SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
IRS Employer
Commission Registrant; State of Incorporation Identification
File Number Address; and Telephone Number 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of each Registrant's knowledge, in definitive Proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the common stock of Wisconsin Energy
Corporation held by non-affiliates is approximately $3,054,459,000 based
upon the reported last sale price of such securities as of March 5, 1999.
All of the common stock of Wisconsin Electric Power Company is held by
Wisconsin Energy Corporation.
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Name of Each Exchange
Registrant / Title of Each Class on Which Registered
-------------------------------- -------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Wisconsin Energy Corporation
Common Stock, $.01 Par Value New York Stock Exchange
Wisconsin Electric Power Company
None N/A
Securities Registered pursuant to Section 12(g) of the Act:
Wisconsin Energy Corporation
None
Wisconsin Electric Power Company
Serial Preferred Stock, 3.60% Series, $100 N/A
Par Value
Six Per Cent. Preferred Stock, $100 Par N/A
Value
-------------------------------
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date (March 8, 1999):
Wisconsin Energy Corporation Common Stock, $.01 Par Value,
116,241,667 shares outstanding.
Wisconsin Electric Power Company Common Stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company Common Stock
--------------------------------
Documents Incorporated by Reference
-----------------------------------
Portions of Wisconsin Energy Corporation's definitive Proxy Statement for
its Annual Meeting of Stockholders, to be held on June 2, 1999, are
incorporated by reference into Part III hereof.
Portions of Wisconsin Electric Power Company's definitive Information
Statement for its Annual Meeting of Stockholders, to be held on May 26,
1999, are incorporated by reference into Part III hereof.
-------------------------------
This combined Form 10-K is separately filed by Wisconsin Energy Corporation
and by Wisconsin Electric Power Company. Information contained herein
relating to any individual Registrant is filed by such Registrant on its
own behalf.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
------
1. Business..............................................................
Electric Operations................................................
Electric Sales..................................................
Sources of Electric Energy......................................
Coal-Fired Generation...........................................
Nuclear Generation..............................................
Hydroelectric Generation........................................
Natural Gas-Fired Generation....................................
Oil-Fired Generation............................................
Purchased Power Commitments.....................................
Interconnections with Other Utilities...........................
Gas Operations.....................................................
Gas Deliveries..................................................
Gas Supply......................................................
Steam Operations...................................................
Non-Utility Operations.............................................
Non-Utility Subsidiaries........................................
Non-Utility Restrictions........................................
Regulation.........................................................
Rate Matters.......................................................
Energy Efficiency..................................................
Environmental Compliance...........................................
Solid Waste Landfills...........................................
Ash Landfills...................................................
Manufactured Gas Plant Sites....................................
Air Quality.....................................................
Other..............................................................
2. Properties............................................................
3. Legal Proceedings.....................................................
Environmental Matters...........................................
Rate Matters....................................................
Other Matters...................................................
4. Submission of Matters to a Vote of Security Holders...................
Executive Officers of the Registrants.................................
PART II
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5. Market for Registrants' Common Equity and Related
Stockholder Matters...................................................
Number of Common Stockholders......................................
Common Stock Listing and Trading...................................
Dividends and Common Stock Prices..................................
6. Selected Financial Data...............................................
Wisconsin Energy Corporation.......................................
Wisconsin Electric Power Company...................................
7. Management's Discussion and Analysis of Financial.....................
Condition and Results of Operations................................
Results of Operations..............................................
Earnings........................................................
Electric Revenues, Gross Margins and Sales......................
Gas Revenues, Gross Margins and Therm Deliveries................
Operating Expenses..............................................
Other Items.....................................................
Factors Affecting Results of Operations............................
Mergers.........................................................
Nuclear Matters.................................................
Electric System Reliability Matters.............................
Industry Restructuring and Competition..........................
Rates and Regulatory Matters....................................
Year 2000 Technology Issues.....................................
Environmental Matters...........................................
Coal Supply and Transportation Matters..........................
Outlook.........................................................
Effects of Weather..............................................
Effects of Inflation............................................
Market Risks....................................................
Accounting Matters..............................................
Liquidity and Capital Resources....................................
Investing Activities............................................
Cash Provided by Operating and Financing Activities.............
Capital Structure...............................................
Capital Requirements............................................
Capital Resources...............................................
Cautionary Factors.................................................
7A. Quantitative and Qualitative Disclosures About Market Risk............
8. Financial Statements and Supplementary Data...........................
Index to 1998 Financial Statements.................................
Wisconsin Energy Corporation.......................................
Wisconsin Electric Power Company...................................
9. Changes in and Disagreements with Accountants.........................
on Accounting and Financial Disclosure.............................
PART III
--------
10. Directors and Executive Officers of the Registrant....................
11. Executive Compensation................................................
12. Security Ownership of Certain Beneficial Owners and Management........
13. Certain Relationships and Related Transactions........................
PART IV
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Schedule 1 - Condensed Parent Company Financial Statements
Consents of Independent Accountants...................................
Signatures............................................................
Exhibit Index.........................................................
DEFINITIONS
Abbreviations and Acronyms used in the text are defined below.
Abbreviations and Acronyms Term
-------------------------- ----
APB 25......................... Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees
AFUDC.......................... Allowance for Funds Used During Construction
Cogentrix...................... Cogentrix Energy Inc., an
independent power producer and
parent company of LS Power
Company........................ Wisconsin Energy Corporation and subsidiaries
Court.......................... United States Court of Appeals
for the District of Columbia circuit
D&D Fund....................... Uranium Enrichment Decontamination and
Decommissioning Fund
D&P............................ Duff & Phelps Inc.
DOE............................ United States Department of Energy
Edison Sault................... Edison Sault Electric Company
EITF 98-10..................... Emerging Issues Task Force
Consensus Number 98-10,
Accounting for Energy Trading
and Risk Management Activities
EPA............................. United States Environmental Protection Agency
Equipment....................... Kimberly Cogeneration Facility
Project equipment
ESELCO.......................... ESELCO, Inc., former parent
company of Edison Sault;
acquired by Wisconsin Energy
effective May 31, 1998
FAS............................. Statement of Financial Accounting Standards
FASB............................ Financial Accounting Standards Board
FAS 71.......................... Accounting for the Effects of
Certain Types of Regulation
FAS 109......................... FAS No. 109, Accounting for Income Taxes
FAS 121......................... FAS No. 121, Accounting for
the Impairment of Long-Lived Assets
FAS 123......................... FAS No. 123, Accounting for
Stock-Based Compensation
FAS 133......................... FAS No. 133, Accounting for
Derivative Instruments and Hedging Activities
FERC............................ Federal Energy Regulatory Commission
Fitch........................... Fitch Investors Service, Inc.
Fund............................ Nuclear Decommission Trust Fund
GCRM............................ Gas Cost Recovery Mechanism
ISFSI........................... Independent Spent Fuel Storage Installation
ISO............................. Independent System Operator (transmission)
LS Power........................ LSP-Whitewater, Limited
Partnership, an unaffiliated
independent power producer and
owner of the Whitewater Cogeneration Facility
MAIN............................ Mid-America Interconnected Network, Inc.
MDNR............................ Michigan Department of Natural Resources
Midwest ISO..................... Midwest Independent Transmission System
Operator, Inc.
Minergy......................... Minergy Corp.
Moody's......................... Moody's Investors Service
MPSC............................ Michigan Public Service Commission
Mwh............................. Megawatt-hour
NEIL............................ Nuclear Electric Insurance Limited
NOx2............................ Nitrogen Oxide
NRC............................. United States Nuclear Regulatory Commission
NSP............................. Northern States Power Company,
a Minnesota corporation
OSIP............................ Omnibus Stock Incentive Plan
PCB............................. Polychlorinated Biphenly (environmental)
Point Beach..................... Point Beach Nuclear Plant
Proposed FAS.................... Proposed FAS, Accounting for
Obligations Associated with
the Retirement of Long-Lived Assets
PRP............................. Potentially Responsible Party
(environmental)
PSCW............................ Public Service Commission of Wisconsin
S&P............................. Standard & Poor's Corporation
SO2............................. Sulfur Dioxide
Trust........................... Wisconsin Electric Fuel Trust (nuclear)
Waste Act....................... Nuclear Waste Policy Act of 1982
Waukesha........................ City of Waukesha, Wisconsin
WDNR............................ Wisconsin Department of Natural Resources
WIEP............................ Wisconsin International Electric Power, Ltd
Wisconsin Electric.............. Wisconsin Electric Power Company
Wisconsin Energy................ Wisconsin Energy Corporation
and subsidiaries
Wispark......................... WISPARK Corporation
Wisvest......................... WISVEST Corporation
Witech.......................... WITECH Corporation
WRAO............................ Wisconsin Reliability
Assessment Organization
WSSA............................ Wilderness Shores Settlement Agreement
Yellowcake...................... Uranium Concentrates (nuclear)
PART I
------
ITEM 1. BUSINESS
Wisconsin Energy Corporation was incorporated in the State of Wisconsin in
1981 and became a holding company in 1986. Unless qualified by the context
used in this document, the terms "Wisconsin Energy" or the "Company" refer
to the holding company and all of its subsidiaries. Wisconsin Energy's
principal subsidiary at December 31, 1998 was Wisconsin Electric Power
Company ("Wisconsin Electric"), an electric, gas and steam utility
which was incorporated in the State of Wisconsin in 1896. The
following discussion includes both Wisconsin Energy and Wisconsin Electric
unless otherwise stated.
Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. ("ESELCO"),
a holding company whose principal subsidiary was Edison Sault Electric
Company ("Edison Sault"), in a tax free reorganization accounted for as a
pooling of interests. Due to the immaterial nature of this transaction,
Wisconsin Energy has not restated any historical financial or statistical
information contained in this document. Wisconsin Energy is operating
Wisconsin Electric and Edison Sault, an electric utility, as separate
subsidiaries within their historical service territories. Unless otherwise
noted, the discussion that follows includes Edison Sault's activity since
June 1, 1998. For additional information concerning Wisconsin Energy's
acquisition of ESELCO, see "Factors Affecting Results of Operations -
Mergers" in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Wisconsin Energy also has certain subsidiaries engaged in various non-
utility businesses. The operations of the Company and its subsidiaries are
conducted in the following four areas of business.
ELECTRIC OPERATIONS: Wisconsin Electric's electric operations generate,
transmit, distribute and sell electric energy in a territory of
approximately 12,000 square miles with a population estimated at 2,300,000
in southeastern (including the metropolitan Milwaukee area), east central
and northern Wisconsin and in the Upper Peninsula of Michigan. Edison
Sault generates, transmits, distributes and sells electric energy in a
territory of approximately 2,000 square miles with a population of
approximately 55,000 in the eastern Upper Peninsula of Michigan.
GAS OPERATIONS: Wisconsin Electric's gas operations purchase, distribute
and sell natural gas to retail customers and transport customer-owned gas
in four distinct service areas of about 3,800 square miles in Wisconsin:
west and south of the City of Milwaukee, the Appleton area, the Prairie du
Chien area and areas within Iron and Vilas Counties. The gas service
territory has an estimated population of approximately 1,200,000.
STEAM OPERATIONS: Wisconsin Electric's steam operations generate,
distribute and sell steam supplied by its Valley and Milwaukee County Power
Plants. Steam is used by customers for space heating and processing in the
metropolitan Milwaukee area.
NON-UTILITY OPERATIONS: Wisconsin Energy's non-utility operations seek to
grow shareholder value by leveraging on the Company's core competencies.
Wisconsin Energy's non-utility subsidiaries are involved in various
activities, among which are development, ownership and operation of
electric generating facilities; waste/energy by-product utilization; and
real estate development. For information about the non-utility
subsidiaries, see "Non-Utility Operations" below.
For additional financial information about Wisconsin Energy's and Wisconsin
Electric's business segments, see "Note K - Segment Reporting" in Wisconsin
Energy's and Wisconsin Electric's Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data.
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 such 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
described in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ELECTRIC OPERATIONS
ELECTRIC SALES
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Results of Operations - Electric Revenues, Gross
Margins and Sales" for selected electric operating information for
Wisconsin Energy and additional selected electric operating information by
customer class for Wisconsin Electric.
WISCONSIN ELECTRIC: Wisconsin Electric is authorized to provide retail
electric service in designated territories in the State of Wisconsin, as
established by indeterminate permits, certificates of public convenience
and necessity, or boundary agreements with other utilities, and in certain
territories in the State of Michigan pursuant to franchises granted by
municipalities. Wisconsin Electric also sells wholesale electric power.
Electric energy sales by Wisconsin Electric in 1998 to all classes of
customers totaled approximately 29.5 billion kilowatt-hours, a 6.5%
increase over 1997. There were approximately 989,000 electric customers at
December 31, 1998, an increase of 1.0% since December 31, 1997.
Electric energy sales are impacted by seasonal factors and varying weather
conditions from year-to-year. Wisconsin Electric, a summer peaking utility
as a result of cooling load, reached its all-time electric peak demand
obligation of 5,468 megawatts on July 21, 1998. During the years 1999
through 2003, Wisconsin Electric currently estimates that electric peak
demand obligation will grow at an annualized rate of 1.0% to
5,746 megawatts by the year 2003.
EDISON SAULT: Edison Sault is authorized to provide retail electric
service in certain territories in the State of Michigan pursuant to
franchises granted by municipalities. Edison Sault also provides wholesale
electric service under contract with one rural cooperative.
During the seven months ended December 31, 1998 following Wisconsin
Energy's acquisition of Edison Sault, electric energy sales by Edison Sault
to all classes of customers totaled approximately 465 million kilowatt-
hours. There were approximately 21,000 electric customers at December 31,
1998.
Edison Sault, a winter peaking utility as a result of heating load, reached
its all-time peak electric demand of 138 megawatts on January 14, 1999.
Edison Sault's peak load growth during the past five years has averaged
between 1% and 2% per year, and Edison Sault expects this level of growth
to continue into the foreseeable future.
SALES TO LARGE RETAIL ELECTRIC CUSTOMERS: Wisconsin Electric provides
electric utility service to a diversified base of industrial customers.
Major industries served by Wisconsin Electric include iron ore mining,
paper, machinery production, foundry and food products. The Empire and
Tilden iron ore mines located in the Upper Peninsula of Michigan, the two
largest retail electric customers of Wisconsin Electric, accounted for 4.3%
and 3.9%, respectively, of total electric kilowatt-hour sales during 1998.
Sales to the Empire and Tilden iron ore mines were 7.4% higher in 1998
compared to 1997 due to a two month outage at the Tilden mine during 1997.
Edison Sault provides electric service to large industrial accounts in the
paper, crude oil pipeline and limestone quarry industries as well as to
several state and federal government facilities.
SALES TO WHOLESALE CUSTOMERS: During 1998, Wisconsin Electric sold
wholesale electric energy to five municipally owned systems, three rural
cooperatives and two municipal joint action agencies located in the States
of Wisconsin, Michigan and Illinois. Wholesale electric energy sales by
Wisconsin Electric were also made to 47 other public utilities and power
marketers throughout the region under rates approved by the Federal Energy
Regulatory Commission ("FERC"). Wholesale sales accounted for
approximately 10% of Wisconsin Electric's total electric energy sales and
6% of total electric operating revenues in 1998 compared to 8% of total
electric energy sales and 5% of total electric operating revenues in 1997.
On January 1, 1998, Upper Peninsula Power Company began taking service from
Wisconsin Electric under a capacity exchange agreement. This agreement
allows for elections to receive 30 to 65 megawatts of power, and runs
through December 31, 2007. Upper Peninsula Power Company elected to
receive 65 megawatts for calendar year 1999. Oconto Electric Cooperative
ceased taking power from Wisconsin Electric for its system on May 1, 1998
when a partial requirements contract of approximately 8 megawatts expired.
Wisconsin Public Power Inc. began taking service May 1, 1998 under a new
three-year contract. This contract allows Wisconsin Public Power Inc. to
choose power demand in amounts up to 100 megawatts by the year 2000.
Initially, Wisconsin Public Power Inc. elected to receive 45 megawatts
under its new contract.
Wisconsin Electric's existing FERC tariffs also provide for transmission
service to its wholesale customers. During 1998, Wisconsin Electric had 19
customers taking transmission service.
COMPETITION: Driven by a combination of market forces, regulatory and
legislative initiatives and technological changes, the electric utility
industry continues a trend towards restructuring and increased competition.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Industry
Restructuring and Competition" for a description of competition issues and
electric industry restructuring initiatives that are underway in regulatory
jurisdictions where Wisconsin Electric and Edison Sault currently do
business.
FERC OPEN ACCESS TRANSMISSION RULING: As a result of the Energy Policy
Act of 1992, the FERC issued two orders in April 1996 and March 1997
relating to open access transmission service, stranded costs, standards of
conduct and open access same-time information systems. On November 25,
1997, these orders were reaffirmed with little change by the FERC on
rehearing. The ruling is intended to create a more competitive wholesale
electric power market. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results
of Operations - Industry Restructuring and Competition" for additional
information.
ELECTRIC UTILITY INDUSTRY INVESTIGATIONS: See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Industry Restructuring and
Competition" for information regarding the Public Service Commission of
Wisconsin's ("PSCW") and Michigan Public Service Commission's ("MPSC")
separate investigations into the structure of the electric industry in the
States of Wisconsin and Michigan, respectively.
ELECTRIC SYSTEM RELIABILITY MATTERS: While Wisconsin Electric had
adequate capacity to meet all of its firm load obligations during the
summer of 1998, it was required to appeal for conservation on two occasions
during 1998 when weather-induced demand and capacity conditions strained
the regional electric network in the midwest. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Electric System Reliability
Matters" for information concerning ongoing actions in which Wisconsin
Electric is currently involved to improve electric reliability in the
midwest region.
SOURCES OF ELECTRIC ENERGY
The table below indicates Wisconsin Energy's and Wisconsin Electric's
sources of electric energy supply for their control areas, including net
generation by fuel type, for the following years ended December 31.
1996 1997(a) 1998(b) 1999(c)
------ ------- ------- -------
Wisconsin Energy
Coal 67.2% 71.8% 63.0% 61.0%
Nuclear 23.9 5.6 18.2 21.7
Hydroelectric 1.6 1.6 1.6 1.9
Natural gas 1.0 1.9 1.8 0.7
Oil (d) 0.3 0.2 0.2 0.0
------ ------ ------ ------
Net Generation 94.0 81.1 84.8 85.3
Power Purchases (e) 6.0 18.9 15.2 14.7
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Wisconsin Electric
Coal 67.2% 71.8% 63.8% 62.8%
Nuclear 23.9 5.6 18.5 22.3
Hydroelectric 1.6 1.6 1.0 1.4
Natural gas 1.0 1.9 1.8 0.7
Oil 0.3 0.2 0.2 0.0
------ ------ ------ ------
Net Generation 94.0 81.1 85.3 87.2
Power Purchases 6.0 18.9 14.7 12.8
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
(a) The mix of electric energy supply during 1997 reflects extended
outages of Units 1 and 2 at Wisconsin Electric's Point Beach Nuclear
Plant ("Point Beach"). See "Electric Operations - Nuclear Generation"
below for discussion of matters related to Point Beach.
(b) Wisconsin Energy's information includes Edison Sault for the period
June through December 1998.
(c) Estimated assuming that there are no unforeseen contingencies such as
unscheduled maintenance or repairs of Wisconsin Energy's generating or
electric transmission facilities. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - "Cautionary
Factors."
(d) Includes generation by Edison Sault's 4.8 megawatt diesel-fired
peaking power plant.
(e) Excludes purchases by Edison Sault of power supplied by Wisconsin
Electric.
WISCONSIN ELECTRIC: Wisconsin Electric's net generation totaled
26 million megawatt-hours during 1998 compared to 24 million megawatt-hours
during 1997 and 27 million megawatt-hours during 1996. Net generation was
down during 1997 primarily due to extended outages at Point Beach. During
1998, Wisconsin Electric's generation was supplemented with 4.5 million
megawatt-hours of power purchases from neighboring utilities; from LSP-
Whitewater Limited Partnership ("LS Power"), an independent power producer
with whom Wisconsin Electric has a long-term power purchase contract; and,
to a minor extent, from other sources. Wisconsin Electric purchased
5.5 million megawatt-hours and 1.8 million megawatt-hours of electric
energy during 1997 and 1996, respectively. The dependable capability of
Wisconsin Electric's generating stations was 5,652 megawatts in August 1998
as more fully described in Item 2. Properties.
Wisconsin Electric's average total fuel costs per million British thermal
units by fuel type for the years ended December 31 are shown below.
1996 1997 1998
---- ---- ----
Coal $1.16 $1.22 $1.17
Nuclear 0.46 0.49 0.53
Natural Gas 3.60 2.79 2.74
Oil 4.22 4.70 3.70
EDISON SAULT: During 1998, Edison Sault generated 20% of its total
electric energy requirements with its hydroelectric plant and purchased the
remaining 80% of such requirements. Edison Sault's total average
generating capability is 34.6 megawatts as more fully described in Item 2.
Properties.
COAL-FIRED GENERATION
Wisconsin Electric diversifies coal sources for its power plants in the
States of Wisconsin and Michigan by purchasing from mines in northern and
central Appalachia as well as from various western mines. Following are
the periods and annual tonnage amounts for Wisconsin Electric's principal
coal contracts.
Contract Period Annual Tonnage
--------------- --------------
Jan. 1980 to Dec. 2006 2,000,000
Jul. 1983 to Dec. 2002 1,000,000
Jan. 1992 to Dec. 2005 2,200,000
Oct. 1992 to Dec. 2001 500,000
Sep. 1994 to Aug. 1999 600,000
Sep. 1995 to Dec. 1999 600,000
Jan. 1996 to Dec. 1999 100,000
Jan. 1998 to Dec. 2002 900,000
For information regarding emission restrictions, see Item 1. Business -
"Environmental Compliance."
Approximately 75% of Wisconsin Electric's 1999 coal requirements are
expected to be delivered by Wisconsin Electric-owned unit trains. The unit
trains will transport coal for the Oak Creek and Pleasant Prairie Power
Plants from Colorado, Pennsylvania, New Mexico and Wyoming mines. Coal
from Pennsylvania and Colorado mines is also transported via rail to Lake
Erie or Lake Michigan transfer docks and delivered to the Valley and Port
Washington Power Plants by lake vessels. Coal from central Appalachia is
shipped via rail to Lake Erie transfer docks and delivered to the Milwaukee
County Power Plant by truck once it arrives by lake vessel in Milwaukee.
Montana and Wyoming coal for Presque Isle is transported via rail to
Superior, Wisconsin, placed in dock storage and reloaded into lake vessels
for plant delivery. The Presque Isle central Appalachian origin and
Colorado origin coal is shipped via rail to Lake Erie and Lake Michigan
(Chicago) coal transfer docks, respectively, for lake vessel delivery to
the plant. Wisconsin Electric's 1999 coal requirements, projected to be
11.3 million tons, will be 89% under contract. Wisconsin Electric does not
anticipate any problem in procuring its remaining 1999 coal requirements
through short-term or spot purchases and inventory adjustments. For
information concerning coal delivery problems during 1997 with the Union
Pacific Railroad as well as coal inventory contingency plans related to the
Year 2000, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Coal Supply and Transportation Matters."
PLEASANT PRAIRIE POWER PLANT: All of the estimated 1999 coal requirements
for this plant are presently under contract.
OAK CREEK POWER PLANT: All of the estimated 1999 coal requirements for
this plant are presently under contract.
PRESQUE ISLE POWER PLANT: All of the estimated 1999 coal requirements for
this plant are presently under contract.
EDGEWATER 5 GENERATING UNIT: Coal for this unit, in which Wisconsin
Electric has a 25% interest, is purchased by Wisconsin Power and Light
Company, a non-affiliated investor owned utility, which is the majority
owner of the facility.
VALLEY AND PORT WASHINGTON POWER PLANTS: Coal requirements for these
plants will be supplied in 1999 by contracts that have been agreed upon in
principle.
MILWAUKEE COUNTY POWER PLANT: Coal for this facility is purchased by
Wisconsin Electric through annual spot purchases.
NUCLEAR GENERATION
Wisconsin Electric purchases uranium concentrates ("Yellowcake") and
contracts for its conversion, enrichment and fabrication. Wisconsin
Electric maintains title to the nuclear fuel until the fabricated fuel
assemblies are delivered to Point Beach, whereupon it is sold to and leased
back from the Wisconsin Electric Fuel Trust. For further information
concerning this nuclear fuel lease, see "Note H - Long-Term Debt" in the
Notes to Financial Statements in Item 8. Financial Statements and
Supplementary Data.
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach in Two
Rivers, Wisconsin. During the summer of 1997, Wisconsin Electric replaced
two low pressure turbines in Unit 1, which increased its maximum dependable
generating capability from 500 to approximately 510 megawatts. During the
winter of 1998-1999, Wisconsin Electric replaced Unit 2's low pressure
turbine rotors, which is expected to also increase the maximum dependable
generating capability of Unit 2 from 500 to approximately 510 megawatts.
Due to extended outages during 1997, Point Beach provided approximately 6%
of Wisconsin Electric's net electric energy supply during 1997 compared to
18% and 24% during 1998 and 1996, respectively. The United States Nuclear
Regulatory Commission operating licenses for Point Beach expire in October
2010 for Unit 1 and in March 2013 for Unit 2.
For additional information concerning Point Beach, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Nuclear Matters" and "Note F -
Nuclear Operations" in the Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data.
URANIUM REQUIREMENTS: Wisconsin Electric requires approximately
400,000 pounds of Yellowcake to refuel a generating unit at Point Beach.
During 1998, Wisconsin Electric implemented staggered, extended fuel cycles
that are expected to average approximately 18 months in duration. The
supply of Yellowcake for these refuelings is currently provided through one
long-term contract, which provides between 60% to 100% of annual
requirements under these staggered, extended fuel cycles. Wisconsin
Electric may exercise flexibility available in this contract and purchase
certain quantities of uranium on the spot market, should the market
conditions prove favorable. Negotiations for the supply of the quantity of
uranium not covered by the long-term contract beyond 1998 will be ongoing
during 1999.
CONVERSION: Wisconsin Electric has a long-term contract with a provider
of uranium conversion services to supply 100% of the conversion
requirements for the Point Beach reactors from 1996 through 1999. For the
years 2000 through 2004, this same contract will provide 75% of Wisconsin
Electric's annual conversion requirements. During 1997, an additional long-
term conversion contract was executed to supply the remaining 25% of
Wisconsin Electric's annual conversion requirements.
ENRICHMENT: During 1998, a long-term contract for the supply of enriched
uranium was executed capable of providing up to 100% of Wisconsin
Electric's enriched uranium requirements through 2006. As a result,
Wisconsin Electric currently has two long-term contracts for the supply of
enrichment services. The combination of the contracts provides for the
required enrichment services for the Point Beach reactors through the year
2006.
FABRICATION: Fabrication of fuel assemblies from enriched uranium for
Point Beach is covered under a contract with Westinghouse Electric
Corporation for the balance of the plant's current operating license.
During 1995, an agreement was reached between Wisconsin Electric and
Westinghouse to supply Wisconsin Electric with a new fuel design beginning
in the fall of 1997. The 1995 agreement was modified in November 1996 due
to delayed licensing of a new analysis method desired for the use of the
new fuel design. Current plans now assume initial use of the new fuel
design in the fall of the year 2000. The new fuel design is expected to
provide additional safety margin and cost savings and to reduce the number
of discharged spent fuel assemblies over the remaining operating license.
SPENT FUEL STORAGE AND DISPOSAL: Wisconsin Electric currently has the
capacity to store limited amounts of spent nuclear fuel in the spent fuel
pool at Point Beach. In addition, Wisconsin Electric completed
construction of an Independent Spent Fuel Storage Installation in 1995 for
the temporary dry storage of spent fuel at Point Beach. For information
concerning spent fuel storage and disposal issues, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Nuclear Matters."
DECOMMISSIONING FUND: Wisconsin Electric provides for costs associated
with the eventual decommissioning of Point Beach through the use of an
external trust fund. Payments to this fund, together with investment
earnings, brought the balance in the trust fund at December 31, 1998 to
approximately $519 million. For additional information regarding
decommissioning, see "Note F - Nuclear Operations" in the Notes to
Financial Statements in Item 8. Financial Statements and Supplementary
Data.
NUCLEAR PLANT INSURANCE: For information regarding matters pertaining to
nuclear plant insurance, see "Note F - Nuclear Operations" in the Notes to
Financial Statements in Item 8. Financial Statements and Supplementary
Data.
HYDROELECTRIC GENERATION
WISCONSIN ELECTRIC: Wisconsin Electric's hydroelectric generating system
consists of fifteen operating plants. Of these fifteen plants, five plants
with a total installed generating capacity of approximately 26 megawatts
have long-term licenses with the FERC, and a sixth plant with an installed
generating capacity of approximately 2 megawatts does not require a FERC
license. Wisconsin Electric is in the process of selling to an independent
party one plant with an installed generating capacity of approximately
1 megawatt.
Wisconsin Electric is seeking renewal of the remaining eight operating
licenses from the FERC for licenses that expired or expire during the
period 1998 to 2001. Key issues concerning relicensing of these eight
plants were covered by the Wilderness Shores Settlement Agreement ("WSSA"),
signed in February 1997. The WSSA was the culmination of more than two
years of negotiations between Wisconsin Electric and representatives of the
Wisconsin Department of Natural Resources, the Michigan Department of
Environmental Quality, the Michigan Department of Natural Resources, the
U.S. Fish and Wildlife Service, the Wisconsin Department of Administration,
the National Park Service and two river/recreational organizations: the
Michigan Hydro Relicensing Coalition and the River Alliance of Wisconsin.
Wisconsin Electric expects the WSSA to assure the continued profitable
operation of its hydroelectric system in the Upper Menominee River Basin as
well as the protection of associated land and water resources for 40 years
following license renewal by the FERC.
Wisconsin Electric's hydroelectric facilities covered by the WSSA are the
Big Quinnesec Falls, Kingsford, Michigamme Falls, Twin Falls, Lower Paint
Dam, Peavy Falls, Hemlock Falls and Way Dam Projects, representing a total
of 59 megawatts of installed capacity. Wisconsin Electric is in the
process of completing an applicant-prepared environmental assessment and a
FERC license application. These, along with the WSSA, will be filed with
the FERC by October 1999.
For additional information concerning Wisconsin Electric's hydroelectric
generating facilities, see Item 2. Properties.
EDISON SAULT: Edison Sault's primary source of generation is its
30 megawatt hydroelectric generating plant located on the St. Marys River
in Sault Ste. Marie, Michigan. The water for this facility is leased under
a contract with the United States Corps of Engineers with tenure to
December 31, 2050. However, the Secretary of the Army has the right to
terminate the contract subsequent to December 2025 by providing at least a
five-year termination notice. No such notice can be given prior to
December 31, 2020. Edison Sault pays for all water taken from the
St. Marys River at predetermined rates with a minimum annual payment
of $100,000 per year. The total flow of water taken out of Lake Superior,
which in effect is the flow of water in the St. Marys River, is under the
direction and control of the International Joint Commission, created by the
Boundary Water Treaty of 1909 between the United States and Great Britain,
now represented by Canada.
Water elevation levels on Lake Superior in the second half of 1998 and into
1999 have been at their lowest levels since the year 1926. As a result,
the International Joint Commission has placed limitations on the flow of
water from Lake Superior that limits Edison Sault's amount of hydroelectric
generation. During any limited flow months, it is necessary for Edison
Sault to purchase additional power from other sources and increase the use
of Edison Sault's diesel generation.
Hydroelectric generation is also purchased by Edison Sault under contract
from the United States Corps of Engineers' hydroelectric generating plant
located within the Soo Locks complex on the St. Marys River in Sault Ste.
Marie, Michigan. This 17 megawatt contract has a tenure to November 1,
2040, and cannot be terminated by the United States government prior to
November 1, 2030.
During 1998, hydroelectric energy provided 38% of Edison Sault's total
energy requirements, of which 20% was generated by Edison Sault's facility
and 18% was purchased from the United States Corps of Engineers.
NATURAL GAS-FIRED GENERATION
The Concord and Paris Combustion Turbine Power Plants and the Oak Creek
combustion turbine use natural gas as their primary fuel, with fuel oil as
backup. Gas for these plants is purchased on the spot market from gas
marketers and/or producers and delivered on the local distribution system
of Wisconsin Electric's gas operations.
An interruptible balancing and storage agreement with ANR Pipeline is
intended to facilitate the variable gas usage pattern of the combustion
turbine plants.
Natural gas for boiler ignition and flame stabilization purposes for the
Pleasant Prairie, Oak Creek and Valley Power Plants is purchased under an
agency agreement with a gas marketing company. The agent purchases natural
gas and arranges for interstate pipeline transportation to the local gas
distribution utility. The local gas distribution utilities then transport
Wisconsin Electric's gas to each plant under interruptible tariffs.
Wisconsin Electric's gas operations is the distribution utility for
Pleasant Prairie and Oak Creek Power Plants. Wisconsin Gas Company, an
unaffiliated company, is the distribution utility for the Valley Power
Plant.
OIL-FIRED GENERATION
Fuel oil is used for the combustion turbines at the Point Beach, Germantown
and Port Washington Power Plants. It is also used for boiler ignition and
flame stabilization at the Presque Isle Power Plant, as backup for ignition
at the Pleasant Prairie Power Plant and as a backup fuel for the natural
gas-fired gas turbines discussed above. Fuel oil requirements are
purchased under partnering agreements with suppliers that assist Wisconsin
Electric with inventory tracking and oil market price trends.
Subject to various regulatory approvals, four existing generating units at
the Germantown Power Plant will be converted, one unit per year from 2000 to
2003, to dual fuel (natural gas and oil). A fifth dual fuel combustion
turbine is planned to begin commercial operation at Germantown Power Plant
in 2000. For further information about these Germantown Power Plant
projects, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Electric System Reliability Matters."
PURCHASE POWER COMMITMENTS
WISCONSIN ELECTRIC: To meet a portion of Wisconsin Electric's anticipated
increase in future electric energy supply needs, Wisconsin Electric has
entered into long-term power purchase contracts with LS Power and with SEI-
Wisconsin, a subsidiary of the Southern Company, an unaffiliated investor
owned utility.
The contract with LS Power, for 236 megawatts of firm capacity from LS
Power's gas-fired cogeneration facility located in Whitewater, Wisconsin,
includes no minimum energy requirements. Wisconsin Electric treats this
power purchase contract as a capital lease. See "Note H - Long-Term Debt"
in the Notes to Financial Statements in Item 8. Financial Statements and
Supplementary Data for additional information about Wisconsin Electric's
long-term power purchase agreement with LS Power.
In March 1998, LS Power's parent company signed an agreement with Cogentrix
Energy Inc. ("Cogentrix"), an independent power producer unrelated to LS
Power or Wisconsin Electric, to sell a majority interest in LS Power to
Cogentrix. Wisconsin Electric's long-term purchase power contract with LS
Power is expected to remain effective under the ownership of Cogentrix.
