SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission Registrant; State of Incorporation IRS Employer
File Number Address; and Telephone Number Identification No.
----------- ---------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether each Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that each Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest
practicable date (October 29, 1999):
Wisconsin Energy Corporation Common Stock, $.01 Par Value,
117,878,461 shares outstanding.
Wisconsin Electric Power Common Stock, $10 Par Value,
Company 33,289,327 shares outstanding.
Wisconsin Energy Corporation is
the sole holder of Wisconsin
Electric Power Company Common
Stock.
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<S> <C>
Item Page
- ---- ----
Introduction...............................................................
Part I - Financial Information
------------------------------
1. Financial Statements
Wisconsin Energy
Consolidated Condensed Income Statement................................
Consolidated Condensed Balance Sheet...................................
Consolidated Statement of Cash Flows...................................
Wisconsin Electric
Condensed Income Statement.............................................
Condensed Balance Sheet................................................
Statement of Cash Flows................................................
Notes to Financial Statement of Wisconsin Energy and Wisconsin Electric..
2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations for Wisconsin Energy and Wisconsin Electric................
3. Quantitative and Qualitative Disclosures About Market Risk.................
Part II - Other Information
---------------------------
1. Legal Proceedings..........................................................
4. Submission of Matters to a Vote of Security Holders........................
5. Other Information..........................................................
6. Exhibits and Reports on Form 8-K...........................................
Signatures.................................................................
</TABLE>
INTRODUCTION
Wisconsin Energy Corporation ("Wisconsin Energy" or the
"Company") is a holding company whose principal subsidiary is
Wisconsin Electric Power Company ("Wisconsin Electric"), an
electric, gas and steam utility. Unless qualified by its context
when used in this combined Form 10-Q, Wisconsin Energy refers to
the holding company and all of its subsidiaries. The unaudited
interim financial statements presented in this combined Form 10-Q
report include the consolidated statements of Wisconsin Energy as
well as separate statements for Wisconsin Electric. These
unaudited statements have been prepared by Wisconsin Energy and
Wisconsin Electric pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations. The Wisconsin Energy and Wisconsin Electric
financial statements should be read in conjunction with the
financial statements and notes thereto included in the companies'
combined Annual Report on Form 10-K for the year ended
December 31, 1998. This combined Form 10-Q is separately filed
by Wisconsin Energy and Wisconsin Electric. Information
contained herein relating to any individual registrant is filed
by such registrant on its own behalf.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating Revenues $591,297 $519,649 $1,687,022 $1,510,902
Operating Expenses
Fuel 106,051 87,017 270,995 241,125
Purchased power 62,328 45,450 165,029 124,733
Cost of gas sold 22,513 21,955 119,119 125,361
Other operation and maintenance 174,787 169,841 535,642 510,633
Depreciation and amortization 71,574 61,084 202,973 183,105
Property and revenue tax 19,076 16,535 55,949 47,811
-------- -------- ---------- ----------
Total Operating Expenses 456,329 401,882 1,349,707 1,232,768
-------- -------- ---------- ----------
Pretax Operating Income 134,968 117,767 337,315 278,134
Other Income and Deductions
Interest income 9,341 6,971 25,892 20,038
Allowance for other funds
used during construction 674 585 3,119 2,177
Other 1,411 (4,086) 5,849 (2,921)
-------- -------- ---------- ----------
Total Other Income and Deductions 11,426 3,470 34,860 19,294
Interest Charges and Other
Interest expense 38,027 32,539 107,592 94,857
Allowance for borrowed funds
used during construction (2,537) (2,175) (6,842) (6,130)
Distributions on preferred
securities of subsidiary trust 3,425 - 7,078 -
Preferred dividend
requirement of subsidiary 301 301 902 902
-------- -------- ---------- ----------
Total Interest Charges and Other 39,216 30,665 108,730 89,629
Income Taxes 38,325 32,396 92,178 71,721
-------- -------- ---------- ----------
Net Income $68,853 $58,176 $171,267 $136,078
======== ======== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 117,307 115,276 116,621 113,952
Earnings Per Share of Common
Stock (Basic and Diluted) $0.59 $0.50 $1.47 $1.19
Dividends Per Share of Common Stock $0.39 $0.39 $1.17 $1.165
<FN>
The accompanying notes, as they relate to Wisconsin Energy Corporation, are an integral part of
these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
(Thousands of Dollars)
<S> <C> <C>
Assets
------
Property, Plant and Equipment
Electric utility $5,107,968 $4,900,836
Gas utility 547,457 523,187
Steam utility 63,204 62,832
Common utility 394,021 420,750
Non-utility plant 219,724 -
Other property 335,070 256,912
Accumulated provision for depreciation (3,136,321) (3,021,548)
---------- ----------
3,531,123 3,142,969
Construction work in progress 116,111 135,544
Leased facilities - net 128,747 133,007
Nuclear fuel - net 82,967 87,660
---------- ----------
Net Property, Plant and Equipment 3,858,948 3,499,180
Investments 897,760 795,676
Current Assets
Cash and cash equivalents 40,131 16,603
Accounts receivable 212,050 190,103
Accrued utility revenues 79,774 130,518
Materials, supplies and fossil fuel 234,588 199,052
Prepayments and other assets 73,204 71,843
---------- ----------
Total Current Assets 639,747 608,119
Deferred Charges and Other Assets
Accumulated deferred income taxes 209,474 199,372
Other 326,361 259,410
---------- ----------
Total Deferred Charges and Other Assets 535,835 458,782
---------- ----------
Total Assets $5,932,290 $5,361,757
========== ==========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $814,359 $760,351
Retained earnings 1,179,049 1,144,092
Unearned compensation - restricted stock award (2,606) (1,338)
---------- ----------
Total Common Stock Equity 1,990,802 1,903,105
Preferred stock 30,450 30,450
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company 200,000 -
Long-term debt 1,989,047 1,749,024
---------- ----------
Total Capitalization 4,210,299 3,682,579
Current Liabilities
Long-term debt due currently 81,130 119,140
Short-term debt 384,039 286,859
Accounts payable 155,602 187,452
Accrued liabilities 107,079 88,510
Other 64,881 53,219
---------- ----------
Total Current Liabilities 792,731 735,180
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 586,219 570,750
Other 343,041 373,248
---------- ----------
Total Deferred Credits and Other Liabilities 929,260 943,998
---------- ----------
Total Capitalization and Liabilities $5,932,290 $5,361,757
========== ==========
<FN>
The accompanying notes, as they relate to Wisconsin Energy Corporation, are an integral
part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
-------------------------------
1999 1998
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $171,267 $136,078
Reconciliation to cash
Depreciation and amortization 202,973 183,105
Nuclear fuel expense - amortization 20,253 13,634
Conservation expense - amortization 16,874 16,874
Debt premium, discount & expense amortization 2,795 3,406
Deferred income taxes - net (8,657) 1,615
Investment tax credit - net (3,444) (3,540)
Allowance for other funds
used during construction (3,119) (2,177)
Change in - Accounts receivable (21,947) (33,478)
Inventories (9,815) 3,600
Accounts payable (31,850) (17,177)
Other current assets 49,383 69,902
Other current liabilities 30,231 15,385
Other (21,187) 13,684
-------- --------
Cash Provided by Operating Activities 393,757 400,911
Investing Activities
Construction expenditures (361,205) (280,275)
Acquisition of power plants (276,792) -
Allowance for borrowed funds
used during construction (6,842) (6,130)
Nuclear fuel (7,973) (5,230)
Nuclear decommissioning trust (30,673) (24,354)
Other (89,341) 5,064
-------- --------
Cash Used in Investing Activities (772,826) (310,925)
Financing Activities
Sale of - Common stock 54,008 61
Long-term debt 274,498 211,324
Mandatorily redeemable trust
preferred securities - net 193,700 -
Retirement of long-term debt (79,069) (80,972)
Change in short-term debt 97,180 (83,801)
Dividends on stock - Common (136,309) (132,429)
Other (1,411) (1,425)
-------- --------
Cash Provided by (Used in) Financing Activities 402,597 (87,242)
-------- --------
Change in Cash and Cash Equivalents 23,528 2,744
Cash and Cash Equivalents
Beginning of Period 16,603 19,607
-------- --------
Cash and Cash Equivalents
End of Period $40,131 $22,351
======== ========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $106,057 $90,855
Income taxes 105,878 68,562
<FN>
The accompanying notes, as they relate to Wisconsin Energy Corporation, are an integral
part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating Revenues $513,890 $496,603 $1,511,635 $1,469,055
Operating Expenses
Fuel 86,701 87,013 232,741 241,115
Purchase power 46,544 37,054 111,561 109,444
Cost of gas sold 22,513 21,955 119,119 125,361
Other operation and maintenance 158,600 159,520 495,234 489,805
Depreciation and amortization 66,779 59,735 191,396 178,978
Property and revenue tax 16,833 15,727 50,443 46,110
-------- -------- ---------- ----------
Total Operating Expenses 397,970 381,004 1,200,494 1,190,813
-------- -------- ---------- ----------
Pretax Operating Income 115,920 115,599 311,141 278,242
Other Income and Deductions
Interest income 5,886 5,236 17,117 16,256
Allowance for borrowed funds
used during construction 674 585 3,119 2,177
Other 3,226 (2,268) 10,695 1,865
-------- -------- ---------- ----------
Total Other Income and Deductions 9,786 3,553 30,931 20,298
Interest Charges
Interest expense 28,617 28,177 85,466 84,129
Allowance for borrowed funds
used during construction (330) (287) (1,529) (1,108)
-------- -------- ---------- ----------
Total Interest Charges 28,287 27,890 83,937 83,021
Income Taxes 35,098 33,005 91,421 75,595
-------- -------- ---------- ----------
Net Income 62,321 58,257 166,714 139,924
Preferred Stock Dividend Requirement 301 301 902 902
-------- -------- ---------- ----------
Earnings Available for
Common Stockholder $62,020 $57,956 $165,812 $139,022
======== ======== ========== ==========
<FN>
Note: Earnings and dividends per share of common stock are not applicable because all of
Wisconsin Electric Power Company's common stock is owned by Wisconsin Energy
Corporation.
The accompanying notes, as they relate to Wisconsin Electric Power Company, are an integral part
of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
(Thousands of Dollars)
<S> <C> <C>
Assets
------
Property, Plant and Equipment
Electric utility $5,026,504 $4,820,239
Gas utility 547,457 523,187
Steam utility 63,204 62,832
Common utility 394,021 420,750
Other property 7,384 7,511
Accumulated provision for depreciation (3,079,892) (2,975,749)
---------- ----------
2,958,678 2,858,770
Construction work in progress 82,179 109,412
Leased facilities - net 128,747 133,007
Nuclear fuel - net 82,967 87,660
---------- ----------
Net Property, Plant and Equipment 3,252,571 3,188,849
Investments 596,263 573,859
Current Assets
Cash and cash equivalents 11,880 14,183
Accounts receivable 167,774 166,648
Accrued utility revenues 78,759 129,463
Materials, supplies and fossil fuel 200,497 198,015
Prepayments and other assets 48,843 59,813
---------- ----------
Total Current Assets 507,753 568,122
Deferred Charges and Other Assets
Accumulated deferred income taxes 199,901 190,114
Other 248,310 247,998
---------- ----------
Total Deferred Charges and Other Assets 448,211 438,112
---------- ----------
Total Assets $4,804,798 $4,768,942
========== ==========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $713,582 $713,582
Retained earnings 1,016,030 984,896
---------- ----------
Total Common Stock Equity 1,729,612 1,698,478
Preferred stock 30,450 30,450
Long-term debt 1,520,183 1,512,531
---------- ----------
Total Capitalization 3,280,245 3,241,459
Current Liabilities
Long-term debt due currently 68,213 112,454
Short-term debt 277,413 219,289
Accounts payable 136,203 169,503
Accrued liabilities 95,528 80,908
Other 60,789 46,574
---------- ----------
Total Current Liabilities 638,146 628,728
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 574,933 559,574
Other 311,474 339,181
---------- ----------
Total Deferred Credits and Other Liabilities 886,407 898,755
---------- ----------
Total Capitalization and Liabilities $4,804,798 $4,768,942
========== ==========
<FN>
The accompanying notes, as they relate to Wisconsin Electric Power Company, are an
integral part of these financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELCETRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
-------------------------------
1999 1998
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Operating Activities
Net income $166,714 $139,924
Reconciliation to cash
Depreciation and amortization 191,396 178,978
Nuclear fuel expense - amortization 20,253 13,634
Conservation expense - amortization 16,874 16,874
Debt premium, discount & expense amortization 2,005 3,103
Deferred income taxes - net (8,681) 1,687
Investment tax credit - net (3,394) (3,518)
Allowance for other funds
used during construction (3,119) (2,177)
Change in - Accounts receivable (1,126) (30,199)
Inventories (2,482) 3,547
Accounts payable (33,300) (17,282)
Other current assets 61,674 77,968
Other current liabilities 28,835 15,093
Other (10,650) 35,265
-------- --------
Cash Provided by Operating Activities 424,999 432,897
Investing Activities
Construction expenditures (263,660) (230,048)
Allowance for borrowed funds
used during construction (1,529) (1,108)
Nuclear fuel (7,973) (5,230)
Nuclear decommissioning trust (30,673) (24,354)
Other (6,157) 970
-------- --------
Cash Used in Investing Activities (309,992) (259,770)
Financing Activities
Sale of long-term debt 30,703 169,657
Retirement of long-term debt (70,556) (71,361)
Change in short-term debt 58,124 (128,274)
Dividends on stock - Common (134,679) (134,108)
Preferred (902) (902)
-------- --------
Cash Used in Financing Activities (117,310) (164,988)
-------- --------
Change in Cash and Cash Equivalents (2,303) 8,139
Cash and Cash Equivalents
Beginning of Period 14,183 10,100
-------- --------
Cash and Cash Equivalents
End of Period $11,880 $18,239
======== ========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $90,915 $87,336
Income taxes 98,442 66,807
<FN>
The accompanying notes, as they relate to Wisconsin Electric Power Company are an
integral part of these financial statements.
</FN>
</TABLE>
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements
for Wisconsin Energy Corporation and the unaudited financial
statements for Wisconsin Electric Power Company should be read in
conjunction with the companies' combined 1998 Annual Report on
Form 10-K. In the opinion of management, all adjustments, normal
and recurring in nature, necessary to a fair statement of the
results of operations and financial position of Wisconsin Energy
and Wisconsin Electric, have been included in the accompanying
income statements and balance sheets. The results of operations
for the nine months ended September 30, 1999 are not necessarily
indicative, however, of the results which may be expected for the
year 1999 because of seasonal and other factors.
2. Due to recent acquisitions by Wisconsin Energy, described
below in Note 4, that have increased the size of Wisconsin
Energy's non-utility operations and assets, Wisconsin Energy has
modified its income statement presentation, and Wisconsin Energy
and Wisconsin Electric have modified their balance sheet
presentations. The primary income statement modification
includes reclassifying the results of non-utility operations from
Other Income and Deductions to the various lines within operating
income. This modification does not change net income. The
primary balance sheet modification includes reclassifying non-
utility property, plant and equipment and the related accumulated
provision for depreciation from Investments to inclusion with
utility Property, Plant and Equipment. This modification does
not change total assets. Prior year financial statements have
been reclassified to the current year presentation of non-utility
results of operations and financial position.
3. Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc.
in a tax-free reorganization accounted for as a pooling of
interests. Due to the immaterial nature of the transaction,
Wisconsin Energy has not restated any historical financial or
statistical information. Instead, Wisconsin Energy combined
ESELCO's May 31, 1998 balance sheet with Wisconsin Energy's.
For additional information, see Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations in
Part I of this report.
