porter (54;28) Anne K. Klisurich (50;25)
Senior Vice President Controller
Michael B. Sellman (50;*) Gordon A. Willis (59;36)
Senior Vice President-Nuclear Power Treasurer
Business Unit and Chief Nuclear Officer
Barbara S. Bras (44;12)
Calvin H. Baker (54;6) Assistant Vice President-Human
Vice President-Finance and Chief Resources
Financial Officer
Jose M. Delgado (51;24)
Charles T. Govin, Jr. (51;19) Assistant Vice President-Electric
Vice President-Electric & Gas System Operations
Operations
Joyce Feaster (35;13)
Kristine M. Krause (43;19) Assistant Corporate Secretary and
Vice President-Fossil Operations Assistant Treasurer
Kristine A. Rappe (41;15) Dale A. Landgren (49;24)
Vice President-Customer Services Assistant Vice President-Business
Planning
Larry Salustro (50;0)
Vice President-Legal, Regulatory & Scott A. Patulski (48;26)
Governmental Affairs Site Vice President-Point Beach
Nuclear Plant
* Mr. Sellman's service with Wisconsin Electric began in 1998.
APPENDIX B
This appendix provides a narrative description of the differences between the
electronic format document and the printed copy relating to the substantive
graphic or image material contained in the proxy statement.
1. Under the heading "PROPOSAL 1: ELECTION OF DIRECTORS - TERMS EXPIRING
IN YEAR 2001 AND PROPOSAL 2: ELECTION OF DIRECTOR - TERM EXPIRING IN
YEAR 2000," a black and white photograph of each nominee and director
appears immediately to the left of the narrative of each respective
nominee and director. The photographs appear on pages 1, 2 and 3 of the
printed copy.
2. Under the heading "Performance Graph," the table in the electronic
format document represents datapoints for the graph labeled "Five-Year
Cumulative Total Return," a paper copy of which is being filed
supplementally to the Branch Chief in the Division of Corporation
Finance. The performance graph appears on page 13 of the printed copy.