On August 28, 1998, Wisconsin Electric entered into a power purchase
agreement with SEI -Wisconsin for SEI-Wisconsin to design, construct, own
and operate a 300 megawatt gas turbine peaking facility in the town of
Neenah, Wisconsin and to provide the output of this facility to Wisconsin
Electric for eight years. The facility is scheduled for commercial
operation by June 2000. The purchase power agreement is similar in
structure to arrangements commonly referred to in the electric industry as
a "tolling arrangement." That is, Wisconsin Electric delivers fuel to the
facility and takes away electric power. Wisconsin Electric pays SEI-
Wisconsin a "toll" to convert Wisconsin Electric's fuel into the electric
energy. The entire output of the facility is available for Wisconsin
Electric to dispatch during the eight year term of the agreement. The
purchase power agreement with SEI-Wisconsin is the culmination of a request
for proposal process that Wisconsin Electric initiated in November 1997 to
fulfill a new capacity need and to comply with a PSCW order and with
Wisconsin Act 204. For additional information concerning the purchase
power agreement with SEI-Wisconsin, see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Electric System Reliability Matters."
For further information regarding Wisconsin Act 204, see "Regulation" below
in Item 1. Business.
In the normal course of business, Wisconsin Electric utilizes contracts of
various duration for the forward purchase of electricity to meet load
requirements in an economic manner and when the anticipated market price
for electric energy is below Wisconsin Electric's expected incremental cost
of generation. Contracts of this nature are one of the power supply
resources Wisconsin Electric uses to meet its reliability requirements.
EDISON SAULT: To meet 80% of its energy requirements, Edison Sault
purchased the following megawatt-hours from the following sources under
firm contracts during the seven months ended December 31, 1998.
Megawatt-hours
--------------
Consumers Energy Company 218,078
Wisconsin Electric 98,437
U.S. Corps of Engineers - Hydro 92,119
Cloverland Electric Cooperative 119
Upper Peninsula Power Company 2
--------
Total 408,755
========
Edison Sault purchases power from Consumers Energy Company under a
wholesale power sales agreement that expires in 2020, or 2010 under an
early termination provision. Rates under the agreement, approved by the
FERC, provide for capacity and energy charges. Effective January 1, 1997
under this agreement, Edison Sault began purchasing 35 megawatts of firm
power and a variable amount of interruptible power. This contract contains
a reorganization provision under which Edison Sault's obligation to
purchase firm power will change to 30 megawatts in 2000, 25 megawatts in
2001 and 20 megawatts in 2002 and thereafter. The interruptible service
provisions of the contract expire on January 1, 2000.
Effective January 1, 1998, Edison Sault began purchasing 20 megawatts of
firm power from Wisconsin Electric under the terms of a ten-year agreement.
As discussed above under "Hydroelectric Generation", Edison Sault purchases
all available hydroelectric generation or approximately 17.4 megawatts from
the United States Corps of Engineers' St. Marys River plant under a long-
term purchase power contract. Annual payments under the contract are
subject to renegotiation every five years with the current terms having
been implemented in November 1996.
INTERCONNECTIONS WITH OTHER UTILITIES
WISCONSIN ELECTRIC: Wisconsin Electric's system is interconnected at
various locations with the systems of Commonwealth Edison Company, Madison
Gas and Electric Company, Northern States Power Company, Upper Peninsula
Power Company, Wisconsin Power and Light Company, Wisconsin Public Service
Corporation and the Marquette, Michigan Board of Light and Power. These
interconnections provide for interchange of power to assure system
reliability as well as facilitating access to generating capacity and the
transfer of energy for economic purposes.
Wisconsin Electric is a member of Mid-America Interconnected Network, Inc.
("MAIN"), which is one of ten regional members of the North American
Electric Reliability Council. Membership in these groups permits better
utilization of reserve generating capacity and coordination of long-range
system planning and day-to-day operations.
In February 1996, Wisconsin Electric and five other Midwest utilities
announced that they had agreed to pursue the development of an independent
organization, the Midwest Independent Transmission System Operator, Inc.
("Midwest ISO"), which would be responsible for ensuring nondiscriminatory
open electric transmission access and the planning and security of the
combined bulk electric transmission systems of the utilities. The group
has grown to include nine utilities. All transmission owners of the East
Central Area Reliability Council and MAIN have participated in the
development of the Midwest ISO. An order conditionally approving of the
Midwest ISO was issued by the FERC on September 16, 1998.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Electric
System Reliability Matters" for additional information regarding certain
electric transmission projects and the Midwest ISO.
EDISON SAULT: Edison Sault's electric transmission system is directly
interconnected with the systems of Consumers Energy Company and Cloverland
Electric Cooperative. With completion of the Central Upper Peninsula
Transmission Project in the spring of 2000, Edison Sault will also be
interconnected with the electric transmission system of Wisconsin Electric.
Edison Sault is currently a member of the East Central Area Reliability
Council, another regional member of the North American Electric Reliability
Council.
GAS OPERATIONS
GAS DELIVERIES
Wisconsin Electric is authorized to provide gas service in designated
territories in the State of Wisconsin, as established by indeterminate
permits, certificates of public convenience and necessity, or boundary
agreements with other utilities.
Total gas therms delivered by Wisconsin Electric, including customer-owned
transported gas, were approximately 923 million therms in 1998, a 6%
decrease compared to 1997. At December 31, 1998, Wisconsin Electric was
transporting gas for approximately 310 customers who choose to purchase gas
directly from other suppliers. Transported gas accounted for approximately
46% of total therms delivered during 1998, 40% during 1997 and 31% during
1996. There were approximately 388,000 natural gas customers at
December 31, 1998, an increase of approximately 3.1% since December 31,
1997.
Wisconsin Electric's maximum daily send-out during 1998 was
619,578 dekatherms on January 13, 1998. A dekatherm is equivalent to ten
therms or one million British thermal units . Sales of gas fluctuate with
the heating cycle of the year and are also impacted by varying weather
conditions from year-to-year.
For further gas operating information by customer class, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Results of Operations - Gas Revenues, Gross Margins and
Therm Deliveries."
Wisconsin Electric's gas operations delivers natural gas to Wisconsin
Electric's Concord, Paris and Oak Creek Power Plants. Deliveries to these
facilities are at rates approved by the PSCW. See "Electric Operations -
Natural Gas-Fired Generation" above.
For information concerning Wisconsin Electric's expansion of natural gas
service to more than 4,500 potential customers in northeastern Wisconsin,
see Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations -
Outlook."
SALES TO LARGE GAS CUSTOMERS: Wisconsin Electric provides gas utility
service to a diversified base of industrial customers who are largely
within its electric service territory. Major industries served by
Wisconsin Electric's gas operations include the paper, food products and
fabricated metal products industries. During 1998, Wisconsin Electric's
electric operations took delivery of 8.5% of total therm deliveries
compared to 8.8% during 1997. See "Electric Operations - Sources of
Electric Energy" above for information about anticipated gas-fired electric
generation by Wisconsin Electric during 1999. No single retail customer of
the gas utility accounted for more than 2.8% of total gas therms sold and
transported during 1998.
COMPETITION: Competition in the natural gas industry is increasing,
driven by a combination of market forces and regulatory initiatives.
Natural gas companies are now operating in a competitive environment at the
wholesale level, and regulators in Wisconsin continue to evaluate
competition at the retail level. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Industry Restructuring and Competition"
for information regarding the PSCW's ongoing generic investigation into the
structure of the retail natural gas industry in the State of Wisconsin.
GAS SUPPLY
Wisconsin Electric's gas operations has entered into more than 60 gas
service contracts for supply, pipeline capacity, underground storage and
balancing services. Contracts vary in term from less than one year to ten
years. Gas supply contracts contain pricing options that allow pricing at
market rates or the ability to fix future prices for varying terms which
Wisconsin Electric can exercise to mitigate substantial market price
fluctuations. The gas from these contracts is used to meet customer
requirements on a daily basis and to fill storage during the warm months to
be withdrawn from storage during the heating season in order to meet system
gas demands.
The use of storage increases the load factor of supply contracts and allows
Wisconsin Electric to take advantage of seasonal price differentials.
Wisconsin Electric's gas operations has six firm gas storage agreements
with pipelines that allow daily withdrawals of 320,511 dekatherms and an
annual capacity of 19.5 million dekatherms. The initial terms of these
contracts vary with the last one expiring in May 2006. Gas stored at these
facilities is purchased by Wisconsin Electric from a number of suppliers.
Wisconsin Electric has 25 transportation contracts, the last of which
expires in 2006, that it uses to meet daily customer requirements and to
inject and withdraw from gas storage. In each case, subject to certain
provisions, Wisconsin Electric's gas operations can extend the terms of
these contracts at the time the agreements would otherwise expire.
Wisconsin Electric also has three contracts for salt dome storage that
provide seasonal gas supply backup in the event of well freeze-off or other
loss of supply.
STEAM OPERATIONS
Wisconsin Electric operates a district steam system in downtown Milwaukee
and the near south side of downtown Milwaukee. Steam is supplied to the
system from Wisconsin Electric's Valley Power Plant, a coal-fired
cogeneration facility. In November 1996, Wisconsin Electric acquired from
Milwaukee County the steam production and distribution facilities of the
Milwaukee County Power Plant located on the Milwaukee County Grounds in
Wauwatosa, Wisconsin. Wisconsin Electric operates these facilities as part
of its steam utility operations.
Annual sales of steam fluctuate from year to year based upon system growth
and variations in weather conditions. Primarily due to a warmer than
normal heating season, steam sales decreased 12% during 1998. At
December 31, 1998, steam was used by 454 customers for processing, space
heating, domestic hot water and humidification.
NON-UTILITY OPERATIONS
See "Note K - Segment Reporting" in Wisconsin Energy's Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data for
information concerning non-utility net income, net identifiable assets and
construction expenditures during each of the three years ended December 31,
1998.
NON-UTILITY SUBSIDIARIES
Wisconsin Energy's non utility subsidiaries include:
WISPARK CORPORATION: WISPARK Corporation ("Wispark") develops and invests
in real estate. While Wispark's core geographic area is southeastern
Wisconsin, it is currently developing properties in metropolitan
Minneapolis/St. Paul, Minnesota; Chicago, Illinois; and Sacramento,
California. Wispark's initial development, LakeView Corporate Park, a
1,500-acre business park located near Kenosha, Wisconsin, has developed 689
acres with over 6,500,000 square feet of buildings for 60 companies during
its first ten years of existence. Wispark is also developing or has
developed business parks such as those in the following locations:
* Westridge Business Park - New Berlin, Wisconsin;
* RidgeView Corporate Park - Pewaukee, Wisconsin;
* GrandView Business Park - Racine, Wisconsin;
* Business Park of Kenosha - Kenosha, Wisconsin:
* Grand Oak Business Park - Eagan, Minnesota;
* NorthWest Corporation Park - Elgin, Illinois; and
* White Oak Business Park - Aurora, Illinois.
In addition to developing business parks, Wispark has established itself as
one of southeastern Wisconsin's largest developers of industrial buildings.
In the last five years, Wispark has developed 2,700,000 square feet of
buildings on a build-to-suit basis, and just over 1,700,000 square feet of
other building space. Wispark has also developed mixed-use projects such
as Gaslight Pointe in Racine, Wisconsin. Wispark constructed a 120-room
Radisson Hotel and Conference Center in LakeView Corporate Park.
WISVEST CORPORATION: WISVEST Corporation ("Wisvest") invests in energy-
related entities and develops energy-related projects. Wisvest owns and
manages the chilled water production and distribution facilities that are
part of the Milwaukee County Power Plant on the Milwaukee County Grounds in
Wauwatosa, Wisconsin. Wisvest is also an investor in other energy-related
entities such as a strategic energy management services company with a
focus on natural gas management, a natural gas marketer, a company that
designs, builds and operates landfill gas recovery systems and a
cogeneration facility in the State of Maine, the Androscoggin Cogeneration
Center. Wisvest's subsidiary, Griffin Energy Marketing, L.L.C. markets
energy related services and trades electricity. See "Liquidity and Capital
Resources - Investing Activities" in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
information concerning the acquisition of the Milwaukee County Power Plant.
See "Note L - Commitments and Contingencies" in Wisconsin Energy's Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data
for information concerning the Androscoggin Cogeneration Center.
In October 1998, WISVEST Connecticut, LLC, a wholly owned subsidiary of
Wisvest, entered into an agreement to purchase two fossil-fueled power
plants in the State of Connecticut that is expected to be consummated in
the second quarter of 1999. See Item 1. Business - "Environmental
Compliance", Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Analysis - "Liquidity and Capital Resources -
Capital Requirements" and "Note L - Commitments and Contingencies" in
Wisconsin Energy's Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data for further information.
WISCONSIN ENERGY CAPITAL CORPORATION: Wisconsin Energy Capital
Corporation, formerly Wisconsin Michigan Investment Corporation, engages in
investing and financing activities. Activities include advances to
affiliated companies and investments in financial instruments and in
partnerships developing low-and moderate-income housing projects. Other
investments may be made from time to time. Wisconsin Energy Capital
Corporation's subsidiary, WMF Corp., engages in financing activities. Any
funds obtained by WMF Corp. through financing arrangements are advanced to
Wisconsin Energy Capital Corporation.
MINERGY CORP.: Minergy Corp. ("Minergy") is engaged in the business of
developing and marketing proprietary technologies designed to convert high
volume industrial and municipal wastes into value-added products. In 1998,
Minergy completed construction of and placed into commercial operation in
Neenah, Wisconsin a facility that recycles paper sludge from area paper
mills into two usable and salable products: glass aggregate and steam.
The plant also provides substantial environmental and economic benefits to
the area by providing a beneficial alternative to landfilling paper sludge.
For additional information related to the Minergy glass aggregate plant,
see Item 3. Legal Proceedings - "Other Matters" and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Liquidity and Capital Resources - Investing Activities."
WEC INTERNATIONAL, INC.: WEC International Inc. serves as Wisconsin
Energy's international investment vehicle. WEC International, Inc. has
investments in two joint ventures in the Netherlands. One joint venture
owns and operates a by-product utilization plant. The other joint venture
is in the process of renovating a waste treatment facility.
WITECH CORPORATION: WITECH Corporation ("Witech") is a venture capital
company operating in the State of Wisconsin. At December 31, 1998, Witech
had investments in eleven companies and three funds totaling more than
$34 million. Among others, the companies include an operator of a
nationwide data communications network for the agriculture industry, a
manufacturer of electronic components and a manufacturer of motor drives.
WEC NUCLEAR CORP.: WEC Nuclear Corp., formerly WEC Sub Corp., has an
ownership interest in Nuclear Management Company L.L.C.. Formed during the
first quarter of 1999, it is intended that Nuclear Management Company
L.L.C. will provide services to Wisconsin Electric in connection with Point
Beach Nuclear Plant as well as to other unaffiliated companies with nuclear
generating facilities. For additional information, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations - Nuclear Matters."
NORTHERN TREE SERVICE, INC.: Northern Tree Service, Inc., a former
subsidiary of ESELCO, is engaged in tree trimming in the State of
Michigan's eastern Upper Peninsula.
BADGER SERVICE COMPANY: Badger Service Company holds coal rights in
Indiana. Estimates indicate that 40 million tons of coal could be
recovered from this property with conventional mining techniques. However,
there are no current plans to develop the property. Badger Service Company
may sell or develop these rights in the future as conditions warrant.
NON-UTILITY RESTRICTIONS
For information concerning certain restrictions which limit diversification
of Wisconsin Energy in non-utility activities, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Rates and Regulatory Matters."
For information concerning restrictions on the ability of Wisconsin
Electric to transfer funds to Wisconsin Energy, see "Note A - Summary of
Significant Accounting Policies" in Wisconsin Energy's Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data.
REGULATION
Wisconsin Electric is subject to the regulation of the PSCW as to retail
electric, gas and steam rates in the State of Wisconsin, standards of
service, issuance of securities, construction of new facilities,
transactions with affiliates, levels of short-term debt obligations,
billing practices and various other matters. Wisconsin Electric and Edison
Sault are subject to the regulation of the MPSC as to the various matters
associated with retail electric service in the State of Michigan as noted
above except as to issuance of securities, construction of certain new
facilities, levels of short-term debt obligations and advance approval of
transactions with affiliates. Wisconsin Electric's hydroelectric
facilities are regulated by the FERC. Wisconsin Electric and Edison Sault
are subject to regulation of the FERC with respect to wholesale power
service, electric transmission, and accounting. Operation and construction
relating to Wisconsin Electric's Point Beach facilities are subject to
regulation by the United States Nuclear Regulatory Commission. Total flow
of water to Edison Sault's hydroelectric generating plant is under the
control of the International Joint Commission, created by the Boundary
Water Treaty of 1909 between the United States and Great Britain, now
represented by Canada. Wisconsin Electric's and Edison Sault's operations
are also subject to regulations, where applicable, of the United States
Environmental Protection Agency ("EPA"), the Wisconsin Department of
Natural Resources ("WDNR"), the Michigan Department of Natural Resources
("MDNR") and the Michigan Department of Environmental Quality.
The PSCW is authorized to direct expenditures for promoting conservation if
it determines that the programs are in the public interest. For
information concerning evolving conservation requirements for utilities in
the State of Wisconsin, see "Energy Efficiency" below.
Wisconsin Energy is an exempt holding company by order of the United States
Securities and Exchange Commission under Section 3(a)(1) of the Public
Utility Holding Company Act of 1935 and, accordingly, is exempt from the
law's provisions other than with respect to certain acquisitions of
securities of a public utility.
In 1997, the Wisconsin State Legislature passed and the Governor of
Wisconsin signed into law Wisconsin Act 204, intended to address concerns
with electric reliability in the State of Wisconsin. Among other things,
Act 204 required the PSCW to replace the Advance Plan process with a new
Strategic Energy Assessment process. In January 1999, the PSCW issued its
final Advance Plan order, Advance Plan 8, approving Wisconsin Electric's
generation and transmission expansion plans essentially as filed. In
response to Act 204, the PSCW has replaced the Advance Plan process with a
non-binding Strategic Energy Assessment performed by the PSCW every two
years beginning in July 2000.
Wisconsin Act 204 includes new requirements concerning market power which
utilities and their affiliates must meet in order to construct generating
facilities. The requirements would apply to utility facilities in excess
of 100 megawatts. The PSCW is currently engaged in a rule making
proceeding involving the applicability of Act 204 to utility affiliates
seeking to construct facilities in the State of Wisconsin. For additional
information concerning the PSCW's current utility affiliate rule making
efforts, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Industry Restructuring and Competition."
In 1994, the PSCW ordered the state's utilities to competitively bid all
new generation needs in excess of 12 megawatts to be built in the State of
Wisconsin. The two-stage process established by the PSCW consists of
(1) an all-parties (including utilities) bidding procedure for fossil-fueled
and renewable generation projects; and (2) the conventional Certificate of
Public Convenience and Necessity procedure for the winner or winners. In
the first quarter of 1997, the PSCW extended this to include repowering or
upgrades of existing generation in excess of 12 megawatts.
RATE MATTERS
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations- "Factors Affecting Results of Operations - Rates and
Regulatory Matters" for a discussion of rate matters, including recent rate
changes and a discussion of the tariffs and procedures with respect to
recovery of changes in the costs of fuel, purchased power and gas purchased
for resale.
ENERGY EFFICIENCY
The PSCW continues to mandate electric and natural gas energy efficiency
goals for Wisconsin Electric's residential, small commercial, and low
income customers. Goals for large commercial and industrial customers were
eliminated in 1997. During 1998, the PSCW continued its policy of moving
the accomplishment of small customer energy efficiency goals from utility
to non-utility providers. Wisconsin Electric supports this policy of using
a bidding process to hire non-utility providers to accomplish its goals.
Currently, Wisconsin Electric has contracts for 100% of its 1999
residential and small commercial energy efficiency goals. Wisconsin
Electric works cooperatively with state weatherization operators and
community organizations in achieving its low income energy efficiency
goals.
As noted above, Wisconsin Electric supports the move away from mandated
utility energy efficiency goals by the PSCW. However, as part of its
commitment to customer service Wisconsin Electric will continue to provide
its customers information on how to control their energy costs.
In a related matter, the Wisconsin State Legislature formed a committee to
study ways of preserving and enhancing various public benefits in a
restructured utility environment. Among other things, public benefits
include efforts to help develop the competitive market for energy
efficiency in the State of Wisconsin and the funding of energy efficiency
services for low income customers. The committee is using the PSCW's
Enunciation of Policy and Principles, as stated in Docket 05-BU-100, as the
foundation piece for its work, although the committee is expected to
recommend some changes. The general concept of the committee is that a
statewide entity would be charged with preserving public benefits. The
responsibility for achieving energy efficiency goals would shift from the
utility to this new entity. The goal of the new entity would be to have
energy efficiency improvements occur through the competitive market place.
It is likely legislation creating such an entity will be submitted in the
current legislative session.
Wisconsin Electric will continue to offer programs which provide customers
the incentive to move their energy use to times when Wisconsin Electric
facilities are less utilized. Interruptible and curtailable rates, along
with an energy cooperative-managed load curtailment program, are offered to
certain industrial customers to control peak demand. Direct load control
of central air conditioners is offered to most residential customers. Time-
of-use rates continue to be available to most customers. Real-time pricing
programs are also being offered to some customers.
ENVIRONMENTAL COMPLIANCE
Compliance with federal, state and local environmental protection
requirements resulted in capital expenditures by Wisconsin Electric of
approximately $23 million in 1998. Expenditures incurred during 1998
included costs associated with the installation of pollution abatement
facilities at Wisconsin Electric's power plants. Such expenditures at
Wisconsin Electric are budgeted at approximately $4 million during 1999,
$54 million during 2000 and $118 million during 2001. The significant
increases in 2000 and 2001 are attributable to final ozone transport rules
that were issued by the EPA in October 1998.
Operation, maintenance and depreciation expenses for Wisconsin Electric's
fly ash removal equipment and other environmental protection systems are
estimated to have been approximately $37 million during 1998, $30 million
during 1997 and $32 million during 1996.
As noted above under "Non-Utility Operations," WISVEST Connecticut, LLC, a
wholly owned subsidiary of Wisvest, agreed to purchase two fossil-fueled
power plants in the State of Connecticut in a deal that is expected to be
consummated in the second quarter of 1999. As a result of this purchase,
WISVEST Connecticut, LLC will also be affected by the final ozone transport
rules that were issued by the EPA in October 1998. These rules will
require WISVEST Connecticut, LLC to reduce nitrogen oxide ("NOx") emissions
from the acquired plants by approximately 25% compared to historical
levels. Engineering and economic studies are currently underway to develop
alternative capital expenditure programs which would provide compliance
with the regulations at the lowest life cycle cost. These studies are
expected to be completed by December 31, 1999. Depending upon the form of
Nox reduction strategy that is implemented, WISVEST Connecticut, LLC
currently estimates that efforts to implement this strategy would cost
between $20 million and $35 million prior to May 2003.
Sub-surface, non-aqueous petroleum liquids have been identified at both
power plant sites that are being acquired by WISVEST Connecticut, LLC.
Based upon recent, preliminary environmental studies, the Company currently
estimates that it will incur approximately $2.7 million during the three
years ending December 31, 2001 to treat and remediate these sites. These
expenditures are expected to bring the two sites into compliance with
applicable standards in the State of Connecticut.
Expenditures for environmental compliance and remediation issues noted
above are included in anticipated construction expenditures described in
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Analysis - "Liquidity and Capital Resources - Capital
Requirements."
For discussion of additional environmental issues, see Item 3. Legal
Proceedings - "Environmental Matters." For further information concerning
the EPA's final ozone transport rules, see "Factors Affecting Results of
Operations - Environmental Matters" in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations. For further
information concerning WISVEST Connecticut, LLC's acquisition of the two
Connecticut power plants, see Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Analysis - "Liquidity and Capital
Resources - Capital Requirements" and "Note L - Commitments and
Contingencies" in Wisconsin Energy's Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data.
SOLID WASTE LANDFILLS
Wisconsin Electric and Edison Sault provide for the disposal of non-ash
related solid wastes and hazardous wastes through licensed independent
contractors, but federal statutory provisions impose joint and several
liability on the generators of waste for certain cleanup costs.
Remediation-related activity pertaining to specific sites is discussed
below.
ETSM PROPERTY/CITY OF WEST ALLIS: See Item 3. Legal Proceedings -
"Environmental Matters" for information concerning iron cyanide-bearing
wastes found at two sites in West Allis, Wisconsin.
MANISTIQUE RIVER/HARBOR AREA: In 1993, Wisconsin Electric and Edison
Sault received independent notifications from the EPA that they were being
named Potentially Responsible Parties ("PRPs") at the Manistique River /
Harbor Area of Concern in Manistique, Michigan. The EPA, with the MDNR,
had identified the Manistique River and Harbor as an Area of Concern due to
polychlorinated biphenyl (more commonly known as "PCB") contamination that
had been found in the area.
In 1993 and again in 1995, Wisconsin Electric responded to information
requests from the EPA concerning Wisconsin Electric's PCB and oil filled
equipment management in the Manistique River drainage basin. Wisconsin
Electric has no reason to believe that it is responsible in total or in
part for the PCB contamination in the Manistique River/Harbor Area of
Concern. Wisconsin Electric has not heard anything from the EPA regarding
this site since 1995.
Edison Sault submitted an Environmental/Cost Analysis to the EPA that
provided an analysis of six alternative methods of remediation and
ultimately recommended a remediation method of in-place capping. Edison
Sault believed this to be the most prudent course of action. During 1995
and 1996, the EPA agreed to allow active PRP's to remediate the harbor
through in-place capping at a cost of $6.4 million, with Edison Sault's
portion costing $3.2 million. Through further negotiations, the EPA and
the active PRP's agreed to a cash-out settlement under which the active
PRP's would pay to the EPA the $6.4 million cost of capping for the right
to be absolved from any future legal actions concerning PCB contamination.
To effect this settlement, all parties executed an Administrative Order on
Consent in December 1996, with payments made to the EPA prior to year-end
1996.
Edison Sault incurred a total cost of $3.6 million related to this matter.
Edison Sault has retained legal assistance to initiate a process of
recovering these costs from several insurance entities. Although four of
seven named insurers have settled to date with Edison Sault and legal
actions continue against the remaining insurers, Edison Sault can not
predict the certainty and magnitude of total insurance recoveries at this
time.
MARINA CLIFFS BARREL DUMP SITE: Wisconsin Electric received a special
notice letter and information request on March 25, 1994 from the WDNR. The
letter described a release of hazardous substances at a former barrel
reclamation facility and landfill site, and requested information on any
business dealings Wisconsin Electric may have had with this former
operation. Wisconsin Electric responded to this request in April 1994. An
additional request for information, or PRP letter, was received on
March 24, 1995. Wisconsin Electric responded to this request in April 1995.
Since that time a number of follow-up contacts have been made with the EPA.
Wisconsin Electric has no reason to believe that it is responsible for the
contamination problems at this site, but the EPA has identified Wisconsin
Electric as a De Minimis Party. The EPA has undertaken remediation
activities at the site. The first phase of such remediation has been
substantially completed. Recently, local residents have voiced concern
regarding use of the site. This publicity has led to additional fencing at
the site and may affect the remediation time table.
Wisconsin Electric has received an executed Buyout Agreement from major
participants at this site. Under the agreement, those participants have
assumed responsibility to complete the clean-up required by the EPA at this
site in return for Wisconsin Electric's payment of $30,000.
TRINITY CHEMICALS SITE: In late 1997, Edison Sault was notified by the
EPA that investigations were being conducted at the Trinity Chemicals site
in Kansas City, Missouri, to which Edison Sault may have shipped PCB-
related materials during the 1980's under legal, appropriate and accepted
industry standards. Edison Sault has answered various EPA interrogatories
which showed that Edison Sault appeared to have been a very minor
contributor to this site and has signed an Administrative Order of Consent,
paid a minimal and final assessment and has been released by the EPA from
future activities related to this site.
WEST AVENUE LANDFILL: Wisconsin Electric has been informed by the City of
Waukesha ("Waukesha") that it has been identified as a "responsible party"
at a former Waukesha landfill which Waukesha will be remediating under
Wisconsin state law. Waukesha has further indicated that it intends to
invoke a new statutory negotiation procedure to attempt to obtain
consensual agreement regarding responsible parties and cost sharing for the
remediation. Waukesha has hired a private environmental allocation
consultant to apportion cost shares in an attempt to promote voluntary
settlement. The consultant has issued a preliminary allocation report in
which assignment of a zero share was given to Wisconsin Electric. The
matter is pending.
ASH LANDFILLS
Wisconsin Electric aggressively seeks environmentally acceptable,
beneficial uses for its combustion products. However, combustion products
have been, and to some degree continue to be, disposed of in company-owned,
licensed landfills. Some landfills may allow the release of low levels of
constituents resulting in the need for various levels of remediation.
Where Wisconsin Electric has become aware of these conditions, efforts have
been expended to define the nature and extent of any release, and work has
been performed to address these conditions. The costs of these efforts are
included in the environmental operating and maintenance costs for Wisconsin
Electric. Sites currently undergoing remediation include:
CEDAR SAUK LANDFILL: During 1997, Wisconsin Electric completed
installation of an upgraded cover to the closed Cedar-Sauk landfill,
located in the Town of Cedarburg, Wisconsin. In addition to a new cover,
the existing groundwater pumping system was removed from service. The
project was completed below the projected cost estimate of $4.5 million.
Future expenses at the site are expected to be minimal.
HIGHWAY 59 LANDFILL: In 1989, a sulfate plume was detected in the
groundwater beneath a Wisconsin Electric-owned former ash landfill located
in the Town of Waukesha, Wisconsin. After notifying the WDNR, Wisconsin
Electric initiated a five-year expanded monitoring program. In July 1995,
Wisconsin Electric prepared an environmental contamination assessment of
the landfill and submitted the report to the WDNR. Wisconsin Electric has
petitioned the City of Waukesha to extend city water service to residents
of the Town of Waukesha affected by contamination from site. The City
Council has agreed to extend service at Wisconsin Electric's cost. In
addition to providing city water to the nine affected residents, Wisconsin
Electric anticipates excavating saturated ash from and capping the
landfill. Total remediation cost for the site is anticipated to be
$6 million.
KANSAS AVE. LANDFILL: The Kansas Ave. site, located in the City of
St. Francis, Wisconsin, was a small landfill area used to support the
operations of Wisconsin Electric's former Lakeside Power Plant. Wisconsin
Electric has entered into an agreement with the WDNR to place a cover over
the former ash landfill site. Expenses associated with a cover
installation are expected to be minimal. No groundwater treatment is
planned at this time.
OAK CREEK NORTH LANDFILL: Groundwater impacts at this landfill, located
in the City of Oak Creek, Wisconsin, prompted Wisconsin Electric to
investigate, during 1998, the condition of the existing cover and other
conditions at the site. Wisconsin Electric and the WDNR are currently
evaluating the results of this investigation. Cover upgrades, leachate
collection (if required) and possible site development will most likely
take place in the year 2000 at the earliest. No cost estimates for this
site will be developed until a work scope is finalized as a result of the
ongoing investigation.
PLEASANT PRAIRIE LANDFILL: A groundwater investigation at this site was
completed in 1997, and Wisconsin Electric is designing an alternative
system for surface water drainage and implementing modification to the
operations of the landfill, located in the Village of Pleasant Prairie,
Wisconsin, to address an isolated area of groundwater contamination.
Financial impacts to Wisconsin Electric are projected to be minimal.
MANUFACTURED GAS PLANT SITES
Wisconsin Electric is reviewing and addressing environmental conditions at
a number of former manufactured gas plant sites. See "Note L - Commitments
and Contingencies" in the Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data.
AIR QUALITY
The 1990 amendments to the Federal Clean Air Act mandate significant
nationwide reductions in air emissions. The most significant sections of
this law to the country's electric utilities are the acid rain and ozone
nonattainment provisions The acid rain provisions are scheduled to limit
sulfur dioxide and nitrogen oxide emissions in phases. Phase I became
effective in 1995 and Phase II will take effect in the year 2000. The
Company has met the requirements of Phase I. The Phase II requirements of
the 1990 amendments to the Federal Clean Air Act are expected to have
minimal future impacts on the Company's utilities because of existing cost
effective compliance strategies and previous actions taken.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations -
Environment Matters" for information concerning National Ambient Air
Quality Standards established during 1997 by the EPA and final ozone
transport rules promulgated by the EPA during 1998.
OTHER
YEAR 2000 TECHNOLOGY ISSUES: See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Year 2000 Technology Issues" for
information concerning the Company's efforts to examine and modify existing
software application and operational programs and hardware that are date
sensitive and may not be "Year 2000 Ready."
RESEARCH AND DEVELOPMENT: Research and development expenditures by
Wisconsin Electric amounted to $7.5 million in 1998, $8.5 million in 1997
and $5.7 million in 1996. Such expenditures were primarily for improvement
of service and abatement of air and water pollution. Research and
development activities include work done by employees, consultants and
contractors, plus sponsorship of research by industry associations.
EMPLOYEES: As of December 31, 1998, the Company added approximately 650
employees compared to December 31, 1997, including approximately 600 new
employees at Wisconsin Electric. About half of the new employees at
Wisconsin Electric replaced existing contract employees, including 210 from
Upper Peninsula Power Company, an unaffiliated investor owned utility which
operated Presque Isle Power Plant under contract since Wisconsin Electric
acquired the plant in 1987. Wisconsin Electric added additional employees
during 1998 to fill vacant positions that occurred while Wisconsin Energy
was pursuing a merger with Northern States Power Company and to support key
areas such as nuclear operations as well as customer and information
services. The acquisition of Edison Sault during 1998 added approximately
70 employees who did not work for the Company during 1997. At December 31,
1998, the following number of individuals were employed by Wisconsin Energy
and its subsidiaries.
Full Time Part Time Total
--------- --------- -----
Utility
Wisconsin Electric 5,111 151 5,262
Edison Sault 68 3 71
----- ----- -----
Total Utility 5,179 154 5,333
Non-Utility 68 3 71
----- ----- -----
Total Employees 5,247 157 5,404
===== ===== =====
Of these employees, the following number of individuals were represented
under labor agreements with the following bargaining units as of
December 31, 1998.
<TABLE>
<CAPTION>
Expiration Date of Current
Number of Employees Labor Agreement
-------------------- --------------------------
<S> <C> <C>
Wisconsin Electric
Local 2150 of International
Brotherhood of Electrical Workers 2,564 August 15, 2001
Local 317 of International
Union of Operating Engineers 501 January 1, 2000
Local 12005 of United
Steel Workers of America 193 November 3, 2001
Local 7-0111 of Paper, Allied-
Industrial Chemical & Energy
Workers International Union 67 November 3, 2001
Local 510 of International
Brotherhood of Electrical Workers 158 May 1, 2000
-----
Total Wisconsin Electric 3,483
Edison Sault
Local 13457 of United
Steel Workers of America 49 October 31, 2001
Non-Utility -
-----
Total Employees 3,532
=====
</TABLE>
For anticipated employee additions during 1999, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Outlook."
ITEM 2. PROPERTIES
The principal properties of Wisconsin Energy and its subsidiaries are owned
in fee except that the major portion of utility electric transmission and
distribution lines and steam distribution mains and gas distribution mains
and services are located, for the most part, on or in streets and highways
and on land owned by others. Substantially all utility plant is subject to
first mortgage liens.
WISCONSIN ELECTRIC: Wisconsin Electric owns the following generating
stations with 1998 capabilities as indicated.