4. In April 1999, Wisvest-Connecticut, LLC, a wholly owned
subsidiary of Wisvest Corporation which is, in turn, a wholly
owned subsidiary of Wisconsin Energy, acquired two fossil-fueled
power plants in the State of Connecticut for $277 million from
The United Illuminating Company, an unaffiliated investor-owned
utility in New Haven, Connecticut. Pursuant to the agreement,
Wisvest-Connecticut, LLC purchased the Bridgeport Harbor Station,
which has an active generating capacity of 590 megawatts, as well
as the New Haven Harbor Station, which has an active generating
capacity of 466 megawatts. Wisvest-Connecticut, LLC financed the
acquisition through the issuance of $195 million of long-term,
nonrecourse notes; an equity contribution of $105 million from
Wisconsin Energy; $30 million of working capital arrangements and
a $25 million letter of credit facility.
Wisvest-Connecticut, LLC has entered into an interest rate
swap agreement to exchange fixed rate payment obligations for
variable rate receipt rights without exchanging the
underlying notional amounts. This agreement, which expires
on December 31, 2005, serves to convert variable rate debt
under Wisvest-Connecticut, LLC's long-term nonrecourse notes
to fixed rate debt to reduce the impact of interest rate
fluctuations. For further information, see Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations - "Factors Affecting Results of
Operations" in Part I of Wisconsin Energy's and Wisconsin
Electric's combined Quarterly Report on Form 10-Q for the
period ended June 30, 1999.
5. WISCONSIN ENERGY: Wisconsin Energy, a holding company with
subsidiaries in utility and non-utility businesses, has two
reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial
information is available that is evaluated regularly in deciding
how to allocate resources or in assessing performance. Wisconsin
Energy's reportable operating segments include a utility segment
and a non-utility segment. As of June 30, 1999, Wisconsin Energy
changed its reportable operating segments as a result of a
material increase in non-utility energy assets and revenues due
to the acquisition of generating assets from The United
Illuminating Company as described in Note 4 above.
The reportable utility segment includes Wisconsin Energy's
two utility subsidiaries, Wisconsin Electric Power Company
and Edison Sault Electric Company. This segment derives its
revenues from electric, gas and steam operations. Electric
operations engage in the generation, transmission,
distribution and sale of electric energy in southeastern
(including Metropolitan Milwaukee), east central and northern
Wisconsin and in the Upper Peninsula of Michigan. Gas
operations engage in the purchase, distribution and sale of
natural gas to retail customers and the transportation of
customer-owned gas in four service areas in southeastern,
east central, western and northern Wisconsin. Steam
operations engage in the production, distribution and sale of
steam to space heating and processing customers in the
Milwaukee area.
The reportable non-utility segment derives its revenues from
energy activities including independent power production and
energy marketing, services and trading.
The following table summarizes the reportable operating
segments of Wisconsin Energy.
<TABLE>
<CAPTION>
Energy
---------------------------------------
Wisconsin Energy Utility Non-Utility Subtotal Other (a) Total
- ---------------- ----------- ----------- ----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
September 30, 1999
------------------
Three Months Ended
Operating Revenues $522,357 $60,833 $583,190 $8,107 $591,297
Pretax Operating
Income (b) 118,235 15,453 133,688 1,280 134,968
Nine Months Ended
Operating Revenues $1,536,976 $130,622 $1,667,598 $19,424 $1,687,022
Pretax Operating
Income (b) 317,220 19,777 336,997 318 337,315
Segment Assets $4,879,451 $605,020 $5,484,471 $368,864 $5,853,335
September 30, 1998
------------------
Three Months Ended
Operating Revenues $506,330 $8,184 $514,514 $5,135 $519,649
Pretax Operating
Income (Loss) (b) 116,954 1,155 118,109 (342) 117,767
Nine Months Ended
Operating Revenues $1,481,979 $15,753 $1,497,732 $13,170 $1,510,902
Pretax Operating
Income (Loss) (b) 280,166 (286) 279,880 (1,746) 278,134
Segment Assets $4,720,814 $108,552 $4,829,366 $289,182 $5,118,548
<FN>
(a) Other includes non-utility real estate investment and development and non-utility
investments in recycling technology.
(b) Income tax expense, interest income and interest expense are not included in segment pretax
operating income.
</FN>
</TABLE>
WISCONSIN ELECTRIC: Wisconsin Electric, Wisconsin Energy's
principal subsidiary, has organized its operating segments
according to how it is currently regulated. Wisconsin
Electric's reportable operating segments include electric,
gas and steam utility segments.
The following table summarizes the reportable operating
segments of Wisconsin Electric.
<TABLE>
<CAPTION>
Wisconsin Electric Electric Gas Steam Total
- ------------------ --------- --------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
September 30, 1999
------------------
Three Months Ended
Operating Revenues (a) $468,696 $41,648 $3,546 $513,890
Pretax Operating
Income (Loss) (b) 122,570 (5,866) (784) 115,920
Nine Months Ended
Operating Revenues (a) $1,282,807 $213,127 $15,701 $1,511,635
Pretax Operating
Income (b) 290,124 19,342 1,675 311,141
September 30, 1998
------------------
Three Months Ended
Operating Revenues (a) $454,821 $38,256 $3,526 $496,603
Pretax Operating
Income (Loss) (b) 124,434 (8,367) (468) 115,599
Nine Months Ended
Operating Revenues (a) $1,244,001 $210,081 $14,973 $1,469,055
Pretax Operating
Income (b) 263,692 12,212 2,338 278,242
<FN>
(a) Wisconsin Electric accounts for intersegment revenues at a tariff rate
established by the Public Service Commission of Wisconsin ("PSCW").
Intersegment revenues are not material.
(b) Income tax expense, interest income and interest expense are not included in
segment pretax operating income.
</FN>
</TABLE>
6. In March 1999, WEC Capital Trust I, a Delaware business trust
of which Wisconsin Energy owns all of the outstanding common
securities, issued $200 million of 6.85% trust preferred
securities to the public. The sole asset of WEC Capital Trust I
is $206 million of 6.85% junior subordinated debentures due
March 31, 2039, issued by Wisconsin Energy. The terms and
interest payments on these debentures correspond to the terms and
distributions on the trust preferred securities. Wisconsin
Energy used the proceeds from the sale of its junior subordinated
debentures to fund a capital contribution of approximately
$105 million to Wisvest-Connecticut, LLC for acquisition in mid-
April 1999 of two fossil-fueled power plants from The United
Illuminating Company (see Note 4 above) and for repayment of
short-term borrowings. WEC Capital Trust I has been consolidated
into Wisconsin Energy's financial statements.
The interest payments, which are tax deductible by Wisconsin
Energy, are reflected as distributions on preferred
securities of the subsidiary trust in Wisconsin Energy's
Consolidated Condensed Income Statement. Wisconsin Energy
may elect to defer interest payments on the debentures for up
to 20 consecutive quarters, causing corresponding
distributions on the trust preferred securities to also be
deferred. In case of a deferral, interest and distributions
will continue to accrue, along with quarterly compounding
interest on the deferred amounts.
Wisconsin Energy may redeem all or a portion of the
debentures after March 25, 2004, requiring an equal amount of
trust preferred securities to be redeemed at face value plus
accrued and unpaid distributions. Wisconsin Energy has
entered into a limited guarantee of payment of distributions,
redemption payments and payments in liquidation with respect
to the trust preferred securities. This guarantee, when
considered together with Wisconsin Energy's obligations under
the related debentures and indenture and the applicable
declaration of trust, provide a full and unconditional
guarantee by Wisconsin Energy of amounts due on the
outstanding trust preferred securities.
7. During the first nine months of 1999, Wispark Corporation, a
wholly owned subsidiary of Wisconsin Energy, secured $37 million
of bank financing in the form of adjustable and fixed rate
mortgage notes due 2002-2004 to finance the construction or
purchase of various facilities, and Wisvest Corporation issued
$210 million of nonrecourse variable rate notes due December 31,
2005, the proceeds of which were used to help finance acquisition
of the two fossil-fueled power plants from The United
Illuminating Company described in Note 4 above and for working
capital.
On November 10, 1999, Wisconsin Energy Capital Corporation, a
wholly owned subsidiary of Wisconsin Energy, agreed to sell
$200 million aggregate principal amount of nine-month adjustable
medium-term notes due August 16, 2000, the proceeds of which
are expected to be used to fund a $150 million capital
contribution by Wisconsin Energy to Wisconsin Electric and to
reduce short-term borrowings and for other general corporate
purposes. For further information, see Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - "Liquidity and Capital Resources" in Part I of
this report.
8. In July 1999, a jury decided against Wisconsin Electric and
awarded the plaintiffs $4.5 million as actual damages and
$100 million in punitive damages in a lawsuit alleging that
Wisconsin Electric had placed contaminated wastes at two sites in
the City of West Allis, Wisconsin. Wisconsin Electric is
preparing to file an appeal of the case. In the opinion of
management, based in part on the advice of legal counsel, the
jury verdict was not supported by the evidence or the law and the
unprecedented award of punitive damages of this magnitude was
unwarranted and should therefore be reversed or substantially
reduced. As such, Wisconsin Electric has not established a
reserve for potential damages from this suit. For further
information, see Item 1. Legal Proceedings - "Environmental
Matters" in Part II of this report.
In November 1999, Wisconsin Electric and Wisconsin International
Electric Power, Ltd ("WIEP") reached agreement on a settlement
in litigation brought against Wisconsin Electric in March 1998,
whereby Wisconsin Electric agreed to pay WIEP $18 million
during the fourth quarter of 1999. For further information,
see Item 1. Legal Proceedings - "Other Matters" in Part II of
this report.
9. On June 27, 1999, Wisconsin Energy and WICOR, Inc., a
Wisconsin corporation, entered into an Agreement and Plan of
Merger providing for a strategic business combination of
Wisconsin Energy and WICOR. The transaction is intended to
qualify as a tax-free reorganization to the extent that shares of
Wisconsin Energy Common Stock are issued in the merger and will
be accounted for as a purchase transaction. The merger agreement
has been approved by the boards of directors and the shareholders
of Wisconsin Energy and WICOR. Consummation of the merger is
subject to the satisfaction of certain closing conditions
including approval by federal and state regulators. The
regulatory approval process is expected to be completed in time
for the transaction to be consummated by the Spring of 2000.
Under the terms of the merger agreement, Wisconsin Energy
will acquire all of the outstanding shares of WICOR Common
Stock for a fixed price of $31.50 for each WICOR share. At
least 40% of the price will be paid in Wisconsin Energy
Common Stock, and Wisconsin Energy has the option to increase
the percentage to 60%; the balance will be paid in cash. The
exchange ratio for the Wisconsin Energy Common Stock will be
set based upon the average closing prices of Wisconsin Energy
stock immediately prior to closing. If the average is less
than $22.00 per share, Wisconsin Energy may elect to pay all
cash. Each WICOR shareholder will be able to elect to
receive cash, stock, or a combination thereof, subject to
proration.
For additional information, see Item 4. Submission of Matters
to a Vote of Security Holders and Item 5. Other Information -
"Merger Agreement With WICOR, Inc." in Part II of this
report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation is a holding company whose principal
subsidiary is Wisconsin Electric Power Company, an electric, gas
and steam utility. Unless qualified by their context when used
in this document, the terms "Wisconsin Energy" or the "Company"
refer to the holding company and all of its subsidiaries. During
the first nine months of 1999, approximately 90% of Wisconsin
Energy's consolidated operating revenues and 92% of Wisconsin
Energy's consolidated pretax operating income were attributable
to Wisconsin Electric. As of September 30, 1999, approximately
81% of Wisconsin Energy's consolidated total assets were
attributable to Wisconsin Electric. The following discussion and
analysis of financial condition and results of operations
includes both Wisconsin Energy and Wisconsin Electric unless
otherwise stated.
See Note 2 above in Item 1. Financial Statements - "Notes to
Financial Statements" for information concerning the 1999
Reclassification of certain amounts in Wisconsin Energy's prior
year financial statements to the current year presentation of non-
utility operations.
CAUTIONARY FACTORS: A number of forward-looking statements are
included in this document. When used, the terms "anticipate,"
"believe," "estimate," "expect," "objective," "plan," "possible,"
"potential," "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 factors that are noted in "Factors
Affecting Results of Operations" and "Cautionary Factors" below.
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin
Energy acquired ESELCO in a tax-free reorganization accounted for
as a pooling of interests. Due to the immaterial nature of the
transaction, Wisconsin Energy has not restated any historical
financial or statistical information. For additional
information, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors
Affecting Results of Operations" in Part II of Wisconsin Energy's
and Wisconsin Electric's combined Annual Report on Form 10-K for
the year ended December 31, 1998.
ESELCO was the parent company of Edison Sault Electric Company,
an electric utility which serves approximately 21,500
residential, commercial and industrial customers in Michigan's
eastern Upper Peninsula. Where appropriate, discussions as well
as financial or statistical information of Wisconsin Energy
include Edison Sault's operations since June 1, 1998.
RESULTS OF OPERATIONS - 1999 THIRD QUARTER
EARNINGS
During the third quarter of 1999, Wisconsin Energy's consolidated
net income and earnings per share of common stock increased to
$69 million and $0.59, respectively, compared with $58 million
and $0.50, respectively, during the third quarter of 1998. For
the same periods, Wisconsin Electric's earnings increased to
$62 million during 1999 compared with $58 million during 1998. A
summary of contributions to Wisconsin Energy's earnings per share
(basic and diluted) as well as a review of pretax operating
results by the utility and non-utility business segments follows.
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------------------
Earnings Per Share - Wisconsin Energy 1999 1998 % Change
- ------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Utility Operations $0.539 $0.507 6.3%
Non-Utility Operations
Energy 0.058 0.003 1,833.3%
Other (0.010) (0.006) (66.7%)
------ ------
Total $0.587 $0.504 16.5%
====== ======
</TABLE>
UTILITY PRETAX OPERATING RESULTS
During the third quarter of 1999, Wisconsin Energy's pretax
utility operating income increased by 1.1% and Wisconsin
Electric's pretax operating income increased by 0.3% when
compared to the third quarter of 1998. For both Wisconsin Energy
and Wisconsin Electric, increases in electric utility and gas
utility gross margins during the third quarter of 1999 were
largely offset by higher depreciation and amortization expenses.
Electric Utility Revenues, Gross Margins and Sales
WISCONSIN ENERGY: Primarily due to an increase in total
electric kilowatt-hour sales during the third quarter of 1999,
total electric operating revenues increased by 2.7% and the gross
margin on electric operating revenues (electric operating
revenues less fuel and purchased power expenses) increased by
1.6% compared to the third quarter of 1998. The following table
summarizes Wisconsin Energy's total electric utility operating
revenues, gross margin and electric kilowatt-hour sales during
the third quarters of 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30
Electric Utility Operations - -------------------------------------------
Wisconsin Energy 1999 1998 % Change
- ------------------------------ -------- -------- --------
<S> <C> <C> <C>
Electric Gross Margin ($000)
Electric Operating Revenues $477,197 $464,548 2.7%
Fuel & Purchased Power 136,678 129,260 5.7%
-------- --------
Gross Margin $340,519 $335,288 1.6%
======== ========
Total Electric Sales
(Megawatt-hours) 8,624,652 8,515,696 1.3%
</TABLE>
A discussion of Wisconsin Electric's contribution to Wisconsin
Energy's third quarter electric utility revenues, gross margin
and sales follows.
WISCONSIN ELECTRIC: During the third quarter of 1999, Wisconsin
Electric's total electric operating revenues increased by 3.1%
compared to the third quarter of 1998, and the gross margin on
electric operating revenues increased by 1.4%. Wisconsin
Electric attributes these increases in large part to higher total
electric kilowatt-hour sales during the third quarter of 1999.
However, higher purchased power expenses during 1999 partially
offset the impact on gross margin of the increased electric
sales.
<TABLE>
<CAPTION>
Three Months Ended September 30
Electric Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------------ --------- --------- --------
<S> <C> <C> <C>
Electric Gross Margin ($000)
Electric Operating Revenues $468,696 $454,821 3.1%
Fuel & Purchased Power 133,245 124,067 7.4%
-------- --------
Gross Margin $335,451 $330,754 1.4%
======== ========
</TABLE>
Fuel and purchased power expenses increased by $9.2 million or
7.4% between the comparative periods. Of this, purchased power
expense was $9.5 million higher primarily due to an increase in
megawatts purchased under firm power purchase contract for the
summer of 1999 cooling season and, to a lesser extent, due to
higher average market prices for energy during 1999.
Wisconsin Electric's total electric sales increased 1.8% between
the comparative periods:
<TABLE>
<CAPTION>
Three Months Ended September 30
Electric Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------------ --------- --------- --------
<S> <C> <C> <C>
Electric Sales (Megawatt-hours)
Residential 2,019,552 1,976,613 2.2%
Small Commercial/Industrial 2,180,798 2,115,095 3.1%
Large Commercial/Industrial 2,870,230 3,043,758 (5.7%)
Other-Retail/Municipal 376,896 328,239 14.8%
Resale-Utilities 1,018,567 852,595 19.5%
--------- ---------
Total Electric Sales 8,466,043 8,316,300 1.8%
========= =========
</TABLE>
During the month of August 1999, the Tilden iron ore mine was not
operating, and from September 1999 through mid-October 1999, both
the Empire and Tilden iron ore mines, Wisconsin Electric's two
largest electric retail customers, were temporarily shut down as
inventory reduction measures. As a result, electric energy sales
to the mines decreased 41.8% during the third quarter of 1999
compared to the third quarter of 1998. Excluding the Empire and
Tilden ore mines, total electric sales increased 5.4% and sales
to the remaining large commercial/industrial customers increased
3.8%. Sales for resale to other utilities increased 19.5%
primarily due to higher opportunity sales during the third
quarter of 1999.
When comparing third quarter 1999 electric sales with the third
quarter of 1998, air conditioning load due to weather was not a
significant factor. As measured by cooling degree days, July
1999 was 54.4% hotter than July 1998, leading to record electric
sales and a series of new all time peak electric demand
obligations during the month of July 1999. However, due to
cooler weather in August and September 1999, the third quarter of
1999 was 2.9% cooler than the third quarter of 1998. The third
quarters of 1999 and 1998 were both significantly warmer than
normal.
Gas Utility Revenues, Gross Margins and Therm Deliveries
Due primarily to an increase in higher margin residential and
commercial/industrial gas sales during the third quarter of 1999,
Wisconsin Electric's gross margin on gas operating revenues (gas
operating revenues less cost of gas sold) increased by 17.4%
compared to the third quarter of 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30
Gas Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Gas Gross Margin ($000)
Gas Operating Revenues $41,648 $38,256 8.9%
Cost of Gas Sold 22,513 21,955 2.5%
------- -------
Gross Margin $19,135 $16,301 17.4%
======= =======
</TABLE>
The following table summarizes Wisconsin Electric's comparative
gas sales and total therm deliveries during the three months
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30
Gas Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Gas Deliveries (000's of Therms)
Residential 24,327 19,107 27.3%
Commercial/Industrial 14,667 13,536 8.4%
Interruptible 2,131 3,818 (44.2%)
------- -------
Total Gas Sales 41,125 36,461 12.8%
Transported Customer - Owned Gas 73,597 78,399 (6.1%)
Other - Interdepartmental 26,008 37,039 (29.8%)
------- -------
Total Gas Deliveries 140,730 151,899 (7.4%)
======= =======
</TABLE>
Between the comparative periods, total natural gas therm
deliveries decreased 7.4% due to a significant decrease in
interdepartmental deliveries and deliveries of transported
customer-owned gas. However, total retail gas sales, which
contribute higher margins to earnings, increased 12.8% during the
third quarter of 1999 as a result of a 27.3% increase in sales to
residential customers and an 8.4% increase in sales to
commercial/industrial customers. Residential and
commercial/industrial sales increased primarily due to an
increase in the number of customers and an increase in usage per
customer.
During the third quarter of 1999, total interdepartmental therm
deliveries decreased 29.8%. Most interdepartmental therm
deliveries are to company-owned, gas-fired generating facilities.
When compared to the third quarter of 1998, an increase in firm
power purchase commitments and higher availability of company-
owned, low cost generation during the third quarter of 1999
allowed Wisconsin Electric to change its power supply mix away
from higher cost per unit generation from company-owned, gas-
fired facilities. Excluding interdepartmental therm deliveries,
total gas deliveries were unchanged during the three months ended
September 30, 1999.
Utility Operating Expenses
OTHER OPERATIONS AND MAINTENANCE: Compared to the third quarter
of 1998, other operation and maintenance expenses in Wisconsin
Energy's utility business segment decreased by $1 million or 0.9%
during the third quarter of 1999, with almost all of the decrease
attributable to Wisconsin Electric.
At Wisconsin Electric, the most significant changes in other
operations and maintenance between the comparative periods
include a $10 million decrease in nuclear non-fuel expenses, a
$4 million increase in administrative and general expenses, a
$3 million increase in electric transmission expenses and a
$2 million increase in customer expenses. Nuclear non-fuel
expenses decreased during 1999 as a result of progress on various
performance improvement initiatives. Administrative and general
expenses, on the other hand, increased during 1999 primarily as a
result of efforts to prepare for Year 2000 technology issues,
various other corporate technology improvement efforts, increased
staffing, and increased medical benefit expenses. During 1999,
Wisconsin Electric added approximately 170 employees, primarily
in distribution operations as a result of system growth and
system rebuild efforts for reliability purposes and in
information resources as a result of various corporate technology
improvement efforts. For further information, see "Year 2000
Technology Issues" below in "Factors Affecting Results of
Operations." During the third quarter of 1999, electric
transmission expenses increased as a result of higher off-system
power purchases. Customer expenses increased due to higher bad
debt write-offs.
DEPRECIATION AND AMORTIZATION: Primarily as a result of an
increase in average depreciable property at Wisconsin Electric as
well as an increase in nuclear decommissioning expenses due to
higher nuclear decommissioning trust fund earnings during the
third quarter of 1999, Wisconsin Energy's utility depreciation
and amortization expense increased by $7 million or 11.7%.
NON-UTILITY PRETAX OPERATING RESULTS
Primarily due to the operation of two fossil-fueled power plants
in the State of Connecticut, which were acquired by Wisvest-
Connecticut, LLC in mid-April 1999, Wisconsin Energy's pretax non-
utility operating income increased by $16 million or 1,958.2%
during the third quarter of 1999 compared to the third quarter of
1998.
<TABLE>
<CAPTION>
Three Months Ended September 30
--------------------------------------------
Non-Utility Operations ($000) 1999 1998 % Change
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
Operating Revenues
Independent Power Production $41,387 $ - -
Energy Marketing, Trading
and Services 9,919 3,231 207.0%
Other 17,634 10,088 74.8%
------- -------
Total Operating Revenues 68,940 13,319 417.6%
Operating Expenses
Fuel and Purchased Power 31,701 3,206 888.8%
Other 20,506 9,300 120.5%
------- -------
Total Operating Expenses 52,207 12,506 317.5%
------- -------
Pretax Operating Income $16,733 $813 1,958.2%
======= =======
</TABLE>
For further information concerning Wisvest-Connecticut, LLC's
recent power plant acquisitions, see Item 1. Financial Statements
- - "Notes To Financial Statements" in Part I of this report.
NON-UTILITY OPERATING REVENUES: During the third quarter of
1999, Wisvest-Connecticut, LLC generated $41 million of operating
revenues through the sale of 916,000 megawatt hours of electric
energy in the New England region. Increased activity during the
third quarter of 1999 by Griffin Energy Marketing, LLC, another
wholly owned subsidiary of Wisvest Corporation, resulted in a
$7 million increase in operating revenues for energy marketing,
trading and services compared to the third quarter of 1998.
Other operating revenues increased by approximately $8 million
between the comparative periods primarily as a result of
ancillary revenues generated by Wisvest-Connecticut, LLC and
increased rent revenues received from various investments by
Wispark Corporation.
NON-UTILITY OPERATING EXPENSES: Fuel and purchased power
expenses increased $28 million during the third quarter of 1999
as a result of electric generation and power purchases by Wisvest-
Connecticut, LLC and as a result of increased activities by
Griffin. Other operating expenses increased $11 million
primarily due to operation of Wisvest-Connecticut, LLC's recently
acquired power plants.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS: Compared to the three months ended
September 30, 1998, other net other income and deductions
increased by $5 million at Wisconsin Energy and at Wisconsin
Electric primarily due to higher nuclear decommissioning trust
fund earnings during the three months ended September 30, 1999.
INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense
also increased by $5 million between the comparative periods of
which $3.5 million was related to the acquisition of the Wisvest-
Connecticut, LLC power plants.
INCOME TAXES: Compared to the third quarter of 1998, Wisconsin
Energy's income taxes increased by approximately $6 million and
Wisconsin Electric's income taxes increased by $2 million during
the third quarter of 1999 primarily due to increased pretax
income.
RESULTS OF OPERATIONS - 1999 YEAR-TO-DATE
EARNINGS
During the first nine months of 1999, Wisconsin Energy's
consolidated net income and earnings per share of common stock
increased to $171 million and $1.47, respectively, compared with
$136 million and $1.19, respectively, during the first nine
months of 1998. For the same periods, Wisconsin Electric's
earnings increased to $166 million during 1999 compared with
$139 million during 1998. A summary of contributions to
Wisconsin Energy's earnings per share (basic and diluted) as well
as a review of pretax operating results during the comparative
periods by the utility and non-utility business segments follows.
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------------
Earnings Per Share - Wisconsin Energy 1999 1998 % Change
- ------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Utility Operations $1.448 $1.226 18.1%
Non-Utility Operations
Energy 0.053 (0.015) 453.3%
Other (0.032) (0.017) (88.2%)
------ ------
Total $1.469 $1.194 23.0%
====== ======
</TABLE>
UTILITY PRETAX OPERATING RESULTS
During the first nine months of 1999, Wisconsin Energy's pretax
utility operating income increased by 13.2% and Wisconsin
Electric's pretax operating income increased by 11.8%. For both
Wisconsin Energy and Wisconsin Electric, an increase in electric
utility and gas utility gross margins contributed in large part
to these increases compared to the first nine months of 1998.
Electric Utility Revenues, Gross Margins and Sales
WISCONSIN ENERGY: Primarily due to an increase in total 1999
electric kilowatt-hour sales, total electric operating revenues
increased by 4.1% during the first nine months of 1999, and the
gross margin on electric operating revenues increased by 6.0%
compared to the first nine months of 1998. The following table
summarizes Wisconsin Energy's total electric utility operating
revenues, gross margin and electric kilowatt-hour sales during
the first nine months of 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30
Electric Utility Operations - --------------------------------------------
Wisconsin Energy 1999 1998 % Change
- ------------------------------ ---------- ---------- --------
<S> <C> <C> <C>
Electric Gross Margin ($000)
Electric Operating Revenues $1,308,147 $1,256,925 4.1%
Fuel & Purchase Power 354,851 357,208 (0.7%)
---------- ----------
Gross Margin $953,296 $899,717 6.0%
========== ==========
Total Electric Sales
(Megawatt-hours) 23,804,511 22,686,148 4.9%
</TABLE>
A discussion of Wisconsin Electric's contribution to Wisconsin
Energy's electric utility revenues, gross margin and sales during
the first nine months of 1999 and 1998 follows.
WISCONSIN ELECTRIC: Compared to the first nine months of 1998,
Wisconsin Electric's total electric operating revenues increased
by 3.1% during the first nine months of 1999, and the gross
margin on electric operating revenues increased by 5.0%.
Wisconsin Electric attributes these increases in large part to
higher total electric kilowatt-hour sales during 1999, with lower
fuel expenses also contributing to the higher gross margin.
<TABLE>
<CAPTION>
Nine Months Ended September 30
Electric Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------------ ---------- ---------- --------
<S> <C> <C> <C>
Electric Gross Margin ($000)
Electric Operating Revenues $1,282,807 $1,244,001 3.1%
Fuel & Purchased Power 344,302 350,559 (1.8%)
---------- ----------
Gross Margin $938,505 $893,442 5.0%
========== ==========
</TABLE>
Fuel and purchased power expenses decreased by $6 million or 1.8%
between the comparative periods. As a result of the higher
availability of lower cost generation during the first nine
months of 1999, especially at its Point Beach Nuclear Plant,
Wisconsin Electric reduced its fuel expense by $8 million
compared to the first nine months of 1998. Even with the higher
electric sales noted below and a 7.6% increase in net generation,
Wisconsin Electric was able to substitute lower cost per unit
generation during the nine months ended September 30, 1999 for
the higher cost per unit generation used to meet its demand for
electric energy during the nine months ended September 30, 1998.
During the first nine months of 1999, Wisconsin Electric's
purchased power expenses increased $2 million primarily due to an
increase in megawatts under firm power purchase contract for the
summer of 1999 cooling season, and, to a lesser extent, due to
higher average market prices for energy during 1999.
Wisconsin Electric's total electric sales increased 4.1% between
the comparative periods:
<TABLE>
<CAPTION>
Nine Months Ended September 30
Electric Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------------ --------- ---------- --------
<S> <C> <C> <C>
Electric Sales (Megawatt-hours)
Residential 5,528,599 5,451,892 1.4%
Small Commercial/Industrial 6,086,700 5,859,232 3.9%
Large Commercial/Industrial 8,576,448 8,559,153 0.2%
Other-Retail/Municipal 999,767 979,351 2.1%
Resale-Utilities 2,138,551 1,571,729 36.1%
---------- ----------
Total Electric Sales 23,330,065 22,421,357 4.1%
========== ==========
</TABLE>
From August 1999 through mid-October 1999, the Empire and Tilden
iron ore mines, Wisconsin Electric's two largest electric retail
customers, were temporarily shut down as an inventory reduction
measure. As a result, electric energy sales to the mines
decreased 8.2% during the first nine months of 1999 compared to
the first nine months of 1998. Excluding the Empire and Tilden
ore mines, total electric sales increased 5.1% and sales to the
remaining large commercial/industrial customers increased 2.4%.
Sales for resale to other utilities increased 36.1% primarily due
to higher opportunity sales during the nine months ended
September 30, 1999.
When comparing electric sales during the first nine months of
1999 with the first nine months of 1998, air conditioning load
due to weather was not a significant factor. As measured by
cooling degree days, the nine months ended September 30, 1999 was
5.8% cooler than the same period during 1998. However, the first
nine months of 1999 and 1998 were both significantly warmer than
normal.
Gas Utility Revenues, Gross Margins and Therm Deliveries
Due primarily to an increase in higher margin residential and
commercial/industrial gas sales during the first nine months of
1999, Wisconsin Electric's gross margin on gas operating revenues
increased by 11.0% compared to the first nine months of 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30
Gas Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Gas Gross Margin ($000)
Gas Operating Revenues $213,127 $210,081 1.4%
Cost of Gas Sold 119,119 125,361 (5.0%)
-------- --------
Gross Margin $94,008 $84,720 11.0%
======== ========
</TABLE>
Despite an increase in total gas sales, the cost of gas sold
decreased by 5.0% during the first nine months of 1999 due to a
decrease in the per unit cost of purchased gas. Because changes
in the cost of natural gas purchased at market prices were
included in customer rates through the purchased gas adjustment
mechanism and the gas cost recovery mechanism, gas operating
revenues changed at the same rate as the cost of gas sold and
gross margin was unaffected by such changes.
The following table summarizes Wisconsin Electric's comparative
gas sales and total therm deliveries during the nine months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30
Gas Utility Operations - --------------------------------------------
Wisconsin Electric 1999 1998 % Change
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Gas Deliveries (000's of Therms)
Residential 219,768 191,267 14.9%
Commercial/Industrial 135,483 125,985 7.5%
Interruptible 12,626 16,327 (22.7%)
------- -------
Total Gas Sales 367,877 333,579 10.3%
Transported Customer - Owned Gas 257,358 260,586 (1.2%)
Other - Interdepartmental 47,976 72,193 (33.5%)
------- -------
Total Gas Deliveries 673,211 666,358 1.0%
======= =======
</TABLE>
During the first nine months of 1999, total retail gas sales,
which contribute higher margins to earnings, increased 10.3%
compared to the first nine months of 1998, primarily due to a
14.9% increase in sales to residential customers and a 7.5%
increase in deliveries to commercial/industrial customers.