<TABLE>
<CAPTIONS>
Dependable Capability
No. of In Megawatts (a)
Generating August December
Name Fuel Units 1998 1998
- ---- ------- ---------- ------ --------
<S> <C> <C> <C> <C>
Steam Plants
Point Beach (b) Nuclear 2 1,000 1,010
Oak Creek Coal 4 1,135 1,139
Presque Isle Coal 9 617 617
Pleasant Prairie Coal 2 1,200 1,210
Port Washington Coal 4 326 327
Valley Coal 2 267 227
Edgewater (c) Coal 1 98 98
Milwaukee County Coal 3 11 11
-- ----- -----
Total Steam Plants 27 4,654 4,639
Hydro Plants (15 in number) 37 63 67
Germantown Combustion Turbines Oil 4 212 252
Concord Combustion Turbines Gas/Oil 4 332 376
Paris Combustion Turbines Gas/Oil 4 332 376
Other Combustion Turbines & Diesel Gas/Oil 6 59 75
-- ----- -----
Total System 82 5,652 5,785
== ===== =====
<FN>
(a) Dependable capability is the net power output under average operating
conditions with equipment in an average state of repair as of a
given month in a given year. Changing seasonal conditions are
responsible for the different capabilities reported for the winter and
summer periods in the above table. The values were established
by test and may change slightly from year to year.
(b) During an outage that began in December 1998, Wisconsin Electric
replaced Unit 2's low pressure turbine rotors which is expected
to increase its maximum dependable capability from 500 to
approximately 510 megawatts. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Nuclear Matters."
(c) Wisconsin Electric has a 25% interest in Edgewater 5 Generating Unit,
which is operated by Wisconsin Power and Light Company, an
unaffiliated utility.
</TABLE>
At December 31, 1998, Wisconsin Electric's electric transmission and
distribution system had 2,855 miles of transmission circuits, of which
639 miles were operating at 345 kilovolts, 123 miles at 230 kilovolts,
1,704 miles at 138 kilovolts, and 394 miles at voltage levels less than 138
kilovolts. At December 31, 1998, Wisconsin Electric was operating 21,927
pole miles of overhead distribution lines and 16,295 miles of underground
distribution cable, as well as 350 distribution substations and 233,726
line transformers.
As of December 31, 1998, the gas distribution system included approximately
7,895 miles of mains connected at 21 gate stations to the pipeline
transmission systems of ANR Pipeline Company, Natural Gas Pipeline Company
of America and Northern Natural Pipeline Company. Wisconsin Electric has a
liquefied natural gas storage plant which converts and stores in liquefied
form natural gas received during periods of low consumption. The liquefied
natural gas storage plant has a send-out capability of 70,000 dekatherms
per day. Wisconsin Electric also has propane tanks for peaking purposes.
These tanks will provide approximately 7,000 dekatherms of supply to the
system.
At December 31, 1998, the combined steam systems supplied by the Valley and
Milwaukee County Power Plants consisted of approximately 43 miles of both
high pressure and low pressure steam piping, 8.8 miles of walkable tunnels
and other pressure regulating equipment.
Wisconsin Electric owns various office buildings and service centers
throughout its service area.
EDISON SAULT: Edison Sault's major source of electric energy is its
29.8 megawatt hydroelectric generating plant on the St. Marys River in
Sault Ste. Marie, Michigan. In addition, Edison Sault owns and operates a
4.8 megawatt diesel-fired peaking power plant.
Edison Sault owns two 138 kilovolt submarine transmission cable circuits
which interconnects with Consumers Power Company in the Lower Peninsula of
Michigan, as well as two 138 kilovolt substations which interconnect with a
46 mile, 138 kilovolt transmission line owned and operated by Cloverland
Electric Cooperative. In total, Edison Sault had 282 miles of transmission
line in service as of December 31, 1998 and maintained 792 miles of
primary distribution lines. Edison Sault renders service to its customers
through approximately 8,600 line transformers.
NON-UTILITY: Wispark properties include the following commercial and
industrial parks in the State of Wisconsin: LakeView, located near
Kenosha; GrandView in Racine County, RidgeView in Pewaukee; and Westridge
in New Berlin. Wispark also owns Gaslight Pointe, a residential and
commercial complex located in Racine, the Radisson Hotel and Conference
Center in Kenosha plus other properties located in Wisconsin Electric's
service territories that are held for future development. Wispark is also
developing other real estate property located in the States of California,
Illinois and Minnesota.
Wisvest owns a chilled water production and distribution facility located
in Milwaukee County, Wisconsin; Minergy owns a glass aggregate facility
located in Neenah, Wisconsin; and Badger Service Company holds rights to
coal in an area of 8,568 acres in Knox County, Indiana.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and certain local laws and
regulations governing the environmental aspects of its operations. The
Company believes that, with immaterial exceptions, its existing facilities
are in compliance with applicable environmental requirements.
See Item 1. Business - "Environmental Compliance", which is incorporated by
reference herein, for a discussion of matters related to certain solid
waste and ash landfills, manufactured gas plant sites, and air quality.
ETSM PROPERTY/CITY OF WEST ALLIS: Iron cyanide-bearing wastes, believed
to be manufactured gas plant process wastes, were found at two sites in
West Allis, Wisconsin. One site is on property formerly owned by Kearney
and Trecker, which was sold to others (including Wisconsin Electric) prior
to the discovery of the wastes, and the other is the "Greenfield Avenue"
site, owned by the City of West Allis. Several years ago, materials were
removed from the "Kearney & Trecker" site, with Wisconsin Electric and the
other current owners paying for disposal of materials found on their
respective portions of the site.
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, alleging that Wisconsin Electric was
responsible for the deposition of the material and liable to the
plaintiffs. Investigations into the potential source of the waste lead
Wisconsin Electric to believe that it was not the source of this waste.
Wisconsin Electric has joined Wisconsin Gas Company, an unaffiliated
natural gas utility which had extensive gas manufacturing operations in the
Milwaukee area, as a third party defendant. Trial in this matter is
scheduled for June 1999.
Wisconsin Electric has been named a defendant in a second action relating
to the waste material at the "Kearny and Trecker" site. That action is a
contract action brought by an environmental remediation contractor for
payment for investigative work for Giddings and Lewis. Giddings and Lewis
counterclaimed because of the non-discovery of the material. The
contractor joined Wisconsin Electric on a contribution theory. The court
has issued a decision in this matter which denies Giddings & Lewis any
substantial recovery from the remediation contract or the counterclaim by
Giddings and Lewis. That decision is on appeal. If upheld, Wisconsin
Electric will have no liability in this proceeding.
RATE MATTERS
WISCONSIN RETAIL JURISDICTION: See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Rates and Regulatory Matters" for
information concerning (1) rate orders issued by the PSCW for the 1996,
1997 and 1998 test years, (2) an interim rate order issued by the PSCW for
the 1998 test year, (3) Wisconsin's fuel cost adjustment procedure, (4) a
fuel surcharge approved by the PSCW during 1997, (5) approval by the PSCW
during 1997 for Wisconsin Electric to defer certain excess non-fuel nuclear
operation and maintenance costs, and (6) Wisconsin's purchase gas
adjustment mechanism.
MICHIGAN RETAIL ELECTRIC JURISDICTION: See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Rates and Regulatory Matters"
for information concerning (1) 1998 test year information filed by
Wisconsin Electric with the MPSC, (2) a Wisconsin Electric rate order
issued by the MPSC for the 1996 test year, (3) Edison Sault's temporary
price cap approved by the MPSC, and (4) Michigan's Power Supply Cost
Recovery Clause.
WHOLESALE ELECTRIC JURISDICTION: Some customers served under Wisconsin
Electric's and Edison Sault's wholesale rates are subject to automatic fuel
adjustment or purchased power pass through provisions to reflect varying
fuel and purchased power costs.
OTHER MATTERS
MINERGY GLASS AGGREGATE PLANT SUIT: In 1996, three individuals and two
environmental organizations filed an action in Circuit Court for Winnebago
County against Minergy Corp., a non-utility subsidiary of Wisconsin Energy;
the City of Neenah, Wisconsin; and a paper company, challenging the
legality of the City's lease of certain land to Minergy for construction
and operation of a facility that recycles paper sludge from area paper
mills into glass aggregate and steam. The plaintiffs alleged that the
lease violated the public trust doctrine under Wisconsin law and requested
that the court declare the lease a public nuisance and grant a permanent
injunction against construction of the facility. The court dismissed the
plaintiffs' complaint and Minergy completed construction of the facility,
placing it into commercial operation in April 1998. The plaintiffs
appealed the circuit court decision to the Wisconsin Court of Appeals which
certified the case to the Wisconsin Supreme Court. On July 2, 1998, the
Supreme Court reversed the decision of the circuit court, holding that the
plaintiffs may bring suit under a Wisconsin statute to abate a public
nuisance. The case was remanded to the circuit court which, on
February 23, 1999, issued a decision dismissing all claims against Minergy
and the other defendants.
PITTSBURG & MIDWAY CASE: In a matter brought before the FERC, Wisconsin
Electric filed an initial brief in July 1993 supporting its right to retain
coal reclamation costs collected through the wholesale fuel adjustment
clause in 1986 that it believes were prudently incurred in a settlement
with the Pittsburg & Midway Coal Mining Company. Of the total costs
involved, the portion recovered through the wholesale fuel clause amounts
to approximately $750,000. This filing was made in response to a FERC
audit staff determination that Wisconsin Electric should have applied for a
waiver for the FERC's fuel clause regulations in order to attempt to pass
through the wholesale portion of the settlement costs. On December 13,
1995, the administrative law judge issued an initial decision that
Wisconsin Electric was required to refund the portion of such cost
collected from its wholesale customers The administrative law judge's
initial decision found in favor of Wisconsin Electric with respect to the
prudence of the administration of the coal contracts. The matter is
pending before the full commission.
In November 1993, the FERC rejected Wisconsin Electric's request to be
allowed to recover, in wholesale rates in the future, the amount which may
have to be refunded to customers in the event of an unfavorable ruling in
the pending fuel adjustment clause proceeding concerning the Pittsburg &
Midway reclamation charges. In January 1994, Wisconsin Electric filed an
appeal with the U.S. Court of Appeals for the District of Columbia Circuit
regarding this rejection . The matter is pending.
POINT BEACH NUCLEAR PLANT: See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Nuclear Matters" for information
concerning the United States Department of Energy's breach of a contract
with Wisconsin Electric that required the United States Department of
Energy to begin permanently removing spent nuclear fuel from Point Beach by
January 31, 1998.
URANIUM ENRICHMENT CHARGES: On October 11, 1996, Wisconsin Electric and
six other utilities filed an action in the U.S. Court of Federal Claims
appealing a final October 1995 decision by the United States Department of
Energy's contracting officer, which denied claims of the utilities for
damages by reason of overcharges for uranium enrichment services provided
under Utility Services Contracts between October 1, 1992 and June 30, 1993.
The damages sought by Wisconsin Electric total $1.3 million. On
December 1, 1997, the government filed a motion for judgment on the
pleadings based upon a prior decision of the U.S. Court of Appeals for the
Federal Circuit in a related matter. On August 12, 1998, the U.S. Court of
Federal Claims granted the government's motion for summary judgment,
dismissing the utilities' complaint. On October 9, 1998, Wisconsin
Electric and the other utilities filed an appeal with the U.S. Court of
Appeals for the Federal Circuit. The matter is pending.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: On March 25, 1998,
Wisconsin International Electric Power, Ltd. ("WIEP") filed an action
against Wisconsin Electric in Milwaukee County Circuit Court 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 plant in Kimberly,
Wisconsin. The complaint in the action alleges that Wisconsin Electric
breached duties allegedly owed to WIEP, causing damages to WIEP in an
amount claimed to be at least $100 million. On April 15, 1998, Wisconsin
Electric filed an answer to the complaint denying liability. The case is
scheduled for trial in May 1999. On March 1, 1999, Wisconsin Electric
filed a motion for summary judgment and supporting papers on all but one
count of the complaint. The motion is pending. See "Note L - Commitments
and Contingencies" in the Notes to Financial Statements in Item 8.
Financial Statements and Supplementary Data for information related to the
Kimberly Cogeneration Equipment.
STRAY VOLTAGE: On July 11, 1996, the PSCW issued its final order
regarding the stray voltage policies of Wisconsin's investor owned
utilities. The PSCW order clarified the definition of stray voltage,
affirmed the level at which utility action is required, and appropriately
placed some of the responsibility for this issue in the hands of the
customer. Additionally, the order established a uniform stray voltage
tariff which delineates utility responsibility and provides for the
recovery of costs associated with unnecessary customer demanded services.
While this action has been beneficial in Wisconsin Electric's efforts to
manage this controversial issue, it has not had a significant impact on
Wisconsin Electric's financial position or results of operation.
In recent years, several actions by dairy farmers have been commenced or
claims made against Wisconsin Electric for loss of milk production and
other damages allegedly caused by stray voltage resulting from the
operation of its electrical system. At the present time, five such actions
are pending. Wisconsin Electric does not believe, however, that these or
any other claims thus far made or threatened against Wisconsin Electric by
reason of stray voltage will result in any substantial liability on its
part. Currently, there are no cases pending or threatened against Edison
Sault.
ELECTROMAGNETIC FIELDS: Claims have been made or threatened against
electric utilities across the country for bodily injury, disease or other
damages allegedly caused or aggravated by exposure to electromagnetic
fields associated with electric transmission and distribution lines.
Results of scientific studies conducted to date have not established the
existence of a causal connection between electromagnetic fields and any
adverse health affects. Wisconsin Electric and Edison Sault believe that
their facilities are constructed and operated in accordance with all
applicable legal requirements and standards. Currently, there are no cases
pending or threatened against Wisconsin Electric nor against Edison Sault.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Wisconsin Energy's nor Wisconsin
Electric's security holders during the fourth quarter of the fiscal year
covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANTS
The names, ages at December 31, 1998 and positions of the executive
officers of Wisconsin Energy and Wisconsin Electric are listed below along
with their business experience during the past five years. All officers
are appointed until they resign, die or are removed pursuant to the Bylaws.
There are no family relationships among these officers, nor is there any
agreement or understanding between any officer and any other person
pursuant to which the officer was selected.
Richard A. Abdoo (54): Chairman of the Board, President and Chief
Executive Officer of Wisconsin Energy
since 1991; Director of Wisconsin Energy
since 1988. Chairman of the Board and
Chief Executive Officer of Wisconsin
Electric, a subsidiary of Wisconsin
Energy, since 1990; Director of Wisconsin
Electric since 1989. Chairman of the
Board and Chief Executive Officer of
Wisconsin Natural Gas Company, a former
subsidiary of Wisconsin Energy that was
merged into Wisconsin Electric on
January 1, 1996, from 1990 through 1995;
Director of Wisconsin Natural Gas Company
from 1989 through 1995.
Richard R. Grigg (50): Vice President of Wisconsin Energy since
1995; Director of Wisconsin Energy since
1995. President and Chief Operating
Officer of Wisconsin Electric since 1995;
Chief Nuclear Officer, December 1996 to
March 1998; Group Executive and Vice
President, June to December 1994; Vice
President, 1990 to June 1994; Director of
Wisconsin Electric since 1994. President
and Chief Operating Officer of Wisconsin
Natural Gas Company during 1995; Director
of Wisconsin Natural Gas Company during
1995.
Calvin H. Baker (55): Treasurer and Chief Financial Officer of
Wisconsin Energy since 1996. Chief
Financial Officer of Wisconsin Electric
since 1996; Vice President - Finance of
Wisconsin Electric since 1994.
Charles T. Govin, Jr. (52): Vice President - Electric & Gas Operations
of Wisconsin Electric since December 1996;
Vice President - Gas Operations from
January to December 1996. Vice President
of Wisconsin Natural, September 1994 to
December 1995; General Manager of
Wisconsin Natural during 1994 and 1995;
Director of Wisconsin Natural Gas Company
June to December 1995.
Anne K. Klisurich (51): Controller of Wisconsin Energy since 1995.
Controller of Wisconsin Electric since
1994. Assistant Corporate Secretary of
Wisconsin Energy and Wisconsin Electric
from July 1997 to March 1998. Controller
of Wisconsin Natural Gas Company from 1994
through 1995.
Kristine M. Krause (44): Vice President - Fossil Operations of
Wisconsin Electric since 1994; Manager of
Valley Power Plant and Steam Services,
1992 to 1994.
David K. Porter (55): Senior Vice President of Wisconsin Electric
since 1989; Director of Wisconsin Electric
since 1989. Vice President of Wisconsin
Natural Gas Company from 1989 through 1995;
Director of Wisconsin Natural Gas Company
from 1988 through 1995.
Kristine A. Rappe (42): Vice President - Customer Services of
Wisconsin Electric since 1994; Regional
Manager of Customer Operations - Fox Valley
Region, 1991 to 1994.
Michael B. Sellman (51): Senior Vice President - Nuclear Power
Business Unit and Chief Nuclear Officer of
Wisconsin Electric since March 1998.
President, Main Yankee Atomic Power Company
from February 1997 to March 1998. Vice
President - Waterford Nuclear Plant, Entergy
Arkansas, Inc. from February 1996 to
February 1997; General Manager - River Bend
Nuclear Plant, Entergy Gulf States, Inc.
from September 1993 to February 1996.
Certain executive officers also hold offices in Wisconsin Energy's non-
utility subsidiaries.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1998, based on the number of Wisconsin Energy Corporation
stockholder accounts (including accounts in Wisconsin Energy's dividend
reinvestment and stock purchase plan), there were 94,645 registered
stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New York Stock
Exchange. The ticker symbol is WEC. Daily trading prices and volume can
be found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WiscEn or WiscEngy.
DIVIDENDS AND COMMON STOCK PRICES
COMMON STOCK DIVIDENDS OF WISCONSIN ENERGY: Cash Dividends on Wisconsin
Energy's common stock, as declared by the Board of Directors, are normally
paid on or about the first day of March, June, September and December.
RANGE OF WISCONSIN ENERGY COMMON STOCK PRICES AND DIVIDENDS:
1998 1997
------------------------- ----------------------------
Quarter High Low Dividend High Low Dividend
- ------- ---- --- -------- ---- --- --------
First $31 $27 $ .385 $27-7/8 $23-1/4 $ .380
Second 31-11/16 28-1/2 .390 25-5/8 23 .385
Third 32 27-3/8 .390 26-1/4 23-1/2 .385
Fourth 34 30 .390 29-1/16 24-1/8 .385
------ ------
Year $34 $27 $1.555 $29-1/16 $23 $1.535
COMMON STOCK DIVIDENDS OF WISCONSIN ELECTRIC: Cash dividends declared on
Wisconsin Electric Power Company's common stock during the two most recent
fiscal years are set forth below. Dividends were paid to Wisconsin
Electric's sole common stockholder, Wisconsin Energy.
Total Dividend
--------------
Quarter 1998 1997
------- ---- ----
First $ 44,322,000 $ 80,726,000
Second 44,893,000 44,322,000
Third 44,893,000 44,322,000
Fourth 44,893,000
44,322,000
------------ ------------
Total $179,001,000 $213,692,000
============ ============
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
(Thousands of Dollars except for per share amounts)
Financial 1998 1997 1996 1995 1994
- ------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Net income $ 188,132 $ 60,716 (a) $ 218,135 $ 234,034 $ 180,868 (b)
Earnings per share of common
stock ($; basic and diluted) 1.65 0.54 (a) 1.97 2.13 1.67 (b)
Dividends per share of
common stock ($) 1.555 1.535 1.5075 1.455 1.39625
Operating revenues
Electric $1,663,632 $1,412,115 $1,393,270 $1,437,480 $1,403,562
Gas 295,848 355,172 364,875 318,262 324,349
Steam 20,506 22,315 15,675 14,742 14,281
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,979,986 $1,789,602 $1,773,820 $1,770,484 $1,742,192
========== ========== ========== ========== ==========
At December 31
Total assets $5,361,757 $5,037,684 $4,810,838 $4,560,735 $4,408,259
Long-term debt and preferred
stock - redemption required $1,749,024 $1,532,405 $1,416,067 $1,367,644 $1,283,686
Sales and Customers - Utility 1998 1997 1996 1995 1994
- ------------------------------ ---- ---- ---- ---- ----
Electric
Megawatt-hours sold 29,940,384 27,671,946 27,560,428 27,283,869 26,911,363
Customers (End of year) 1,010,318 978,835 968,735 955,616 944,855
Gas
Therms delivered (Thousands) 922,836 983,676 936,894 886,729 811,219
Customers (End of year) 388,478 376,732 367,275 357,030 347,080
Steam
Pounds sold (Millions) 2,773 3,161 2,705 2,532 2,395
Customers (End of year) 454 474 465 473 471
<CAPTION>
CONSOLIDATED QUARTERLY FINANCIAL DATA
(Thousands of Dollars except for per share amounts)
March June
--------------------- -------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $510,681 $510,383 $464,968 $403,214
Operating income 67,411 65,637 55,058 31,716
Net income 49,048 45,069 28,854 (10,632)
Earnings per share of common
stock ($; basic and diluted) 0.43 0.40 0.25 (0.09)
<CAPTION>
September December
--------------------- --------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $506,330 $400,614 $498,007 $475,391
Operating income 83,867 46,441 70,367 55,665
Net income 58,176 23,975 52,054 2,304
Earnings per share of common
stock ($; basic and diluted) 0.50 0.21 0.45 0.02
<FN>
Quarterly results of operations are not directly comparable because of seasonal and other factors.
See Management's Discussion and Analysis of Financial Condition and Results of Operations.
(a) Includes May 1997 nonrecurring $31 million charge ($19 million net of tax or $.17 per share)
to write-off deferred merger costs related to the terminated merger agreement with Northern
States Power Company and December 1997 $30 million write-down $18 million net of tax
or $.16 per share) of equipment purchased for the Kimberly Cogeneration Project.
(b) Includes 1994 nonrecurring $74 million charge ($45 million net of tax or $.42 per share)
for Wisconsin Electric Power Company's restructuring program.
</TABLE>
<TABLE>
<CAPTION>
WISCONSIN ELECTRIC POWER COMPANY
SELECTED FINANCIAL DATA
(Thousands of Dollars)
Financial 1998 1997 1996 1995 1994
- --------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Earnings available for
common stockholder $ 182,971 $ 69,412 (a) $ 210,112 $ 239,465 $ 180,403 (b)
Operating revenues
Electric $1,641,403 $1,412,115 $1,393,270 $1,437,480 $1,403,562
Gas 295,848 355,172 364,875 318,262 324,349
Steam 20,506 22,315 15,675 14,742 14,281
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,957,757 $1,789,602 $1,773,820 $1,770,484 $1,742,192
========== ========== ========== ========== ==========
At December 31
Total assets $4,768,942 $4,667,840 $4,507,160 $4,318,924 $4,202,193
Long-term debt and preferred
stock - redemption required $1,512,531 $1,448,558 $1,371,446 $1,325,169 $1,257,776
Sales and Customers - Utility 1998 1997 1996 1995 1994
- -------------------------------- ---- ---- ---- ---- ----
Electric
Megawatt-hours sold 29,475,163 27,671,946 27,560,428 27,283,869 26,911,363
Customers (End of year) 988,929 978,835 968,735 955,616 944,855
Gas
Therms delivered (Thousands) 922,836 983,676 936,894 886,729 811,219
Customers (End of year) 388,478 376,732 367,275 357,030 347,080
Steam
Pounds sold (Millions) 2,773 3,161 2,705 2,532 2,395
Customers (End of year) 454 474 465 473 471
<CAPTION>
QUARTERLY FINANCIAL DATA
(Thousands of Dollars)
March June
--------------------- --------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $510,681 $510,383 $461,771 $403,214
Operating income 67,411 65,637 54,623 31,716
Earnings available for
common stockholder 49,995 43,386 31,071 (6,353)
<CAPTION>
September December
--------------------- --------------------
Three Months Ended 1998 1997 1998 1997 (a)
- ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $496,603 $400,614 $488,702 $475,391
Operating income 82,839 46,441 68,823 55,665
Earnings available for
common stockholder 57,956 22,321 43,949 10,058
<FN>
Quarterly results of operations are not directly comparable because of seasonal and other factors. See
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Earnings and dividends per share are not provided as all of Wisconsin Electric Power Company's common stock
is held by Wisconsin Energy Corporation.
(a) Includes May 1997 nonrecurring $22 million charge ($13 million net of tax) to write-off deferred merger
costs related to the terminated merger agreement with Northern States Power Company and
December 1997 $30 million write-down ($18 million net of tax) of equipment purchased for the Kimberly
Cogeneration Project.
(b) Includes 1994 nonrecurring $74 million charge ($45 million net of tax) for Wisconsin Electric Power
Company's restructuring program.
</TABLE>
ITEM 7. 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 ("Wisconsin Electric"), an
electric, gas and steam utility. Unless qualified by the context used in
this document, the terms "Wisconsin Energy" or the "Company" refer to the
holding company and all of its subsidiaries. As of December 31, 1998,
approximately 89% of the Company'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.
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired
ESELCO, Inc. ("ESELCO"), a holding company whose principal subsidiary was Edison
Sault Electric Company ("Edison Sault"), 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. Wisconsin Energy is operating Wisconsin Electric and Edison Sault,
an electric utility, as separate subsidiaries within their historical service
territories. The discussion that follows below includes Edison Sault's activity
since June 1, 1998. Wisconsin Electric and Edison Sault continue to be
separately regulated by their respective states. For additional information,
see "Factors Affecting Results of Operations - Mergers" below.
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 such 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 described below under "Factors Affecting
Results of Operations" and under "Cautionary Factors."
RESULTS OF OPERATIONS
See "Note K - Segment Reporting" in the Notes To Financial Statements for
additional information related to Wisconsin Energy's and Wisconsin Electric's
results of operations.
EARNINGS
1998 COMPARED TO 1997: During 1998, Wisconsin Energy's consolidated net income
and earnings per share of common stock were $188 million and $1.65,
respectively, compared to $61 million and $0.54 per share during 1997. Between
the comparative periods, Wisconsin Electric's earnings increased from
$69 million during 1997 to $183 million during 1998. As described in further
detail below, 1998 earnings increased primarily because increased revenues from
interim and final 1998 retail rate increases for Wisconsin Electric's customers
in the State of Wisconsin and from an increase in total 1998 electric kilowatt-
hour sales more than offset the effects of reduced natural gas therm deliveries
as well as the effects of increased operating expenses during 1998.
Strengthened performance at Wisconsin Electric's Point Beach Nuclear Plant
("Point Beach") also contributed to increased comparative earnings during 1998.
Comparative earnings during 1997 were negatively impacted by (1) a one-time
charge of $31 million at Wisconsin Energy ($19 million net of tax or 17 cents
per share) for the write-off of deferred costs related to Wisconsin Energy's
terminated merger agreement with Northern States Power Company, a Minnesota
corporation ("NSP"), (2) a one-time $30 million impairment charge at Wisconsin
Electric ($18 million net of tax or 16 cents per share) for its Kimberly
Cogeneration Equipment, and (3) increased costs beyond those included in
electric rates associated with buying replacement power for both generating
units at Point Beach, which were out of service during a large part of 1997.
1997 COMPARED TO 1996: Compared to consolidated net income of $218 million and
earnings per share of $1.97 during 1996, Wisconsin Energy's consolidated net
income and earnings per share were $61 million and $0.54 per share,
respectively, during 1997. Wisconsin Electric's earnings decreased from
$210 million in 1996 to $69 million in 1997. As described further below, 1997
earnings decreased primarily due to (1) significantly higher fuel and purchased
power expenses, (2) increased other operation and maintenance expenses,
(3) higher depreciation expense, (4) the one-time write-off in the second
quarter of 1997 of deferred costs related to Wisconsin Energy's terminated
merger agreement with NSP, (5) the one-time impairment charge in the fourth
quarter of 1997 for the write-down to fair value of Wisconsin Electric's
Kimberly Cogeneration Equipment, and (6) retail electric and gas rate decreases
that became effective in February 1997.
ELECTRIC REVENUES, GROSS MARGINS AND SALES
The following table summarizes Wisconsin Energy's and Wisconsin Electric's
electric revenues, gross margins, sales and customers for each of the three
years ended December 31, 1998.
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Electric Operations 1998 1997 to 1998 1996 to 1997
------------------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
WISCONSIN ENERGY:
Electric Gross Margin ($000's)
Total Operating Revenues $1,663,632 $1,412,115 17.8% $1,393,270 1.4%
Total Fuel & Purchased Power 461,365 444,655 3.8% 331,867 34.0%
---------- ---------- ----------
Gross Margin $1,202,267 $ 967,460 24.3% $1,061,403 (8.9%)
========== ========== ==========
Total Electric Sales (Mwh) 29,940,384 27,671,946 8.2% 27,560,428 0.4%
Total Average Customers 1,009,223 972,593 3.8% 962,020 1.1%
WISCONSIN ELECTRIC:
Electric Gross Margin ($000's)
Operating Revenues
Residential $ 571,378 $ 487,219 17.3% $ 494,142 (1.4%)
Small Commercial/Industrial 487,549 430,193 13.3% 421,511 2.1%
Large Commercial/Industrial 450,138 402,684 11.8% 383,047 5.1%
Other-Retail/Municipal 51,211 55,246 (7.3%) 56,318 (1.9%)
Resale-Utilities 60,927 24,538 148.3% 26,372 (7.0%)
Other Operating Revenues 20,200 12,235 65.1% 11,880 3.0%
---------- ---------- ----------
Total Operating Revenues 1,641,403 1,412,115 16.2% 1,393,270 1.4%
Fuel & Purchased Power
Fuel 308,374 311,966 (1.2%) 295,651 5.5%
Purchased Power 141,619 132,689 6.7% 36,216 266.4%
---------- ---------- ----------
Total Fuel & Purchased Power 449,993 444,655 1.2% 331,867 34.0%
---------- ---------- ----------
Gross Margin $1,191,410 $ 967,460 23.2% $1,061,403 (8.9%)
========== ========== ==========
Sales (Mwh)
Residential 7,327,024 6,863,569 6.8% 6,998,769 (1.9%)
Small Commercial/Industrial 7,612,397 7,433,087 2.4% 7,204,694 3.2%
Large Commercial/Industrial 11,391,979 11,021,476 3.4% 10,785,505 2.2%
Other-Retail/Municipal 1,287,162 1,412,623 (8.9%) 1,476,999 (4.4%)
Resale-Utilities 1,856,601 941,191 97.3% 1,094,461 (14.0%)
---------- ---------- ----------
Total Electric Sales 29,475,163 27,671,946 6.5% 27,560,428 0.4%
========== ========== ==========
Average Customers
Residential 886,635 876,776 1.1% 867,917 1.0%
Small Commercial/Industrial 94,675 93,259 1.5% 91,565 1.9%
Large Commercial/Industrial 720 714 0.8% 706 1.1%
Other-Retail/Municipal 1,804 1,811 (0.4%) 1,812 0.0%
Resale-Utilities 51 33 54.5% 20 65.0%
---------- ---------- ----------
Total Average Customers 983,885 972,593 1.2% 962,020 1.1%
========== ========== ==========
</TABLE>
1998 COMPARED TO 1997: Primarily due to retail electric rate increases during
1998 for Wisconsin Electric's customers in the State of Wisconsin and to an
increase in total 1998 electric kilowatt-hour sales, total electric operating
revenues increased by $252 million or 17.8% during 1998 compared to 1997.
Between the comparative periods, the gross margin on electric operating revenues
(total electric operating revenues less fuel and purchased power expenses)
increased by $235 million or 24.3%. The discussion that follows reflects
Wisconsin Electric's contribution to Wisconsin Energy's 1998 electric revenues,
gross margin and sales.
Wisconsin Electric's total electric operating revenues increased by $229 million
or 16.2% during 1998 compared to 1997 and the gross margin on electric operating
revenues increased by $224 million or 23.2%. Wisconsin Electric attributes
these increases to (1) an interim Wisconsin retail electric rate increase,
effective from January 1, 1998 through April 30, 1998, of $135 million on an
annualized basis, (2) a final Wisconsin retail electric rate increase, effective
May 1, 1998, of $160 million or 12.7% on an annualized basis, and (3) increased
total electric kilowatt-hour sales during 1998. The increase in gross margin
can also be partly attributed to a smaller rate of increase in total fuel and
purchased power costs during 1998 compared to the rate of increase in total
electric sales and electric operating revenues.
Total fuel and purchased power expenses at Wisconsin Electric increased by
$5 million or 1.2% compared to 1997. Increased availability of lower cost per
kilowatt-hour generating capacity at Point Beach during 1998 allowed Wisconsin
Electric to generate 11.3% more electricity while enjoying a 1.2% decrease in
fuel costs compared to 1997. However, despite a 17.7% decrease in megawatt-hour
power purchases between the comparative periods, purchased power expense
increased 6.7%, resulting in the net increase in total fuel and purchased power
expenses. Contributing to the increased purchased power expenses, Wisconsin
Electric arranged for the purchase of more reliable firm supplies of energy and
incurred a full twelve months of demand charges for the first time under a long-
term power purchase contract with LSP-Whitewater Limited Partnership ("LS
Power") during 1998, resulting in higher fixed contract and power transportation
costs. In addition, the per unit cost of wholesale electric energy fluctuated
more during 1998 compared to 1997, increasing the cost of certain spot market
purchases.
Total electric kilowatt-hour sales increased 6.5% during 1998 compared to 1997.
Increased use per customer by residential and large commercial/industrial
customers, combined with growth in the number of residential and small
commercial/industrial customers, contributed to the increase in total electric
kilowatt-hour sales. Warmer weather during the cooling load months of 1998 also
contributed to the increase in 1998 sales, especially to residential and small
commercial/industrial customers who tend to be more weather sensitive. Electric
energy sales to the Empire and Tilden ore mines, Wisconsin Electric's two
largest electric retail customers, increased 7.4% between the comparative
periods primarily due to a temporary shutdown of the Tilden mine during July and
August 1997. Excluding the Empire and Tilden ore mines, total 1998 electric
sales at Wisconsin Electric increased 6.4% and sales to the remaining large
commercial/industrial customers increased 2.3%. During 1998, sales in the other-
retail/municipal customer class decreased 8.9% primarily due to reduced
contractual requirements nominations, effective May 1997, by Wisconsin Public
Power Inc., Wisconsin Electric's largest municipal wholesale customer. This
customer had been reducing its purchases from Wisconsin Electric over the past
several years subsequent to acquiring generating capacity and expanding use of
its existing generation facilities. Mostly due to higher opportunity sales,
sales for resale to other utilities, the resale-utilities customer class,
increased 97.3% in 1998 compared to 1997.
1997 COMPARED TO 1996: Primarily due to a fuel surcharge in Wisconsin
Electric's electric retail jurisdiction in the State of Wisconsin, effective
May 24, 1997, total electric operating revenues increased by $19 million or 1.4%
during 1997 compared to 1996. Revenues from the fuel surcharge offset the
impact on electric operating revenues of a retail electric rate decrease in the
State of Wisconsin, effective February 18, 1997, of $7 million or 0.6% on an
annualized basis.
The gross margin on electric operating revenues decreased by $94 million or 8.9%
primarily due to significantly higher fuel and purchased power expenses.