Residential and commercial/industrial sales increased due to an
increase in the number of customers and to an increase in usage
per customer, with the increase in sales per customer due in part
to colder winter weather. As measured by heating degree days,
the winter months of January through March 1999 were 10.8% colder
than the same period in 1998. However, the winter months of 1999
were still 4.1% warmer than normal.
During the first nine months of 1999, total interdepartmental
therm deliveries decreased 33.5%. As noted above, an increase in
firm power purchase commitments during the summer of 1999 and
higher availability of company-owned, low cost generation during
the first nine months of 1999 allowed Wisconsin Electric to
change its power supply mix away from higher cost per unit
generation from company-owned, gas-fired facilities. Excluding
interdepartmental therm deliveries, total gas deliveries
increased 5.2% during the nine months ended September 30, 1999.
Utility Operating Expenses
OTHER OPERATIONS AND MAINTENANCE: Compared to the first nine
months of 1998, other operation and maintenance expenses in
Wisconsin Energy's utility business segment increased by
approximately $8 million or 1.6% during the first nine months of
1999, including a $5 million or 1.1% increase at Wisconsin
Electric.
At Wisconsin Electric, the most significant changes in other
operations and maintenance between the comparative periods
include a $27 million decrease in nuclear non-fuel expenses, a
$21 million increase in administrative and general expenses and a
$5 million increase in steam power generation expenses. Nuclear
non-fuel expenses decreased during 1999 as a result of progress
on various performance improvement initiatives. Administrative
and general expenses, on the other hand, increased during 1999
primarily as a result of efforts to prepare for Year 2000
technology issues, various other corporate technology improvement
efforts, increased staffing noted above, and increased medical
benefit expenses. For further information, see "Year 2000
Technology Issues" below in "Factors Affecting Results of
Operations." Steam power generation expenses increased during
1999 as a result of an increase in the number of maintenance
outages at Wisconsin Electric's fossil-fuel power plants in
anticipation of higher electric demand during the summer of 1999.
DEPRECIATION AND AMORTIZATION: Primarily as a result of an
increase in average depreciable property at Wisconsin Electric as
well as an increase in nuclear decommissioning expenses due to
higher nuclear decommissioning trust fund earnings during the
first nine months of 1999, Wisconsin Energy's utility
depreciation and amortization expense increased by $14 million
and Wisconsin Electric's depreciation and amortization expense
increased by $12 million compared to the first nine months of
1998.
NON-UTILITY OPERATING RESULTS
Primarily due to the operation of two fossil-fueled power plants
in the State of Connecticut since they were acquired by Wisvest-
Connecticut, LLC in mid-April 1999, Wisconsin Energy's pretax non-
utility operating income increased by $22 million or 1,088.9%
during the first nine months of 1999 compared to the first nine
months of 1998.
<TABLE>
<CAPTION>
Nine Months Ended September 30
--------------------------------------------
Non-Utility Operations ($000) 1999 1998 % Change
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
Operating Revenues
Independent Power Production $77,484 $ - -
Energy Marketing, Trading
and Services 40,700 8,548 376.1%
Other 31,862 20,375 56.4%
------- -------
Total Operating Revenues 150,046 28,923 418.8%
Operating Expenses
Fuel and Purchased Power 81,173 8,650 838.4%
Other 48,778 22,305 118.7%
------- -------
Total Operating Expenses 129,951 30,955 319.8%
------- -------
Pretax Operating Income $20,095 ($2,032) 1,088.9%
======= =======
</TABLE>
For further information concerning Wisvest-Connecticut, LLC's
recent power plant acquisitions, see Item 1. Financial Statements
- - "Notes to Financial Statements" in Part 1 of this report.
NON-UTILITY OPERATING REVENUES: During the first nine months of
1999, Wisvest-Connecticut, LLC generated $77 million of operating
revenues through the sale of 1,877,000 megawatt-hours of electric
energy in the New England region. Increased activity during the
first nine months of 1999 by Griffin Energy Marketing, LLC
resulted in a $32 million increase in operating revenues for
energy marketing, trading and services compared to the first nine
months of 1998. Other operating revenues increased by
$11 million between the comparative periods as a result of
ancillary revenues generated by Wisvest-Connecticut, LLC,
increased activity by Minergy Corp. at its glass aggregate plant
in Neenah, Wisconsin and increased rent revenues received from
various investments by Wispark Corporation. Minergy Corp. is a
wholly owned subsidiary of Wisconsin Energy.
NON-UTILITY OPERATING EXPENSES: Fuel and purchased power
expenses increased by approximately $73 million during the first
nine months of 1999 as a result of electric generation and power
purchases by Wisvest-Connecticut, LLC and as a result of
increased activities by Griffin. Other operating expenses
increased $26 million primarily due to operation of Wisvest-
Connecticut, LLC's plants since mid-April 1999.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS: Compared to the nine months ended
September 30, 1998, other net other income and deductions during
the nine months ended September 30, 1999 increased by
approximately $9 million at Wisconsin Energy and at Wisconsin
Electric due to the gain on the sale of certain properties and to
higher nuclear decommissioning trust fund earnings at Wisconsin
Electric.
INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense
increased by approximately $13 million between the comparative
periods of which $7 million was related to the acquisition of the
Wisvest-Connecticut, LLC power plants in mid-April 1999.
INCOME TAXES: Compared to the first nine months of 1998,
Wisconsin Energy's income taxes increased by $20 million and
Wisconsin Electric's income taxes increased by approximately
$16 million during the first nine months of 1999 primarily due to
increased pretax income.
FACTORS AFFECTING RESULTS OF OPERATIONS
GIDDINGS & LEWIS INC. / CITY OF WEST ALLIS LAWSUIT
See Item 1. Legal Proceedings - "Environmental Matters" below in
Part II of this report for information concerning a July 1999
jury verdict against Wisconsin Electric awarding the plaintiffs
$4.5 million of actual damages and $100 million in punitive
damages in a lawsuit alleging that Wisconsin Electric had placed
contaminated wastes at two sites in the City of West Allis,
Wisconsin.
WISCONSIN INTERNATIONAL ELETRIC POWER LITIGATION
See Item 1. Legal Proceedings - "Other Matters" below in Part II
of this report for information concerning a November 1999 settlement
agreement between Wisconsin Electric and WIEP in litigation
brought against Wisconsin Electric in March 1998 whereby
Wisconsin Electric agreed to pay WIEP $18 million during
the fourth quarter of 1999.
NUCLEAR MATTERS
SPENT NUCLEAR FUEL STORAGE AND DISPOSAL: See Item 1. Legal
Proceedings - "Other Matters" below in Part II of this report for
information concerning an August 1999 petition filed by Wisconsin
Electric in the United States Court of Appeals for the District
of Columbia Circuit seeking a court order directing the United
States Department of Energy to provide both monetary and non-
monetary relief under its Standard Contract as a result of the
Department of Energy's failure to comply with its unconditional
obligation under the Nuclear Waste Act of 1982 to dispose of
Wisconsin Electric's spent nuclear fuel from Point Beach Nuclear
Plant.
POINT BEACH NUCLEAR PLANT: In February 1999, WEC Nuclear Corp.,
a subsidiary of Wisconsin Energy, Northern States Power Company
and WPS Nuclear Corp., a subsidiary of WPS Resources Corporation,
announced the formation of the Nuclear Management Company, LLC
("NMC"). At the same time, Alliant Energy Resources, Inc.
announced its intention to join the NMC following approval of the
Securities and Exchange Commission, which was received in early
November 1999. The three existing participants in the NMC or
their affiliates, and an affiliate of Alliant Energy Resources,
operate seven nuclear generating units in total at five sites in
the States of Wisconsin, Minnesota and Iowa with a total combined
generating capacity exceeding 3,600 megawatts. Each utility will
continue to own its respective nuclear units, maintain exclusive
rights to the energy generated, and retain financial
responsibility for safe operation, maintenance and
decommissioning.
The primary goals of the NMC are to identify and achieve enhanced
reliability and continued safe operation of the seven nuclear
generating units as well as to provide enhanced nuclear plant
support and operating services. The NMC will provide services to
Wisconsin Electric's Point Beach Nuclear Plant and, upon transfer
of its operating licenses, the NMC will also be responsible for
the day-to-day operation of Point Beach.
During 1999, the board of directors of the NMC gave authorization
to proceed with steps necessary to acquire the operating licenses
for the seven nuclear generating units. In October 1999, the
Wisconsin Energy and Wisconsin Electric boards of directors
authorized Wisconsin Electric's management to transfer operating
authority for Point Beach Nuclear Plant to the NMC. During the
fourth quarter of 1999, Wisconsin Electric expects to file an
application with the United States Nuclear Regulatory Commission
to transfer the operating licenses of Point Beach to the NMC.
Also during the fourth quarter of 1999, Wisconsin Electric
expects to submit an affiliated interest application with the
Public Service Commission of Wisconsin for approval of its
nuclear power plant operating services agreement with the NMC.
In a separate matter, see Item 1. Legal Proceedings - "Other
Matters" below in Part II of this report for information
concerning an August 1999 decision by the United States Court of
Appeals for the Federal Circuit regarding claims against the
United States Department of Energy by Wisconsin Electric and six
other utilities for overcharges for uranium enrichment services.
INDUSTRY RESTRUCTURING AND COMPETITION
MPSC ELECTRIC RESTRUCTURING: In 1998, the Michigan Public
Service Commission ("MPSC") took actions to implement direct
access beginning on January 1, 2002 for all retail customers of
regulated utilities and Co-ops in the State of Michigan. During
1998, 6.7% of Wisconsin Energy's and 5.6% of Wisconsin Electric's
total utility operating revenues were under MPSC jurisdiction.
The two largest utilities in the State of Michigan, Detroit
Edison and Consumers Energy, had reached settlement with the MPSC
for a phase-in access program to commence in 1999. Following
meetings with the MPSC staff, the remaining utilities, including
Wisconsin Electric and Edison Sault, had proposed a plan
providing full direct access on January 1, 2002 without a
phase-in program.
In June 1999, however, the Michigan Supreme Court ruled that the
MPSC did not have the authority to mandate direct access plans.
On September 1, 1999, Detroit Edison and Consumers Energy, filed
their agreement to proceed on a voluntary basis with a phase-in
of direct access commencing in late 1999 with full access on
January 1 , 2002. In October 1999, the MPSC's authority to
implement access on a voluntary basis was challenged. The MPSC
is expected to continue to support its authority to implement
voluntary open access programs with full access on January 1,
2002. To date, the other utilities have not as yet filed
voluntary access plans.
Bills addressing restructuring of the gas and electric industry
have been introduced and will be discussed in Legislative arenas
beginning as early as the fourth quarter of 1999.
RATES AND REGULATORY MATTERS
See Item 1. Legal Proceedings -"Rates and Regulatory Matters" in
Part II of this report for information concerning 1999 test year
information for Wisconsin Electric that was filed with the PSCW
in July 1999 and for information concerning changes to the non-
utility asset cap to which Wisconsin Energy is subject under
provisions of the State of Wisconsin's public utility holding
company law.
YEAR 2000 TECHNOLOGY ISSUES
The Company continues to work to resolve the potential impact of
the Year 2000 on its ability to operate critical systems and to
accurately process information that may be date sensitive.
YEAR 2000 PROJECT: During 1997, the Company created Year 2000
program teams, overseen by executives of the Company, to address
its Year 2000 issues. The teams, comprised of representatives
with subject matter expertise, are addressing business
applications, voice and data infrastructure, process control and
embedded systems, and supplier readiness.
The Year 2000 teams are following a structured process of
inventorying and assessing potential Year 2000 problems, of
remediating, testing, and certifying Year 2000 readiness and of
developing and implementing Year 2000 risk management contingency
plans. The Company substantially completed an inventory of
potential Year 2000 problems across all operating areas and
completed its assessment of critical areas in the fourth quarter
of 1998. The remediation and testing phases and contacts with
critical third party suppliers are substantially complete. Based
upon an initial assessment of critical supplier Year 2000
readiness that was completed in the third quarter of 1998, the
Company is continuing to implement supplier risk mitigation
actions. Contact with significant customers to evaluate the
potential impact of their Year 2000 actions on Wisconsin Energy
will continue throughout the remainder of 1999.
The Company has structured its Year 2000 program to identify,
prioritize and address critical business functions within the
Company. Based upon the Nuclear Energy Institute's standard
definition, which has been adopted by Wisconsin Energy,
"Year 2000 Ready" systems or applications will be suitable for
continued use into the Year 2000 even though the system or
application may not be fully "Year 2000 Compliant." Wisconsin
Electric participates in monthly reporting conducted by the North
American Electric Reliability Council ("NERC"). As of June 30,
1999, Wisconsin Electric reported to NERC the readiness of those
critical systems needed to support the generation, transmission
and distribution of electricity with minor exceptions consisting
of previously tested upgrades scheduled for implementation during
fall maintenance activities. At this time, the Company's core,
critical business functions are "Year 2000 Ready." However,
additional refinements and testing will continue through the end
of 1999.
POTENTIAL RISKS AND CONTINGENCY PLANNING: The Company is
continuing an ongoing process of assessing potential Year 2000
risks and uncertainties. Internal and external risks are
included in the Company's assessment and identification of
mitigation strategies. Wisconsin Energy expects to successfully
mitigate its controllable internal Year 2000 problems.
For its core operation, Wisconsin Energy also relies upon third
parties such as other power providers to and operators of the
integrated electric transmission and distribution grid, fuel
suppliers, producers of natural gas and suppliers of interstate
natural gas transportation services, and providers of external
infrastructure such as telecommunications, municipal sewer and
water as well as emergency services. Failure of these critical
third parties to identify and remediate their Year 2000 problems
could have a material impact on the Company's operation and
financial condition. The Company's Year 2000 program is
structured to identify, assess and mitigate these third party
risks where possible. At this time, Wisconsin Energy believes
that mitigation efforts will be successful.
As part of its normal business practice, the Company maintains
and periodically initiates various contingency plans to maintain
and restore its energy services during emergency circumstances,
some of which could arise from Year 2000 related problems.
During 1999, Wisconsin Energy is using this experience as a basis
for the development and implementation of Year 2000 related
contingency and business continuity plans. As part of this
effort, the Company is coordinating its Year 2000 readiness
program with various trade associations and industry groups and
is working with the Mid-America Interconnected Network, Inc.
("MAIN"), NERC, the Wisconsin Reliability Assessment Organization
and NEPOOL, the New England power pool, to develop and implement
regional electric reliability contingency plans. Wisconsin
Electric is participating with other utilities in MAIN to develop
reasonably likely worst case scenarios for the region. Scenarios
that have been jointly identified and assessed are:
* Loss or unavailability of some generation.
* Partial loss of system monitoring and control functions,
including data communication.
* Partial loss of voice communications.
* Loss of transmission facilities.
* Loss of load and/or uncharacteristic loads.
Wisconsin Electric agrees with MAIN's assessment that the
probability of these scenarios occurring due to Year 2000 is not
significantly in excess of normal expectations. The Company's
current operating and contingency plans are expected to
adequately handle the above scenarios. The Company has
substantially completed revising its operating and contingency
plans, incorporating enhancements and updates specifically
addressing Year 2000 issues.
FINANCIAL IMPLICATIONS: Wisconsin Energy currently estimates
that it will incur $40 million of expenses during 1998 through
2000 for its Year 2000 program of which $29 million has been
incurred as of September 30, 1999. In addition, the Company
expects to capitalize costs of approximately $18 million to
replace certain existing infrastructure and process control
systems of which $17 million has been capitalized as of
September 30, 1999.
For additional information concerning Year 2000 Technology
Issues, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors
Affecting Results of Operations" in Part II of Wisconsin Energy's
and Wisconsin Electric's combined Annual Report on Form 10-K for
the year ended December 31, 1998 and Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations" in Part I
of Wisconsin Energy's and Wisconsin Electric's combined quarterly
Reports on Form 10-Q for the periods ended March 31, 1999 and
June 30, 1999.