Compared to 1996, fuel and purchased power expenses increased by $113 million or
34.0% during 1997 as a result of (1) extended outages at Point Beach, (2) an
extended maintenance outage at Oak Creek Power Plant that was concluded in June
1997, (3) delayed commercial operation of contractual generating capacity from
LS Power, and (4) higher costs per megawatt-hour of power purchases due to
regional generation outages. During 1997, Wisconsin Electric replaced its lost
generating capacity with higher cost generation and with a 218% increase in
megawatt-hours of power purchases. Partially offsetting the increased 1997 fuel
and purchased power expenses, Wisconsin Electric recorded $24 million of
revenues during 1997 as a result of the fuel surcharge. For further information
concerning the 1997 fuel surcharge and the extended outages at Point Beach, see
"Rates and Regulatory Matters" and "Nuclear Matters", respectively, below under
"Factors Affecting Results of Operations."
Total electric sales increased by 0.4% during 1997 compared to 1996. Increased
1997 sales to small commercial/industrial and to large commercial/industrial
customers were almost completely offset by decreased sales to customers in the
residential, the other-retail/municipal and resale-utilities customer classes.
Total 1997 electric sales were positively impacted by growth in the number of
customers in the residential, the small commercial/industrial and especially in
the large commercial/industrial customer classes and by increased use per
customer by small and by large commercial/industrial customers. Cooler weather
during the summer of 1997 compared to the summer 1996, however, primarily
contributed to lower use per residential customer and to the decrease in 1997
residential electric sales. Compared to 1996, electric energy sales to the
Empire and Tilden ore mines decreased by 5.4% in 1997 due to the temporary
shutdown in 1997 of the Tilden ore mine noted above. Excluding the Empire and
Tilden ore mines, total electric sales increased 1.0% and sales to the remaining
large commercial/industrial customers increased 4.3% between the comparative
periods.
1997 sales in the other-retail/municipal customer class decreased 4.4% compared
to 1996 primarily due to the continued phase out in 1997 of firm requirements
contracts totaling 12.5 megawatts with two wholesale customers and a reduction
of 30 megawatts in contractual requirements nominations during 1997 by Wisconsin
Public Power Inc.. Sales for resale to other utilities, the resale-utilities
customer class, decreased 14.0% primarily as a result of reduced opportunity
sales caused by the Point Beach and Oak Creek Power Plant outages mentioned
above.
GAS REVENUES, GROSS MARGINS AND THERM DELIVERIES
The following table summarizes Wisconsin Electric's gas operating revenues,
gross margins, therm deliveries and average customers for each of the three
years ended December 31, 1998.
<TABLE>
<CAPTION>
% Change % Change
1997 1996
Gas Operations 1998 1997 to 1998 1996 to 1997
-------------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Gas Gross Margin ($000's)
Operating Revenues
Residential $176,499 $221,968 (20.5%) $218,811 1.4%
Commercial/Industrial 87,899 113,609 (22.6%) 108,100 5.1%
Interruptible 7,003 8,970 (21.9%) 11,531 (22.2%)
Interdepartmental 138 3,096 (95.5%) 3,050 1.5%
-------- -------- --------
Total Gas Sales 271,539 347,643 (21.9%) 341,492 1.8%
Transported Customer Owned Gas 12,014 11,295 6.4% 11,006 2.6%
Transported - Interdepartmental 2,462 2,105 17.0% 725 190.3%
Other Operating Revenues 9,833 (5,871) 267.5% 11,652 (150.4%)
-------- -------- --------
Total Operating Revenues 295,848 355,172 (16.7%) 364,875 (2.7%)
Cost of Gas Sold 175,475 233,877 (25.0%) 234,254 (0.2%)
-------- -------- --------
Gross Margin $120,373 $121,295 (0.8%) $130,621 (7.1%)
======== ======== ========
Therms Delivered (000's)
Residential 289,509 347,859 (16.8%) 371,990 (6.5%)
Commercial/Industrial 182,033 211,453 (13.9%) 225,169 (6.1%)
Interruptible 22,872 24,532 (6.8%) 35,869 (31.6%)
Interdepartmental 398 9,696 (95.9%) 11,280 (14.0%)
-------- -------- --------
Total Gas Sales 494,812 593,540 (16.6%) 644,308 (7.9%)
Transported Customer Owned Gas 349,443 313,466 11.5% 268,163 16.9%
Transported - Interdepartmental 78,581 76,670 2.5% 24,423 213.9%
-------- -------- --------
Total Gas Delivered 922,836 983,676 (6.2%) 936,894 5.0%
======== ======== ========
Average Customers
Residential 347,747 339,002 2.6% 330,153 2.7%
Commercial/Industrial 31,586 30,594 3.2% 29,936 2.2%
Interruptible 146 170 (14.1%) 190 (10.5%)
Interdepartmental - 2 (100.0%) 4 (50.0%)
-------- -------- --------
Total Sales Customers 379,479 369,768 2.6% 360,283 2.6%
Transportation 271 254 6.7% 230 10.4%
Transportation - Interdepartmental 6 5 20.0% 4 25.0%
-------- -------- --------
Total Average Customers 379,756 370,027 2.6% 360,517 2.6%
======== ======== ========
</TABLE>
1998 COMPARED TO 1997: Despite an interim retail gas rate increase,
effective from January 1, 1998 through April 30, 1998, of $19 million on an
annualized basis and despite a final retail gas rate increase, effective
May 1, 1998, of $19 million or 5.4% on an annualized basis, total gas
operating revenues decreased by $59 million or 16.7% and the gross margin
on gas operating revenues (gas operating revenues less cost of gas sold)
decreased by $1 million or 0.8% during 1998 compared to 1997. Between the
comparative periods, the cost of gas sold decreased by $58 million or 25.0%
due to decreased gas sales and to a lower cost per unit of purchased gas.
Changes in the cost of natural gas purchased at market prices are included
in customer rates through the purchased gas adjustment mechanism, reducing
1998 operating revenues but not gross margin. See "Rates and Regulatory
Matters" below in "Factors Affecting Results of Operations" for additional
information concerning the purchased gas adjustment mechanism. Total gas
operating revenues and gross margin both declined in 1998 due to a decrease
in therm deliveries, especially to residential and commercial/industrial
customers who contribute higher margins to earnings than other customers.
Other operating revenues reflect adjustments for over and under collection
of gas costs included in operating revenues from gas sales.
Compared to the same period in 1997, total natural gas therm deliveries
decreased 6.2% during 1998 primarily due to significantly lower therm use
per residential and commercial/industrial customer. While the number of
residential and commercial/industrial customers increased between the
comparative periods, residential and commercial/industrial therm deliveries
decreased 16.8% and 13.9%, respectfully, due in large part to warmer
weather during the heating months of 1998. During 1998, therm deliveries
to the Whitewater Cogeneration Facility, owned by LS Power, an unaffiliated
independent power producer, primarily contributed to an 11.5% increase in
transported customer owned gas deliveries. The Whitewater Cogeneration
Facility, a gas-fired electric cogeneration plant in Wisconsin Electric's
gas service territory, went into commercial operation in September 1997.
Wisconsin Electric purchases the majority of the electricity generated by
the Whitewater Cogeneration Facility under a long-term power purchase
contract. During 1998, natural gas therm deliveries to the
interdepartmental customer classes decreased 8.6% primarily due to
increased availability of Point Beach, allowing Wisconsin Electric to
reduce generation at its Concord and Paris Power Plants, natural gas-fired
peaking facilities. Therm deliveries to the Concord and Paris Power Plants
are at rates approved by the Public Service Commission of Wisconsin
("PSCW"). Excluding deliveries to Wisconsin Electric's facilities, total
therm deliveries during 1998 decreased 6.0% compared to 1997.
1997 COMPARED TO 1996: Total gas operating revenues decreased by
$10 million or 2.7% during 1997 compared to 1996, and the gross margin on
gas operating revenues decreased by $9 million or 7.1%. Total gas
operating revenues and gross margin declined primarily due to an annualized
gas retail rate decrease, effective February 18, 1997, of $6 million or
2.0% on an annualized basis and to a weather-related decrease in therm
deliveries to residential and commercial/industrial customers. As noted
above, other operating revenues reflect adjustments for over and under
collection of gas costs included in operating revenues from gas sales.
Cost of gas sold was unchanged between the comparative periods. An 8.4%
increase in 1997 in the per unit cost of purchased gas was offset by a 7.9%
decrease in total gas purchases during 1997. Wisconsin Electric arranges
for its own gas supply contracts with terms of various lengths. As noted
above, changes in the cost of natural gas purchased affect operating
revenues due to the purchased gas adjustment mechanism but do not affect
gross margin.
Total natural gas therm deliveries increased by 5.0% in 1997 compared to
1996. Decreased deliveries to the residential, the commercial/industrial
and the interruptible customer classes during 1997 were more than offset by
increased interdepartmental deliveries to Wisconsin Electric-owned gas-
fired generating facilities and increased deliveries of transported -
customer owned gas. Despite an increase in the average number of
residential and commercial/industrial customers during 1997 compared to
1996, deliveries to these two customer classes decreased between the
comparative periods primarily due to warmer weather during the 1997 heating
seasons. These customers are more sensitive to weather variations as a
result of heating requirements and contribute higher margins to earnings
than other customer classes. Therm deliveries to interruptible customers
decreased during 1997 compared to 1996 due to a decrease in the average
number of interruptible customers and the average therm use per
Interruptible customer.
Deliveries of transported - customer owned gas increased by 16.9% during
1997 compared to 1996 due to an increase in the average number of transport
customers and to an increase in the average therm use per transport
customer. During 1997, a number of sales customers switched to become
transportation customers. Also, increased deliveries of transported -
customer owned gas in 1997 reflect start-up in September 1997 of commercial
operations of LS Power's Whitewater Cogeneration Facility.
Due to the Point Beach and Oak Creek plant outages noted above, Wisconsin
Electric increased generation at its natural gas-fired Concord and Paris
Power Plants, resulting in a 142% increase in total 1997 interdepartmental
deliveries compared to 1996. Excluding interdepartmental deliveries, total
1997 therm deliveries decreased 0.8% compared to 1996.
For further information concerning Wisconsin Electric's 1996, 1997 and 1998
Rate Orders, see "Rates and Regulatory Matters" below under "Factors
Affecting Results of Operations."
OPERATING EXPENSES
1998 COMPARED TO 1997: During 1998, Wisconsin Energy's other operation
and maintenance expenses increased by $107 million or 19.7% compared to
1997, including a $49 million increase in Wisconsin Electric's nuclear non-
fuel expenses, a $40 million increase in Wisconsin Electric's
administrative and general expenses, an $11 million increase in Wisconsin
Electric's electric distribution expenses and a $10 million increase in
Wisconsin Electric's non-nuclear, non-fuel power generation expenses.
Nuclear non-fuel expenses increased during 1998 primarily due to efforts by
Wisconsin Electric to continue to improve the overall performance at Point
Beach. Also influencing the 1998 increase in nuclear non-fuel expenses,
Wisconsin Electric deferred $18 million of nuclear non-fuel operation
expenses during 1997 and began amortizing these deferred costs to expense
in 1998 on a five-year straight line basis. See "Nuclear Matters" below in
"Factors Affecting Results of Operations" for additional information
concerning Wisconsin Electric's Point Beach Nuclear Plant. Administrative
and general expenses increased during 1998 primarily due to efforts to
resolve Year 2000 technology issues, to various other corporate technology
improvement efforts and to increased staffing and higher employee pension
and benefit expenses. For further information, see "Year 2000 Technology
Issues" below in "Factors Affecting Results of Operations." Electric
distribution expenses increased in large part as a result of damage from an
unusually high number of violent storms that struck Wisconsin Electric's
service territory during 1998 and as a result of increased tree
trimming/forestry efforts intended to improve reliability of the electric
distribution system. Non-nuclear, non-fuel power generation expenses
increased primarily due to a scheduled maintenance outage at Wisconsin
Electric's Oak Creek Power Plant during the second quarter of 1998 and to
other reliability improvement efforts.
The increase in depreciation expense during 1998 is the net result of
several factors at Wisconsin Electric. Depreciation expense increased as a
result of increased (1) depreciable plant during 1998, (2) amortizable
software during 1998, and (3) decommissioning expenses during 1998 compared
to 1997. This was offset to a large extent by a change in the regulatory
accounting treatment of pre-1991 contribution in aid of construction
balances, which had the effect of reducing current year depreciation
expense. For further information, see "Note C - Depreciation" in the Notes
to Financial Statements. Total operating income taxes increased as a
result of higher taxable income.
1997 COMPARED TO 1996: During 1997, Wisconsin Energy's other operation
and maintenance expenses increased by $48 million or 9.6% compared to 1996,
including a $33 million increase in non-fuel nuclear expenses, an
$11 million increase in administrative and general expenses and an
$8 million increase in transmission system expenses. Non-fuel nuclear
expenses increased during 1997 due to extended and unscheduled generating
unit outages at Point Beach and due to efforts by Wisconsin Electric's
nuclear operations to strengthen plant performance. During 1997,
administrative and general expenses increased primarily due to higher
salaries and outside services employed, and transmission expenses increased
due to significantly higher 1997 power purchases. An $11 million decrease
in customer service expenses during 1997, primarily due to reduced
conservation expenses, partially offset the higher 1997 other operation and
maintenance expenses.
Depreciation expense increased between the comparative periods primarily
due to higher depreciable plant balances in 1997 and to higher depreciation
rates included in the PSCW's 1997 Rate Order. Total operating income taxes
decreased as a result of lower taxable income.
During 1997, Wisconsin Electric deferred $18 million of nuclear non-fuel
operation and maintenance costs under authority granted by the PSCW in July
1997. For further information concerning Wisconsin Electric's deferred
nuclear non-fuel operation and maintenance costs, see "Note F - Nuclear
Operations" in the Notes to Financial Statements.
OTHER ITEMS
1998 COMPARED TO 1997: During the second quarter of 1997, Wisconsin
Energy recorded a one-time $31 million charge to write off deferred merger
costs related to the terminated merger agreement with NSP of which
$22 million was attributable to Wisconsin Electric. Also during 1997,
Wisconsin Energy recorded $1 million of merger expenses related to the
acquisition of ESELCO. For further information concerning the terminated
merger with NSP and the acquisition of ESELCO, see "Mergers" below under
"Factors Affecting Results of Operations."
Miscellaneous net other income and deductions increased by $47 million or
99.5% at Wisconsin Energy and by $37 million or 98.2% at Wisconsin Electric
during 1998 compared to 1997. Significantly contributing to these
increases, Wisconsin Electric recorded a one-time $30 million impairment
charge in December 1997 for its Kimberly Cogeneration Equipment based upon
the results of a discounted cash flow analysis. For further information
concerning the Kimberly Cogeneration Equipment, see "Note L - Commitments
and Contingencies" in the Notes to Financial Statements. In addition,
miscellaneous net other income and deductions increased during 1998 due to
(1) a $9 million increase in net pretax miscellaneous income at WITECH
Corporation, (2) a $5 million increase in net pretax miscellaneous income
at WISPARK Corporation, and (3) a $4 million reduction during 1998 in
charitable donations by Wisconsin Electric. WITECH Corporation and WISPARK
Corporation are non-utility subsidiaries of Wisconsin Energy.
Primarily due to increased short-term borrowing levels between the
comparative periods, other interest expense increased by $10 million or
102.4% at Wisconsin Energy and by $3 million or 34.7% at Wisconsin
Electric.
1997 COMPARED TO 1996: As noted above, Wisconsin Energy recorded a one-
time $31 million charge in 1997 to write off deferred merger costs related
to the terminated merger agreement with NSP of which $22 million was
attributable to Wisconsin Electric. During 1997, Wisconsin Energy also
recorded $1 million of merger expenses related to the acquisition of ESELCO
by Wisconsin Energy.
Compared to 1996, Wisconsin Energy's miscellaneous net other income and
deductions decreased by $45 million during 1997 of which $34 million was
attributable to Wisconsin Electric. As noted above, Wisconsin Electric
recorded a one-time $30 million impairment charge in December 1997 for the
Kimberly Cogeneration Equipment. During 1997, miscellaneous net other
income and deductions also decreased due to increased 1997 charitable
donations by Wisconsin Electric and due to fair market valuation
adjustments of non-utility investments.
Interest income increased by $6 million or 34.8% during 1997 compared to
1996 primarily due to increased earnings on Wisconsin Electric's
decommissioning trust fund. Interest charges on long-term debt increased
between the comparative periods as a result of increased average
outstanding long-term debt during 1997, primarily at Wisconsin Electric.
FACTORS AFFECTING RESULTS OF OPERATIONS
MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors
of Wisconsin Energy and NSP agreed to terminate the Agreement and Plan of
Merger which provided for a business combination of Wisconsin Energy and
NSP to form Primergy Corporation. As a result, Wisconsin Energy recorded a
$31 million charge in the second quarter of 1997 ($19 million net of tax or
approximately 17 cents per share) to write off the deferred transaction
costs and costs to achieve the merger. Approximately $22 million of merger
write-off costs were attributable to Wisconsin Electric.
ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired ESELCO in
a tax free reorganization accounted for as a pooling of interests. In
connection with the acquisition, Wisconsin Energy issued 2,407,275 shares
of common stock, with fractional interests paid in cash, based upon an
exchange ratio of 1.5114 shares of Wisconsin Energy common stock for each
outstanding share of ESELCO common stock.
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, including a $1.2 million credit to retained earnings of
which $0.9 million represents ESELCO's consolidated net income during the
first five months of 1998.
ESELCO was the parent company of Edison Sault, an electric utility which
serves approximately 21,000 residential, commercial and industrial
customers in the State of 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.
Wisconsin Energy is operating Wisconsin Electric and Edison Sault as
separate utility subsidiaries within their historical service territories.
Wisconsin Electric and Edison Sault continue to be separately regulated by
their respective states.
NUCLEAR MATTERS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach Nuclear
Plant in Two Rivers, Wisconsin. During 1998, 1997 and 1996, Point Beach
provided 18%, 6% and 24% of Wisconsin Electric's net electric energy
supply, respectively. The United States Nuclear Regulatory Commission
("NRC") operating licenses for Point Beach expire in October 2010 for
Unit 1 and in March 2013 for Unit 2.
From late 1996 through early 1999, Point Beach experienced extended
generating unit outages. During a scheduled outage of Unit 2 that began in
October 1996 and was completed in August 1997, Wisconsin Electric replaced
the unit's steam generators. For additional information concerning the
Unit 2 steam generator replacement, see "Investing Activities" below in
"Liquidity and Capital Resources". In February 1997, Unit 1 was taken out
of service for equipment repairs. Wisconsin Electric decided to keep
Unit 1 out of service to allow Point Beach staff to focus their attention
on the work necessary to bring Unit 2 back to service. During the Unit 1
outage, Wisconsin Electric replaced two low pressure turbines which
increased Unit 1's maximum dependable generating capability from 500 to
approximately 510 megawatts. Wisconsin Electric returned Unit 1 to service
from December 1997 through mid-February 1998, when it began a scheduled
refueling outage that was completed in late June 1998. With completion of
this outage, Wisconsin Electric initiated its first extended fuel cycle
which should allow for the operation of Unit 1 until its next refueling and
maintenance outage scheduled for the fall of 1999. In early March 1999,
Wisconsin Electric returned Unit 2 to service following a scheduled
refueling and maintenance outage that began in early December 1998. During
this outage, Wisconsin Electric replaced the unit's low pressure turbine
rotors, which is expected to increase the maximum dependable generating
capability of Unit 2 from 500 to approximately 510 megawatts. As a result
of the low pressure turbine work recently performed on Units 1 and 2,
Wisconsin Electric expects to reduce future maintenance costs at point beach.
During the Unit 2 outage, Wisconsin Electric initiated an extended fuel
cycle, which should allow for the operation of the unit until its next
refueling and maintenance outage scheduled for the fall of 2000. Over
the last few years, Point Beach Unit's 1 and 2 have also experienced
some unplanned short-term shutdowns or power reductions to address various
equipment issues.
As a result of the outages noted above and various performance improvement
initiatives, Wisconsin Electric's total nuclear operation and maintenance
expenses, excluding fuel and benefit overheads, have increased from
$74 million in 1996 to $107 million in 1997 to $156 million in 1998. See
"Note F - Nuclear Operations" in the Notes to Financial Statements for
information concerning Wisconsin Electric's deferral during 1997 of
approximately $18 million of nuclear non-fuel O&M costs in excess of those
included in 1997 rates. Due in large part to the need for Wisconsin
Electric to replace Point Beach's low cost generating capacity during the
period 1996 through 1998 with higher cost sources of electric energy,
Wisconsin Electric's total fuel and purchased power costs have increased
from $332 million in 1996 to $445 million in 1997 to $450 million in 1998.
Additional unplanned shutdowns or power reductions of Point Beach Units 1
or 2 may be necessary as Wisconsin Electric continues to perform reviews of
facility design and to implement other improvement initiatives. However,
availability of Point Beach increased significantly during 1998 compared to
1997, and Wisconsin Electric expects the reliability of the units to
continue to improve toward historical levels as these efforts progress. In
addition, Wisconsin Electric expects that nuclear non-fuel operating and
maintenance expenses will begin to decline in 1999.
On January 27, 1997, the NRC notified Wisconsin Electric of a declining
trend in performance at Point Beach. The NRC issues trend letters to
provide early notification of declining performance and to offer a utility
the opportunity to take early corrective actions. During 1997, Wisconsin
Electric undertook a comprehensive effort to address specific concerns and
to take advantage of industry best practices to further strengthen
performance at the plant. In January 1998, the NRC rescinded its declining
trend letter and informed Wisconsin Electric that the corrective actions
taken or being taken by Wisconsin Electric appeared to be effective in
addressing the adverse trends in performance at Point Beach.
In a March 12, 1999 inspection report to Wisconsin Electric, the NRC
requested a meeting with Wisconsin Electric to discuss Wisconsin Electric's
response to the condition of certain systems at Point Beach in late
December 1998 and early January 1999. The NRC indicated that there was an
apparent violation of its requirements based upon the status of certain
safety related equipment. An analysis indicates that the safety systems
would have performed their intended function if called upon. On March 26,
1999, representatives of Wisconsin Electric met with staff of the NRC and
provided information to assist the NRC in its evaluation of the apparent
violation. The matter is pending.
In August 1998, Wisconsin Electric announced that it was participating in
cooperative alliance teams with three other unaffiliated utilities: Alliant
Energy, NSP and Wisconsin Public Service Corporation. The purpose of these
teams was to examine opportunities to enhance safety and improve
performance and reliability at the participants' nuclear generating plants.
The participants operate seven nuclear generating units at five sites in
the States of Wisconsin, Minnesota and Iowa with a total combined
generating capacity exceeding 3.600 megawatts.
The alliance work led the participants to a conclusion that, in some areas
of technical expertise, greater benefit could be gained in a more formal,
integrated structure. In February 1999, Wisconsin Electric, NSP and
Wisconsin Public Service Corporation announced the formation of Nuclear
Management Company, L.L.C. to further pursue the initial alliance
objectives. At the same time, Alliant Energy announced its intention to
join the other members of the nuclear management company but that it
required prior approval of the Securities and Exchange Commission.
Services to be delivered by the nuclear management company to the
participating utilities will also be subject to additional state and
federal regulatory approvals.
Nuclear Management Company L.L.C. is in the process of establishing a
senior management team that will focus on consolidating the expertise and
talents of their nuclear employees, building on the best business practices
identified as strengths at each plant site, reducing the overhead of
commonly used services and commodities, and more effectively integrating
the resources of all seven nuclear generating units. 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.
Wisconsin Electric and Wisconsin Public Service Corporation anticipate
transfer of their NRC operating licenses for Point Beach and Kewaunee
generating stations, respectively, to Nuclear Management Company LLC. A
submittal, seeking approval of the NRC for the license transfer of Point Beach
is planned during the second quarter of 1999.
SPENT FUEL STORAGE AND DISPOSAL: Wisconsin Electric completed
construction of an Independent Spent Fuel Storage Installation ("ISFSI") in
1995 for the temporary dry storage of spent nuclear fuel at Point Beach.
The PSCW has authorized Wisconsin Electric to load up to twelve casks
containing a total of 288 fuel assemblies with spent fuel and transfer the
casks to the ISFSI. To date, five VSC-24 casks, designed by Sierra Nuclear
Corporation and containing a total of 120 spent fuel assemblies, have been
loaded and moved to the ISFSI. Wisconsin Electric currently plans to load
four additional casks during 1999 and the remaining three authorized casks
in 2000.
To maintain flexibility associated with the continued temporary dry storage
of spent fuel at Point Beach, Wisconsin Electric is in the process of
procuring alternative model TN-32 casks from Transnuclear Corp. TN-32 dry
storage casks have been previously approved by the NRC for specific use at
other nuclear generating facilities in the United States. Wisconsin
Electric currently plans to obtain three TN-32 casks by the spring of 2000.
In August 1998, the PSCW issued an order approving the substitution of up
to six TN-32 casks for VSC-24 casks at Point Beach in the event that this
becomes necessary. Wisconsin Electric believes that the NRC will authorize
TN-32 casks for use at Point Beach by early in the year 2000.
Wisconsin Electric estimates that, with implementation of the extended fuel
cycles noted above, with the remaining authorized casks and with the
remaining space in the spent fuel pool in its current configuration, it has
sufficient temporary spent fuel storage capacity to continue operating
Point Beach until 2004. Wisconsin Electric currently plans to apply with
the PSCW in the fall of 1999 for authority to load additional casks beyond
the twelve that are currently authorized.
Temporary spent fuel storage alternatives are necessary at Point Beach
until the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel as mandated by the Nuclear Waste Policy
Act of 1982, as amended in 1987 ("Waste Act"). The DOE has indicated that
it does not expect a permanent spent fuel repository to be available until
at least 2010.
As of January 31, 1998, the DOE has failed to meet its contractual
obligation to begin removing spent fuel from Point Beach. In February
1998, Wisconsin Electric joined other utilities in a motion to enforce a
July 1996 mandate of the United States Court of Appeals for the District of
Columbia Circuit ("Court") that the DOE had an unconditional obligation to
begin accepting spent fuel by January 31, 1998. Wisconsin Electric and the
other utilities requested an order (1) compelling the DOE to submit a
detailed program for disposing of spent fuel from utilities, (2) declaring
that the utilities are relieved of their obligation to pay fees into the
Nuclear Waste Fund for a permanent spent fuel repository and are authorized
to place such fees into escrow until the DOE commences with disposing of
spent fuel pursuant to its obligation, and (3) precluding the DOE from
using any fees paid into the Nuclear Waste Fund to reimburse utilities for
damages they have incurred as a result of the DOE's breach of its
obligations. On May 5, 1998, the Court issued a decision denying the
motion of Wisconsin Electric and the other utilities to enforce the Court's
mandate, principally on the ground that the question of whether the DOE
could properly use the Nuclear Waste Fund as a source to pay damages to
utilities was not ripe for review. The Court further held that the other
requested remedies fell outside the scope of its mandate, which was limited
to defining the nature of the DOE's statutory obligations and did not
extend to requiring the DOE to perform under its contracts with Wisconsin
Electric and the other utilities. At this time, Wisconsin Electric is
unable to predict when the DOE will actually begin accepting spent nuclear
fuel.
During 1997 and again in 1998, the United States Senate and the United
States House of Representatives each passed versions of the Nuclear Waste
Policy Acts of 1997 and 1998, respectively. The legislation would require
the DOE to establish a temporary spent fuel repository in the State of
Nevada until the permanent repository is available and to begin taking
ownership from utilities and removing spent fuel as required by the Waste
Act. Differences between Senate and House versions of the bill were not
reconciled in 1997 nor in 1998. In early January 1999, the Nuclear Waste
Policy Act of 1999 was introduced in the House, and in mid-March 1999, a
similar bill was introduced in the Senate. President Clinton has
threatened to veto any legislation which mandates a DOE temporary spent
fuel repository in Nevada.
ELECTRIC SYSTEM RELIABILITY MATTERS
During the summer of 1998, Wisconsin Electric had adequate capacity to meet
all of its firm load obligations. While Wisconsin Electric did make public
appeals for conservation on two days during the summer; this was due to
constraints on the regional electric network in the Midwest caused by high
weather-induced demand as well as generation and transmission unavailability.
Wisconsin Electric also experienced curtailments of power purchases from
other companies on various occasions during the summer of 1998.
The regional electric energy supply was especially tight in late June,
1998, as unusually warm, humid weather coincided with storm-related outages
of major transmission lines and generating plants in nearby states. Under
such circumstances, utilities with available capacity are required to make
that capacity available to neighboring utilities who are experiencing
shortages. Wisconsin Electric has available the ability to free up
generation by interrupting and /or curtailing certain customers. Said
customers who participate, voluntarily, in these load management programs
receive rate discounts in exchange for allowing their service to be
curtailed or interrupted when power supplies become tight. Wisconsin
Electric has used such load management programs regularly since the early
1980s. During late June, 1998, Wisconsin Electric was one of the utilities
in the region which contributed its available resources, including curtailable
and interruptible capacity, to help maintain regional reliability.
Wisconsin Electric expects to have adequate capacity during 1999 to meet all
of its firm load obligations. However, the Company anticipates that the regional
electric energy supply will remain tight during 1999. As a result of this,
or of extremely hot weather along with unexpected equipment unavailability,
Wisconsin Electric could be required to call upon its load management
procedures, as it has in the past.
Wisconsin Electric is proceeding with several long-term measures to enhance
the reliability of its own system and that of the midwestern region. The
measures described in the following sections will begin to contribute as
early as the summer of 1999.
300 MEGAWATT CONTRACT WITH SOUTHERN ENERGY: In August 1998, Wisconsin
Electric and Atlanta-based Southern Energy, Inc., a subsidiary of Southern
Company, signed a formal power purchase agreement wherein Southern Energy,
Inc. will license, construct, own and operate a 300-megawatt natural gas-
fired peaking power plant, located in Neenah, Wisconsin, and sell its
electric output to Wisconsin Electric for eight years. The agreement
satisfies Wisconsin Electric's responsibility under directives from the
PSCW and under the new reliability legislation, 1997 Wisconsin Act 204,
signed into law in April 1998 by the governor of the State of Wisconsin.
In February 1999, Southern Energy received a certificate of public
convenience and necessity for the facility from the PSCW and a construction
air permit from the Wisconsin Department of Natural Resources ("WDNR").
The facility is scheduled for commercial operation by June 2000.
COMBUSTION TURBINE INLET COOLERS: Wisconsin Electric received PSCW
approval to proceed with the installation of inlet coolers at its Concord
and Paris Power Plants in February and April 1998, respectively. PSCW
approval was granted promptly upon Wisconsin Electric's receipt of amended
air emission permits from the WDNR. Construction of the inlet cooling
facilities at both plants is on schedule for the facilities to be
operational by the summer of 1999. The facilities will counteract the
reduction in generating capacity due to hot summer weather experienced by
these two plants. Approximately 112 megawatts of total hot weather
capacity degradation will be recovered. Wisconsin Electric estimates that
the inlet coolers for the two plants will cost a total of approximately
$24 million during the 1998-1999 biennial period. The costs of these
projects are included in anticipated construction expenditures described
below in "Capital Requirements" under "Liquidity and Capital Resources."
GERMANTOWN GENERATION PROJECTS: As a result of updated load growth
projections based upon summer of 1998 experience, Wisconsin Electric
determined that it has the need for additional generating capacity by the
summer of 2000 and selected its Germantown Power Plant for installation of
a new combustion turbine unit and other facilities. The addition of an
85 megawatt combustion turbine is planned for a June 2000 in-service date.
Further, inlet cooling facilities, similar to those at the Concord and
Paris Generating Stations, are planned to be installed on the four existing
combustion turbine units at the Germantown Power Plant as well as on the
new unit. The inlet cooling facilities will counteract the reduction in
generating capacity due to hot summer weather. A net increase in summer
capacity of approximately 133 megawatts is planned to be available by June
2000 as a result of these efforts. Natural gas facilities are also planned
to be added at the Germantown site to provide dual fuel capability for the
new as well as the existing units. As part of the dual fuel project, dry
low-nitrogen oxide burners will be installed on the existing units to
reduce air emissions. The dual fuel facilities will be installed over a
four-year period with completion in 2003. The project is subject to
approval of various state and local authorities. Applications with the
PSCW to install the new combustion turbine, inlet cooling and dual fuel
facilities were submitted in March 1999. The matter is pending. 1999
expenditures for this project are included in anticipated construction
expenditures described below in "Capital Requirements" under "Liquidity and
Capital Resources."
ELECTRIC TRANSMISSION PROJECTS: Wisconsin Electric is pursuing multiple
projects designed to increase the electric import capability into eastern
Wisconsin and to improve electric system reliability. The Northern
Interface Project involves operation of an existing 138 kilovolt
transmission line at 345 kilovolts (for which the line was originally
designed and constructed) and construction of a new 345-138 kilovolt Morgan
Substation. The project will allow an additional 80 megawatts of
generating capacity in the Upper Peninsula of Michigan to be available to
Wisconsin Electric's transmission system in the State of Wisconsin. PSCW
approval was received in June 1998, and the project is under construction
with a scheduled in-service date of June 1999. The Southern Interface
Project is the first of several projects being undertaken to improve system
reliability in southeast Wisconsin and the metropolitan Milwaukee area as
well as to eliminate constraints on the Wisconsin Electric system for
future increased transfer capability between northern Illinois and southern
Wisconsin. The Southern Interface Project will replace 138 kilovolt
substation facilities and upgrade 345 kilovolt substation facilities at
Wisconsin Electric's Oak Creek Substation. Authorization from the PSCW was
received in June 1998, and the project is scheduled to be in service by
June 1999. The Oak Creek-Arcadian 345 kilovolt Transmission Upgrade Project
will upgrade a 230 kilovolt transmission line to 345 kilovolt operation and
will also upgrade substation facilities at Wisconsin Electric's Oak Creek
and Arcadian Substations to improve system reliability. An application
with the PSCW for authorization to proceed with the project was submitted
in March 1999. Expenditures during 1999 for these projects are included in
anticipated construction expenditures described below in "Capital
Requirements" under "Liquidity and Capital Resources." Other transmission
projects to improve system reliability are in the planning stage for
submission to the PSCW later in 1999.
WISCONSIN RELIABILITY ASSESSMENT ORGANIZATION: The Wisconsin Reliability
Assessment Organization ("WRAO") was formed in early 1998 to coordinate
activities relating to generation and transmission reliability issues in
the State of Wisconsin. Wisconsin Electric is an active participant in the
WRAO, whose members include all of the state's other investor owned
utilities, members of the PSCW Staff, several municipal utilities and
coops, and utilities from surrounding states. Activities of the WRAO
include reliability policy development, performance evaluations of its
members with respect to the adequacy of their supplies, and sponsorship of
regional transmission planning studies (see "Wisconsin Interface
Reliability Enhancement Study" below). The WRAO also conducts meetings and
regional reliability symposia with external organizations with interests in
system reliability to provide forums for information and idea sharing.
WISCONSIN INTERFACE RELIABILITY ENHANCEMENT STUDY: Under WRAO direction,
the Wisconsin Interface Reliability Study group is conducting a continuing
study which examines numerous options for improving the reliability of the
state's electric system by strengthening its connections with the
interstate transmission grid. The group includes transmission planners
from WRAO members as well as planning and regulatory staff from throughout
the region. The Wisconsin Interface Reliability Study group produced a
report from the first phase of its current study which became the basis for
the PSCW's recent "Report to the Wisconsin Legislature on the Regional
Electric Transmission System."
An assessment of the strengths and weaknesses of various reliability
improvement options is expected to be completed by the end of March 1999.
The WRAO will combine this information with the results of an environmental
screening process and other relevant information to recommend a preferred
expansion plan and two alternatives to the PSCW by the end of April 1999.
Filing for the required Certificate of Public Convenience and Necessity is
planned for the third quarter of 1999.
NEW RENEWABLE ELECTRIC ENERGY: In early August 1998, Wisconsin Electric
issued a request for proposal soliciting bids for one or more contracts
totaling up to 75 megawatts of renewable electric generating capacity.
Renewable electric energy, also known as green energy, includes power
generated by wind, water, sun, biomass and other renewable resources. The
request for proposals is in response to the requirements of 1997 Wisconsin
Act 204 and supports Wisconsin Electric's "Energy for Tomorrow" renewable
energy program. The deadline for proposals was October 1, 1998. By the
October 1, 1998 deadline, Wisconsin Electric received more than 20
responses to the request for proposal. After evaluation of all the
proposals that were submitted, Wisconsin Electric developed a short list of
proposals and is currently engaged in contract negotiations. Wisconsin
Electric expects to complete these negotiations and sign purchase power
agreements in the spring of 1999.
1997 Wisconsin Act 204 calls for the investor-owned utilities in the
eastern part of the State of Wisconsin to add a combined total of
50 megawatts of renewable electric generating capacity to their energy mix
by the end of year 2000. Wisconsin Electric is responsible for
27 megawatts of this total. The August 1998 request for proposal fulfills
this obligation.
In June 1999, Wisconsin Electric will place in service two 660 kilowatt
Vestas V47 wind turbines. The wind turbines will be located in southern
Fond du Lac County in the Town of Byron. The electricity generated from
this approximately $1.8 million dollar project will be sold to "Energy for
Tomorrow" customers.
MIDWEST ISO: Wisconsin Electric is currently participating in the
formation of a regional independent electric transmission system operator
("ISO") to promote reliability in the Midwest (the "Midwest ISO"). On
January 15, 1998, Wisconsin Electric, along with eight other utilities,
filed a proposal with the Federal Energy Regulatory Commission ("FERC") to
establish the Midwest ISO, which would operate member electric transmission
systems within the region as a single system. Regional oversight is
required to maintain reliability because the system is being used
increasingly for broad, regional transactions. In addition to reliability
benefits, a regional ISO helps to ensure open and equal access to the
electric transmission system and broadens the energy market by eliminating
redundant transmission fees. As a net buyer of electric energy, Wisconsin
Electric expects the Midwest ISO to result in lower energy costs for its
customers as well as to improved regional reliability.
The PSCW completed a review of ISOs and issued an order in June 1998 that
laid out new ISO guidelines that are more consistent with guidelines of the
FERC. However, in its order, the PSCW stated that the Midwest ISO did not
entirely meet the PSCW's guidelines. While not necessarily required,
Wisconsin Electric plans to seek approval of the Midwest ISO from the PSCW.
The FERC conditionally approved the Midwest ISO proposal by order issued
September 16, 1998. By order dated December 17, 1998, the FERC granted the
Midwest ISO applicants' request for rehearing of certain portions of the
September 1998 order. Hearings on the transmission rate aspects of the
proposal are expected to commence before the FERC in June 1999. An
independent Board of Directors for the Midwest ISO was elected in December
1998.
INDUSTRY RESTRUCTURING AND COMPETITION
Driven by a combination of market forces, regulatory and legislative
initiatives, and technological changes, the electric industry continues a
trend towards restructuring and increased competition. To date,
competitive forces have been most prominent in the wholesale power market
but are expected to continue to develop in the electric retail markets.
The State of Illinois has passed legislation introducing retail electric
choice for large customers in 1999 and for all customers by May 2002. For
information concerning restructuring in the State of Michigan, see "MPSC
Electric Restructuring" below. While the Company cannot predict the
ultimate timing or impact of a restructured electric industry, Wisconsin
Electric believes that, as a low-cost energy provider, it is well
positioned to compete in a deregulated and competitive market. Among
others, the following electric and gas industry restructuring initiatives
are underway in regulatory jurisdictions where the Company currently does
business.
PSCW'S ELECTRIC UTILITY INDUSTRY INVESTIGATION: Because of electric power
shortages experienced during the summer of 1997, the PSCW expressed a
desire in October 1997 to work on infrastructure issues and to develop a
robust competitive electric wholesale market. The PSCW also stated its
belief that the question of whether to implement electric retail
competition in Wisconsin ultimately should be decided by the Wisconsin
Legislature rather than by the PSCW. The PSCW agreed to pursue the
following priority infrastructure issues as prerequisites to other
restructuring work:
* Improvements to existing and addition of new electric transmission
lines in the State of Wisconsin.
* Additions of new generating capacity in the State of Wisconsin.
* Modifications to State of Wisconsin statutes to allow merchant
generating plants to be built in Wisconsin without prior PSCW
determination of need as one means of ensuring adequate generation.
* Development of an ISO for either the electric transmission system in
the State of Wisconsin or in the region.
The Governor of the State of Wisconsin recently proposed in his current
budget that the PSCW conduct a one year study on what it would take to get
retail access in Wisconsin. This proposal will need to go through the
legislative review process before such a study would be conducted.
AFFILIATE INTEREST DOCKET (05-BU-101): The PSCW is developing policies
governing activities that can be performed by a utility or a utility
affiliate. The activities under review include providing or selling any
product or service other than core utility products. Wisconsin Electric
has taken the position that state policy should protect competition, not
individual competitors, and that customers should have the choice to use
either Wisconsin Electric or another vendor for these products and
services. Technical and public hearings were held in October and November
of 1998. The PSCW is expected to issue an order by June 1999.
PUBLIC BENEFITS: The Wisconsin Legislature has formed a Council to draft
legislation forming a Public Benefits Board. The Council is using the PSCW
order in Docket 05-BU-100 as the starting point for the draft legislation.
This PSCW order recommends plans to protect low-income utility customers,
conservation programs and the environment under a deregulated electric
industry. Wisconsin Electric has supported the development of such an
approach to public benefits to ensure that Wisconsin Electric is not
competitively disadvantaged by being required to continue to provide these
benefits. It is likely legislation creating such a Public Benefits Board
will be submitted in 1999.
MPSC ELECTRIC RESTRUCTURING: In 1998, the Michigan Public Service
Commission ("MPSC") continued to move toward implementation of direct
access for retail electric markets beginning on January 1, 2002. In
February, the MPSC issued an order clarifying restructuring issues and
directing Detroit Edison and Consumers Energy, the two largest utilities in
the State of Michigan, to file tariff sheets and draft implementation plans
for direct access. Following company submittals in late February 1998, the
MPSC staff held several public meetings to discuss the plans with
stakeholders. On June 30, 1998, the two companies filed revised
implementation plans reflecting some of issues raised during the meetings.
While the MPSC is currently reviewing other issues raised by the meetings,
a phase-in of direct access is expected to commence in late 1999 for
Michigan's two largest utilities with full access by January 1, 2002.
During 1998, public meetings on electric restructuring were also conducted
in Michigan's Upper Peninsula to discuss direct access. Following meetings
with the MPSC staff and the opening of dockets to begin the process of
electric restructuring for smaller utilities, the smaller Michigan
utilities, including Wisconsin Electric, filed proposals with the MPSC for
implementing retail direct access on January 1, 2002 without a phase-in
program. On February 2, 1999, the MPSC issued an order closing the above
dockets, citing the progress made to date. Issues requiring further
resolution will be the subject of future dockets for the smaller companies.
The MPSC is expected to address access programs for smaller utilities after
the initial phase-in has commenced in late 1999 for the large utilities in
Michigan.
FERC OPEN ACCESS TRANSMISSION PROCEEDINGS: As a result of the Energy
Policy Act of 1992, the FERC issued Order Nos. 888 and 889 in April 1996
relating to open access transmission service, stranded costs, standards of
conduct and open access same-time information systems. The ruling was
intended to create a more competitive wholesale electric power market.
In April 1997, Wisconsin Electric submitted a revised transmission tariff
in compliance with FERC's orders on rehearing of its Order No. 888. In
connection with Wisconsin Energy's acquisition of ESELCO, the FERC approved
a joint transmission tariff covering both Wisconsin Electric and Edison
Sault by order issued June 29, 1998. On December 18, 1998, the FERC
approved Wisconsin Electric's Standards of Conduct required by Order
No. 889. Order Nos. 888 and 889 have been appealed by many parties to the U.S.
Court of Appeals for the Second Circuit.
Wisconsin Electric has long advocated open access to electric transmission
facilities as a necessary step in the competitive restructuring of the
electric utility industry. Wisconsin Electric does not believe that the
FERC rulings or judicial review of these orders will have a detrimental
effect on its liquidity, financial position or results of operations.
WHOLESALE COMPETITION: Wholesale sales of electric energy accounted for
6%, 5% and 5% of Wisconsin Electric's total electric operating revenues in
1998, 1997 and 1996, respectively. Wisconsin Electric attributes the
increase in the past year to additional sales for resale that offset
decreasing sales to municipal and rural electric wholesale customers as a
result of renegotiated power sales contracts in 1995 and 1996. The
renegotiated contracts contain discounts from previous rates charged to
these customers.
A current contract with a 75 megawatt wholesale customer includes
nominations of 90 megawatts as of May 1999 and 120 megawatts as of May
2000. A second wholesale customer with a current 50 megawatt demand may
become a partial requirements customer beginning in October 2000.
Wisconsin Electric expects to continue providing transmission services to
this customer.
PSCW NATURAL GAS UTILITY INDUSTRY INVESTIGATION: The PSCW continued a
generic investigation of the natural gas industry in the State of Wisconsin
and addressed the extent to which traditional regulation should be replaced
with a different approach. On July 1, 1997, Wisconsin Electric filed a
modified dollar for dollar gas cost recovery mechanism ("GCRM") in
accordance with a November 1996 PSCW order. This filing was updated on
June 30, 1998. Purchased gas adjustment mechanisms have been evaluated by
the PSCW as part of the PSCW's generic investigation. A GCRM will include
after the fact prudence reviews by the PSCW. The matter is pending with
anticipated implementation in the third quarter of 1999. Wisconsin
Electric does not expect that a major portion of gas costs that are
currently passed through to customers will be subject to price risk under
this GCRM.
RATES AND REGULATORY MATTERS
The table below summarizes the anticipated annualized revenue impact of
recent rate changes authorized by regulatory commissions for Wisconsin
Electric's electric, natural gas and steam utilities based upon the sales
projections utilized by those commissions in setting rates. Edison Sault
implemented a temporary price cap in 1995. The PSCW regulates retail
electric, steam and natural gas rates in the State of Wisconsin, while the
FERC regulates wholesale power, electric transmission and gas
transportation service rates. The MPSC regulates retail electric rates in
the State of Michigan.
Revenue Percent
Increase Change
Service (Decrease) in Rates Effective Date
------- ---------- -------- --------------
(Millions) (%)
Retail electric, WI (a) $ 160.2 12.7 05/01/98
Retail gas (a) 18.5 5.4 05/01/98
Steam heating (a) 1.2 9.3 05/01/98
Retail electric, WI (a) 134.9 10.7 01/01/98
Retail gas (a) 18.5 5.5 01/01/98
Steam heating (a) 0.8 6.3 01/01/98
Retail electric, WI (b) 27.2 2.2 05/23/97
Retail electric, WI (7.4) (0.6) 02/18/97
Retail gas (6.4) (2.0) 02/18/97
Steam heating 0.1 .5 02/18/97
Retail electric, WI (33.4) (2.8) 01/01/96
Retail electric, WI (1.1) (3.3) 01/01/96
Retail gas (8.3) (2.6) 01/01/96
Steam heating (0.8) (5.1) 01/01/96
(a) The January 1, 1998 order was an interim PSCW order that was effective
until the May 1, 1998 final order was received from the PSCW. The
final May 1, 1998 order superseded the January 1, 1998 interim order.
(b) Fuel surcharge which ended as of May 1, 1998. Reflecting the combined
effect of two PSCW orders, this surcharge was initially ordered on
May 23, 1997 and was amended by the PSCW on December 23, 1997.
The PSCW requires that rate cases to be conducted once every two years.
Wisconsin Electric's next test year filing under the biennial cycle is
scheduled to be filed with the PSCW in 1999. Discussion of rate changes
for the 1998, 1997 and 1996 test years follow.
1998 TEST YEAR: On December 23, 1997, the PSCW issued an order
authorizing Wisconsin Electric to implement interim Wisconsin retail rate
increases effective January 1, 1998 in the amount of $154 million on an
annualized basis, including $135 million for electric operations,
$19 million for gas operations and $1 million for steam operations. The
PSCW authorized permanent annualized retail base rate increases in the
State of Wisconsin effective May 1, 1998 of $160 million for electric
operations, $19 million for gas operations and $1 million for steam
operations. The increases were based upon an authorized regulatory return
on common equity of 12.2%.
In November 1998, Wisconsin Electric filed testimony and exhibits with the
MPSC showing a $4 million annual revenue deficiency for its electric
utility operations in the State of Michigan. Wisconsin Electric proposed a
two stage increase in the filing. The first stage would increase rates
9.4% on an annualized basis effective with issuance of an order in the
case. The second stage, proposed to be effective July 1, 1999, would
increase the stage-one rates by another 4.8% on an annualized basis.
The primary factors influencing the 1998 rate changes in the State of
Wisconsin and the proposed rate changes in the State of Michigan include:
* Increased costs related to the construction, operation and maintenance
of generation, transmission and distribution facilities to assure
reliability of electric service.
* Increased costs associated with the need to implement technological
solutions to make computer systems "Year 2000 Ready" and to meet
customer expectations.
* Increased payroll and benefits due to (1) additional personnel to fill
vacant positions that occurred while Wisconsin Energy and Northern
States Power Company were pursuing the Primergy merger and (2) increased
staff to support key areas such as nuclear operations, customer
service and information services.
* Increased fuel and purchased power costs.
* Increased cost of capital.
* Accelerated amortization of the remaining balance of pre-1991
contributions in aid of construction at December 31, 1997..
See "Mergers" above for additional information concerning the Wisconsin
Energy's terminated merger agreement with NSP. See "Year 2000 Technology
Issues" below for further information concerning the estimated costs to
examine and modify existing software application and operational programs
and hardware that is date sensitive and may not be "Year 2000 Ready." See
Note C - Depreciation" in the Notes to Financial Statements for information
about the accelerated amortization of certain contributions in aid of
construction.
1997 TEST YEAR: In an order dated February 13, 1997, the PSCW directed
Wisconsin Electric to implement rate decreases for retail electric and gas
customers in the State of Wisconsin of $7 million and $6 million,
respectively, on an annualized basis, and a steam rate increase of
$0.1 million on an annualized basis. The order was effective February 18,
1997 and was based upon a regulatory return on common equity of 11.8%. The
PSCW had determined that it required a special full review of Wisconsin
Electric's rates for the 1997 test year in connection with consideration of
the application for approval of the proposed merger of Wisconsin Energy and
NSP discussed above under "Mergers."
1996 TEST YEAR: In a letter order dated September 11, 1995, the PSCW
directed Wisconsin Electric to implement rate decreases for Wisconsin
retail electric, gas and steam customers of $33 million, $8 million and
$0.8 million, respectively, on an annualized basis effective January 1,
1996. Also effective January 1, 1996, the MPSC authorized Wisconsin
Electric to implement a rate decrease for Michigan non-mine retail electric
customers of $1 million or 3.3% on an annualized basis. The Empire and
Tilden ore mines are separately regulated by the MPSC.
EDISON SAULT PRICE CAP: On August 22, 1995, Edison Sault filed an
application with the MPSC for authority to implement price cap regulation
for its electric customers in the State of Michigan. In the application,
Edison Sault proposed that its base rates be capped at existing levels,
that its existing Power Supply Cost Recovery factor be rolled into base
rates and that its existing Power Supply Cost Recovery Clause be suspended.
On September 21, 1995, the MPSC approved Edison Sault's application subject
to the modification that Edison Sault give thirty days notice rather than
two weeks notice for rate decreases. Edison Sault will file an application
with the MPSC by October 1, 2000 to address the experience under the price
cap mechanism. The MPSC's order authorizing Edison Sault's price cap
represents a temporary experimental regulatory mechanism and allows Edison
Sault to file an application seeking an increase in rates under
extraordinary circumstances.
FUEL COST ADJUSTMENT PROCEDURE: Effective in 1998 under the PSCW's retail
electric fuel cost adjustment procedure in the State of Wisconsin, retail
electric rates may be adjusted, on a prospective basis, if cumulative fuel
and purchased power costs, when compared to the costs projected in the
retail electric rate proceeding, deviate from a prescribed range and are
expected to continue to be above or below the authorized annual range of
2%.
During 1997, extended outages at Point Beach, an extended maintenance
outage at Oak Creek Power Plant that was concluded in June 1997, delayed
commercial operation of LS Power's cogeneration facility, and higher than
projected purchased power costs per megawatt-hour due to regional electric
energy supply constraints resulted in increased fuel and purchased power
costs at Wisconsin Electric. Wisconsin Electric estimates that such costs
were approximately $116 million higher than those included in 1997 base
electric rates in all jurisdictions.
On December 23, 1997, the PSCW issued a combined final order on two 1997
Wisconsin Electric filings under Wisconsin's fuel cost adjustment
procedure, authorizing Wisconsin Electric to recover $27 million of
additional 1997 fuel and purchased power costs from Wisconsin retail
electric customers during the 1997-1998 biennial period. This temporary
fuel surcharge ended as of May 1, 1998. Wisconsin Electric estimates that
of the $116 million of excess fuel and purchased power costs incurred
during 1997, it recovered a total of $27 million as a result of the PSCW's
December 1997 order, leaving $89 million unrecovered.
As part of the PSCW's 1998 Rate Order, Wisconsin Electric was required to
file by October 1, 1998 its forecast of electric fuel costs for the 1999
calendar year. Wisconsin Electric filed the forecast, which indicated no
change in fuel costs compared to the 1998 Rate Order, with the PSCW on
September 25, 1998. This matter is currently under review by the PSCW.
In December 1995, the MPSC approved the suspension of the Power Supply Cost
Recovery Clause (fuel adjustment procedure) for a five-year period for
Michigan retail electric customers.
NUCLEAR OPERATION AND MAINTENANCE COST DEFERRAL: See "Note F - Nuclear
Operations" in the Notes to Financial Statements for information regarding
approval by the PSCW during 1997 for Wisconsin Electric to defer certain
non-fuel nuclear operation and maintenance costs.
PURCHASED GAS ADJUSTMENT MECHANISM: In the case of natural gas costs,
differences between the test year estimate and the actual cost of purchased
gas are accounted for through a purchased gas adjustment clause. See
"Industry Restructuring and Competition" above for information concerning a
PSCW order changing the purchased gas adjustment mechanism in 1999.
NON-UTILITY ASSET CAP: Wisconsin Energy is subject to certain current
restrictions which may limit diversification in non-utility activities.
Under a formula included in the provisions of Wisconsin's Public Utility
Holding Company Law, the sum of the assets of all non-utility affiliates in
a holding company system generally may not exceed 25% of the assets of all
public utility affiliates. As of December 31, 1998, the assets of
Wisconsin Energy's non-utility affiliates approximated 12% of the assets of
its public utility affiliates. Following WISVEST Corporation's pending
acquisition of $272 million of generating facilities in the second quarter
of 1999, Wisconsin Energy anticipates that the percent of asset cap formula
non-utility assets will increase from approximately 12% to over 18%.
Wisconsin Energy is currently working with the other utility holding
companies in the State of Wisconsin in an effort to modify the asset cap
provisions of Wisconsin's Public Utility Holding Company Law. However,
there can be no assurance that the current asset cap restrictions will be
modified or that the restrictions will not affect Wisconsin Energy's future
non-utility diversification activities.
For additional information concerning WISVEST Corporation's pending
acquisition of generating assets in the State of Connecticut, see "Note L -
Commitments and Contingencies" in Wisconsin Energy's Notes to Financial
Statements.
YEAR 2000 TECHNOLOGY ISSUES
The Company is working 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. Wisconsin Energy, including
Wisconsin Electric, Edison Sault and the non-utility subsidiaries, utilize
business application software as well as infrastructure and process control
systems across their operations. Related computer programs and hardware
may use two-character digits such as `00' to define the applicable year
rather than four-character digits such as `2000'. When these systems or
applications encounter the Year 2000, they could potentially read the year
as `1900' and either process data incorrectly or shut down altogether. If
not addressed in a timely manner, this Year 2000 problem could have a
materially adverse impact on the operations or financial condition of the
Company.
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, comprising representatives with subject matter
expertise, are addressing:
* Business applications that provide function and process to the
business units;
* Infrastructure including information technology voice, video, data
systems and related structure;
* Process control systems including the impact of embedded systems
across all operations;
* Supplier compliance dealing with critical direct suppliers of services
and materials; and
* Significant customers and their ability to avoid major Year 2000-
related business interruptions.
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. Although additional systems or
processes may be identified as the program moves forward, the Company has
substantially completed an initial 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 are currently in progress and extensive contacts with critical third
party suppliers are ongoing. Based upon an initial assessment of critical
supplier Year 2000 readiness that was completed in the third quarter of
1998, the Company is currently initiating additional supplier risk
mitigation actions. Wisconsin Energy expects to evaluate its significant
customers during 1999.
The Company has structured its Year 2000 program to identify, prioritize
and address critical business functions within the Company including:
* Providing Energy Supply, which includes the safe operation and
maintenance of all nuclear, fossil and hydro generating facilities;
* Providing a Reliable Energy Pathway, which includes the safe operation
and maintenance of the Company's electric transmission and electric,
gas and steam distribution systems;
* Providing Customer Service, which includes the ability to respond to
customer emergencies both from a customer contact point of view and from
a restoration perspective as well as the ability to handle customer
calls, to bill customers and to process payments;
* Supporting the Business, which includes the critical human resource,
supply chain, finance and information resource activities that support
operation of the business; and
* Critical Facilities operations.
With the exception of those projects that are dependent upon activities
such as scheduled power plant maintenance outages later in 1999, the
Company currently expects its core, critical business functions to be
"Year 2000 Ready" by June 30, 1999. However, additional refinements and
testing may continue through the end of 1999. 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."
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 (1) other power providers to and operators of the integrated
electric transmission and distribution grid, (2) fuel suppliers,
(3) producers of natural gas and suppliers of interstate natural gas
transportation services, and (4) 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
intends to leverage this experience in 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"), the North American
Electric Reliability Council and the Wisconsin Reliability Assessment
Organization 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. The scenarios currently identified as reasonably likely represent
situations that have been encountered under normal operating conditions.
Contingencies for these scenarios are generally addressed through normal
operating procedures. 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; and
* Loss of load and/or uncharacteristic loads.
Wisconsin Electric presently 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 is currently reviewing operating and contingency
plans to identify further enhancements or updates specifically addressing
Year 2000 issues.
FINANCIAL IMPLICATIONS: Wisconsin Energy currently estimates that it will
incur approximately $44 million of expenses during 1998 through 2000 for
its Year 2000 program. $15 million has been incurred as of December 31,
1998. In addition, the Company expects to capitalize costs of
approximately $20 million to replace certain existing infrastructure and
process control systems of which $9 million has been capitalized as of
December 31, 1998. In its May 1998 Rate Order from the PSCW, Wisconsin
Electric received approval for recovery in rates of approximately
$13 million per year of Year 2000-related expenses in the Wisconsin retail
jurisdiction during the 1998-1999 biennial period. In addition, the 1998
PSCW rate order included the associated capital expenditures related to
Wisconsin Electric's Year 2000 program.
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 changes 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.
ENVIRONMENTAL MATTERS
NATIONAL AMBIENT AIR QUALITY STANDARDS: On July 18, 1997 the United
States Environmental Protection Agency ("EPA") revised the National Ambient
Air Quality Standards for ozone and particulate matter. Although specific
emission control requirements are not yet defined, Wisconsin Electric
believes that these revised standards will likely require significant
reductions in sulfur dioxide ("SO2") and nitrogen oxide ("NOx") emissions
from coal-fired generating facilities. Wisconsin Electric expects that
reductions needed to achieve compliance with the ozone attainment standards
will be implemented in stages from the year 2003 through the year 2012,
beginning with the ozone transport reductions described below under "Final
EPA Ozone Transport Rulemaking." Reductions associated with the new
particulate matter standard will likely be implemented in stages after the
year 2010 and extending to the year 2017. Beyond the cost estimates
identified below in "Final EPA Ozone Transport Rulemaking", Wisconsin
Electric is currently unable to determine the impact of the revised air
quality standards on its future liquidity, financial condition or results
of operation.
FINAL EPA OZONE TRANSPORT RULEMAKING: On October 27, 1998, the EPA
promulgated ozone transport rules to address transport of NOx and ozone
into ozone non-attainment areas in the eastern half of the United States.
The rules require electric utilities in 22 eastern states and the District
of Columbia, including the State of Wisconsin, to significantly reduce NOx
emissions by May 1, 2003. Affected states are required to submit their
respective state implementation plans to the EPA by September 1999. The
rules have been legally challenged by numerous affected states and other
stakeholders.
Wisconsin Electric is working with a variety of state and regional
stakeholders to provide input to the plan under development by the State of
Wisconsin. Wisconsin Electric is evaluating various NOx control techniques
to develop a least cost compliance plan and currently estimates total
capital costs of $250 million to $300 million and annual operation and
maintenance costs of $10 million to $25 million to comply with such a plan.
Wisconsin Electric believes that compliance with the NOx emission
reductions required by the EPA's final ozone transport rules will likely
mitigate costs to comply with the EPA's July 18, 1997 revisions to the
ozone National Ambient Air Quality Standards discussed above.
As a result of the EPA's October 1998 final ozone transport rules, the
Company also expects to incur capital costs in the range of $20 million to
$35 million prior to May 2003 at the two fossil-fueled power plants in the
State of Connecticut, which the Company expects to acquire in the second
quarter of 1999. For additional information concerning the acquisition of
these two Connecticut power plants, see "Liquidity and Capital Resources -
Capital Requirements" below as well as "Note L - Commitments and
Contingencies" in Wisconsin Energy's Notes to Financial Statements.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric is voluntarily reviewing
and addressing environmental conditions at a number of former manufactured
gas plant sites. See "Note L - Commitments and Contingencies" in the Notes
to Financial Statements for additional information.
ASH LANDFILL SITES: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion byproducts. However, ash
materials have been, and to some degree, continue to be disposed in company
owned, licensed landfills. Some early designed and constructed landfills
may allow the release of low levels of constituents resulting in the need
for various levels of remediation. Where Wisconsin Electric has become
aware of these conditions, efforts have been performed to address these
conditions. These costs are included in the environmental operating and
maintenance costs of Wisconsin Electric.
COAL SUPPLY AND TRANSPORTATION MATTERS
During 1997, coal deliveries to certain Wisconsin Electric generating
facilities, as well as to the electric generating facilities of many other
utilities, had been impaired by massive congestion problems on the Union
Pacific Railroad. As a result of the merger of the Union Pacific Railroad
with the Southern Pacific Railroad, a backlog of coal deliveries had caused
stockpiles to decline at some of Wisconsin Electric's power plants and
forced Wisconsin Electric to seek alternative coal delivery routes. While
coal delivery performance by the Union Pacific Railroad has not fully
recovered, performance improved during 1998 and Wisconsin Electric's coal
inventories have now returned to acceptable levels.
During the fall of 1997, Wisconsin Electric completed construction of a
rail spur at the Pleasant Prairie Power Plant, which burns over 40% of
Wisconsin Electric's annual coal requirements. The new rail spur,
connecting to the rail line of a competitor of the Union Pacific Railroad,
provides Wisconsin Electric with another means of delivery to the Pleasant
Prairie Power Company and significantly reduced Wisconsin Electric's risk
of future impaired coal delivery due to problems at the Union Pacific
Railroad.
As of the beginning of 1999, Wisconsin Electric had approximately a 94-day
supply of coal in inventory at its coal-fired facilities. As part of its
Year 2000-related contingency planning and implementation, Wisconsin
Electric expects to build the inventory of coal during 1999 at its coal-
fired facilities to an estimated 111-day supply by December 31, 1999.
OUTLOOK
The following forecasts are forward-looking statements subject to certain
risks, uncertainties and assumptions. Actual results may vary materially.
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 service territory; availability
of the Company's generating facilities; changes in purchased power costs;
and the economy, weather, the restructuring of the electric and gas utility
industries, and unforeseen problems associated with non-utility
diversification efforts. See "Cautionary Factors" below.
EARNINGS: The Company currently estimates that its earnings during 1999
will be in the range of $1.85 to $2.05 per share, an increase of between 12
and 24 percent over 1998 earnings.
ELECTRIC SALES: Assuming moderate growth in the economy of its service
territory and normal weather, the Company presently anticipates total
retail and municipal electric kilowatt-hour sales to grow at a compound
annual rate of 2.1% over the five-year period ending December 31, 2003.
GAS DELIVERIES: Assuming moderate growth in the economy of its service
territory and normal weather, the Company currently forecasts total therm
deliveries of natural gas to grow at a compound annual rate of
approximately 1.9 % over the five-year period ending December 31, 2003.
ADDITIONAL GAS SERVICE TERRITORY: In July 1997, the PSCW approved
Wisconsin Electric's application to expand natural gas service to more than
4,500 potential customers in northeastern Wisconsin. When completed, the
project will involve the installation of more than 350 miles of new gas
main. During 1998, about 2,400 customers were connected and the remainder
are expected to be connected during 1999. 1999 capital expenditures for
this project are included in anticipated construction expenditures shown
below under "Capital Requirements" in "Liquidity and Capital Resources."
EMPLOYEES: The Company expects to add approximately 570 full-time
equivalent employees during 1999. Of the total 570 full-time equivalent
employees, approximately 370 are attributable to Wisconsin Electric,
primarily in such key areas as distribution operations, nuclear operations,
customer service and information resources. Approximately half of the new
employees at Wisconsin Electric are expected to replace contract labor that
has been used during the past couple of years. Approximately 200 full-time
equivalent non-utility employees are expected to be added in the second
quarter of 1999 when WISVEST Corporation closes on the acquisition of two
fossil-fuel power plants from The United Illuminating Company, an
unaffiliated investor owned utility in New Haven, Connecticut. For
additional information concerning this acquisition, see "Note L -
Commitments and Contingencies" in Wisconsin Energy's Notes to Financial
Statements.
EFFECTS OF WEATHER
By the nature of its utility business segments, Wisconsin Energy's and
Wisconsin Electric's earnings are sensitive to weather variations from
period to period. Variations in winter weather affect heating load for
both the gas and electric utilities. Variations in summer weather affect
cooling load for the electric utilities as well as therm deliveries to gas-
fired electric generating customers. The table below summarizes weather as
measured by degree days at Mitchell International Airport in Milwaukee,
Wisconsin for each of the three years ended December 31, 1998.
% Change % Change
1997 1996
Degree Days 1998 1997 to 1998 1996 to 1997
----------- ---- ---- ------- ---- -------
Heating (7,005 Normal) 5,848 7,101 (17.7%) 7,469 (4.9%)
Cooling (657 Normal) 800 407 96.6% 608 (33.1%)
EFFECTS OF INFLATION
With expectations of low-to-moderate inflation, the Company does not
believe the impact of inflation will have a material effect on its future
results of operations.
MARKET RISKS
The Company is potentially exposed to market risk due to changes in
interest rates, the return on marketable securities and the market price of
electricity as well as to changes in fuel costs incurred to generate
electricity and in the cost of gas for its gas operations. Exposure to
interest rate changes relates to the Company's short and long-term debt as
well as its preferred equity obligations, while exposure to fluctuations in
the return on marketable securities relates to debt and equity security
investments held in various trust funds. Exposure to electricity market
price risk relates to forward activities taken to manage the supply of and
demand for electric energy, and exposure to fuel and gas cost variations
relates to the supply of and demand for coal, uranium, natural gas and fuel
oil. Currently, the Company does not utilize derivative financial
instruments. Griffin Energy Marketing L.L.C., a subsidiary of Wisvest,
began marketing energy related services and limited trading of electricity
in 1998. Griffin's activities during 1998 were financially insignificant.
The Company is evaluating to what extent it will use derivative financial
and commodity instruments in the normal course of their future business.
For additional information concerning risk factors, including market risks,
see "Cautionary Factors" below.
INTEREST RATE RISK: The Company, including its affiliates, have various
short-term borrowing arrangements to provide working capital and general
corporate funds. The level of borrowings under such arrangements vary from
period to period, depending upon, among other factors, capital investments.
Future short-term interest expense and payments will reflect both the level
of future short-term interest rates and borrowing levels.
The table that follows provides information about long-term financial
instruments that were held by the Company at December 31, 1998 and that are
sensitive to changes in interest rates. For long-term debt, the table
presents principal cash flows that exist by maturity date and the related
annualized average interest rate of the maturing long-term debt. The
annualized average interest rate on the variable rate long-term debt was
estimated based upon a weighted average interest rate at December 31, 1998.
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value
-------------------------------------------------- as of
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Long-Term Debt
Wisconsin Electric $92.9 $ 1.9 $ 1.9 $ 1.9 $ 1.9 $1,193.1 $1,293.6 $1,378.7
Average Interest Rate 6.6% 7.5% 7.5% 7.5% 7.5% 7.2% 7.2%
Wisconsin Energy (a) $95.9 $31.9 $20.7 $16.9 $16.0 $1,338.3 $1,519.7 $1,605.7
Average Interest Rate 6.6% 6.4% 6.8% 6.6% 6.9% 7.2% 7.1%
Variable Rate Long-Term Debt
Wisconsin Electric - - - - - $ 165.4 $ 165.4 $ 165.4
Average Interest Rate 4.0% 4.0%
Wisconsin Energy (a) $ 2.9 $ 8.1 $ 4.3 $ 0.2 $ 0.3 $ 167.8 $ 183.6 $ 183.6
Average Interest Rate 7.7% 6.9% 6.9% 7.6% 7.6% 4.1% 4.3%
Preferred Stock Not Subject to
Mandatory Redemption
Wisconsin Electric
and Wisconsin Energy (a) - - - - - - $ 30.4 $ 20.2
Average Dividend Rate 4.0%
<FN>
(a) Wisconsin Energy includes the holding company as well as all
subsidiaries.
</TABLE>
For additional information concerning the Company's short-term debt, long-
term debt and preferred stock, see "Note I- Notes Payable," "Note H - Long-
Term Debt" and "Note G - Preferred Stock", respectively, in the Notes to
Financial Statements.
MARKETABLE SECURITIES RETURN RISK: The Company funds its pension, other
postretirement benefit and nuclear decommissioning obligations through
various trust funds, which in turn invest in debt and equity securities.
Changes in the market price of the assets in these trust funds can affect
pension, other postretirement benefit and nuclear decommissioning expenses
in future periods. Future annuity payments to these trust funds can be
affected by changes in the market price of the trust fund assets.
Wisconsin Energy expects that the risk of expense and annuity payment
variations as a result of changes in the market price of trust fund assets
would be mitigated in part through future rate actions by the Company's
various utility regulators.