The discussion above includes many forward looking statements
concerning potential schedules, plans, costs, risks and
uncertainties facing Wisconsin Energy as a result of the
Year 2000 problem. Based upon its activities to date, the
Company expects to successfully implement the remaining actions
necessary to become "Year 2000 Ready" by the end of 1999.
However, the Year 2000 problem has many elements and potential
consequences, some of which may not be reasonably foreseeable,
and there can be no assurances that every Year 2000 problem will
be identified and addressed or that unforeseen consequences will
not arise. Unanticipated factors while implementing the changes
necessary to mitigate Year 2000 problems, including the ongoing
availability and costs of trained personnel, the ability to
locate and correct all relevant codes in computer and embedded
systems, or the failure of critical third parties to communicate
about and to mitigate their Year 2000 problems could result in
unanticipated interruptions in certain core business activities
or operations of Wisconsin Energy.
MARKET RISKS
INTEREST RATE RISK: Wisvest-Connecticut, LLC has entered into
an interest rate swap agreement to exchange fixed rate payment
obligations for variable rate receipt rights without exchanging
the underlying notional amounts. For further information
concerning this agreement, see Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations" in Part I of Wisconsin
Energy's and Wisconsin Electric's combined Quarterly Report on
Form 10-Q for the period ended June 30, 1999.
OUTLOOK
EARNINGS: Excluding a one time charge in the fourth quarter of
1999 for settlement of the Wisconsin International Electric Power
litigation, results during the first nine months indicate that
the Company is on course to meet anticipated earnings in the
range of $1.85 to $2.05 per share during 1999. This earnings
forecast is a forward-looking statement subject to certain risks,
uncertainties and assumptions. Actual results may materially
vary. Factors that could cause actual results to differ
materially include, but are not limited to: business and
competitive conditions in the energy industry, in general, and in
the Company's utility service territories; availability of the
Company's generating facilities; changes in purchased power
costs; disposition of legal proceedings; and the economy, weather
and unforeseen problems with non-utility diversification efforts.
See "Cautionary Factors" below. For further information
concerning settlement of the Wisconsin International Electric
Power litigation, see Item 1. Legal Proceedings - "Other Matters"
in Part II of this report.
MERGER AGREEMENT WITH WICOR, INC.
On June 27, 1999, Wisconsin Energy and WICOR entered into an
Agreement and Plan of Merger providing for a strategic business
combination of Wisconsin Energy and WICOR. The transaction is
intended to qualify as a tax-free reorganization to the extent
that shares of Wisconsin Energy Common Stock are issued in the
merger and will be accounted for as a purchase transaction. The
merger agreement has been approved by the boards of directors and
the shareholders of Wisconsin Energy and WICOR. Consummation of
the merger is subject to the satisfaction of certain closing
conditions including approval by federal and state regulators.
The regulatory approval process is expected to be completed in
time for the transaction to be consummated by the spring of 2000.
For additional information, see Item 4. Submission of Matters to
a Vote of Security Holders and Item 5. Other Information -
"Merger Agreement With WICOR, Inc." in Part II of this report.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash provided by operating activities
totaled $394 million at Wisconsin Energy and $425 million at
Wisconsin Electric during the first nine months of 1999. This
compares to $401 million at Wisconsin Energy and $433 million at
Wisconsin Electric during the same period in 1998.
INVESTING ACTIVITIES: Net cash used in investing activities
totaled $773 million at Wisconsin Energy and $310 million at
Wisconsin Electric during the first nine months of 1999 compared
to $311 million at Wisconsin Energy and $260 million at Wisconsin
Electric during the same period in 1998.
In April 1999, Wisvest-Connecticut, LLC completed the acquisition
of two fossil-fueled power plants for $277 million from The
United Illuminating Company. For additional information, see the
"Notes To Financial Statements" above in Part I of this report.
Investing activities during the first nine months of 1999 also
included $361 million for the acquisition or construction of new
or improved facilities of which $264 million was for a number of
projects related to utility plant at Wisconsin Electric. During
1999, Wisconsin Electric recorded $31 million of payments to
and earnings of the Nuclear Decommissioning Trust Fund for the
eventual decommissioning of Point Beach Nuclear Plant and
$8.0 million for the acquisition of nuclear fuel. During the
nine months ended September 1999, $89 million of other
investments at Wisconsin Energy were primarily attributable to
Wisvest Corporation, which has funded $75 million under loan
agreements with SkyGen Energy Holdings LLC, an unaffiliated
independent power producer. For additional information, see
Item 5. Other Information - "Non-Utility Matters" in Part II of
this report.
FINANCING ACTIVITIES: During the first nine months of 1999,
Wisconsin Energy received $403 million of net cash through
financing activities compared to using a net of $87 million
during the first nine months of 1998. Wisconsin Electric used a
net of $117 million for financing activities during the first
nine months of 1999 compared to using a net of $165 million
during the same period in 1998.
During the nine months ended September 30, 1999, Wisconsin Energy
issued 2,074,224 new shares of common stock which were purchased
by participants in the Company's stock plans with cash
investments and reinvested dividends aggregating approximately
$54 million.
On March 25, 1999, WEC Capital Trust I, a Delaware business trust
of which Wisconsin Energy owns all of the outstanding common
securities, issued $200 million of 6.85% trust preferred
securities due March 31, 2039. WEC Capital Trust I used the
proceeds from the sale of the trust preferred securities to
purchase corresponding junior subordinated debentures due
March 31, 2039 from Wisconsin Energy. Wisconsin Energy used the
proceeds from the sale of its junior subordinated debentures to
fund a capital contribution of approximately $105 million to
Wisvest-Connecticut, LLC for acquisition in mid-April 1999 of the
two fossil-fueled power plants from The United Illuminating
Company mentioned above and for repayment of short-term
borrowings.
Financing activities during the first nine months of 1999 also
included a $51 million payment of principal on the maturity of 6-
5/8% Wisconsin Electric First Mortgage Bonds due 1999. During
the nine months ended September 30, 1999, Wispark Corporation
secured $37 million of bank financing in the form of adjustable
and fixed rate mortgage notes due 2002-2004 to finance the
construction or purchase of various facilities, and Wisvest
Corporation issued $210 million of nonrecourse variable rate
notes due December 31, 2005, the proceeds of which were used to
help finance the acquisition of the two fossil-fueled power
plants from The United Illuminating Company noted above and for
working capital. For additional information concerning the
acquisition of the The United Illuminating Company's electric
generating plants and related financing, see the "Notes To
Financial Statements" in Part I of this report. During the nine
months ended September 30, 1999, Wisconsin Energy increased its
short-term debt by $97 million in the form of commercial paper,
$58 million of which was attributable to Wisconsin Electric.
CAPITAL REQUIREMENTS AND RESOURCES: Capital requirements during
the remainder of 1999 are expected to be principally for
construction expenditures and for other investments, for long-
term debt maturity and sinking fund requirements, and for
payments to the Nuclear Decommissioning Trust Fund for the
eventual decommissioning of Point Beach Nuclear Plant. In order
to stop the accrual of interest on the verdict against Wisconsin
Electric in the Giddings & Lewis Inc / City of West Allis lawsuit
pending appeal, Wisconsin Electric presently intends to take
appropriate steps to tender the $104.5 million of funds to the
court during the fourth quarter of 1999 pursuant to a stay of
execution providing appropriate security for the funds during
pendency of an appeal. For further information concerning this
lawsuit, see Item 1. Legal Proceedings - "Environmental Matters"
in Part II of this report. These cash requirements are expected
to be met through a combination of internal sources of funds
from operations, short-term borrowings, issuance of medium-term
debt and proceeds from the sale of new issue common stock under
Wisconsin Energy's stock plans.
On November 10, 1999, Wisconsin Energy Capital Corporation agreed
to sell $200 million aggregate principal amount of nine-month
adjustable medium-term notes due August 16, 2000. The initial
interest rate for the Wisconsin Energy Capital Corporation
medium-term notes is 6.16375%. The interest rate will be reset
quarterly based on 3-month LIBOR plus 10 basis points. Delivery
of the Wisconsin Energy Capital Corporation medium-term notes is
expected to occur on November 16, 1999. Proceeds from the notes
are expected to be used to fund a $150 million capital
contribution by Wisconsin Energy to Wisconsin Electric and to
reduce short-term borrowings and for other general corporate
purposes.
Wisconsin Electric expects to issue $150 million of medium-term
debentures in a public offering later in 1999 or 2000. The
specific timing of the debt securities has not yet been
determined. Proceeds from the issue are expected to be used to
reduce short-term borrowings and for other general corporate
purposes.
For information concerning recently announced plans by a
subsidiary of Minergy Corp. to begin construction in June 2000 of
a $100 million wastewater solids recycling facility in Detroit,
Michigan, see Item 5. Other Information - "Non-Utility Matters"
in Part II of this report.
With respect to the pending acquisition of WICOR, Inc., Wisconsin
Energy plans to fund the portion of the WICOR acquisition price
not paid with Wisconsin Energy Common Stock from bank borrowing
arrangements or from securities to be issued in the capital
markets. The amount and timing of bank borrowings and securities
to be issued in the capital markets have not yet been determined.
For additional information concerning the merger with WICOR, see
Item 4. Submission of Matters to a Vote of Security Holders and
Item 5. Other Information - "Merger Agreement with WICOR, Inc."
in Part II of this report.
The following table summarizes various current ratings of
Wisconsin Energy's and Wisconsin Electric's debt by Standard &
Poors Corporation ("S&P"), Moody's Investors Service ("Moody's"),
Duff & Phelps Inc. ("D&P) and Fitch Investors Service ("Fitch").
<TABLE>
<CAPTION>
S & P Moody's D & P Fitch
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Wisconsin Electric Power Company
Commercial Paper A-1+ P-1 D-1+ -
Senior Secured Debt AA+ Aa2 AA+ AA
Unsecured Debt AA Aa3 AA AA-
Preferred Stock AA- aa3 AA AA-
Wisconsin Energy Corporation
Commercial Paper A-1+ P-1 D-1 -
Wisconsin Energy Capital Corporation
Unsecured Debt AA A1 - -
WEC Capital Trust I
Trust Preferred Securities A+ a1 A -
</TABLE>
Following the announcement of the proposed merger with WICOR;
Moody's Investors Service, Duff & Phelps Inc., and Fitch
Investors Service affirmed their previous ratings of Wisconsin
Energy's and Wisconsin Electric's securities, and Standards &
Poors Corporation placed its ratings of certain of Wisconsin
Energy's securities on credit watch with negative implications.
At September 30, 1999, Wisconsin Energy had $383 million of
unused lines of bank credit on a consolidated basis of which
$128 million was at Wisconsin Electric.
For certain other information which may impact Wisconsin Energy's
and Wisconsin Electric's future financial condition or results of
operations, see Item 1. Financial Statements - "Notes to
Financial Statements" in Part I of this report as well as Item 1.
Legal Proceedings and Item 5. Other Information in Part II of
this report.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or
may contain forward-looking statements made by or on behalf of
Wisconsin Energy or Wisconsin Electric. Such statements are
based upon management's current expectations and are subject to
risks and uncertainties that could cause Wisconsin Energy's or
Wisconsin Electric's actual results to differ materially from
those contemplated in the statements. Readers are cautioned not
to place undue reliance on the forward-looking statements. When
used in written documents or oral presentations, the terms
"anticipate," "believe," "estimate," "expect," "objective,"
"plan," "possible," "potential," "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 Wisconsin Energy's or Wisconsin Electric's actual
results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
OPERATING, FINANCIAL AND INDUSTRY FACTORS
* Factors affecting utility operations such as unusual weather
conditions; catastrophic weather-related damage; availability of
Wisconsin Electric's, Edison Sault's or Wisvest's generating
facilities; unscheduled generation outages, maintenance or
repairs; unanticipated changes in fossil fuel, nuclear fuel,
purchased power, gas supply or water 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.
* 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; changes in the United States Nuclear
Regulatory Commission's regulations related to Point Beach
Nuclear Plant; changes in the United States Environmental
Protection Agency's as well as the Wisconsin or Michigan
Department of Natural Resources' regulations related to emissions
from fossil-fuel-fired power plants; or the siting approval
process for new generation and transmission facilities.
* 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.
* Restrictions imposed by various financing arrangements and
regulatory requirements on the ability of Wisconsin Electric or
other subsidiaries to transfer funds to Wisconsin Energy in the
form of cash dividends, loans or advances.
* Changes in social attitudes regarding the utility and power
industries.
* Customer business conditions including demand for their
products or services and supply of labor and material used in
creating their products and services.
* 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.
* 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 in computer and embedded systems, 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.
* Possible risks associated with non-utility diversification
such as competition; operating risks; dependence upon certain
suppliers and customers; the cyclical nature of property values
that could affect real estate investments; risks associated with
international investments, including foreign currency valuations;
unanticipated changes in environmental or energy regulations;
timely regulatory approval without onerous conditions of
potential acquisitions; risks associated with minority
investments, where there is a limited ability to control the
development, management or operation of the project; and the risk
of higher interest costs associated with potentially reduced
securities ratings by independent rating agencies as a result of
these and other factors.
* Legislative or regulatory restrictions or caps on non-utility
acquisitions, investments or projects, including the State of
Wisconsin's amended public utility holding company law.
* Factors affecting foreign non-utility operations including
foreign governmental actions; foreign economic and currency
risks; political instability; and unanticipated changes in
foreign environmental or energy regulations.
* Other business or investment considerations that may be
disclosed from time to time in Wisconsin Energy's or Wisconsin
Electric's Securities and Exchange Commission filings or in other
publicly disseminated written documents.
BUSINESS COMBINATION FACTORS
* Consummation of the merger with WICOR, which will have a
significant effect on the future operations and financial
position of Wisconsin Energy. Specific factors include:
* Regulatory delays or conditions imposed by regulatory bodies
in approving the merger, or adverse regulatory treatment of the
merger.
* Unanticipated costs or difficulties related to the integration
of the businesses of Wisconsin Energy and WICOR, or unexpected
difficulties or delays in realizing anticipated net cost savings
or receiving regulatory authorization to retain the benefit of
those savings for the shareholders of the combined company.
Wisconsin Energy and Wisconsin Electric undertake no obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
For information concerning Wisconsin Energy's and Wisconsin
Electric's market risk exposures, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations - Market
Risks" in Part II of Wisconsin Energy's and Wisconsin Electric's
combined Annual Report on Form 10-K for the year ended
December 31, 1998 and Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations" in Part I of Wisconsin
Energy's and Wisconsin Electric's combined Quarterly Report on
Form 10-Q for the period ended June 30, 1999.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 3. Legal
Proceedings in Part I of Wisconsin Energy's and Wisconsin
Electric's combined Annual Report on Form 10-K for the year ended
December 31, 1998 and Item 1. Legal Proceedings in Part II of
Wisconsin Energy's and Wisconsin Electric's combined Quarterly
Reports on Form 10-Q for the periods ended March 31 and June 30,
1999.
RATES AND REGULATORY MATTERS
2000 / 2001 TEST YEARS: The Public Service Commission of
Wisconsin requires a review of rates once every two years. On
July 6, 1999, Wisconsin Electric filed its financial test year
data with the PSCW. In that filing, Wisconsin Electric did not
seek any changes in rates for electric, natural gas or steam
service. Also in that filing, Wisconsin Electric indicated that
by September 1999, should any rate changes be required, it would
file proposed rate changes incorporating performance-based
measures and incentives as an alternative to cost of service
ratemaking.
On September 17, 1999, Wisconsin Electric submitted an
application with the PSCW requesting incremental price relief for
specific capital investments for electric and gas system
reliability and safety and for a one-time accounting adjustment.
The application further recommended the adoption of performance-
based measures and incentives. In its application, Wisconsin
Electric proposed a two-step price increase. The first increase,
to be effective January 1, 2000, totals $46 million (3.1%) for
electric operations and $8 million (2.3%) for gas operations.