At December 31, 1998, the Company had the following total trust fund assets
at fair value, primarily consisting of available for sale debt and equity
security investments.
Wisconsin Energy Wisconsin Electric
---------------- -----------------
(Thousands of Dollars)
Pension trust funds $839,659 $828,491
Nuclear decommissioning trust fund 518,505 518,505
Other postretirement benefit trust funds 68,913 68,913
For additional information concerning the Company's pension and other
postretirement benefits, see "Note J - Benefits" in the Notes to Financial
Statements. For additional information concerning nuclear decommissioning,
see "Note F - Nuclear Operations" in the Notes to Financial Statements.
COMMODITY PRICE RISK: In the normal course of business, the Company's
utility subsidiaries utilize contracts of various duration for the forward
sale and purchase of electricity to effectively manage utilization of their
available generating capacity and energy during periods when available
power resources are expected to exceed the requirements of their native
load customers. This practice may also include forward contracts for the
purchase of power during periods when the anticipated market price of
electric energy is below expected incremental power production costs.
Wisconsin Electric manages its fuel and gas supply costs through a
portfolio of short and long-term procurement contracts with various
suppliers. To a certain extent, Wisconsin Electric's retail fuel cost
adjustment procedure in Wisconsin may mitigate some of the risk of fuel
cost price fluctuation. Currently, the purchased gas adjustment mechanism
in Wisconsin mitigates the risk of gas cost variations. During 1999, this
purchased gas adjustment mechanism will be replaced by a new gas cost
recovery mechanism. For additional information concerning the fuel cost
adjustment procedure and the purchased gas adjustment mechanism, see "Rates
and Regulatory Matters" above in "Factors Affecting Results of Operations."
For additional information concerning the change in the purchased gas
adjustment mechanism, see "Industry Restructuring and Competition" above in
"Factors Affecting Results of Operations."
ACCOUNTING MATTERS
NEW PRONOUNCEMENTS: See "Note A - Summary of Significant Accounting
Policies" in the Notes to Financial Statements for information concerning
new pronouncements issued by the Financial Accounting Standards Board
("FASB") during 1998.
In February 1996, the FASB released for comment an exposure draft of a
Proposed Statement of Financial Accounting Standards entitled "Accounting
for Certain Liabilities Related to Closure or Removal of Long-Lived Assets"
("Proposed FAS"). The Proposed FAS would have required the Company to
recognize as a liability the present value of the estimated future total
costs associated with closure or removal of certain long-lived assets and
to correspondingly capitalize those costs as an increase in the cost of
long-lived asset associated with the obligation. The capitalized costs
would have been depreciated to expense over the useful life of the asset.
Following redeliberations during 1997 and 1998, the FASB has decided to
continue with the project and plans to issue a second exposure draft in the
second quarter of 1999. To reflect a broadened scope from the original
project, the title of the project was changed to "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets."
The scope of the second exposure draft of the Proposed FAS would most
likely include decommissioning costs for Point Beach and may also apply to
other facilities of the Company. With respect to decommissioning costs for
Point Beach, the Proposed FAS would result in Wisconsin Electric recording
a decommissioning liability and a corresponding asset as required by the
pronouncement. Currently, nuclear decommissioning costs are accrued as
depreciation expense over the expected service lives of the two units at
Point Beach based upon an external sinking fund method. Any changes in
depreciation expense due to differing assumptions between the Proposed FAS
and those currently required by the PSCW are not expected to be material
and would most likely be deferrable and recoverable in rates. For
additional information on the costs of decommissioning Point Beach, see
"Note F - Nuclear Operations" in the Notes to Financial Statements.
REGULATORY ACCOUNTING: Wisconsin Energy's utility subsidiaries, Wisconsin
Electric and Edison Sault, operate under electric utility rates which are
subject to the approval of the PSCW, MPSC and FERC, and natural gas and
steam utility rates that are subject to the approval of the PSCW (see
"Rates and Regulatory Matters" above). Such rates are designed to recover
the cost of service and provide a reasonable return to investors.
Developing competitive pressures in the utility industry may result in
future utility rates which are based upon factors other than the
traditional original cost of investment. In such a situation, continued
deferral of certain regulatory asset and liability amounts on the
utility's' books may no longer be appropriate as allowed under Statement of
Financial Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation ("FAS 71"), and the unamortized regulatory
assets net of the regulatory liabilities would be recorded as an
extraordinary after-tax non-cash charge to earnings.
As discussed above under "Rates and Regulatory Matters", the MPSC issued a
five-year experimental price cap order for Edison Sault electric rates that
expires in the year 2000. This order allows Edison Sault to seek rate
relief for costs incurred under extraordinary circumstances.
Because of Edison Sault's price cap order and other potential changes in
the industry, the Company continually reviews the applicability of FAS 71
and has determined that it is currently appropriate to continue following
FAS 71 at Edison Sault. At this time, the Company is unable to predict
whether any adjustments to regulatory assets and liabilities will occur in
the future at either Wisconsin Electric or at Edison Sault. See "Note A -
Summary of Significant Accounting Policies" in the Notes to Financial
Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING ACTIVITIES
Wisconsin Energy invested a net total of $1.3 billion in its businesses
during the three years ended December 31, 1998 of which $1.0 billion was at
Wisconsin Electric. Investments during this three-year period included
$1.1 billion for construction of or investment in new or improved
facilities or projects: $909 million for the construction of new or
improved utility plant at Wisconsin Electric and $225 million for projects
at Wisconsin Energy's remaining subsidiaries. Additional investments
during this three-year period included $43 million for the acquisition of
nuclear fuel and $85 million for the eventual decommissioning of Point
Beach. The following are some of the larger construction or investment
projects in which the Company invested during the three years ended
December 31, 1998.
POINT BEACH UNIT 2 STEAM GENERATORS: In May 1996, Wisconsin Electric
received a written order from the PSCW approving replacement of the Point
Beach Unit 2 steam generators. Replacement of the Unit 2 steam generators
was completed in January 1997. Capital expenditures of $7 million and
$48 million were made during 1997 and 1996, respectively, for replacement
of the Unit 2 steam generators.
MILWAUKEE COUNTY POWER PLANT: In December 1996, Wisconsin Energy acquired
the steam and chilled water production and distribution facilities to
complete the second phase of the purchase of the Milwaukee County Power
Plant. Two outstanding contingencies were met prior to closing the
purchase. The PSCW approved the purchase of the steam facilities, and the
five largest customers signed steam and chilled water service agreements
which obligate them to purchase their present and future heating and
cooling requirements from Wisconsin Energy for a period of ten years. The
capital cost for the steam facilities was approximately $21 million.
Wisconsin Electric has integrated these facilities and the associated
customers into its steam utility operations. The capital cost for the
chilled water facilities was approximately $19 million. A separate
subsidiary of Wisconsin Energy operates the chilled water facilities as a
non-regulated business.
NON-UTILITY: Wisconsin Energy's net non-utility assets amounted to
approximately $524 million at December 31, 1998, an increase of
$293 million over the past three years. Primary additions during this
three-year period included $138 million of energy related investments by
WISVEST Corporation, $82 million of investments in land and buildings by
WISPARK Corporation, $45 million for Minergy's glass aggregate plant
described below and 19 million for WISVEST Corporation's acquisition of the
chilled water facilities at the Milwaukee County Power Plant described
above.. Wisconsin Energy is reviewing additional non-utility growth
opportunities on an ongoing basis and may make further investments and/or
acquisitions from time to time. For additional information concerning
WISVEST Corporation's pending acquisition of two fossil-fueled power plants
in the State of Connecticut, see "Capital Requirements" below. Also, see
"Note K - Segment Reporting" in Wisconsin Energy's Notes to Financial
Statements.
MINERGY GLASS AGGREGATE PLANT: In 1998, Minergy Corp., a non-utility
subsidiary of Wisconsin Energy, placed into operation a $45 million
facility in Neenah, Wisconsin that recycles paper sludge from area paper
mills into two usable products: glass aggregate and steam. The glass
aggregate is being sold into existing construction and aggregate markets
and the steam is being sold to a local paper mill. The plant results in
substantial environmental and economic benefits to the area by providing an
alternative to landfilling paper sludge. Minergy commenced construction in
July 1996, with commercial operation scheduled for April 1998. Capital
expenditures of $3 million, $27 million and $15 million were made during
1998, 1997 and 1996, respectively, for this facility.
CASH PROVIDED BY OPERATING AND FINANCING ACTIVITIES
During the three years ended December 31, 1998, total cash provided by
operating activities at both Wisconsin Energy and Wisconsin Electric were
$1.3 billion. During this period, internal sources of funds, after the
payment of dividends, provided 63% of Wisconsin Energy's and 74% of
Wisconsin Electric's capital requirements.
Financing activities during the three-year period ended December 31, 1998
included the issuance of $599 million of long-term debt by Wisconsin Energy
of which $400 million was issued by Wisconsin Electric. The proceeds of
these new debt issues were used to retire maturing debt or refinance higher
coupon debt in the amount of $324 million at Wisconsin Energy, including
$303 million at Wisconsin Electric, and for other general corporate
purposes. Wisconsin Energy and Wisconsin Electric increased their short-
term debt by $125 million and $69 million, and Wisconsin Energy added
$63 million of common equity from the issuance of new shares through the
Company's stock plans during the three years ended December 31, 1998. No
preferred stock was issued. Dividends on Wisconsin Energy's common stock
were $177 million, $173 million and $167 million during 1998, 1997 and
1996, respectively. Wisconsin Electric paid dividends to Wisconsin Energy
of $179 million, $214 million and $168 million during 1998, 1997 and 1996,
respectively, and received a total of $100 million in capital contributions
from Wisconsin Energy during this three-year period.
During 1998, WISPARK Corporation, a non-utility subsidiary of Wisconsin
Energy, secured $18 million of bank financing in the form of adjustable
rate mortgage notes due 2000-2008 to finance the construction or purchase
of various facilities.
In December 1998, Wisconsin Energy Capital Corporation, another non-utility
subsidiary of Wisconsin Energy then named Wisconsin Michigan Investment
Corporation, issued $20 million of 6.21% medium-term notes due 2008,
$30 million of 6.51% medium-term notes due 2013 and $50 million of 6.94%
medium-term notes due 2028. Proceeds of the issues were added to Wisconsin
Energy Capital Corporation's general funds and were used to finance non-
utility projects and for other general corporate purposes.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds and were used to reduce short-term borrowings and for other
general corporate purposes.
In April 1998, Wisconsin Energy Capital Corporation issued $25 million of
6.48% medium-term notes due 2008. Proceeds from the issue were added to
Wisconsin Energy Capital Corporation's general funds and were used to
financed non-utility projects and for other general corporate purposes.
In October 1997, Wisconsin Energy Capital Corporation, issued $15 million
of 6.40% medium-term notes due 2001 and $12 million of 6.33% medium-term
notes due 2002. In November 1997, Wisconsin Energy Capital Corporation
issued $20 million of 6.22% medium-term notes due 2000. Proceeds were
added to Wisconsin Energy Capital Corporation's general funds and were used
to finance various non-utility projects and for other general corporate
purposes.
In December 1996, Wisconsin Electric and WISVEST Corporation issued
promissory notes in the amount of $12 million and $11 million,
respectively, due 2006. The notes were issued as part of the transaction
to acquire the steam and chilled water facilities from Milwaukee County.
The notes have been discounted to reflect the difference between an
effective interest rate of 6.36% and a stated rate of 1.93%.
In November 1996, Wisconsin Electric issued $200 million of 6 5/8%
unsecured debentures due 2006. Proceeds were added to Wisconsin Electric's
general funds and were applied to the repayment of short-term borrowings
and for other general corporate purposes.
See "Note A - Summary of Significant Accounting Policies" in Wisconsin
Energy's Notes to Financial Statements for a discussion of various
limitations on the ability of Wisconsin Electric to transfer funds to
Wisconsin Energy.
CAPITAL STRUCTURE
Wisconsin Energy's and Wisconsin Electric's capitalization at December 31
were:
Wisconsin Energy Wisconsin Electric
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
Common Equity 46.6% 48.6% 47.5% 48.5%
Preferred Stock 0.7% 0.8% 0.9% 0.9%
Long-Term Debt (including
current maturities) 45.7% 42.3% 45.5% 43.7%
Short-Term Debt 7.0% 8.3% 6.1% 6.9%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Even though earnings increased during 1998 compared to 1997, the Company's
common equity ratio decreased while long-term debt increased. This was due
to the issuance of $150 million of debentures by Wisconsin Electric and
$100 million of medium term notes by Wisconsin Energy Capital Corporation,
which were added to the general funds of Wisconsin Electric and Wisconsin
Energy Capital Corporation, respectively, and used to reduce short-term
borrowings and for other general corporate purposes. Wisconsin Electric
decreased short-term debt by $23 million, while Wisconsin Energy's
consolidated short-term debt decreased by $38 million.
The Company has maintained strong bond ratings which provides necessary
access to the capital markets for growth opportunities. Wisconsin Electric
currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P") and Duff & Phelps Inc. ("D&P"), Aa2 by Moody's
Investors Service ("Moody's") and AA by Fitch Investors Service ("Fitch").
In addition, Wisconsin Electric currently has unsecured debt ratings of AA
by S&P and D&P, Aa3 by Moody's and AA- by Fitch. Wisconsin Electric's
preferred stock has ratings of AA- by S&P and Fitch, aa3 by Moody's and AA
by D&P. Moody's has assigned a rating on Wisconsin Energy Capital
Corporation's unsecured debt of A1 and S&P an AA. Wisconsin Energy
Corporation's and Wisconsin Electric's commercial paper are rated A-1+ by
S&P and P1 by Moody's. In March 1999, the Trust Preferred securities of
WEC Capital Trust I were assigned preliminary ratings of a1 by Moody's and
a+ by S&P.
At year-end 1998, Wisconsin Energy had $255 million of unused lines of bank
credit and approximately $17 million of cash and cash equivalents, and
Wisconsin Electric had $128 million of unused lines of bank credit and
$14 million of cash and cash equivalents.
CAPITAL REQUIREMENTS
CONSTRUCTION EXPENDITURES: The Company's total construction budget for
1999 is approximately $889 million, including $350 million for Wisconsin
Electric and $539 million for Wisconsin Energy's non-utility subsidiaries
as well as for Edison Sault.
Wisconsin Electric's construction expenditures during 1999 include
recurring additions to and/or improvements of generation, transmission and
distribution facilities to assure the reliability of electric service;
anticipated expenditures at fossil power plants to comply with evolving air
quality standards; the acquisition of new combustion turbines; and
technology-related expenditures for the Year 2000 and for other technology
improvement efforts.
Of Wisconsin Energy's $539 million capital budget for the non-utility
subsidiaries and for Edison Sault, $315 million is directly related to
WISVEST Corporation's anticipated acquisition of certain generating assets
discussed below. The remaining capital budget is primarily for property
additions at Wisconsin Energy's principal non-utility subsidiaries
including WISVEST Corporation, Minergy Corp., and WISPARK Corporation.
In October 1998, WISVEST Connecticut, LLC, a wholly owned subsidiary of
WISVEST Corporation, entered into an agreement to purchase two fossil-
fueled power plants for $272 million from The United Illuminating Company,
an unaffiliated investor owned utility in New Haven, Connecticut. The
acquisition is expected to close in the second quarter of 1999. To finance
the purchase price of the facilities as well as provide working capital and
letter of credit capabilities, Wisvest anticipates a nonrecourse long-term
project financing arrangement of $245 million and a capital contribution
from Wisconsin Energy of $105 million. For additional information
concerning WISVEST Connecticut, LLC's pending acquisition, see "Note L -
Commitments and Contingencies" in Wisconsin Energy's Notes to Financial
Statements.
Due to changing environmental and other regulations that impact the
Company's utility affiliates, future long-term capital requirements may
vary from recent capital requirements. For example, see "Environmental
Matters" and "Industry Restructuring and Competition" above in "Factors
Affecting Results of Operations" for a discussion of the EPA's evolving air
quality standards applicable to utilities and for the changing utility
industry, respectively. Wisconsin Electric currently expects to spend
$350 million to $400 million for new construction in each of the next five
years. Also, Wisconsin Energy is reviewing additional non-utility growth
opportunities on an ongoing basis and may make further investments and/or
acquisitions from time to time in projects or entities that are expected to
provide a satisfactory return on the investment. The specific form, amount
and timing of these investments and the related financing of these
opportunities have not yet been determined. As a result, the Company
expects that its future long-term capital requirements may vary from
historical levels.
CAPITAL RESOURCES
The Company expects internal sources of funds from operations after the
payment of dividends to provide approximately 40% and 80% of Wisconsin
Energy's and Wisconsin Electric's respective construction expenditures for
1999. The remaining cash requirements at Wisconsin Energy and Wisconsin
Electric during 1999 are expected to be met through one or more of the
following: short-term borrowings, the issuance of intermediate or long-term
debt, the issuance of trust preferred securities, and proceeds from the
sale of new issue common stock under Wisconsin Energy's stock plans.
Wisconsin Electric is planning to issue up to $150 million of debentures
during 1999. In March 1999, Wisconsin Energy filed a registration
statement for the issuance of up to $300 million of trust preferred
securities of which $200 million was issued in March 1999 in anticipation
of funding Wisconsin Energy's capital contribution to WISVEST Connecticut,
LLC for the pending power plant acquisitions from The United
Illuminating Company and to pay down short-term borrowings. A secondary
offering of the balance may occur later in 1999. Also in March 1999,
Wisconsin Energy Capital Corporation increased the availability of its
medium-term note program from $200 million to $400 million. Beyond 1999,
capital requirements will be met through internally generated funds
supplemented, when required, by debt and equity financing, including
Wisvest's nonrecourse long-term project financing arrangements described
above. The specific form, amount and timing of securities which may be
issued have not yet been determined and will depend, to a large extent, on
market conditions and other factors.
Between November 1, 1998 and December 31, 1998, Wisconsin Energy issued
334,270 new shares of common stock which were purchased by participants in
the Company's stock plans with cash investments and reinvested dividends
aggregating approximately $10 million. Prior to November 1, 1998,
Wisconsin Energy had been purchasing shares for its stock plans on the open
market.
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:
* Factors affecting utility operations such as unusual weather
conditions; catastrophic weather-related damage; availability of
Wisconsin Electric's or Edison Sault'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.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of Wisconsin Electric 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 regulation.
* 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; unanticipated changes in environmental or energy
regulations; timely regulatory approval without onerous conditions of
potential acquisitions; and risks associated with minority investments,
where there is a limited ability to control the development, management
or operation of the project.
* Legislative or regulatory restrictions or caps on non-utility
acquisitions, investments or projects, including the State of Wisconsin's
Public Utility Holding Company Law, which could limit the Company's
diversification and growth opportunities or require the Company to divest
of certain existing non-utility assets.
* 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.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Factors Affecting Results of Operations - Market Risks" in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations for information concerning potential market risks to which
Wisconsin Energy and Wisconsin Electric are exposed due to changes in
interest rates, the return on marketable equity securities and the market
price of electricity, fuel to generate electricity and gas to supply
Wisconsin Electric's gas operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO 1998 FINANCIAL STATEMENTS
Page
WISCONSIN ENERGY CORPORATION ----
Consolidated Income Statement.................
Consolidated Statement of Cash Flows..........
Consolidated Balance Sheet....................
Consolidated Capitalization Statement.........
Consolidated Common Stock Equity Statement....
Notes to Financial Statements.................
Report of Independent Accountants.............
WISCONSIN ELECTRIC POWER COMPANY
Income Statement..............................
Statement of Cash Flows.......................
Balance Sheet.................................
Capitalization Statement......................
Common Stock Equity Statement.................
Notes to Financial Statements.................
Report of Independent Accountants.............
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,663,632 $1,412,115 $1,393,270
Gas 295,848 355,172 364,875
Steam 20,506 22,315 15,675
---------- ---------- ----------
Total Operating Revenues 1,979,986 1,789,602 1,773,820
Operating Expenses
Fuel (Note H) 308,385 311,966 295,651
Purchased power (Note H) 152,980 132,689 36,216
Cost of gas sold 175,475 233,877 234,254
Other operation expenses 479,618 407,114 391,520
Maintenance 169,262 135,096 103,046
Depreciation (Note C) 243,271 237,698 202,796
Taxes other than income taxes 79,512 73,914 77,866
Federal income tax (Note D) 80,267 40,221 105,656
State income tax (Note D) 18,605 10,558 24,976
Deferred income taxes - net (Note D) (658) 7,937 (1,575)
Investment tax credit - net (Note D) (3,434) (927) (2,430)
---------- ---------- ----------
Total Operating Expenses 1,703,283 1,590,143 1,467,976
Operating Income 276,703 199,459 305,844
Other Income and Deductions
Interest income 27,903 24,497 18,177
Allowance for other funds used
during construction (Note E) 2,936 3,349 3,036
Merger expenses (Note B) (563) (31,934) -
Miscellaneous - net (Note L) (240) (47,507) (2,468)
Federal income tax (Note D) 3,357 23,773 1,939
State income tax (Note D) (743) 3,011 (642)
---------- ---------- ----------
Total Other Income and Deductions 32,650 (24,811) 20,042
Income Before Interest Charges
and Preferred Dividend 309,353 174,648 325,886
Interest Charges
Long-term debt 108,509 110,138 103,045
Other interest 19,337 9,552 9,032
Allowance for borrowed funds used
during construction (Note E) (7,828) (6,961) (5,529)
---------- ---------- ----------
Total Interest Charges 120,018 112,729 106,548
Preferred Dividend Requirement
of Subsidiary 1,203 1,203 1,203
---------- ---------- ----------
Net Income $ 188,132 $ 60,716 $ 218,135
========== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 114,315 112,570 110,983
========== ========== ==========
Earnings Per Share of Common Stock
($; Basic and Diluted) 1.65 0.54 1.97
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $188,132 $ 60,716 $218,135
Reconciliation to cash
Depreciation 243,271 237,698 202,796
Nuclear fuel expense - amortization 18,922 5,426 21,887
Conservation expense - amortization 22,498 22,498 22,498
Debt premium, discount &
expense - amortization 4,202 7,930 9,809
Deferred income taxes - net (658) 7,937 (1,575)
Investment tax credit - net (3,434) (927) (2,430)
Allowance for other funds used
during construction (2,936) (3,349) (3,036)
Write-off of merger costs 563 30,684 -
Write-down of equipment - 30,000 -
Change in - Accounts receivable (39,559) 5,736 (1,324)
Inventories (562) (12,788) (30,703)
Accounts payable 36,001 159 39,921
Other current assets 10,881 8,452 (15,190)
Other current liabilities (11,572) 31,933 295
Other (5,798) (39,143) 3,716
-------- -------- --------
Cash Provided by Operating Activities 459,951 392,962 464,799
Investing Activities
Construction expenditures (398,982) (345,908) (389,194)
Allowance for borrowed funds used
during construction (7,828) (6,961) (5,529)
Nuclear fuel (10,183) (6,352) (26,053)
Nuclear decommissioning trust (31,379) (27,248) (26,309)
Other (29,552) 25,531 15,666
-------- -------- --------
Cash Used in Investing Activities (477,924) (360,938) (431,419)
Financing Activities
Sale of - 10,275 29,586 23,180
313,610 47,000 238,809
Retirement of - - - (1)
(93,023) (177,725) (53,356)
Change in short-term debt (38,496) 250,688 (87,654)
Dividends on stock - Common (177,397) (172,714) (167,236)
-------- -------- --------
Cash Provided by (Used in) Financing Activities 14,969 (23,165) (46,258)
-------- -------- --------
Change in Cash and Cash Equivalents $ (3,004) $ 8,859 $(12,878)
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $133,244 $111,383 $ 94,964
Income taxes 103,855 42,859 103,916
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,900,836 $4,690,347
Gas 523,187 492,271
Steam 62,832 61,921
Common 420,750 330,761
---------- ----------
5,907,605 5,575,300
Accumulated provision for depreciation (3,007,735) (2,700,839)
---------- ----------
2,899,870 2,874,461
Construction work in progress 117,848 81,612
Leased facilities - net (Note H) 133,007 138,687
Nuclear fuel - net (Note H) 87,660 90,219
---------- ----------
Net Utility Plant 3,238,385 3,184,979
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 518,505 404,240
Non-utility property - net 260,795 222,035
Investments in unconsolidated subsidiaries 130,555 73,194
Other 146,616 125,888
---------- ----------
Total Other Property and Investments 1,056,471 825,357
Current Assets
Cash and cash equivalents 16,603 19,607
Accounts receivable, net of allowance for
doubtful accounts - $16,653 and $15,641 190,103 145,737
Accrued utility revenues 130,518 141,273
Fossil fuel (at average cost) 123,618 124,045
Materials and supplies (at average cost) 75,434 73,159
Prepayments 68,745 62,479
Other 3,098 7,017
---------- ----------
Total Current Assets 608,119 573,317
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 199,372 172,546
Deferred regulatory assets (Note A) 225,464 215,200
Other 33,946 66,285
---------- ----------
Total Deferred Charges and Other Assets 458,782 454,031
---------- ----------
Total Assets $5,361,757 $5,037,684
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,903,105 $1,862,932
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,749,024 1,532,405
---------- ----------
Total Capitalization 3,682,579 3,425,787
Current Liabilities
Long-term debt due currently (Note H) 119,140 90,004
Notes payable (Note I) 286,859 319,953
Accounts payable 187,452 148,588
Payroll and vacation accrued 29,578 25,392
Taxes accrued - income and other 38,177 41,495
Interest accrued 20,755 20,334
Other 53,219 63,832
---------- ----------
Total Current Liabilities 735,180 709,598
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 570,750 525,666
Accumulated deferred investment tax credits 84,216 86,871
Deferred regulatory liabilities (Note A) 159,078 173,688
Other 129,954 116,074
---------- ----------
Total Deferred Credits and Other Liabilities 943,998 902,299
Commitments and Contingencies (Note L) ---------- ----------
Total Capitalization and Liabilities $5,361,757 $5,037,684
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $.01 par value; authorized 325,000,000 shares;
outstanding - 115,607,389 and 112,865,844 shares $ 1,156 $ 1,129
Other paid in capital 759,195 729,654
Retained earnings 1,144,092 1,132,149
Unearned compensation - restricted stock award (1,338) -
---------- ----------
Total Common Stock Equity 1,903,105 1,862,932
Preferred Stock - Wisconsin Electric Power Company, Cumulative
Six Per Cent. Preferred Stock - $100 par value;
authorized 45,000 shares; outstanding - 44,498 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds
Wisconsin Electric Power Company - 5-1/8% to 7-1/4% due 1998-2004 231,000 291,000
6.85% to 7-3/4% due 2016-2023 209,000 209,000
7.05% to 9-1/8% due 2024-2027 363,443 363,443
Edison Sault Electric Company - 7.90% to 10.31% due 2001-2009 6,170 -
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/2% to 9.47% due 2006-2095 480,600 331,300
Notes (secured)
Northern Tree Service, Inc. - Variable rate due 2003 36 -
Wispark Corporation - Variable rate due 2000-2008 15,463 -
7.40% due 2003 2,469 -
Wisvest Corporation - 6.36% effective rate due 2006 8,758 9,853
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006-2030 165,350 165,350
6.36% effective rate due 2006 9,642 10,847
Edison Sault Electric Company - 6.55% to 8.00% due 1999-2007 6,756 -
Variable rate due 1999 2,750 -
Wisconsin Energy Capital Corporation - 5.80% to 6.85% due 1998-2005 74,600 81,600
6.21% to 6.94% due 2008-2028 125,400 -
WMF Corp. - 9.1% due 2001 1,880 2,400
Obligations under capital leases - Wisconsin Electric Power Company 189,980 182,450
Unamortized discount - net (25,133) (24,834)
Long-term debt due currently (119,140) (90,004)
---------- ----------
Total Long-Term Debt (Note H) 1,749,024 1,532,405
---------- ----------
Total Capitalization $3,682,579 $3,425,787
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
<CAPTION>
Common Stock
------------
$.01 Par Other Paid Retained Unearned
Shares Value In Capital Earnings Compensation Total
------ -------- ---------- -------- ------------ -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 110,819,337 $1,108 $676,909 $1,193,248 $ - $1,871,265
Net income 218,135 218,135
Common stock cash dividends
$1.5075 per share (167,236) (167,236)
Sale of common stock 859,458 9 23,171 23,180
----------- ------ -------- ---------- -------- ----------
Balance - December 31, 1996 111,678,795 1,117 700,080 1,244,147 - 1,945,344
Net income 60,716 60,716
Common stock cash dividends
$1.535 per share (172,714) (172,714)
Sale of common stock 1,187,049 12 29,574 29,586
----------- ------ -------- ---------- -------- ----------
Balance - December 31, 1997 112,865,844 1,129 729,654 1,132,149 - 1,862,932
Common stock cash dividends
$1.555 per share (177,397) (177,397)
Sale of common stock 334,270 3 10,292 (20) 10,275
Acquisition of ESELCO, Inc. (Note B) 2,407,275 24 19,249 1,228 20,501
Restricted stock award (1,338) (1,338)
----------- ------ -------- ---------- -------- ----------
Balance - December 31, 1998 115,607,389 $1,156 $759,195 $1,144,092 $ (1,338) $1,903,105
=========== ====== ======== ========== ======== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cont'd)
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company"); its
utility subsidiaries, Wisconsin Electric Power Company ("Wisconsin
Electric") and Edison Sault Electric Company ("Edison Sault"); and its non-
utility subsidiaries, WISPARK Corporation; WISVEST Corporation; Wisconsin
Energy Capital Corporation, formerly Wisconsin Michigan Investment
Corporation; Minergy Corp.; WEC International, Inc.; WITECH Corporation;
Northern Tree Service, Inc; Badger Service Company; and other non-utility
companies.
The accounting records of the Company's utility subsidiaries are maintained
as prescribed by the Federal Energy Regulatory Commission. Wisconsin
Electric's accounting records are modified for requirements of the Public
Service Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUES: Utility revenues are recognized on the accrual basis and
include estimated amounts for service rendered but not billed.
FUEL: The cost of fuel is expensed in the period consumed.
PROPERTY: Property is recorded at cost. Additions to and significant
replacements of utility property are charged to utility plant at cost;
minor items are charged to maintenance expense. Cost includes material,
labor and allowance for funds used during construction (see Note E). The
cost of depreciable utility property, together with removal cost less
salvage, is charged to accumulated provision for depreciation when property
is retired.
In 1998, Wisconsin Electric began classifying certain utility plant as
common. Common plant is allocated to electric, gas and steam utility plant
in rate proceedings. All periods presented have been reclassified for
comparative purposes.
REGULATORY MATTERS: Pursuant to Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation, the utility subsidiaries capitalize, as regulatory assets,
incurred costs which are expected to be recovered in future utility rates.
The utility subsidiaries also record, as regulatory liabilities, the
current recovery in utility rates of costs which are expected to be paid in
the future.
The following deferred regulatory assets and liabilities are reflected in
the Consolidated Balance Sheet at December 31.
1998 1997
---- ----
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $160,941 $151,157
Department of Energy assessments 24,841 28,575
Deferred nuclear costs 15,324 17,681
Purchase power commitment 13,379 5,050
Other 10,979 12,737
-------- --------
Total Deferred Regulatory Assets $225,464 $215,200
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $142,483 $148,292
Tax and interest refunds 8,667 13,943
Other 7,928 11,453
-------- --------
Total Deferred Regulatory Liabilities $159,078 $173,688
======== ========
Wisconsin Electric directs a variety of demand-side management programs to
help foster energy conservation by its customers. As authorized by the
PSCW, Wisconsin Electric capitalized certain conservation program costs
prior to 1995. Utility rates approved by the PSCW provide for a current
return on these conservation investments. As of December 31, 1998, there
were $46.4 million of conservation investments on the Consolidated Balance
Sheet in other property and investments which will be amortized on a
straight line basis to income over the next two years, as well as
$69.5 million of conservation investments as of December 31, 1997.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable
debt securities acquired three months or less from maturity. During 1997,
Wisconsin Electric recorded a $140 million non-cash capital lease
transaction for a long-term power purchase contract (see Note H). During
1998, Wisconsin Energy recorded a $19.3 million non-cash acquisition of
ESELCO, Inc. accounted for as a pooling of interests (see Note B).
RESTRICTIONS: Various financing arrangements and regulatory requirements
impose certain restrictions on the ability of Wisconsin Energy's utility
subsidiaries to transfer funds to Wisconsin Energy in the form of cash
dividends, loans or advances. Under Wisconsin law, Wisconsin Electric is
prohibited from loaning funds, either directly or indirectly, to Wisconsin
Energy. The Company does not believe that such restrictions will affect
its operations.
NEW PRONOUNCEMENTS: On June 15, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective January 1, 2000 for Wisconsin Energy. FAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in fair value of derivatives are recorded
each period in current earnings or in other comprehensive income depending
upon how the derivative is designated. Based upon the current limited use
of derivative instruments at Wisconsin Energy, the adoption of FAS 133
would not have a significant effect on its results of operations or
financial position.
In 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board issued EITF 98-10, Accounting for Energy Trading and Risk
Management Activities. EITF 98-10 requires entities engaged in energy
trading activities to adopt mark to market accounting for fiscal years
beginning after December 15, 1998. The Company elected early adoption for
Griffin Energy Marketing L.L.C. ("Griffin"), a subsidiary of WISVEST
Corporation, and the impact was not material. Griffin began marketing
energy related services and limited trading of electricity in January 1998.
B - MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors
of Wisconsin Energy and Northern States Power Company, a Minnesota
corporation, agreed to terminate by mutual written consent an Agreement and
Plan of Merger which provided for a business combination of Wisconsin
Energy and Northern States Power Company to form Primergy Corporation. As
a result, Wisconsin Energy recorded a $30.7 million charge in the second
quarter of 1997 ($18.8 million net of tax or approximately 17 cents per
share) to write off deferred transaction costs and costs to achieve the
merger.
ESELCO, INC.: On May 31, 1998, Wisconsin Energy acquired ESELCO, Inc.
("ESELCO"), parent company of Edison Sault, in a tax-free reorganization
accounted for as a pooling of interests. In connection with the
acquisition, Wisconsin Energy issued 2,407,275 shares of common stock, with
fractional interests paid in cash, based upon an exchange ratio of 1.5114
shares of Wisconsin Energy common stock for each outstanding share of
ESELCO common stock. 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, including a $1.2 million credit to
retained earnings of which $0.9 million represents ESELCO's consolidated
net income during the first five months of 1998. Wisconsin Energy is
operating Edison Sault as a separate utility subsidiary.
C - DEPRECIATION
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the state
regulatory commissions and include estimates for salvage and removal costs.
Depreciation as a percent of average depreciable utility plant was 4.4% in
1998, 4.5% in 1997 and 4.1% in 1996. Nuclear plant decommissioning is
accrued as depreciation expense (see Note F). For contributions in aid of
construction remaining on the Consolidated Balance Sheet that were
collected prior to 1991, Wisconsin Electric had been amortizing
approximately $3 million per year as a credit to depreciation expense. In
its 1998 Rate Order, the PSCW authorized Wisconsin Electric to amortize the
remaining $45.7 million balance of pre-1991 contributions in aid of
construction at December 31, 1997 on a straight line basis over the 1998-
1999 biennial period. As a result, credits to depreciation expense for pre-
1991 contributions were $22.9 million in 1998, $3.5 million in 1997 and
$3.4 million in 1996.