The second price increase, to be effective January 1, 2001,
totals $29 million (2.0%) for electric operations.
NON-UTILITY ASSET CAP: On October 27, 1999, the Governor of the
State of Wisconsin signed Wisconsin's 1999-2001 state budget,
which included amendments to Wisconsin's public utility holding
company law. As a result, Wisconsin Energy remains subject, to a
lesser extent, to certain restrictions which have the potential
of limiting diversification into non-utility activities. Under
the amended public utility holding company law, the sum of
certain assets of all non-utility affiliates in a holding company
system may not exceed 25% of the assets of all public utility
affiliates. However, the amended law exempts energy-related
assets and assets used for providing environmental engineering
services, among other assets, from being counted against the
asset cap provided that they are employed in qualifying
businesses.
As part of the amendment to Wisconsin's public utility holding
company law, a voluntary state electric transmission company
("Transco") will be created and will become part of the Midwest
Independent System Operator. For a public utility holding
company system to qualify for the amended asset cap rules, all of
it's public utility affiliates must irrevocably transfer their
electric transmission facilities and rights of way in the State
of Wisconsin to the Transco in exchange for an ownership interest
in the Transco. Wisconsin Electric has previously indicated that
it would transfer its electric transmission assets to such a
Transco and is an active participant in the Midwest Independent
System Operator.
Other amendments to the asset cap provisions of the public
utility holding company law will require public utility
affiliates of a public utility holding company, such as Wisconsin
Electric, to commit to certain spending levels for low-income
residents and for conservation programs and to meet certain
renewable energy source targets as a percent of total retail
energy sales between 2000 and 2010. In addition, non-supervisory
employees must be retained for a 30 month period at the same wage
and with similar benefits after any energy business acquisition.
ENVIRONMENTAL MATTERS
GIDDINGS & LEWIS INC / CITY OF WEST ALLIS LAWSUIT: As
previously reported, iron-cyanide-bearing wastes were found at
two sites in West Allis, Wisconsin. One site is on property
formerly owned by Kearney & Trecker Corporation, now a part of
Giddings & Lewis Inc. The other site is owned by the City of
West Allis. Environmental remediation at both sites was
completed several years ago, with the current owners paying for
disposal of materials found on their respective portions of the
sites.
On July 25, 1996, Giddings & Lewis, Kearney & Trecker and the
City of West Allis filed an action for damages in the Milwaukee
County Circuit Court against Wisconsin Electric Power Company,
the principal utility subsidiary of Wisconsin Energy Corporation,
alleging that Wisconsin Electric was responsible for deposition
of the material in 1959 and therefore liable to the plaintiffs.
Investigations into the potential source of the waste led
Wisconsin Electric to believe that it was not the source of this
waste.
On July 14, 1999, a Milwaukee County Circuit Court jury issued a
verdict against Wisconsin Electric in the lawsuit that awarded
the plaintiffs $4.5 million as actual damages for clean-up costs
and loss of property value and also awarded the plaintiffs
$100 million in punitive damages. On October 6, 1999, the
Wisconsin trial court judge denied Wisconsin Electric's post
trial motions and directed that judgment on the verdict be
entered.
By statute under Wisconsin law, interest at the rate of 12% per
annum accrues until the funds are tendered or until the
judgment is reversed. If funds are tendered during the pendency
of an appeal, Wisconsin law further provides that upon reversal
or reduction of the judgment there shall be restitution with
interest of the applicable amount of any funds tendered.
Wisconsin Electric will file an appeal of the case to the
Wisconsin Court of Appeals. In order to stop the accrual of
interest at 12% during the pendency of the appeal, Wisconsin
Electric presently intends to take appropriate steps to tender
the funds to the court pursuant to a stay of execution providing
appropriate security for the funds during the pendency of the
appeal.
In the opinion of management, based in part on the advice of
legal counsel, the jury verdict was not supported by the evidence
or the law and the unprecedented award of punitive damages of
this magnitude was unwarranted and should therefore be reversed
or substantially reduced. As such, Wisconsin Electric has not
established a reserve for potential damages from this suit.
OTHER MATTERS
SPENT NUCLEAR FUEL STORAGE AND DISPOSAL: On August 24, 1999,
Wisconsin Electric filed a petition for review and for writ of
mandamus in the United States Court of Appeals for the District
of Columbia Circuit seeking both monetary and non-monetary relief
under its Standard Contract with the United States Department of
Energy as a result of the Department of Energy's failure to
comply with its unconditional obligation under the Nuclear Waste
Policy Act of 1982 to dispose of Wisconsin Electric's spent
nuclear fuel from Point Beach Nuclear Plant. The relief
requested by Wisconsin Electric includes an order directing the
Department of Energy to provide storage casks for the spent fuel,
to take title of the spent fuel when it is placed in dry storage
at the Independent Spent Fuel Storage Installation at Point Beach
and to reimburse Wisconsin Electric for its costs incurred as a
result of the Department of Energy's failure to comply with its
obligations. Wisconsin Electric also filed a motion requesting
the Court to stay the proceedings for a period of 120 days to
enable the parties to assess the impact of pending legislation,
if enacted, upon Wisconsin Electric's petition and the impact of
any clarification of the Department of Energy's policies
regarding contract modification.
On September 7, 1999, the government filed its opposition to
Wisconsin Electric's motion to stay the proceedings, asking the
Court to deny the motion and stating that Wisconsin Electric has
failed to provide sufficient justification for postponing
consideration of the government's jurisdictional objections or
deferring consideration of the merits of the petition. On
October 12, 1999, the government filed a motion to dismiss
Wisconsin Electric's petition for review on grounds of failure to
exhaust administrative remedies and lack of jurisdiction. On
October 25, 1999, Wisconsin Electric filed a response to the
government's motion, asking the Court to deny the motion. The
matter is pending.
URANIUM ENRICHMENT CHARGES: On August 25, 1999, the U.S. Court
of Appeals for the Federal Circuit reversed the August 12, 1998
decision of the U.S. Court of Federal Claims which had granted
the government's motion for summary judgment dismissing claims of
Wisconsin Electric and six other utilities for damages by reason
of overcharges for uranium enrichment services provided by the
Department of Energy. The damages sought by Wisconsin Electric
total $1.3 million. The Court of Appeals remanded the case to
the Court of Federal Claims for trial. The matter is pending.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: As previously
reported, Wisconsin International Electric Power, Ltd. ("WIEP")
filed an action against Wisconsin Electric in Milwaukee County
Circuit Court in March 1998 alleging that WIEP and Wisconsin
Electric were parties to a joint venture to develop, build,
operate and maintain an electric generating plant at Subic Bay
in the Philippines involving certain equipment originally
purchased by Wisconsin Electric for a proposed cogeneration
facility in Kimberly, Wisconsin. The complaint in the action
alleged that Wisconsin Electric breached contractual duties
allegedly owed to WIEP, causing damages to WIEP in an amount
claimed to be at least $100 million. In April 1999, Wisconsin
Electric received a copy of an amended complaint from WIEP
seeking additional relief in the form of punitive damages to be
determined at trial, which was concluded in June 1999. In
November 1999, prior to a decision by the court, Wisconsin
Electric and WIEP reached agreement on a settlement of the case
in the amount of $18 million to be paid during the fourth
quarter of 1999. A stipulated order for dismissal of all
claims is being filed with the court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
WISCONSIN ENERGY CORPORATION
MERGER AGREEMENT WITH WICOR,INC.: On October 27, 1999, the
shareholders of Wisconsin Energy and WICOR voted, in their
respective special shareholder meetings, to approve the Agreement
and Plan of Merger, dated as of June 27, 1999, as amended,
between Wisconsin Energy Corporation, WICOR, Inc. and CEW
Acquisition, Inc., a subsidiary of Wisconsin Energy, as well as
the transactions contemplated thereby, including the issuance of
Wisconsin Energy common stock pursuant to the terms of the merger
agreement. Of 117,589,619 Wisconsin Energy voting shares
outstanding as of the September 9, 1999 record date for the
October 27, 1999 special meeting, 87,850,591 shares (74.7% of
shares outstanding) were represented at the meeting. The shares
represented at Wisconsin Energy's October 27, 1999 special
shareholders meeting were voted as follows:
<TABLE>
<CAPTION>
For Against Abstain
---------- ---------- ----------
<S> <C> <C> <C>
86,473,270 (98.4%) 949,656 (1.1%) 427,665 (0.5%)
</TABLE>
A copy of Wisconsin Energy's press release issued following the
special meeting of Wisconsin Energy's shareholders is filed as an
exhibit to this report and is incorporated herein by reference.
For further information concerning the proposed merger, see
Item 5. Other Information - "Merger Agreement With Wicor, Inc."
below.
ITEM 5. OTHER INFORMATION
NON-UTILITY MATTERS
WISVEST CORPORATION: During the third quarter of 1999, Wisvest
Corporation entered into a $30 million loan agreement with SkyGen
Energy Holdings LLC (with its affiliate defined as "SkyGen"), to
provide secured short-term financing for the purchase of
combustion turbines associated with various SkyGen power
projects. Also during the quarter, Wisvest Corporation funded
$22 million under a second, preexisting $116.4 million loan
facility with SkyGen. The total amount outstanding under the two
loan facilities as of September 30, 1999 was $141.4 million.
Under certain circumstances, the second loan may be converted in
stages to minority equity ownership of 25% to up to 49.9% in
SkyGen Energy Holdings LLC. Following any such conversion,
management control will remain with SkyGen.
SkyGen develops, owns and operates independent power plants and
cogeneration facilities. The company has approximately
350 megawatts of generation plants in operation, 1,500 megawatts
under construction and 2,500 megawatts in advanced development.
The loan facilities follow Wisvest Corporation's 1997
collaboration with SkyGen to develop and jointly own the
Androscoggin Energy Center, a 160 megawatt cogeneration facility
located in Jay, Maine. This facility is expected to commence
commercial operation in the fourth quarter of 1999.
MINERGY DETROIT, LLC: On September 30, 1999, the City Council
of Detroit, Michigan, awarded a 15 year contract to Minergy
Detroit, LLC, a wholly owned subsidiary of Minergy Corp., to
recycle 500 to 600 dry tons per day of the city's wastewater
solids into a glass aggregate construction product used in the
manufacture of floor tiles, roofing shingle granules, sand blast
grit and other construction materials. Minergy Detroit, LLC
expects to begin construction in June 2000 of a proposed
$100 million recycling facility in the Delray area of Detroit
with startup anticipated in 2002. The proposed facility would
replace existing wastewater solids incinerators operated by
Detroit's Water and Sewer Department. The 15 year contract will
be contingent upon obtaining proper performance bonding and
financing as well as upon reaching agreement with the City of
Detroit on the results of a series of post-startup tests of the
proposed recycling facility. Minergy Detroit, LLC has not yet
identified specific financing plans for the facility.
MERGER AGREEMENT WITH WICOR, INC.
As previously reported, on June 27, 1999, Wisconsin Energy and
WICOR, Inc., a Wisconsin corporation [NYSE: WIC], entered into an
Agreement and Plan of Merger providing for a strategic business
combination of Wisconsin Energy and WICOR. WICOR is a
diversified holding company with investments in utility and non-
utility energy subsidiaries as well as in pump manufacturing
subsidiaries. Following the merger, WICOR will become a wholly
owned subsidiary of Wisconsin Energy. The merger agreement has
been approved by the boards of directors and the shareholders of
Wisconsin Energy and WICOR.
Under the terms of the agreement, Wisconsin Energy will acquire
all of the outstanding shares of WICOR Common Stock for a fixed
price of $31.50 for each WICOR share. At least 40% of the price
will be paid in Wisconsin Energy Common Stock, and Wisconsin
Energy has the option to increase the percentage to 60%; the
balance will be paid in cash. The exchange ratio for the
Wisconsin Energy Common Stock will be set based upon the average
closing prices of Wisconsin Energy stock immediately prior to
closing. If the average is less than $22.00 per share, Wisconsin
Energy may elect to pay all cash. Each WICOR shareholder will be
able to elect to receive cash, stock, or a combination thereof,
subject to proration.
Consummation of the merger is subject to the satisfaction of
certain closing conditions including approval by the PSCW,
approval by the Securities and Exchange Commission under the
Public Utility Holding Company Act of 1935, as amended, and
expiration or termination of the waiting period applicable to the
merger under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. Currently, Wisconsin Energy and WICOR are
preparing responses to a request from the Federal Trade
Commission for additional information and documentation in
connection with their original Hart-Scott-Rodino Act filings in
late September 1999. The regulatory approval process is expected
to be completed in time for the transaction to be consummated by
the Spring of 2000.
Assuming timely realization of estimated cost savings and
avoidances expected to result from the merger, and assuming
favorable regulatory treatment, Wisconsin Energy expects the
business combination to result in increased earnings per share
beginning in the first full year following the merger. While no
definitive synergies study has been done, net merger-related cost
savings are anticipated to be approximately $35 million annually
beginning in the first full year after the merger. Savings are
expected from lower costs for cost of gas, materials and services
through enhanced purchasing power, elimination of duplication
through attrition, and through sharing of resources. Additional
cost savings are anticipated from logical consolidation of common
functions over time as well as from savings in areas such as
insurance and regulatory costs and legal, audit and consulting
fees. In its merger application, Wisconsin Energy has asked the
PSCW to permit it to retain synergy savings to offset the
acquisition premium that Wisconsin Energy will pay in the merger
and which is attributable to WICOR's regulated utility assets,
which would not require any increase in rates.
As previously reported in its proxy statement dated September 10,
1999 included in Wisconsin Energy's registration statement on
Form S-4 filed September 9, 1999 (File No. 333-86827), a
stipulation of settlement was entered into with respect to an
action filed on July 2, 1999 by a shareholder of WICOR in the
Circuit Court of Milwaukee County, Wisconsin against WICOR, all
of the members of its board of directors, and Wisconsin Energy.
The complaint alleged that the consideration to be received by
WICOR shareholders in the proposed merger was inadequate and
unfair to WICOR shareholders. The complaint also alleged that
Wisconsin Energy aided, abetted and assisted in the alleged
breaches of the fiduciary duties of the individual defendants.
The complaint sought certification as a class action on behalf of
all WICOR shareholders, an injunction against proceeding with the
merger, an auction or open bidding process for the sale of WICOR,
and unspecified damages.
As provided in the stipulation of settlement, the merger
agreement was amended on September 9, 1999 to remove a provision
contractually obligating WICOR to resist another acquisition
proposal that is not a superior proposal to Wisconsin Energy's
and to reduce the amount of the break-up fee payable by WICOR to
Wisconsin Energy if WICOR pursues or closes another transaction
instead of completing the merger with Wisconsin Energy from
$30 million to $25 million. Consummation of the settlement is
subject to, and the related amendments to the merger agreement
described above are conditioned upon, final court approval and
the consummation of the merger.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial
information for the combined company after the merger are based
upon the historical consolidated financial statements of
Wisconsin Energy and WICOR, combined and adjusted to give effect
to the merger and related transactions (including the related
financing), as described in the notes to this information.
Certain amounts in the WICOR financial statements have been
reclassified to conform to Wisconsin Energy's presentation. This
information should be read in conjunction with the historical
financial statements and related notes of Wisconsin Energy and
WICOR. The allocation of the estimated cost savings from the
merger, net of costs incurred to achieve such estimated cost
savings, will be subject to regulatory review and approval. None
of the estimated cost savings, the costs to achieve such savings,
nor transaction costs (other than estimated debt issue costs) are
reflected in the unaudited pro forma combined condensed income
statement information.
The unaudited pro forma combined condensed income statements for
the nine months ended September 30, 1999 and 1998 present the
results for Wisconsin Energy and WICOR as if the merger had
occurred on January 1, 1998. The unaudited pro forma combined
condensed balance sheet as of September 30, 1999 gives effect to
the merger as of that date.
We have assumed that the merger consideration will consist of 40%
stock and 60% cash and have described in the footnotes the pro
forma differences that would occur should the merger
consideration consist of either 60% stock and 40% cash or of 100%
cash. We have also assumed (a) the exercise prior to the merger
of all outstanding options to purchase WICOR Common Stock; and
(b) that the exchange ratio is 1.3440 Wisconsin Energy shares per
each WICOR share, which is $31.50 divided by the $23.4375 closing
price of Wisconsin Energy Common Stock on September 30, 1999.
The actual exchange ratio will depend upon the average closing
prices of Wisconsin Energy Common Stock on the New York Stock
Exchange during a valuation period consisting of the 10 trading
days ending with the fifth trading day prior to the merger.
Therefore, the actual exchange ratio will not be determined until
shortly before the closing.
The pro forma adjustments are based upon preliminary estimates,
information currently available and assumptions that management
believes are reasonable under the circumstances. Wisconsin
Energy's actual consolidated financial statements will reflect
the results of the merger on and after its effective date rather
than the dates indicated above. You should not rely on the
unaudited combined condensed pro forma financial data as an
indication of the results of operations or financial position
that would have been achieved if the merger had taken place
earlier nor an indication of the results of operations or
financial position of the combined company after completion of
the merger.
The merger will be accounted for by the purchase method and,
therefore, the assets and liabilities of WICOR will be recorded
at their fair values. The excess of the purchase price over the
fair value of the net assets at the effective time of the merger
will be recorded as goodwill. Allocations included in the pro
forma information are based upon analysis which is not yet
completed. Accordingly, the final allocation of the purchase
price may differ, perhaps significantly, from the amounts shown
in this pro forma information.
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER
Nine Months Ended September 30, 1999
Wisconsin Pro Forma Pro Forma
Energy(a) WICOR Adjustments Combined
------------ --------- -------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating Revenues $1,687,022 $726,529 $ - $2,413,551
Operating Expenses
Fuel 270,995 - - 270,995
Purchased power 165,029 - - 165,029
Cost of gas sold 119,119 201,678 - 320,797
Cost of goods sold - 268,574 - 268,574
Other operation and maintenance 535,642 151,230 750 (c)
2,485 (b) 690,107
Depreciation and amortization 202,973 27,629 13,060 (d)
6,525 (e) 250,187
Property and revenue tax 55,949 6,187 (2,485) (b) 59,651
---------- -------- -------- ----------
Pretax Operating Income 337,315 71,231 (20,335) 388,211
Other Income and Deductions 34,860 (611) - 34,249
Interest Charges and Other (108,730) (11,808) (34,111) (f) (154,649)
---------- -------- -------- ----------
Income Before Income Taxes 263,445 58,812 (54,446) 267,811
Provision (Benefit) for
Income Taxes 92,178 23,312 (15,727) (g) 99,763
---------- -------- -------- ----------
Net Income $171,267 $35,500 ($38,719) $168,048
========== ======== ======== ==========
Weighted Average Common Shares 116,621 21,933 (h) 138,554
Earnings Per Share
(Basic and Diluted) $1.47 $1.21 (i)
<FN>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER
Nine Months Ended September 30, 1998
Wisconsin Pro Forma Pro Forma
Energy(a) WICOR Adjustments Combined
------------ --------- -------------- ------------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating Revenues $1,510,902 $695,952 $ - $2,206,854
Operating Expenses
Fuel 241,125 - - 241,125
Purchased power 124,733 - - 124,733
Cost of gas sold 125,361 211,226 - 336,587
Cost of goods sold - 253,261 - 253,261
Other operation and maintenance 510,633 140,593 750 (c)
2,560 (b) 654,536
Depreciation and amortization 183,105 26,162 13,060 (d)
6,525 (e) 228,852
Property and revenue tax 47,811 7,024 (2,560) (b) 52,275
---------- -------- -------- ----------
Pretax Operating Income 278,134 57,686 (20,335) 315,485
Other Income and Deductions 19,294 2,966 - 22,260
Interest Charges and Other (89,629) (12,634) (34,111) (f) (136,374)
---------- -------- -------- ----------
Income Before Income Taxes 207,799 48,018 (54,446) 201,371
Provision (Benefit) for
Income Taxes 71,721 18,242 (15,727) (g) 74,236
---------- -------- -------- ----------
Net Income $136,078 $29,776 ($38,719) $127,135
========== ======== ======== ==========
Weighted Average Common Shares 113,952 21,933 (h) 135,885
Earnings Per Share
(Basic and Diluted) $1.19 $0.94 (i)
<FN>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
</FN>
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER
September 30, 1999
Wisconsin Pro Forma Pro Forma
Energy(a) WICOR Adjustments Combined
------------ --------- -------------- ------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets
------
Property, Plant & Equipment $3,858,948 $450,338 $87,000 (j) $4,396,286
Other Property and Investments 897,760 - 8,172 (b) 905,932
Current Assets
Cash & cash equivalents 40,131 389 - 40,520
Accounts receivable-net,
including accrued
utility revenues 291,824 136,723 - 428,547
Materials, supplies and
inventory 234,588 126,150 12,700 (j)
6,729 (b) 380,167
Prepayments and other
current assets 73,204 33,199 (6,729) (b) 99,674
---------- -------- -------- ----------
Total Current Assets 639,747 296,461 12,700 948,908
Deferred Charges and Other Assets
Goodwill - 83,085 696,526 (k) 779,611
Regulatory assets 206,996 53,640 - 260,636
Accumulated deferred
income taxes 209,474 - 19,839 (b) 229,313
Other assets, including prepaid
pension costs 119,365 91,943 54,900 (l)
(8,172) (b) 258,036
---------- -------- -------- ----------
Total Deferred Charges
and Other Assets 535,835 228,668 763,093 1,527,596
---------- -------- -------- ----------
Total Assets $5,932,290 $975,467 $870,965 $7,778,722
========== ======== ======== ==========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock equity $1,990,802 $417,686 $90,373 (m) $2,498,861
Preferred stock 30,450 - - 30,450
Long-term debt 1,989,047 192,349 719,053 (m) 2,900,449
Wisconsin Energy obligated
redeemable preferred
securities of subsidiary trust 200,000 - - 200,000
---------- -------- -------- ----------
Total Capitalization 4,210,299 610,035 809,426 5,629,760
Current Liabilities
Short-term debt, including
long-term debt due currently 465,169 52,599 - 517,768
Accounts payable 155,602 81,075 - 236,677
Accrued liabilities and other 171,960 68,175 20,500 (j) 260,635
---------- -------- -------- ----------
Total Current Liabilities 792,731 201,849 20,500 1,015,080
Deferred Credits and
Other Liabilities
Accumulated deferred
income taxes 586,219 49,564 68,900 (j)
19,839 (b) 724,522
Regulatory liabilities 133,969 29,359 - 163,328
Other, including postretirement
benefit obligation 209,072 84,660 (47,700) (j) 246,032
---------- -------- -------- ----------
Total Deferred Credits and
Other Liabilities 929,260 163,583 41,039 1,133,882
---------- -------- -------- ----------
Total Capitalization and
Liabilities $5,932,290 $975,467 $870,965 $7,778,722
========== ======== ======== ==========
<FN>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
</FN>
</TABLE>
WISCONSIN ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
(In Thousands)
The unaudited pro forma financial information gives effect to the
acquisition by Wisconsin Energy of WICOR in a transaction to be
accounted for as a purchase.
Wisconsin Energy's Unaudited Pro Forma Combined Condensed
Financial Information assumes the WICOR acquisition occurred
(1) as of January 1, 1998, for purposes of the Unaudited Pro
Forma Combined Condensed Income Statements and (2) on
September 30, 1999 for purposes of the Unaudited Pro Forma
Combined Condensed Balance Sheet.
a. Due to recent acquisitions by Wisconsin Energy that have
increased the size of Wisconsin Energy's non-utility operations,
Wisconsin Energy has modified its income statement and balance
sheet presentations. The primary modification includes
reclassifying the results of the non-utility operations from
Other Income and Deductions to the various lines within operating
income (i.e. Operating Revenues and Operating Expenses). This
modification does not change net income. The primary balance
sheet modification includes reclassifying the non-utility
property, plant and equipment and related accumulated provision
for depreciation from investments to inclusion with utility
property, plant and equipment. This modification does not change
total assets.
b. Reclassification of amounts to conform the companies'
historical presentation.
c. Based upon revised actuarial information, WICOR's annual
pension income will increase by $1.5 million and will be offset
by an additional $2.5 million of annual postretirement benefit
expense.
d. Amortization of goodwill over 40 years
($696.5 million/40 years = $17.4 million per year or $4.4 million
per quarter).
e. Additional depreciation resulting from the increased fair
value of machinery, equipment and buildings acquired based on
estimated useful lives of 10 years
($87 million/10 years = $8.7 million per year or $2.2 million per
quarter).
f. Incremental interest expense based upon an assumed rate of
6.25% ($719.1 million x 6.25% = $45.0 million per year or
$11.2 million per quarter). A 1/8 percent increase (or decrease)
in the interest rate would increase (or decrease) annual interest
expense by approximately $0.9 million. Estimated debt issue cost
of $5.4 million will be amortized over ten years.
g. Reduction of income taxes relating to the foregoing
adjustments.
h. Shares to be issued assuming the purchase price is paid with
40% stock, including outstanding stock options. The closing
price of Wisconsin Energy's Common Stock on September 30, 1999
was $23-7/16.
i. Assuming the purchase price is paid with 100% cash or 60%
stock and 40% cash, pro forma earnings per share would
approximate $1.31 and $1.17 for the nine months ended
September 30, 1999, respectively, and $0.98 and $0.92 per share,
respectively, for the nine months ended September 30, 1998.
j. Adjustments to net assets of WICOR to reflect fair value,
purchase accounting adjustments and related tax effects.
k. The excess of cost over fair value of net assets acquired
resulting from the preliminary purchase price allocation is
assumed to be as follows:
<TABLE>
<S> <C>
Pro forma purchase price $1,221,712
Pro forma historical net book
value of assets acquired 417,686
----------
Excess of purchase price over
net book value of assets acquired 804,026
Allocated to:
Inventories (12,700)
Property, plant and equipment (87,000)
Prepaid pension asset (49,500)
Deferred tax liabilities 68,900
Other current liabilities 20,500
Postretirement obligation (47,700)
----------
Remaining excess of cost over
fair value of net assets acquired (goodwill) $696,526
==========
</TABLE>
The foregoing preliminary purchase price allocation is based
on available information and certain assumptions Wisconsin
Energy considers reasonable. The final purchase price
allocation will be based upon a determination of the fair
value of the net assets acquired at the date of the
acquisition. The final purchase price allocation may differ
from the preliminary allocation.
l. Amount consists of an adjustment of $49.5 million to fair
value WICOR's prepaid pension asset and $5.4 million in estimated
debt issue costs.
m. Purchase price is assumed to be financed with 40% stock and
60% debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed with or incorporated by
reference in the applicable Form 10-Q report:
Exhibit No.
WISCONSIN ENERGY CORPORATION
(2)-1 Agreement and Plan of Merger, dated as of June 27,
1999, as amended as of September 9, 1999, by and among
Wisconsin Energy Corporation, WICOR, Inc. and CEW
Acquisition, Inc. (Incorporated by reference to
Appendix A to the joint proxy statement/prospectus
dated September 10, 1999, included in Wisconsin
Energy's Registration on Form S-4 filed on September 9,
1999 (File No. 333-86827) (the "Form S-4").)
(2)-2 Amendment to Agreement and Plan of Merger dated as of
September 9, 1999. (Incorporated by reference to
Exhibit 2.2 to the Form S-4)
(10)-1 Employment arrangement with Paul Donovan as Senior Vice
President and Chief Financial Officer of Wisconsin
Energy Corporation, effective August 20, 1999.
(27)-1 Wisconsin Energy Corporation Financial Data Schedule
for the nine months ended September 30, 1999.
(27)-2 Wisconsin Energy Corporation Restated Financial Data
Schedule for the nine months ended September 30, 1998,
which reflects the reclassification of certain amounts
to conform to Wisconsin Energy's current financial
statement presentation.
(99)-1 Press release of Wisconsin Energy Corporation dated
October 27, 1999 reporting the results of votes cast at
separate special shareholder meetings for Wisconsin
Energy Corporation and WICOR, Inc. approving the merger
of WICOR with a subsidiary of Wisconsin Energy.
WISCONSIN ELECTRIC POWER COMPANY
(27)-3 Wisconsin Electric Power Company Financial Data
Schedule for the nine months ended September 30, 1999.
(27)-4 Wisconsin Electric Power Company Restated Financial
Data Schedule for the nine months ended September 30,
1998, which reflects the reclassification of certain
amounts to conform to Wisconsin Energy's current
financial statement presentation.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated as of July 14, 1999 was
filed separately by Wisconsin Energy and by Wisconsin
Electric on August 6, 1999 disclosing the results of a
July 14, 1999 jury verdict against Wisconsin Electric in a
lawsuit concerning the placement of contaminated wastes on
two properties in the City of West Allis, Wisconsin.
A Current Report on Form 8-K dated as of September 1, 1999
was filed by Wisconsin Energy on September 1, 1999 updating
the description of the common stock of Wisconsin Energy
Corporation to the "Plain English" requirements of the
Securities and Exchange Commission.
No other reports on Form 8-K were filed by Wisconsin Energy
or by Wisconsin Electric during the quarter ended
September 30, 1999.
A Current Report on Form 8-K dated as of October 6, 1999 was
filed separately by Wisconsin Energy and by Wisconsin
Electric on October 19, 1999 disclosing the results of a
motion by Wisconsin Electric related to a July 1999 jury
verdict against Wisconsin Electric in a lawsuit concerning
the placement of contaminated wastes on two properties in the
City of West Allis, Wisconsin.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, each registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
(Registrant)
/s/ Paul Donovan
------------------------------------
Date: November 12, 1999 Paul Donovan, Senior Vice President,
Chief Financial Officer and duly
authorized officer
WISCONSIN ELECTRIC POWER COMPANY
(Registrant)
/s/ Calvin H. Baker
------------------------------------
Date: November 12, 1999 Calvin H. Baker, Vice President -
Finance, Chief Financial Officer and
duly authorized officer
WISCONSIN ENERGY CORPORATION
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1999
EXHIBIT INDEX
The following exhibits are filed with or incorporated by reference in
this report:
Exhibit No.
- -----------
(2)-1 Agreement and Plan of Merger, dated as of June 27, 1999, as
amended as of September 9, 1999, by and among Wisconsin Energy
Corporation, WICOR, Inc. and CEW Acquisition, Inc.
(Incorporated by reference to Appendix A to the joint proxy
statement/prospectus dated September 10, 1999, included in
Wisconsin Energy's Registration on Form S-4 filed on September 9,
1999 (File No. 333-86827) (the "Form S-4").)
(2)-2 Amendment to Agreement and Plan of Merger dated as of
September 9, 1999. (Incorporated by reference to Exhibit 2.2 to
the Form S-4)
(10)-1 Employment arrangement with Paul Donovan as Senior Vice President
and Chief Financial Officer of Wisconsin Energy Corporation,
effective August 20, 1999.
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for
the nine months ended September 30, 1999.
(27)-2 Wisconsin Energy Corporation Restated Financial Data Schedule
for the nine months ended September 30, 1998, which reflects the
reclassification of certain amounts to conform to Wisconsin
Energy's current financial statement presentation.
(99)-1 Press release of Wisconsin Energy Corporation dated October 27,
1999 reporting the results of votes cast at separate special
shareholder meetings for Wisconsin Energy Corporation and WICOR,
Inc. approving the merger of WICOR with a subsidiary of Wisconsin
Energy.
CONFIDENTIAL
August 20, 1999
Mr. Paul Donovan
2515 Cherokee Trail
Rockford, Illinois 61107
Dear Paul:
This letter extends an offer of employment to you, with the
specifics to be as follows:
1. Position: You will be employed as Senior Vice President and
Chief Financial Officer of Wisconsin Energy Corporation (the
"Company"). In that capacity, you will report directly to me.