D - INCOME TAXES
The Company follows the liability method in accounting for income taxes.
The liability method provides that deferred tax assets and liabilities be
recorded based on the difference between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
The following table is a summary of income tax expense and a reconciliation
of total income tax expense with the tax expected at the federal statutory
rate.
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Current tax expense $ 96,258 $23,995 $129,335
Deferred income taxes - net (658) 7,937 (1,575)
Investment tax credit - net (3,434) (927) (2,430)
--------- ------- --------
Total Tax Expense $ 92,166 $31,005 $125,330
========= ======= ========
Income Before Income Taxes
and Preferred Dividend $ 281,501 $92,924 $344,668
========= ======= ========
Expected tax at federal statutory rate $ 98,525 $32,523 $120,634
State income tax net of federal tax benefit 13,550 6,176 17,671
Flowback of prior contributions in aid (8,039) (1,157) (1,157)
of construction
Investment tax credit restored (4,729) (4,487) (4,509)
Low-income housing credits (2,846) (2,831) (2,930)
Other (no item over 5% of expected tax) (4,295) 781 (4,379)
--------- ------- --------
Total Tax Expense $ 92,166 $31,005 $125,330
========= ======= ========
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and
liabilities to recognize the expected future tax consequences of events
that have been reflected in the Company's financial statements or tax
returns and the adjustment of deferred tax balances to reflect tax rate
changes. Following is a summary of deferred income taxes under FAS 109 at
December 31.
1998 1997
---- ----
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 48,812 $ 43,405
Construction advances 55,696 49,202
Other 94,864 79,939
-------- --------
Total Deferred Income Tax Assets $199,372 $172,546
======== ========
Deferred Income Tax Liabilities
Property related $553,393 $514,792
Other 17,357 10,874
-------- --------
Total Deferred Income Tax Liabilities $570,750 $525,666
======== ========
Wisconsin Electric and Edison Sault have also recorded deferred regulatory
assets and liabilities representing the future expected impact of deferred
taxes on utility revenues (see Note A).
E - ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction ("AFUDC") is included in
utility plant accounts and represents the cost of borrowed funds used
during plant construction and a return on stockholders' capital used for
construction purposes. Allowance for borrowed funds also includes interest
capitalized on qualifying assets of non-utility subsidiaries. On the
Consolidated Income Statement, the cost of borrowed funds (before income
taxes) is a reduction of interest expense and the return on stockholders'
capital is an item of non-cash other income.
As approved by the PSCW, Wisconsin Electric's AFUDC was capitalized during
the following periods on 50% of construction work in progress at the
following rates:
* June 1, 1998 December 31, 1998 10.21%
* February 18, 1997 May 31, 1998 10.29%
* January 1, 1996 February 17, 1997 10.17%
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach Nuclear
Plant ("Point Beach") in Two Rivers, Wisconsin. During 1998, 1997 and
1996, Point Beach provided 18%, 6% and 24%, respectively, of Wisconsin
Electric's net electric energy supply. The United States Nuclear
Regulatory Commission operating licenses for Point Beach expire in October
2010 for Unit 1 and in March 2013 for Unit 2.
In 1997, the PSCW authorized Wisconsin Electric to defer certain nuclear
non-fuel operation and maintenance costs in excess of those included in
1997 rates. As a result, Wisconsin Electric deferred $18 million during
1997. During 1998, the PSCW authorized a five-year recovery in the
electric retail jurisdiction in the State of Wisconsin of the excess 1997
nuclear non-fuel operation and maintenance costs, and Wisconsin Electric
began amortizing the $18 million of deferred costs on a straight line basis
over the five year recovery period. As of December 31, 1998, $15 million
of deferred costs remain on the Consolidated Balance Sheet in Deferred
Charges and Other Assets - Deferred Regulatory Assets (see Note A).
NUCLEAR INSURANCE: The Price-Anderson Act as amended and extended to
August 1, 2002, currently limits the total public liability for damages
arising from a nuclear incident at a nuclear power plant to approximately
$9.8 billion, of which $200 million is covered by liability insurance
purchased from private sources, and $9.6 billion is covered by an industry
retrospective loss sharing plan whereby in the event of a nuclear incident
resulting in damages exceeding the private insurance coverage, each owner
of a nuclear plant would be assessed a deferred premium of up to
$88.1 million per reactor (Wisconsin Electric owns two) with a limit of
$10 million per reactor within one calendar year. As the owner of Point
Beach, Wisconsin Electric would be obligated to pay its proportionate share
of any such assessment.
Wisconsin Electric participated in an industry-wide insurance program, with
an aggregate limit of $200 million which covered radiation injury claims of
nuclear workers first employed after 1987. This program was replaced with
a new program (which has no retrospective assessment provisions) at the end
of 1997. However, the discovery period for claims covered under the former
program remains open until the end of 2007 for those few former insureds
who no longer need to participate in the new, replacement program. If
claims in excess of the funds available under the old program develop,
Wisconsin Electric would be assessed up to a maximum of approximately
$3.1 million per reactor.
Wisconsin Electric, through its membership in Nuclear Electric Insurance
Limited ("NEIL"), carries decontamination, property damage and
decommissioning shortfall insurance covering losses of up to $1.5 billion
(subject to a $1 million deductible for each loss) at Point Beach. Under
policies issued by NEIL, the insured member is liable for a retrospective
premium adjustment in the event of catastrophic losses exceeding the full
financial resources of NEIL. Wisconsin Electric's maximum retrospective
liability under its policies is $10.1 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage (in
excess of 23 weeks) at Point Beach, where such outage is caused by
accidental property damage from radioactive contamination or other risks of
direct physical loss. Wisconsin Electric's maximum retrospective liability
under this policy is $5.1 million.
It should not be assumed that, in the event of a major nuclear incident,
any insurance or statutory limitation of liability would protect Wisconsin
Electric from material adverse impact.
NUCLEAR DECOMMISSIONING: Wisconsin Electric expects to operate the two
units at Point Beach to the expiration of their current operating licenses.
The estimated cost to decommission the plant in 1998 dollars is
$489 million based upon a site specific decommissioning cost study
completed in 1998. Assuming plant shutdown at the expiration of the
current operating licenses, prompt dismantlement and annual escalation of
costs at specific inflation factors established by the PSCW, it is
projected that approximately $1.8 billion will be spent over a thirty-three
year period, beginning in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund
will provide sufficient funds at the time of decommissioning. Wisconsin
Electric believes it is probable that any shortfall in funding would be
recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, Wisconsin
Electric's debt and equity security investments in the Fund are classified
as available for sale. Gains and losses on the Fund were determined on the
basis of specific identification; net unrealized holding gains on the Fund
were recorded as part of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31. The Fund balance is stated at fair value.
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Decommissioning costs $ 15,461 $ 11,402 $15,418
Earnings 15,918 15,846 10,891
-------- -------- -------
Depreciation Expense $ 31,379 $ 27,248 $26,309
======== ======== =======
Total costs accrued to date $320,356 $288,977
Unrealized gain 198,149 115,263
-------- --------
Accumulated Provision for Depreciation $518,505 $404,240
======== ========
DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992
establishes a Uranium Enrichment Decontamination and Decommissioning Fund
("D&D Fund") for the United States Department of Energy's nuclear fuel
enrichment facilities. Deposits to the D&D Fund are derived in part from
special assessments on utilities using enrichment services. As of
December 31, 1998, Wisconsin Electric has recorded its remaining estimated
liability equal to the projected special assessments of $21.4 million. A
corresponding deferred regulatory asset is detailed in Note A. The
deferred regulatory asset will be amortized to nuclear fuel expense and
included in utility rates over the next nine years.
In Wisconsin Electric's 1998 Rate Order, the PSCW approved recovery over
the 1998-1999 biennial period of D&D Fund costs disallowed in 1997.
G - PREFERRED STOCK
Preferred stock authorized but unissued is: Wisconsin Energy, $.01 par
value, 15,000,000 shares and Wisconsin Electric, cumulative, $25 par value,
5,000,000 shares.
The 3.60% series preferred stock is redeemable in whole or in part at the
option of Wisconsin Electric at $101 per share plus any accrued dividends.
The fair value of Wisconsin Electric's preferred stock was $20.2 million
and $17.8 million at December 31, 1998 and 1997, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking
fund requirements through 2003 for the aggregate amount of long-term debt
outstanding (excluding obligations under capital lease) at December 31,
1998 are shown below.
(Thousands of Dollars)
1999 $98,809
2000 40,022
2001 25,031
2002 17,173
2003 16,220
Sinking fund requirements for the years 1999 through 2003, included in the
table above, are $27.6 million. Substantially all utility plant is subject
to the mortgage of the respective subsidiary.
Long-term debt premium or discount and expense of issuance are amortized by
the straight line method over the lives of the debt issues and included as
interest expense. Unamortized amounts pertaining to reacquired debt are
written off currently, when acquired for sinking fund purposes, or
amortized in accordance with state regulatory commission orders, when
acquired for early retirement.
In October 1997, Wisconsin Energy Capital Corporation issued $15 million of
6.40% medium-term notes due 2001 and $12 million of 6.33% medium-term notes
due 2002. In November 1997, Wisconsin Energy Capital Corporation issued
$20 million of 6.22% medium-term notes due 2000. Proceeds were added to
Wisconsin Energy Capital Corporation's general funds and were used to
finance various non-utility projects and for other general corporate
purposes.
In April 1998, Wisconsin Energy Capital Corporation issued $25 million of
6.48% medium-term notes due 2008. Proceeds from the issue were added to
Wisconsin Energy Capital Corporation's general funds and were used to
finance non-utility projects and for other general corporate purposes.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds and were used to reduce short-term borrowings and for other
general corporate purposes.
In December 1998, Wisconsin Energy Capital Corporation issued $20 million
of 6.21% medium-term notes due 2008, $30 million of 6.51% medium-term notes
due 2013, and $50 million of 6.94% medium-term notes due 2028. Proceeds of
the issues were added to Wisconsin Energy Capital Corporation's general
funds and were used to finance non-utility projects and for other general
corporate purposes.
During 1998, WISPARK Corporation secured $18 million of bank financing in
the form of adjustable rate mortgage notes due 2000-2008 to finance the
construction or purchase of various facilities.
Following is Wisconsin Energy's long-term debt outstanding at December 31.
<TABLE>
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
First Mortgage Bonds
Wisconsin Electric Power Company - 5-1/8% Series due 1998 $ - $ 60,000
6-1/2% Series due 1999 40,000 40,000
6-5/8% Series due 1999 51,000 51,000
7-1/4% Series due 2004 140,000 140,000
7-1/8% Series due 2016 100,000 100,000
6.85% Series due 2021 9,000 9,000
7-3/4% Series due 2023 100,000 100,000
7.05% Series due 2024 60,000 60,000
9-1/8% Series due 2024 3,443 3,443
8-3/8% Series due 2026 100,000 100,000
7.70% Series due 2027 200,000 200,000
Edison Sault Electric Company - 10.31% Series D due 2001 900 -
7.90% Series H due 2002 1,200 -
10-1/4% Series G due 2009 4,070 -
Debentures (unsecured)
Wisconsin Electric Power Company - 6-5/8% due 2006 200,000 200,000
9.47% due 2006 5,600 6,300
8-1/4% due 2022 25,000 25,000
6-1/2% due 2028 150,000 -
6-7/8% due 2095 100,000 100,000
Notes (secured)
Northern Tree Service, Inc. - Variable rate due 2003 36 -
Wispark Corporation - Variable rate due 2000 7,886 -
Variable rate due 2001 4,070 -
Variable rate due 2008 3,507 -
7.4% due 2003 2,469 -
Wisvest Corporation - 6.36% effective rate due 2006 8,758 9,853
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
6.36% effective rate due 2006 9,642 10,847
Edison Sault Electric Company - 6.55%-8.00% due 1999-2007 6,756 -
Variable rate due 1999 2,750 -
Wisconsin Energy Capital Corporation - 5.8% due 1998 - 7,000
6.49% due 2000 7,000 7,000
6.22% due 2000 20,000 20,000
6.40% due 2001 15,000 15,000
6.33% due 2002 12,000 12,000
6.66% due 2003 10,600 10,600
6.85% due 2005 10,000 10,000
6.48% due 2008 25,400 -
6.21% due 2008 20,000 -
6.51% due 2013 30,000 -
6.94% due 2028 50,000 -
WMF Corp. - 9.1% due 2001 1,880 2,400
Obligations under capital leases - 189,980 182,450
Wisconsin Electric Power Company
Unamortized discount - net (25,133) (24,834)
Long-term debt due currently (119,140) (90,004)
---------- ----------
Total Long-Term Debt $1,749,024 $1,532,405
========== ==========
</TABLE>
Following is additional information concerning the variable rate notes
outstanding and their corresponding interest rates at December 31, 1998.
Variable Rate Interest Rate
Notes
------------- -------------
(Thousands of Dollars)
Northern Tree Service, Inc. $ 36 Due 2003 7.75%
Wispark Corporation 7,886 Due 2000 6.89%
4,070 Due 2001 6.84%
3,507 Due 2008 7.60%
Wisconsin Electric Power Company 67,000 Due 2016 4.10%
98,350 Due 2006-2030 3.95%
Edison Sault Electric Company 2,750 Due 1999 7.75%
OBLIGATIONS UNDER CAPITAL LEASE: Wisconsin Electric has a nuclear fuel
leasing arrangement with Wisconsin Electric Fuel Trust ("Trust") which is
treated as a capital lease. The nuclear fuel is leased and amortized to
fuel expense for a period of 60 months or until the removal of the fuel
from the reactor, if earlier. Lease payments include charges for the cost
of fuel burned, financing costs and management fees. In the event
Wisconsin Electric or the Trust terminates the lease, the Trust would
recover its unamortized cost of nuclear fuel from Wisconsin Electric.
Under the lease terms, Wisconsin Electric is in effect the ultimate
guarantor of the Trust's commercial paper and line of credit borrowings
financing the investment in nuclear fuel. Interest expense on the nuclear
fuel lease, included in fuel expense, was $3.1 million, $0.9 million and
$2.3 million during 1998, 1997 and 1996, respectively.
To meet a portion of its electric energy supply needs, Wisconsin Electric
entered into a long-term power purchase contract with an unaffiliated
independent power producer, LSP-Whitewater Limited Partnership ("LS
Power"). The contract, for 236 megawatts of firm capacity from LS Power's
gas-fired cogeneration facility located in Whitewater, Wisconsin, includes
no minimum energy requirements. When the contract expires in 2022,
Wisconsin Electric may, at its option and with proper notice, renew for
another ten years or purchase the generating facility at fair value or
allow the contract to expire. Wisconsin Electric treats this contract as a
capital lease. The leased facility and corresponding obligation under
capital lease were recorded at the estimated fair value of the plant's
electric generating facilities. The leased facility is being amortized on
a straight line basis over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September
1997, imputed interest costs on the purchase power obligation were
$22.9 million and $6.5 million during 1998 and 1997, respectively, and total
amortization costs of the leased facilities were $5.7 million and
$1.6 million during 1998 and 1997, respectively. The long-term power purchase
contract is treated as an operating lease for rate-making purposes. As a
result, the difference between the minimum lease payments and the sum of
the imputed interest and amortization costs are recorded as a deferred
regulatory asset (see Note A). Due to the timing of the minimum lease
payments, Wisconsin Electric expects the regulatory asset to increase to
approximately $78 million by the year 2009 and the total obligation under
capital lease to increase to $160 million by the year 2005 before each is
reduced over the remaining life of the contract. The minimum lease
payments are classified as purchased power expense on the Consolidated
Income Statement. Interest expense on the purchase power obligation,
included in purchased power expense, was $20.3 million and $5.6 million
during 1998 and 1997, respectively.
Provided below is a summary of Wisconsin Electric's nuclear fuel and leased
facilities at December 31.
1998 1997
---- ----
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $100,809 $ 95,464
Accumulated provision for amortization (62,888) (59,783)
In process/stock 49,739 54,538
-------- --------
Total Nuclear Fuel $ 87,660 $ 90,219
======== ========
Leased Facilities
Long-term purchase power commitment $140,312 $140,312
Accumulated provision for amortization (7,305) (1,625)
-------- --------
Total Leased Facilities $133,007 $138,687
======== ========
Future minimum lease payments under the capital leases and the present
value of the net minimum lease payments as of December 31, 1998 are as
follows:
Purchase
Nuclear Power
Fuel Lease Commitment Total
---------- ---------- -----
(Thousands of Dollars)
1999 $21,678 $ 24,123 $ 45,801
2000 13,841 25,031 38,872
2001 7,433 25,968 33,401
2002 3,664 26,961 30,625
2003 1,071 27,954 29,025
Later Years - 560,191 560,191
------- -------- --------
Total Minimum Lease Payments 47,687 690,228 737,915
Less: Estimated Executory Costs - (139,956) (139,956)
------- -------- --------
Net Minimum Lease Payments 47,687 550,272 597,959
Less: Interest (4,093) (403,886) (407,979)
------- -------- --------
Present Value of Net Minimum Lease Payments 43,594 146,386 189,980
Less: Due Currently (19,549) - (19,549)
------- -------- --------
$24,045 $146,386 $170,431
======= ======== ========
FAIR VALUE: The carrying amount of Wisconsin Energy's long-term debt
outstanding (excluding obligations under capital lease) was $1,703 million
and $1,465 million at December 31, 1998 and 1997, respectively, with a fair
value of $1,789 million and $1,504 million, respectively. The fair value
of the first mortgage bonds and debentures is estimated based upon the
market value of the same or similar issues. Book value approximates fair
value for Wisconsin Energy's notes.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
1998 1997
---- ----
Interest Interest
Balance Rate Balance Rate
------- ---- ------- ----
(Thousands of Dollars)
Banks $ 51,503 5.42% $127,815 6.40%
Commercial paper 235,356 5.35% 192,138 5.84%
-------- --------
$286,859 $319,953
======== ========
Unused lines of credit for short-term borrowing amounted to $383 million at
December 31, 1998 of which $378 million supports commercial paper. In
support of various informal lines of credit from banks, Wisconsin Energy's
subsidiaries have agreed to maintain unrestricted compensating balances or
to pay commitment fees; neither the compensating balances nor the
commitment fees are significant.
J - BENEFITS
The Company provides defined benefit pension and other postretirement
benefit plans to employees. The status of these plans, including a
reconciliation of benefit obligations, a reconciliation of plan assets and
the funded status of the plans follows. Also disclosed below is the
aggregate funded status of those pension and other postretirement benefit
plans with accumulated net benefit obligations in excess of plan assets.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at January 1 $649,256 $601,213 $ 148,181 $142,783
Service cost 12,503 9,216 2,660 1,911
Interest cost 46,831 45,613 11,751 10,343
Plan participants' contributions - - 5,908 4,903
Plan amendments - 1,379 3,737 (4,828)
Actuarial loss 52,508 35,985 22,333 6,359
Acquisition 13,676 - 1,862 -
Benefits paid (45,674) (44,150) (15,665) (13,290)
-------- -------- --------- --------
Benefit Obligation at December 31 $729,100 $649,256 $ 180,767 $148,181
-------- -------- --------- --------
Change in Plan Assets
Fair Value at January 1 $761,881 $687,482 $ 59,841 $ 49,424
Actual return on plan assets 104,658 114,294 8,515 10,555
Employer contributions 7,551 4,255 10,252 8,249
Plan participants' contributions - - 5,908 4,903
Acquisition 11,243 - - -
Benefits paid (45,674) (44,150) (15,603) (13,290)
-------- -------- --------- --------
Fair Value at December 31 $839,659 $761,881 $ 68,913 $ 59,841
-------- -------- --------- --------
Funded Status of Plans
Funded status at December 31 $110,559 $112,625 $(111,854) $(88,340)
Unrecognized
Net actuarial (gain) loss (117,185) (123,094) 4,673 (14,458)
Prior service cost 31,646 34,344 2,582 (938)
Net transition obligation (asset) (27,220) (31,009) 64,918 68,825
-------- -------- --------- --------
Net Accrued Benefit Cost $ (2,200) $ (7,134) $ (39,681) $(34,911)
======== ======== ========= ========
Funded Status of Plans with Net
Benefit Obligations at December 31
Fair value of plan assets $ 11,168 $ - $ 68,444 $ 59,394
Less: Benefit obligation (14,664) - (180,494) (147,919)
-------- -------- --------- --------
Net Benefit Obligation $ (3,496) $ - $(112,050) $(88,525)
======== ======== ========= ========
</TABLE>
The components of net periodic pension and other postretirement benefit
costs as well as the weighted-average assumptions used in accounting for
the plans include the following:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------ -------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Periodic Benefit Cost
Service cost $12,503 $ 9,216 $ 9,912 $ 2,660 $ 1,911 $ 2,436
Interest cost 46,831 45,613 41,454 11,751 10,343 10,456
Expected return on plan assets (57,384) (51,592) (48,494) (5,008) (4,085) (3,708)
Amortization of
Transition obligation (asset) (3,798) (3,802) (3,802) 4,615 4,586 4,887
Prior service cost 3,090 3,061 1,755 217 (100) (100)
Actuarial loss (gain) 7 - - (270) (235) (272)
------- ------- ------- ------- ------- -------
Net Periodic Benefit Cost $ 1,249 $ 2,496 $ 825 $13,965 $12,420 $13,699
======= ======= ======= ======= ======= =======
Weighted-Average Assumptions
at December 31 (%)
Discount rate 6.75 7.25 7.75 6.75 7.25 7.75
Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase 3.0 to 4.75 to 4.75 to 3.0 to 4.75 to 4.75 to
5.0 5.0 5.0 5.0 5.0 5.0
</TABLE>
PENSION PLANS: Pension plan assets, the majority of which are equity
securities, are held by pension trusts. Other pension plan assets include
corporate and government bonds and real estate. In the opinion of the
Company, current pension trust assets and amounts which are expected to be
paid to the trusts in the future will be adequate to meet pension payment
obligations to current and future retirees.
OTHER POSTRETIREMENT BENEFIT PLANS: The Company uses Employees' Benefit
Trusts to fund a major portion of other postretirement benefits for
employees of Wisconsin Electric and the non-utility affiliates. The
majority of the trusts' assets are mutual funds.
The assumed health care cost trend rate at December 31, 1998 was 6.0% for
those under age 65 and 6.8% for those over age 65, decreasing gradually to
5.0% in 2004 and thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for health care plans.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1% Increase 1% Decrease
----------- -----------
(Thousands of Dollars)
Effect on
Postretirement benefit obligation $17,275 ($15,163)
Total of service and interest cost components 1,664 (1,444)
OMNIBUS STOCK INCENTIVE PLAN: The Omnibus Stock Incentive Plan ("OSIP"),
as approved by stockholders in 1993 and amended by the Board of Directors
in 1998, enables the Company to provide a long-term incentive, through
equity interests in Wisconsin Energy, to outside directors, selected
officers and key employees. The OSIP provides for the granting of stock
options, stock appreciation rights, stock awards and performance units
during the ten year term of the plan. Awards may be paid in common stock,
cash or a combination thereof. No stock appreciation rights have been
granted to date. Four million shares of common stock have been reserved
under the OSIP.
The exercise price of a stock option under the OSIP is to be no less than
100% of the common stock's fair market value on the grant date and options
may not be exercised within six months of the grant date. The following is
a summary of stock options issued through December 31, 1998 under the
Omnibus Stock Incentive Plan.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Options Price Options Price Options Price
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 530,200 $27.999 523,900 $28.038 335,500 $28.832
Granted 331,500 $29.372 40,000 $27.653 210,900 $26.813
Exercised (3,000) $27.375 - - - -
Forfeited - - (33,700) $28.085 (22,500) $28.400
------- -------- -------
Outstanding at December 31 858,700 $28.531 530,200 $27.999 523,900 $28.038
======= ======= =======
</TABLE>
As of December 31, 1998, the 858,700 options outstanding under the OSIP are
exercisable at per share prices of between $26.813 and $30.875 with a
weighted average remaining contractual life of 8.0 years. Under "cliff
vesting" terms, 527,200 of these options are exercisable four years after
the grant date, while 307,500 of these options vest on a straight-line
"graded" basis over a four-year period from the grant date and 24,000 of
these options vest on a straight-line "graded" basis over a three-year
period from the grant date. All outstanding options have an exercise
period of ten years from the grant date.
The earliest year in which any of the options could be exercised was 1997.
As of December 31, 1998, the 120,500 of exercisable options outstanding
under the OSIP are exercisable at per share prices of between $26.813 and
$27.375 with a weighted average remaining contractual life of 5.5 years.
Each stock option granted prior to 1998 under the Omnibus Stock Incentive
Plan includes performance units based upon contingent dividends for four
years from the date of grant. Payment of these dividends depends on the
achievement of certain performance goals. No performance units have been
earned to date.
Wisconsin Energy has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), and continues to apply the intrinsic value method
of accounting for awards under the OSIP as required by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25"). If Wisconsin Energy had adopted the optional FAS 123
accounting method, the effect on net income and earnings per share for
1998, 1997 and 1996 would have been immaterial.
During 1998 and 1997, the Company granted to certain key employees the
following restricted shares of common stock under the OSIP at the following
weighted-average fair market values on the grant date.
1998 1997
---- ----
Weighted Weighted
Number Average Number Average
of Market of Market
Shares Price Shares Price
----------------- -----------------
Outstanding at January 1 6,000 -
Granted 49,750 $28.644 6,000 $28.814
------ -----
Outstanding at December 31 55,750 6,000
====== =====
Recipients of the restricted shares have the right to vote the shares and
to receive restricted dividends and are not required to provide
consideration to the Company other than rendering service. Forfeiture
provisions on the restricted stock expire 10 years after award grant
subject to an accelerated expiration schedule based on the achievement of
certain financial performance goals.
Under the provisions of APB 25, the market value of the restricted stock
awards on the date of grant is recorded as a separate unearned compensation
component of common stock equity and is then charged to expense over the
vesting period of the awards. Adjustments are also made to expense for
achievement of performance goals. Restricted stock compensation charged to
expense during 1998 and 1997 was immaterial.
K - SEGMENT REPORTING
Wisconsin Energy, a holding company with subsidiaries in utility and non-
utility businesses, has organized its operating segments according to how
its principal subsidiary, Wisconsin Electric, is currently regulated.
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 electric, gas and steam
utility segments.
The electric utility segment derives its revenues from 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. The gas utility segment derives its
revenues from 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. The
steam utility segment derives its revenues from the production,
distribution and sale of steam to space heating and processing customers in
the Milwaukee area.
The lines of business for Wisconsin Energy's non-utilities include real
estate investment and development, venture capital investments in Wisconsin
and investments in recycling technology and energy related entities.
See Note L for information concerning a pending energy related acquisition
by WISVEST Corporation.
The following summarizes the reportable operating segments of Wisconsin
Energy for the years ended December 31.
<TABLE>
<CAPTION>
Reportable Operating Segments (a)
Electric Gas Steam Total
-------- --- ----- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1998
External revenues $1,663,512 $293,250 $20,506 $1,977,268
Intersegment revenues (b) 120 2,598 - 2,718
---------- -------- ------- ----------
Total Operating Revenues $1,663,632 $295,848 $20,506 $1,979,986
========== ======== ======= ==========
Depreciation $ 217,368 $ 23,272 $ 2,631 $ 243,271
Operating Income Taxes 93,392 1,055 333 94,780
Operating Income (c) 254,589 19,180 2,934 276,703
Segment Assets (d) 4,151,647 421,951 48,358 4,621,956
Construction Expenditures 290,968 43,447 1,600 336,015
1997
External revenues $1,411,962 $349,971 $22,315 $1,784,248
Intersegment revenues (b) 153 5,201 - 5,354
---------- -------- ------- ----------
Total Operating Revenues $1,412,115 $355,172 $22,315 $1,789,602
========== ======== ======= ==========
Depreciation $ 213,785 $ 21,421 $ 2,492 $ 237,698
Operating Income Taxes 48,442 7,973 1,374 57,789
Operating Income (c) 170,117 25,122 4,220 199,459
Segment Assets (d) 3,900,889 392,865 45,131 4,338,885
Construction Expenditures 236,384 22,977 1,006 260,367
1996
External revenues $1,393,057 $361,101 $15,675 $1,769,833
Intersegment revenues (b) 213 3,774 - 3,987
---------- -------- ------- ----------
Total Operating Revenues $1,393,270 $364,875 $15,675 $1,773,820
========== ======== ======= ==========
Depreciation $ 183,159 $ 18,246 $ 1,391 $ 202,796
Operating Income Taxes 110,752 14,516 1,359 126,627
Operating Income (c) 269,068 33,204 3,572 305,844
Segment Assets (d) 3,646,997 400,582 46,499 4,094,078
Construction Expenditures 272,838 22,851 21,651 317,340
<FN>
(a) The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies
(see Note A).
(b) Wisconsin Electric accounts for intersegment revenues at a tariff
rate established by the PSCW.
(c) Interest income and expense are not recorded to the segments to
determine segment operating income.
(d) Common utility plant is allocated to electric, gas and steam to
determine segment assets (see Note A).
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the financial statements is as follows:
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Assets
Reportable segments $4,621,956 $4,338,885 $4,094,078
Non-utility
Real estate activities 247,972 211,359 200,603
Other (a) 272,283 154,822 89,358
Other - corporate (b) 219,546 332,618 426,799
---------- ---------- ----------
Total Assets $5,361,757 $5,037,684 $4,810,838
========== ========== ==========
Construction Expenditures
Reportable segments $ 336,015 $ 260,367 $ 317,340
Non-utility 62,967 85,541 71,854
---------- ---------- ----------
Total Construction Expenditures $ 398,982 $ 345,908 $ 389,194
========== ========== ==========
Other Information
Non-utility Net Income (c)
Real estate activities $ 8,377 $ 6,966 $ 8,820
Other (a) (1,607) (8,979) (455)
(a) Primarily venture capital, recycling technology and energy related
activities.
(b) Primarily other property and investments, materials and supplies and
deferred charges.
(c) Excludes merger expenses and holding company net income.
L - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a cogeneration facility in Kimberly, Wisconsin, Wisconsin
Electric purchased three combustion turbines, three heat recovery boilers
and a steam turbine (the "Equipment"). Wisconsin Electric carried the
Equipment at a cost of approximately $66.3 million, entertaining numerous
proposals and projects for which the Equipment could be used. During 1997,
Wisconsin Electric continued to review its options for use or sale of the
Equipment. In the fourth quarter of 1997, WISVEST Corporation, a non-
utility subsidiary of Wisconsin Energy, entered into the final phase of
negotiations for a joint independent power project involving the Equipment.
Under the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, Wisconsin Electric refined its cash flow
projection for the Equipment based upon this proposal. As measured by
expected gross cash flows to be earned under this project, Wisconsin
Electric determined that an impairment existed. As a result, Wisconsin
Electric recorded a $30.0 million impairment charge in the fourth quarter
of 1997 which was included in the Miscellaneous - Net Other Income and
Deductions line of the Consolidated Income Statement. During the second
quarter of 1998, WISVEST Corporation purchased the Equipment from Wisconsin
Electric and contributed it to a joint independent power project, the
Androscoggin Cogeneration Center.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric continues a voluntary
program to investigate the remediation of eleven former manufactured gas
plant sites. Wisconsin Electric currently estimates that future costs for
detailed site investigation and remediation will be $25 million to
$40 million over the next ten years. Actual costs are uncertain pending
the results of further site specific investigations and the selection of
site specific remediation.
Of the eleven sites, Wisconsin Electric has begun remediation activities at
the former manufactured gas plant site in the City of Burlington,
Wisconsin. Wisconsin Electric also expects to begin remediation in 1999 at
sites in Fort Atkinson and Kenosha, Wisconsin. Wisconsin Electric's
expected remediation of these sites is anticipated to be accomplished at an
aggregate cost of between $6 million and $11 million.
In Wisconsin Electric's February 13, 1997 Rate Order, the PSCW amplified
its position on the recovery of manufactured gas plant site remediation
costs. It reiterated its position that such costs should be deferred and
amortized and recovered, without carrying costs, in future rate cases.
Since the timing and recovery of remediation costs will be affected by the
biennial rate case cycle, the timing and magnitude of remediation
expenditures, and their recovery may be affected.