2. Base Salary: Base salary will be payable to you at the rate
of Three Hundred and Ninety Five Thousand Dollars ($395,000) per
year, payable in accordance with the Company's regular payroll
practices.
3. Stock Option Award: You will be granted a non-qualified
option to purchase 30,000 shares of WEC common stock. The option
exercise price will be determined as the fair market value on the
date of your employment with the Company, and will vest over a
4 year period, 25% each year. The option will have a 10 year
life.
4. Moving Expenses and Temporary Living Expenses; Purchase and
Leaseback of Home: The Company will pay or reimburse you for
your reasonable moving costs in accordance with standard Company
policy, and will reimburse you for temporary living expenses for
60 days maximum. It is understood your family wishes to remain
in Rockford so your daughter can complete high school there. The
Company will purchase your existing residence (the "Residence")
in Rockford for a cash amount equal to its Appraised Fair Market
Value, as defined below and simultaneously lease it back to you
for the Fair Rental Value, as defined below. For purposes of
this paragraph:
(a) "Fair Market Value" will mean the appraised fair market
value as determined by a qualified real estate
appraiser familiar with the Rockford area, selected and
paid for by the Company and approved by you in writing.
We agree to select such appraiser promptly after your
date of employment. Alternatively, you may select two
appraisers and such appraisers shall then both be asked
(at Company expense) to render fair market value
opinions and the average of the two opinions shall then
be used as the Fair Market Value. The closing of such
purchase and sale will occur promptly after the Fair
Market Value has been determined and will otherwise be
on standard terms and conditions as are customary for
residential real estate sales in the Rockford area.
(b) "Fair Rental Value" will mean a monthly cash amount
calculated by first determining the sum of 1/12th of
annual interest at 6% on the finally determined Fair
Market Value, 1/12th of the current annual real estate
taxes on the Residence if known and if not currently
known, 1/12th of the annual net real estate taxes that
were payable on the Residence for the immediately prior
calendar year, and 1/12th of the annual premium on such
insurance policy on the Residence as the Company
reasonably elects to maintain; 60% of such sum will
equal the Fair Rental Value. The Company will prepare
a month to month lease reflecting the Fair Rental Value
and otherwise containing such standard terms and
conditions as are customary for residential leases in
the Rockford area.
5. Other Benefits: You will be entitled to participate in all
applicable retirement and savings plans and all welfare benefit
plans and practices which the Company makes available to its
salaried employees generally. In addition:
(a) You will participate in the Company's short-term incentive
plan at a target award level of 50 percent of your base salary.
Our incentive plan provides for higher levels of award depending
upon performance. At the highest level of performance, the
payment can be 200% of target. In addition, the incentive plan
provides for an individual performance adjustment based upon your
contribution to the Company, which can range from 0.0 to 2.0 and
is applied as a multiplier toward the final award. Your 1999
award will be prorated.
(b) You will participate in the Company's long-term incentive
plan. Subject to the approval by the Compensation Committee of
the Board of Directors at the time when annual grants to
executives are customarily considered, you will be placed in
award category which provide an annual option to purchase 30,000
shares of WEC common stock at fair market value at time of award,
plus 6,000 shares of restricted stock.
(c) You will be eligible to participate in the executive
deferred compensation plan, which allows deferral of a portion of
base salary and performance awards into a nonqualified fund.
(d) You will be eligible to take up to 5 weeks of vacation
annually. Your vacation during the balance of 1999 will be
prorated.
(e) You will participate in a split dollar life insurance
program at 3 times your base salary.
(f) You will be eligible for a financial planning benefit of
$4,000 in the first year (prorated for 1999) and every fifth year
thereafter, and $2,500 in intervening years.
(g) You will also participate on a basis commensurate with other
senior executives of the Company in any other executive benefits,
which currently include an annual physical examination by a
physician or clinic of your choice, travel and accident
insurance, and various perquisites.
(h) To the extent that you and your dependents do not
participate in the medical and dental benefits, the financial
planning benefits and the annual physical exam benefits offered
by the Company or any of its affiliates for a period starting
with your date of employment and ending on the earlier of the
expiration of 36 months thereafter or the first date when you or
your dependents first participate in any such benefit (the
"Excluded Period"), the Company will extend such benefits to you
and your dependents after your employment with the Company ceases
for a period of time equal to the Excluded Period, on the same
terms and conditions as if your employment had not terminated.
This extension of benefits will be in addition to any benefit
extension to which you may become entitled under paragraph 6
below.
6. Change in Control, Severance and Special Pension Agreement:
You will be afforded protection under an agreement that will
provide that if your employment ceases other than for cause in
connection with a change in control, you will receive the
equivalent of three years of base salary and bonus, three years
of medical, dental and life coverage, and a three year extension
of service under your special pension agreement described below
(which will assume that your compensation during such three-year
period would have been equal to your salary and target bonus as
in effect immediately before your termination). This agreement
will include gross up protection from excise taxes. The
agreement will also provide you with protection in the event of
termination for anything other than cause in the absence of any
change in control. Under those circumstances, you will be
provided with the same benefits that would apply if a change in
control event had occurred, but without any gross up protection
from excise taxes.
Further, you will be provided with a special pension
agreement regarding your participation in the Company's
Supplemental Executive Retirement Plan (the "SERP") with
respect to monthly benefits "A" and "B." Monthly benefit
"A" is designed to make up for any limitations imposed on
the amount of your accrued benefit under the Company's
tax-qualified defined benefit pension plan (the "Retirement
Account Plan") because of benefit limits under Section 415
of the Internal Revenue Code or the limit on annual
compensation imposed by Section 401(a)(17) of such Code.
You will become entitled to monthly benefit "A" upon your
retirement at or after age 55, or if you die or become
disabled prior to age 55. In addition, you will be entitled
to past service credit under monthly benefit "A," calculated
as if your participation in the Retirement Account Plan had
commenced at age 30 and as if the benefit formula under such
pension plan for all periods before December 31, 1995 was
the same as that in effect on December 31, 1995, and for all
periods after December 31, 1995, pursuant to the actual
benefit formula used in such pension plan (including the
grandfathered minimum benefit provisions thereof), offset by
the value of any benefits payable to you from Social
Security which is the actuarial equivalent of a single life
annuity benefit payable to you at the later of age 65 or the
date when benefits commence under monthly benefit "A."
Actuarial equivalency for this purpose shall be determined
using the interest rate and mortality table referenced in
Article VIII of the SERP. Finally, any early retirement
reduction factor that would otherwise apply to you at any
time between your attainment of age 55 and 62 will be
disregarded and in lieu thereof, you will be deemed entitled
for purposes of monthly benefit "A" to the following
percentages of the calculated benefit:
Age % of Benefit "A" Becoming
Payable
55 51%
56 57%
57 75%
58 81%
59 86%
60 or later 100%
Monthly benefit "B" is a special supplemental pension
benefit equal to a life annuity of 10% of your average total
compensation during your highest 36 consecutive months. You
will become entitled to monthly benefit "B" on your
retirement at or after age 55.
__________________________________________
All benefits described above which are further defined in plan
documents are subject to all of the terms in those documents
which supersede any other description. Management reserves the
right in its discretion to change or terminate all current
benefit plans or practices and other policies and procedures.
The benefits discussed above in paragraph 6 will be provided
under separate agreements to be prepared promptly after the start
of your employment with us.
Your employment would be considered at-will; that is, you could
be discharged for any reason or no reason at all, at any time and
without notice, and likewise, you may resign at any time and
without notice. This offer also requires successful completion
of a pre-employment drug screen.
This offer supersedes all prior discussions and will remain open
until August 24, 1999. We look forward to hearing from you and
hope that you will join us for what looks to be an exciting
future!
Sincerely,
Richard A. Abdoo
Accepted by: /s/ Paul Donovan
-----------------------
Paul Donovan
Date: August 20, 1999
Copy to: Thomas Fehring/Lisa George
<TABLE> <S> <C>
<S> <C>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS OF
WISCONSIN ENERGY CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S.DOLLARS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> <F1> 3,307,874
<OTHER-PROPERTY-AND-INVEST> <F2> 1,448,834
<TOTAL-CURRENT-ASSETS> 639,747
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 535,835
<TOTAL-ASSETS> 5,932,290
<COMMON> 1,177
<CAPITAL-SURPLUS-PAID-IN> 813,182
<RETAINED-EARNINGS> <F3> 1,176,443
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,990,802
0
30,450
<LONG-TERM-DEBT-NET> 1,174,413
<SHORT-TERM-NOTES> 50,695
<LONG-TERM-NOTES-PAYABLE> 635,708
<COMMERCIAL-PAPER-OBLIGATIONS> 333,344
<LONG-TERM-DEBT-CURRENT-PORT> 54,822
0
<CAPITAL-LEASE-OBLIGATIONS> 178,926
<LEASES-CURRENT> 26,308
<OTHER-ITEMS-CAPITAL-AND-LIAB> <F4> 1,456,822
<TOT-CAPITALIZATION-AND-LIAB> 5,932,290
<GROSS-OPERATING-REVENUE> 1,687,022
<INCOME-TAX-EXPENSE> 92,178
<OTHER-OPERATING-EXPENSES> 1,349,707
<TOTAL-OPERATING-EXPENSES> <F5> 1,349,707
<OPERATING-INCOME-LOSS> <F5> 337,315
<OTHER-INCOME-NET> 34,860
<INCOME-BEFORE-INTEREST-EXPEN> <F6> 372,175
<TOTAL-INTEREST-EXPENSE> <F7> 108,730
<NET-INCOME> <F8> 171,267
<F9> 0
<EARNINGS-AVAILABLE-FOR-COMM> 171,267
<COMMON-STOCK-DIVIDENDS> 136,309
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 372,551
<EPS-BASIC> 1.47
<EPS-DILUTED> 1.47
<FN>
<F1> TOTAL NET UTILITY PLANT IS $3,858,948 OF NET PROPERTY,
PLANT AND EQUIPMENT LESS $551,074 OF NET NON-UTILITY
PROPERTY.
<F2> OTHER PROPERTY AND INVESTMENTS IS $897,760 OF INVESTMENTS
PLUS $551,074 OF NET NON-UTILITY PROPERTY.
<F3> RETAINED EARNINGS IS NET OF $2,606 OF UNEARNED COMPENSATION
FOR RESTRICTED STOCK AWARDS.
<F4> OTHER ITEMS - CAPITAL AND LIABILITIES INCLUDES $200,000
OF COMPANY-OBLIGATED, MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES
OF THE COMPANY.
<F5> TOTAL OPERATING EXPENSES AND OPERATING INCOME OR LOSS EXCLUDE
INCOME TAXES OF $92,178.
<F6> INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES.
<F7> TOTAL INTEREST EXPENSE INCLUDES $7,078 OF DISTRIBUTIONS ON
PREFERRED SECURITIES OF SUBSIDIARY TRUST AND $902 OF PREFERRED
DIVIDEND REQUIREMENTS OF SUBSIDIARY.
<F8> NET INCOME IS AFTER INCOME TAXES OF $92,178.
<F9> PREFERRED STOCK DIVIDENDS ARE INCLUDED IN TOTAL INTEREST EXPENSE.
SEE FINANCIAL STATEMENTS AND NOTES IN THE ACCOMPANYING 10-Q.
</FN>
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> UT
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS OF
WISCONSIN ENERGY CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS SCHEDULE
REFLECTS RECLASSIFICATION OF AMOUNTS TO CONFORM TO
THE COMPANY'S CURRENT FINANCIAL STATEMENT PRESENTATION.
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S.DOLLARS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> <F1> 3,263,882
<OTHER-PROPERTY-AND-INVEST> <F2> 935,366
<TOTAL-CURRENT-ASSETS> 544,603
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 437,162
<TOTAL-ASSETS> 5,181,013
<COMMON> 1,153
<CAPITAL-SURPLUS-PAID-IN> 748,985
<RETAINED-EARNINGS> 1,135,581
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,885,719
0
30,450
<LONG-TERM-DEBT-NET> 1,214,974
<SHORT-TERM-NOTES> 60,267
<LONG-TERM-NOTES-PAYABLE> 306,871
<COMMERCIAL-PAPER-OBLIGATIONS> 182,511
<LONG-TERM-DEBT-CURRENT-PORT> 58,061
0
<CAPITAL-LEASE-OBLIGATIONS> 173,601
<LEASES-CURRENT> 23,095
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,245,464
<TOT-CAPITALIZATION-AND-LIAB> 5,181,013
<GROSS-OPERATING-REVENUE> 1,510,902
<INCOME-TAX-EXPENSE> 71,721
<OTHER-OPERATING-EXPENSES> 1,232,768
<TOTAL-OPERATING-EXPENSES> <F3> 1,232,768
<OPERATING-INCOME-LOSS> <F3> 278,134
<OTHER-INCOME-NET> 19,294
<INCOME-BEFORE-INTEREST-EXPEN> <F4> 297,428
<TOTAL-INTEREST-EXPENSE> <F5> 89,629
<NET-INCOME> <F6> 136,078
<F7> 0
<EARNINGS-AVAILABLE-FOR-COMM> 136,078
<COMMON-STOCK-DIVIDENDS> 132,429
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 400,911
<EPS-BASIC> 1.19
<EPS-DILUTED> 1.19
<FN>
<F1> TOTAL NET UTILITY PLANT IS $3,524,816 OF NET PROPERTY,
PLANT AND EQUIPMENT LESS $260,934 OF NET NON-UTILITY
PROPERTY.
<F2> OTHER PROPERTY AND INVESTMENTS IS $674,432 OF INVESTMENTS
PLUS $260,934 OF NET NON-UTILITY PROPERTY.
<F3> TOTAL OPERATING EXPENSES AND OPERATING INCOME OR LOSS
EXCLUDE INCOME TAXES OF $71,721.
<F4> INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES.
<F5> TOTAL INTEREST EXPENSE INCLUDES $902 OF PREFERRED DIVIDEND
REQUIREMENTS OF SUBSIDIARY.
<F6> NET INCOME IS AFTER INCOME TAXES OF $71,721.
<F7> PREFERRED STOCK DIVIDENDS ARE INCLUDED IN TOTAL INTEREST
EXPENSE.
SEE FINANCIAL STATEMENTS AND NOTES IN THE ACCOMPANYING 10-Q.
</FN>
</TABLE>
EXHIBIT 99.1
[Wisconsin Energy Logo] [WICOR logo]
From: Michael John
Oct. 27, 1999
Wisconsin Energy shareholders approve merger with WICOR
MILWAUKEE - Wisconsin Energy Corp. (NYSE: WEC) today announced it
has received shareholder approval of its proposed merger with
WICOR, Inc. (NYSE: WIC). WEC Chairman and Chief Executive
Officer Richard A. Abdoo made the announcement following a
special shareholder meeting this afternoon held in Milwaukee.
More than 98 percent of the shares represented at the meeting
were voted in favor of the merger.
"Shareholder approval was a major step in the process," said
Abdoo. "We believe this strategic combination will create new
competitive opportunities that are in the best interest of our
shareholders, customers and employees. The single company that
will result will be stronger and better able to compete in
today's changing energy market."
WICOR shareholders voted to approve the proposed merger at a
shareholder meeting held earlier in the day.
The merger is on schedule for completion in the first quarter of
2000. It is subject to the approval of the Public Service
Commission of Wisconsin and the Securities and Exchange
Commission.
WEC and WICOR announced plans to merge on June 28 with WEC
acquiring all outstanding WICOR shares for a fixed price of
$31.50 per share. The combined company will serve approximately
921,000 natural gas customers and more than one million electric
customers in Wisconsin and Michigan's Upper Peninsula and will
operate more than 16,500 miles of gas main and 30,000 miles of
electrical transmission and distribution wires. The combined
company will have approximately 9,000 employees. No layoffs are
expected as a result of the merger.
Wisconsin Energy Corp. is a holding company with subsidiaries in
utility and non-utility businesses. Its principal subsidiaries
are Wisconsin Electric, Edison Sault Electric, Wisvest, Wispark
and Minergy. Visit the company website at www.wisenergy.com.