FUTURE PLANT ADDITIONS: In October 1998, WISVEST Connecticut, LLC, a
wholly owned subsidiary of WISVEST Corporation, entered into an agreement
to purchase two fossil-fueled power plants for $272 million from The United
Illuminating Company, an unaffiliated investor owned utility in New Haven,
Connecticut. Pursuant to the agreement, WISVEST Connecticut, L.L.C. is
purchasing the Bridgeport Harbor Station, which has an active generating
capacity of 590 megawatts, as well as the 466-megawatt New Haven Harbor
Station. The Bridgeport Harbor Station, located in Bridgeport Connecticut,
is comprised of one active oil-fired unit, one oil and coal-fired unit and
one jet-fueled unit. The New Haven Harbor Station, located in New Haven,
Connecticut, has one oil and gas-fired generating unit.. The sale,
expected to close in the second quarter of 1999, is contingent upon certain
regulatory approvals. WISVEST Corporation anticipates financing the
acquisition through long-term, nonrecourse project financing arrangements
and through an equity contribution from Wisconsin Energy.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Wisconsin Energy Corporation and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 27, 1999
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENT
Year Ended December 31
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Revenues
Electric $1,641,403 $1,412,115 $1,393,270
Gas 295,848 355,172 364,875
Steam 20,506 22,315 15,675
---------- ---------- ----------
Total Operating Revenues 1,957,757 1,789,602 1,773,820
Operating Expenses
Fuel (Note H) 308,374 311,966 295,651
Purchased power (Note H) 141,619 132,689 36,216
Cost of gas sold 175,475 233,877 234,254
Other operation expenses 476,279 407,114 391,520
Maintenance 168,120 135,096 103,046
Depreciation (Note C) 241,572 237,698 202,796
Taxes other than income taxes 78,652 73,914 77,866
Federal income tax (Note D) 79,198 40,221 105,656
State income tax (Note D) 18,605 10,558 24,976
Deferred income taxes - net (Note D) (438) 7,937 (1,575)
Investment tax credit - net (Note D) (3,395) (927) (2,430)
---------- ---------- ----------
Total Operating Expenses 1,684,061 1,590,143 1,467,976
Operating Income 273,696 199,459 305,844
Other Income and Deductions
Interest income 21,651 17,974 13,553
Allowance for other funds used
during construction (Note E) 2,936 3,349 3,036
Merger expenses (Note B) - (21,881) -
Miscellaneous - net (Note L) (684) (37,531) (3,642)
Federal income tax (Note D) (2,124) 19,687 (631)
State income tax (Note D) (605) 3,090 (570)
---------- ---------- ----------
Total Other Income
and Deductions 21,174 (15,312) 11,746
Income Before Interest Charges 294,870 184,147 317,590
Interest Charges
Long-term debt 100,420 106,573 100,133
Other interest 11,756 8,730 7,821
Allowance for borrowed funds used
during construction (Note E) (1,480) (1,771) (1,679)
--------- --------- ---------
Total Interest Charges 110,696 113,532 106,275
--------- --------- ---------
Net Income 184,174 70,615 211,315
Preferred Stock Dividend Requirement 1,203 1,203 1,203
--------- --------- ---------
Earnings Available for Common
Stockholder $ 182,971 $ 69,412 $ 210,112
========== ========== ==========
<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 are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
Year Ended December 31
<CAPTION>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $184,174 $ 70,615 $211,315
Reconciliation to cash
Depreciation 241,572 237,698 202,796
Nuclear fuel expense - amortization 18,922 5,426 21,887
Conservation expense - amortization 22,498 22,498 22,498
Debt premium, discount &
expense - amortization 3,794 7,561 9,762
Deferred income taxes - net (438) 7,937 (1,575)
Investment tax credit - net (3,395) (927) (2,430)
Allowance for other funds used
during construction (2,936) (3,349) (3,036)
Write-off of merger costs - 21,881 -
Write-down of equipment - 30,000 -
Change in - Accounts receivable (26,537) 145 4,220
Inventories (811) (12,788) (30,703)
Accounts payable 26,706 (3,097) 38,779
Other current assets 14,224 10,782 (14,297)
Other current liabilities (14,268) 29,074 (2,780)
Other 26,868 (52,759) 4,874
------- -------- -------
Cash Provided by Operating Activities 490,373 370,697 461,310
Investing Activities
Construction expenditures (328,482) (260,649) (319,832)
Allowance for borrowed funds used
during construction (1,480) (1,771) (1,679)
Nuclear fuel (10,183) (6,352) (26,053)
Nuclear decommissioning trust (31,379) (27,248) (26,309)
Other (1,873) 22,359 (7,892)
-------- -------- -------
Cash Used in Investing Activities (373,397) (273,661) (381,765)
Financing Activities
Retirement of preferred stock - - (1)
Sale of long-term debt 169,434 - 230,094
Retirement of long-term debt (78,779) (171,155) (52,921)
Change in short-term debt (23,344) 197,243 (105,304)
Stockholder capital contribution - 100,000 -
Dividends on - Common stock (179,001) (213,692) (167,889)
Preferred stock (1,203) (1,203) (1,203)
-------- -------- -------
Cash Used in Financing Activities (112,893) (88,807) (97,224)
-------- -------- --------
Change in Cash and Cash Equivalents $ 4,083 $ 8,229 $(17,679)
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $125,344 $112,682 $ 94,845
Income taxes 106,550 45,210 107,682
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
ASSETS
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Utility Plant
Electric $4,820,239 $4,690,347
Gas 523,187 492,271
Steam 62,832 61,921
Common 420,750 330,761
---------- ----------
5,827,008 5,575,300
Accumulated provision for depreciation (2,973,007) (2,700,839)
---------- ----------
2,854,001 2,874,461
Construction work in progress 109,412 81,612
Leased facilities - net (Note H) 133,007 138,687
Nuclear fuel - net (Note H) 87,660 90,219
---------- ----------
Net Utility Plant 3,184,080 3,184,979
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 518,505 404,240
Other 60,123 84,223
---------- ----------
Total Other Property and Investments 578,628 488,463
Current Assets
Cash and cash equivalents 14,183 10,100
Accounts receivable, net of allowance for
doubtful accounts - $16,621 and $15,641 166,648 140,111
Accrued utility revenues 129,463 141,273
Fossil fuel (at average cost) 123,616 124,045
Materials and supplies (at average cost) 74,399 73,159
Prepayments 59,046 56,192
Other 767 6,035
---------- ----------
Total Current Assets 568,122 550,915
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 190,114 169,306
Deferred regulatory assets (Note A) 222,951 215,200
Other 25,047 58,977
---------- ----------
Total Deferred Charges and Other Assets 438,112 443,483
---------- ----------
Total Assets $4,768,942 $4,667,840
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $1,698,478 $1,694,508
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,512,531 1,448,558
---------- ----------
Total Capitalization 3,241,459 3,173,516
Current Liabilities
Long-term debt due currently (Note H) 112,454 81,389
Notes payable (Note I) 219,289 242,633
Accounts payable 169,503 142,797
Payroll and vacation accrued 29,569 25,392
Taxes accrued - income and other 31,475 38,475
Interest accrued 19,864 20,012
Other 46,574 57,871
---------- ----------
Total Current Liabilities 628,728 608,569
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 559,574 521,429
Accumulated deferred investment tax credits 83,476 86,871
Deferred regulatory liabilities (Note A) 157,951 173,688
Other 97,754 103,767
---------- ----------
Total Deferred Credits and Other Liabilities 898,755 885,755
Commitments and Contingencies (Note L)
---------- ----------
Total Capitalization and Liabilities $4,768,942 $4,667,840
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
CAPITALIZATION STATEMENT
December 31
<CAPTION>
1998 1997
---- ----
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $10 par value; authorized 65,000,000 shares;
outstanding - 33,289,327 shares $ 332,893 $ 332,893
Other paid in capital 380,689 380,689
Retained earnings 984,896 980,926
---------- ----------
Total Common Stock Equity 1,698,478 1,694,508
Preferred Stock - Cumulative
Six Per Cent. Preferred Stock - $100 par value; authorized
45,000 shares; outstanding - 44,498 shares 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds - 5-1/8% to 7-1/4% due 1998-2004 231,000 291,000
6.85% to 7-3/4% due 2016-2023 209,000 209,000
6.85% to 7-3/4% due 2016-2023 363,443 363,443
Debentures (unsecured) - 6-1/2% to 9.47% due 2006-2095 480,600 331,300
Notes (unsecured) - Variable rate due 2006-2030 165,350 165,350
6.36% effective rate due 2006 9,642 10,847
Obligations under capital leases 189,980 182,450
Unamortized discount - net (24,030) (23,443)
Long-term debt due currently (112,454) (81,389)
---------- ----------
Total Long-Term Debt (Note H) 1,512,531 1,448,558
---------- ----------
Total Capitalization $3,241,459 $3,173,516
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
WISCONSIN ELECTRIC POWER COMPANY
COMMON STOCK EQUITY STATEMENT
<CAPTION>
Common Stock
-------------------
$10 Par Other Paid Retained
Shares Value In Capital Earnings Total
------ ------- ---------- -------- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1995 33,289,327 $332,893 $280,689 $1,082,983 $1,696,565
Net income 211,315 211,315
Cash dividends
Common stock (167,889) (167,889)
Preferred stock (1,203) (1,203)
---------- -------- -------- ---------- ----------
Balance - December 31, 1996 33,289,327 332,893 280,689 1,125,206 1,738,788
Net income 70,615 70,615
Cash dividends
Common stock (213,692) (213,692)
Preferred stock (1,203) (1,203)
Stockholder capital contribution 100,000 100,000
---------- -------- -------- ---------- ----------
Balance - December 31, 1997 33,289,327 332,893 380,689 980,926 1,694,508
Net income 184,174 184,174
Cash dividends
Common stock (179,001) (179,001)
Preferred stock (1,203) (1,203)
---------- -------- -------- ---------- ----------
Balance - December 31, 1998 33,289,327 $332,893 $380,689 $ 984,896 $1,698,478
========== ======== ======== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cont'd)
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The accounting records of Wisconsin Electric Power Company
("Wisconsin Electric") are maintained as prescribed by the Federal Energy
Regulatory Commission, modified for requirements of the Public Service
Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the date
of financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUES: Utility revenues are recognized on the accrual basis and
include estimated amounts for service rendered but not billed.
FUEL: The cost of fuel is expensed in the period consumed.
PROPERTY: Property is recorded at cost. Additions to and significant
replacements of utility property are charged to utility plant at cost;
minor items are charged to maintenance expense. Cost includes material,
labor and allowance for funds used during construction (see Note E). The
cost of depreciable utility property, together with removal cost less
salvage, is charged to accumulated provision for depreciation when property
is retired.
In 1998, Wisconsin Electric began classifying certain utility plant as
common. Common plant is allocated to electric, gas and steam utility plant
in rate proceedings. All periods presented have been reclassified for
comparative purposes.
REGULATORY MATTERS: Pursuant to Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of
Regulation, Wisconsin Electric capitalizes, as regulatory assets, incurred
costs which are expected to be recovered in future utility rates.
Wisconsin Electric also records, as regulatory liabilities, the current
recovery in utility rates of costs which are expected to be paid in the
future.
The following deferred regulatory assets and liabilities are reflected in
the Balance Sheet at December 31.
1998 1997
---- ----
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $160,752 $151,157
Department of Energy assessments 24,841 28,575
Deferred nuclear costs 15,324 17,681
Purchase power commitment 13,379 5,050
Other 8,655 12,737
-------- --------
Total Deferred Regulatory Assets $222,951 $215,200
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $141,356 $148,292
Tax and interest refunds 8,667 13,943
Other 7,928 11,453
-------- --------
Total Deferred Regulatory Liabilities $157,951 $173,688
======== ========
Wisconsin Electric directs a variety of demand-side management programs to
help foster energy conservation by its customers. As authorized by the
PSCW, Wisconsin Electric capitalized certain conservation program costs
prior to 1995. Utility rates approved by the PSCW provide for a current
return on these conservation investments. As of December 31, 1998, there
were $46.4 million of conservation investments on the Balance Sheet in
other property and investments which will be amortized on a straight line
basis to income over the next two years as well as $69.5 million of
conservation investments as of December 31, 1997.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable
debt securities acquired three months or less from maturity. During 1997,
Wisconsin Electric recorded a $140 million non-cash capital lease
transaction for a long-term power purchase contract (see Note H).
NEW PRONOUNCEMENTS: On June 15, 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133").
FAS 133 is effective January 1, 2000 for Wisconsin Electric. FAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or in other comprehensive income depending
upon how the derivative is designated. Based upon the current limited use
of derivative instruments at Wisconsin Electric, the adoption of FAS 133
would not have a significant effect on its results of operations or
financial position.
B - MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors
of Wisconsin Energy and Northern States Power Company, a Minnesota
corporation, agreed to terminate by mutual written consent an Agreement and
Plan of Merger which provided for a business combination of Wisconsin
Energy, parent company of Wisconsin Electric, and Northern States Power
Company to form Primergy Corporation. Primergy Corporation would have
become the parent company of Wisconsin Electric under the proposed business
combination. As a result, Wisconsin Energy recorded a $30.7 million charge
in the second quarter of 1997 ($18.8 million net of tax or approximately 17
cents per share) to write off deferred transaction costs and costs to
achieve the merger, of which approximately $21.9 million was attributable
to Wisconsin Electric.
C - DEPRECIATION
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the PSCW and
include estimates for salvage and removal costs. Depreciation as a percent
of average depreciable utility plant was 4.4% in 1998, 4.5% in 1997 and
4.1% in 1996. Nuclear plant decommissioning is accrued as depreciation
expense (see Note F). For contributions in aid of construction remaining
on the Balance Sheet that were collected prior to 1991, Wisconsin Electric
had been amortizing approximately $3 million per year as a credit to
depreciation expense. In its 1998 Rate Order, the PSCW authorized
Wisconsin Electric to amortize the remaining $45.7 million balance of pre-
1991 contributions in aid of construction at December 31, 1997 on a
straight line basis over the 1998-1999 biennial period. As a result,
credits to depreciation expense for pre-1991 contributions were
$22.9 million in 1998, $3.5 million in 1997 and $3.4 million in 1996.
D - INCOME TAXES
Wisconsin Electric follows the liability method in accounting for income
taxes. The liability method provides that deferred tax assets and
liabilities be recorded based on the difference between the tax bases of
assets and liabilities and their carrying amounts for financial reporting
purposes.
The following table is a summary of income tax expense and a reconciliation
of total income tax expense with the tax expected at the federal statutory
rate.
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Current tax expense $100,532 $ 28,002 $131,833
Deferred income taxes - net (438) 7,937 (1,575)
Investment tax credit - net (3,395) (927) (2,430)
-------- -------- --------
Total Tax Expense $ 96,699 $ 35,012 $127,828
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $280,873 $105,627 $339,143
======== ======== ========
Expected tax at federal statutory rate $ 98,306 $ 36,969 $118,700
State income tax net of federal
tax benefit 13,461 6,125 17,624
Flowback of prior contributions
in aid of construction (8,039) (1,157) (1,157)
Investment tax credit restored (4,690) (4,487) (4,509)
Other (no item over 5% of expected tax) (2,339) (2,438) (2,830)
-------- -------- --------
Total Tax Expense $ 96,699 $ 35,012 $127,828
======== ======== ========
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and
liabilities to recognize the expected future tax consequences of events
that have been reflected in Wisconsin Electric's financial statements or
tax returns and the adjustment of deferred tax balances to reflect tax rate
changes. Following is a summary of deferred income taxes under FAS 109 at
December 31.
1998 1997
---- ----
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 48,812 $ 43,405
Construction advances 54,820 49,202
Other 86,482 76,699
-------- --------
Total Deferred Income Tax Assets $190,114 $169,306
======== ========
Deferred Income Tax Liabilities
Property related $542,898 $510,621
Other 16,676 10,808
-------- --------
Total Deferred Income Tax Liabilities $559,574 $521,429
======== ========
Wisconsin Electric has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues (see Note A).
E - ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction ("AFUDC") is included in
utility plant accounts and represents the cost of borrowed funds used
during plant construction and a return on stockholders' capital used for
construction purposes. On the Income Statement, the cost of borrowed funds
(before income taxes) is a reduction of interest expense and the return on
stockholders' capital is an item of non-cash other income.
As approved by the PSCW, AFUDC was capitalized during the following periods
on 50% of construction work in progress at the following rates:
* June 1, 1998 December 31, 1998 10.21%
* February 18, 1997 May 31, 1998 10.29%
* January 1, 1996 February 17, 1997 10.17%
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 500 megawatt electric generating units at Point Beach Nuclear
Plant ("Point Beach") in Two Rivers, Wisconsin. During 1998, 1997 and
1996, Point Beach provided 18%, 6% and 24%, respectively, of Wisconsin
Electric's net electric energy supply. The United States Nuclear
Regulatory Commission operating licenses for Point Beach expire in October
2010 for Unit 1 and in March 2013 for Unit 2.
In 1997, the PSCW authorized Wisconsin Electric to defer certain nuclear
non-fuel operation and maintenance costs in excess of those included in
1997 rates. As a result, Wisconsin Electric deferred $18 million during
1997. During 1998, the PSCW authorized a five year recovery in the
electric retail jurisdiction in the State of Wisconsin of the excess 1997
nuclear non-fuel operation and maintenance costs, and Wisconsin Electric
began amortizing the $18 million of deferred costs on a straight line basis
over the five year recovery period. As of December 31, 1998, $15 million
of deferred costs remain on the Balance Sheet in Deferred Charges and Other
Assets - Deferred Regulatory Assets (see Note A).
NUCLEAR INSURANCE: The Price-Anderson Act as amended and extended to
August 1, 2002, currently limits the total public liability for damages
arising from a nuclear incident at a nuclear power plant to approximately
$9.8 billion, of which $200 million is covered by liability insurance
purchased from private sources, and $9.6 billion is covered by an industry
retrospective loss sharing plan whereby in the event of a nuclear incident
resulting in damages exceeding the private insurance coverage, each owner
of a nuclear plant would be assessed a deferred premium of up to
$88.1 million per reactor (Wisconsin Electric owns two) with a limit of
$10 million per reactor within one calendar year. As the owner of Point
Beach, Wisconsin Electric would be obligated to pay its proportionate share
of any such assessment.
Wisconsin Electric participated in an industry-wide insurance program, with
an aggregate limit of $200 million which covered radiation injury claims of
nuclear workers first employed after 1987. This program was replaced with
a new program (which has no retrospective assessment provisions) at the end
of 1997. However, the discovery period for claims covered under the former
program remains open until the end of 2007 for those few former insureds
who no longer need to participate in the new, replacement program. If
claims in excess of the funds available under the old program develop,
Wisconsin Electric would be assessed up to a maximum of approximately
$3.1 million per reactor.
Wisconsin Electric, through its membership in Nuclear Electric Insurance
Limited ("NEIL"), carries decontamination, property damage and
decommissioning shortfall insurance covering losses of up to $1.5 billion
(subject to a $1 million deductible for each loss) at Point Beach. Under
policies issued by NEIL, the insured member is liable for a retrospective
premium adjustment in the event of catastrophic losses exceeding the full
financial resources of NEIL. Wisconsin Electric's maximum retrospective
liability under its policies is $10.1 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage (in
excess of 23 weeks) at Point Beach, where such outage is caused by
accidental property damage from radioactive contamination or other risks of
direct physical loss. Wisconsin Electric's maximum retrospective liability
under this policy is $5.1 million.
It should not be assumed that, in the event of a major nuclear incident,
any insurance or statutory limitation of liability would protect Wisconsin
Electric from material adverse impact.
NUCLEAR DECOMMISSIONING: Wisconsin Electric expects to operate the two
units at Point Beach to the expiration of their current operating licenses.
The estimated cost to decommission the plant in 1998 dollars is
$489 million based upon a site specific decommissioning cost study
completed in 1998. Assuming plant shutdown at the expiration of the
current operating licenses, prompt dismantlement and annual escalation of
costs at specific inflation factors established by the PSCW, it is
projected that approximately $1.8 billion will be spent over a thirty-three
year period, beginning in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund
will provide sufficient funds at the time of decommissioning. Wisconsin
Electric believes it is probable that any shortfall in funding would be
recoverable in utility rates.
As required by Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, Wisconsin
Electric's debt and equity security investments in the Fund are classified
as available for sale. Gains and losses on the Fund were determined on the
basis of specific identification; net unrealized holding gains on the Fund
were recorded as part of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31. The Fund balance is stated at fair value.
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Decommissioning costs $ 15,461 $ 11,402 $15,418
Earnings 15,918 15,846 10,891
-------- -------- -------
Depreciation Expense $ 31,379 $ 27,248 $26,309
======== ======== =======
Total costs accrued to date $320,356 $288,977
Unrealized gain 198,149 115,263
-------- --------
Accumulated Provision for Depreciation $518,505 $404,240
======== ========
DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992
establishes a Uranium Enrichment Decontamination and Decommissioning Fund
("D&D Fund") for the United States Department of Energy's nuclear fuel
enrichment facilities. Deposits to the D&D Fund are derived in part from
special assessments on utilities using enrichment services. As of
December 31, 1998, Wisconsin Electric has recorded its remaining estimated
liability equal to the projected special assessments of $21.4 million. A
corresponding deferred regulatory asset is detailed in Note A. The
deferred regulatory asset will be amortized to nuclear fuel expense and
included in utility rates over the next nine years. In the 1998 Rate
Order, the PSCW approved recovery over the 1998-1999 biennial period of
D&D Fund costs disallowed in 1997.
G - PREFERRED STOCK
Serial preferred stock authorized but unissued is cumulative, $25 par
value, 5,000,000 shares.
In the event of default in the payment of preferred dividends, no dividends
or other distributions may be paid on Wisconsin Electric's common stock.
The 3.60% series preferred stock is redeemable in whole or in part at the
option of Wisconsin Electric at $101 per share plus any accrued dividends.
The fair value of Wisconsin Electric's preferred stock was $20.2 million
and $17.8 million at December 31, 1998 and 1997, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking
fund requirements through 2003 for the aggregate amount of long-term debt
outstanding (excluding obligations under capital lease) at December 31,
1998 are shown below.
(Thousands of Dollars)
1999 $92,905
2000 1,905
2001 1,905
2002 1,905
2003 1,905
Sinking fund requirements for the years 1999 through 2003, included in the
table above, are $9.5 million. Substantially all utility plant is subject
to the mortgage.
Long-term debt premium or discount and expense of issuance are amortized by
the straight line method over the lives of the debt issues and included as
interest expense. Unamortized amounts pertaining to reacquired debt are
written off currently, when acquired for sinking fund purposes, or
amortized in accordance with PSCW orders, when acquired for early
retirement.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds and were used to reduce short-term borrowings and for other
general corporate purposes.
Following is Wisconsin Electric's long-term debt outstanding at
December 31.
1998 1997
---- ----
(Thousands of Dollars)
First Mortgage Bonds
5-1/8% Series due 1998 $ - $ 60,000
6-1/2% Series due 1999 40,000 40,000
6-5/8% Series due 1999 51,000 51,000
7-1/4% Series due 2004 140,000 140,000
7-1/8% Series due 2016 100,000 100,000
6.85% Series due 2021 9,000 9,000
7-3/4% Series due 2023 100,000 100,000
7.05% Series due 2024 60,000 60,000
9-1/8% Series due 2024 3,443 3,443
8-3/8% Series due 2026 100,000 100,000
7.70% Series due 2027 200,000 200,000
Debentures (unsecured)
6-5/8% due 2006 200,000 200,000
9.47% due 2006 5,600 6,300
8-1/4% due 2022 25,000 25,000
6-1/2% due 2028 150,000 -
6-7/8% due 2095 100,000 100,000
Notes (unsecured)
Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
6.36% effective rate due 2006
9,642 10,847
Obligations under capital leases 189,980 182,450
Unamortized discount - net (24,030) (23,443)
Long-term debt due currently (112,454) (81,389)
---------- ----------
Total Long-Term Debt $1,512,531 $1,448,558
========== ==========
At December 31, 1998, the interest rate for the $67 million variable rate
note due 2016 was 4.10% and the interest rate for the $98.35 million
variable rate notes due 2006-2030 was 3.95%.
OBLIGATIONS UNDER CAPITAL LEASE: Wisconsin Electric has a nuclear fuel
leasing arrangement with Wisconsin Electric Fuel Trust ("Trust") which is
treated as a capital lease. The nuclear fuel is leased and amortized to
fuel expense for a period of 60 months or until the removal of the fuel
from the reactor, if earlier. Lease payments include charges for the cost
of fuel burned, financing costs and management fees. In the event
Wisconsin Electric or the Trust terminates the lease, the Trust would
recover its unamortized cost of nuclear fuel from Wisconsin Electric.
Under the lease terms, Wisconsin Electric is in effect the ultimate
guarantor of the Trust's commercial paper and line of credit borrowings
financing the investment in nuclear fuel. Interest expense on the nuclear
fuel lease, included in fuel expense, was $3.1 million, $0.9 million and
$2.3 million during 1998, 1997 and 1996, respectively.
To meet a portion of its electric energy supply needs, Wisconsin Electric
entered into a long-term power purchase contract with an unaffiliated
independent power producer, LSP-Whitewater Limited Partnership ("LS
Power"). The contract, for 236 megawatts of firm capacity from LS Power's
gas-fired cogeneration facility located in Whitewater, Wisconsin, includes
no minimum energy requirements. When the contract expires in 2022,
Wisconsin Electric may, at its option and with proper notice, renew for
another ten years or purchase the generating facility at fair value or
allow the contract to expire. Wisconsin Electric treats this contract as a
capital lease. The leased facility and corresponding obligation under
capital lease were recorded at the estimated fair value of the plant's
electric generating facilities. The leased facility is being amortized on
a straight line basis over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September
1997, imputed interest costs on the purchase power obligation were
$22.9 million and $6.5 million during 1998 and 1997, respectively, and
total amortization costs of the leased facilities were $5.7 million and
$1.6 million during 1998 and 1997, respectively. The long-term power
purchase contract is treated as an operating lease for rate-making
purposes. As a result, the difference between the minimum lease payments
and the sum of the imputed interest and amortization costs are recorded as
a deferred regulatory asset (see Note A). Due to the timing of the minimum
lease payments, Wisconsin Electric expects the regulatory asset to increase
to approximately $78 million by the year 2009 and the total obligation
under capital lease to increase to $160 million by the year 2005 before
each is reduced over the remaining life of the contract. The minimum lease
payments are classified as purchased power expense on the Income Statement.
Interest expense on the purchase power obligation, included in purchased
power expense, was $20.3 million and $5.6 million during 1998 and 1997,
respectively.
Provided below is a summary of Wisconsin Electric's nuclear fuel and leased
facilities at December 31.
1998 1997
---- ----
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $100,809 $ 95,464
Accumulated provision for amortization (62,888) (59,783)
In process/stock 49,739 54,538
-------- --------
Total Nuclear Fuel $ 87,660 $ 90,219
======== ========
Leased Facilities
Long-term purchase power commitment $140,312 $140,312
Accumulated provision for amortization (7,305) (1,625)
-------- --------
Total Leased Facilities $133,007 $138,687
======== ========
Future minimum lease payments under the capital leases and the present
value of the net minimum lease payments as of December 31, 1998 are as
follows:
Purchase
Nuclear Power
Fuel Lease Commitment Total
---------- ---------- -----
(Thousands of Dollars)
1999 $ 21,678 $ 24,123 $ 45,801
2000 13,841 25,031 38,872
2001 7,433 25,968 33,401
2002 3,664 26,961 30,625
2003 1,071 27,954 29,025
Later Years - 560,191 560,191
-------- -------- --------
Total Minimum Lease Payments 47,687 690,228 737,915
Less: Estimated Executory Costs - (139,956) (139,956)
-------- -------- --------
Net Minimum Lease Payments 47,687 550,272 597,959
Less: Interest (4,093) (403,886) (407,979)
-------- -------- --------
Present Value of Net Minimum
Lease Payments 43,594 146,386 189,980
Less: Due Currently (19,549) - (19,549)
-------- -------- --------
$ 24,045 $146,386 $170,431
======== ======== ========
FAIR VALUE: The carrying amount of Wisconsin Electric's long-term debt
outstanding (excluding obligations under capital lease) was $1,459 million
and $1,371 million at December 31, 1998 and 1997, respectively, with a fair
value of $1,544 million and $1,411 million, respectively. The fair value
of the first mortgage bonds and debentures is estimated based upon the
market value of the same or similar issues. Book value approximates fair
value for Wisconsin Electric's unsecured notes.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
1998 1997
---- ----
Interest Interest
Balance Rate Balance Rate
------- ---- ------- ----
(Thousands of Dollars)
Banks $ 50,495 5.42% $ 50,495 5.89%
Commercial paper 68,794 5.32% 192,138 5.84%
-------- --------
$219,289 $242,633
======== ========
Unused lines of credit for short-term borrowing amounted to $128 million at
December 31, 1998, all of which supports commercial paper. In support of
various informal lines of credit from banks, Wisconsin Electric has agreed
to maintain unrestricted compensating balances or to pay commitment fees;
neither the compensating balances nor the commitment fees are significant.
J - BENEFITS
Wisconsin Electric provides defined benefit pension and other
postretirement benefit plans to employees. The status of these plans,
including a reconciliation of benefit obligations, a reconciliation of plan
assets and the funded status of the plans follows. Also disclosed below is
the aggregate funded status of those pension and other postretirement
benefit plans with accumulated net benefit obligations in excess of plan
assets.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at January 1 $649,256 $601,213 $ 148,181 $ 142,783
Service cost 12,408 9,216 2,654 1,911
Interest cost 46,261 45,613 11,676 10,343
Plan participants' contributions - - 5,908 4,903
Plan amendments - 1,379 3,737 (4,828)
Actuarial loss 51,512 35,985 22,283 6,359
Benefits paid (45,001) (44,150) (15,603) (13,290)
-------- -------- --------- ---------
Benefit Obligation at December 31 $714,436 $649,256 $ 178,836 $ 148,181
Change in Plan Assets
Fair Value at January 1 $761,881 $687,482 $ 59,841 49,424
Actual return on plan assets 104,264 114,294 8,515 10,555
Employer contributions 7,347 4,255 10,252 8,249
Plan participants' contributions - - 5,908 4,903
Benefits paid (45,001) (44,150) (15,603) (13,290)
-------- -------- --------- ---------
Fair Value at December 31 $828,491 $761,881 $ 68,913 $ 59,841
-------- -------- --------- ---------
Funded Status of Plans
Funded status at December 31 $114,055 $112,625 $(109,923) $ (88,340)
Unrecognized
Net actuarial (gain) loss (119,025) (123,094) 4,587 (14,458)
Prior service cost 31,284 34,344 2,582 (938)
Net transition obligation (asset) (27,207) (31,009) 64,239 68,825
-------- -------- --------- ---------
Net Accrued Benefit Cost $ (893) $ (7,134) $ (38,515) $ (34,911)
======== ======== ========= =========
Funded Status of Plans with Net
Benefit Obligations at December 31
Fair value of plan assets $ - $ - $ 68,444 $ 59,394
Less: Benefit obligation - - (178,563) (147,919)
-------- ------- --------- ---------
Net Benefit Obligation $ - $ - $(110,119) $ (88,525)
======== ======== ========= =========
</TABLE>
The components of net periodic pension and other postretirement benefit
costs as well as the weighted-average assumptions used in accounting for
the plans include the following:
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(Thousand of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Periodic Benefit Cost
Service cost $12,408 $ 9,216 $ 9,912 $ 2,654 $ 1,911 $ 2,436
Interest cost 46,261 45,613 41,454 11,677 10,343 10,456
Expected return on plan assets (56,822) (51,592) (48,494) (5,008) (4,085) (3,708)
Amortization of
Transition obligation (asset) (3,801) (3,802) (3,802) 4,586 4,586 4,887
Prior service cost 3,061 3,061 1,755 217 (100) (100)
Actuarial loss (gain) - - - (270) (235) (272)
------- ------- ------- ------- ------- -------
Net Periodic Benefit Cost $ 1,107 $ 2,496 $ 825 $13,856 $12,420 $13,699
======= ======= ======= ======= ======= =======
Weighted-Average Assumptions
at December 31 (%)
Discount rate 6.75 7.25 7.75 6.75 7.25 7.75
Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to 4.75 to
5.0 5.0 5.0 5.0 5.0 5.0
</TABLE>
PENSION PLANS: Pension plan assets, the majority of which are equity
securities, are held by pension trusts. Other pension plan assets include
corporate and government bonds and real estate. In the opinion of
Wisconsin Electric, current pension trust assets and amounts which are
expected to be paid to the trusts in the future will be adequate to meet
pension payment obligations to current and future retirees.
OTHER POSTRETIREMENT BENEFIT PLANS: Wisconsin Electric uses Employees'
Benefit Trusts to fund a major portion of other postretirement benefits for
its employees. The majority of the trusts' assets are mutual funds.
The assumed health care cost trend rate at December 31, 1998 was 6.0% for
those under age 65 and 6.8% for those over age 65, decreasing gradually to
5.0% in 2004 and thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1% 1%
Increase Decrease
-------- --------
(Thousands of Dollars)
Effect on
Postretirement benefit obligation $17,058 ($14,957)
Total of service and interest cost components 1,650 (1,430)
K - SEGMENT REPORTING
Wisconsin Electric, a public utility incorporated in the State of
Wisconsin, has organized its operating segments according to how it is
currently regulated. 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 Electric's reportable operating segments include
electric, gas and steam utility segments.
The electric utility segment derives its revenues from 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. The gas utility segment derives its
revenues from 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. The
steam utility segment derives its revenues from the production,
distribution and sale of steam to space heating and processing customers in
the Milwaukee area.
The following summarizes the reportable operating segments of Wisconsin
Electric for the years ended December 31.
<TABLE>
<CAPTION>
Reportable Operating Segments (a)
Electric Gas Steam Total
-------- --- ----- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
1998
External revenues $1,641,283 $293,250 $20,506 $1,955,039
Intersegment revenues (b) 120 2,598 - 2,718
---------- -------- ------- ----------
Total Operating Revenues $1,641,403 $295,848 $20,506 $1,957,757
========== ======== ======= ==========
Depreciation $ 215,669 $ 23,272 $ 2,631 $ 241,572
Operating Income Taxes 92,582 1,055 333 93,970
Operating Income (c) 251,582 19,180 2,934 273,696
Segment Assets (d) 4,087,413 421,951 48,358 4,557,722
Construction Expenditures 283,367 43,447 1,600 328,414
1997
External revenues $1,411,962 $349,971 $22,315 $1,784,248
Intersegment revenues (b) 153 5,201 - 5,354
---------- -------- ------- ----------
Total Operating Revenues $1,412,115 $355,172 $22,315 $1,789,602
========== ======== ======= ==========
Depreciation $ 213,785 $ 21,421 $ 2,492 $ 237,698
Operating Income Taxes 48,442 7,973 1,374 57,789
Operating Income (c) 170,117 25,122 4,220 199,459
Segment Assets (d) 3,900,889 392,865 45,131 4,338,885
Construction Expenditures 236,384 22,977 1,006 260,367
1996
External revenues $1,393,057 $361,101 $15,675 $1,769,833
Intersegment revenues (b) 213 3,774 - 3,987
---------- -------- ------- ----------
Total Operating Revenues $1,393,270 $364,875 $15,675 $1,773,820
========== ======== ======= ==========
Depreciation $ 183,159 $ 18,246 $ 1,391 $ 202,796
Operating Income Taxes 110,752 14,516 1,359 126,627
Operating Income (c) 269,068 33,204 3,572 305,844
Segment Assets (d) 3,646,997 400,582 46,499 4,094,078
Construction Expenditures 272,838 22,851 21,651 317,340
<FN>
(a) The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies
(see Note A).
(b) Wisconsin Electric accounts for intersegment revenues at a tariff
rate established by the PSCW.
(c) Interest income and expense are not recorded to the segments to
determine segment operating income.
(d) Common utility plant is allocated to electric, gas and steam to
determine segment assets (see Note A).
</TABLE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the financial statements is as follows:
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Assets
Reportable segments $4,557,722 $4,338,885 $4,094,078
Non-utility 4,769 5,308 9,199
Other - corporate (a) 206,451 323,647 403,883
---------- ---------- ----------
Total Assets $4,768,942 $4,667,840 $4,507,160
========== ========== ==========
Construction Expenditures
Reportable segments $ 328,414 $ 260,367 $ 317,340
Non-utility 68 282 2,492
---------- ---------- ----------
Total Construction Expenditures $ 328,482 $ 260,649 $ 319,832
========== ========== ==========
(a) Primarily other property and investments, materials and supplies
and deferred charges.
L - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a cogeneration facility in Kimberly, Wisconsin, Wisconsin
Electric purchased three combustion turbines, three heat recovery boilers
and a steam turbine (the "Equipment"). Wisconsin Electric carried the
Equipment at a cost of approximately $66.3 million, entertaining numerous
proposals and projects for which the Equipment could be used. During 1997,
Wisconsin Electric continued to review its options for use or sale of the
Equipment. In the fourth quarter of 1997, WISVEST Corporation, a non-
utility subsidiary of Wisconsin Energy, entered into the final phase of
negotiations for a joint independent power project involving the Equipment.
Under the provisions of Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, Wisconsin Electric refined its cash flow
projection for the Equipment based upon this proposal. As measured by
expected gross cash flows to be earned under this project, Wisconsin
Electric determined that an impairment existed. As a result, Wisconsin
Electric recorded a $30.0 million impairment charge in the fourth quarter
of 1997 which was included in the Miscellaneous - Net Other Income and
Deductions line of the Income Statement. During the second quarter of
1998, WISVEST Corporation purchased the Equipment from Wisconsin Electric.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric continues a voluntary
program to investigate the remediation of eleven former manufactured gas
plant sites. Wisconsin Electric currently estimates that future costs for
detailed site investigation and remediation will be $25 million to
$40 million over the next ten years. Actual costs are uncertain pending
the results of further site specific investigations and the selection of
site specific remediation.
Of the eleven sites, Wisconsin Electric has begun remediation activities at
the former manufactured gas plant site in the City of Burlington,
Wisconsin. Wisconsin Electric also expects to begin remediation in 1999 at
sites in Fort Atkinson and Kenosha, Wisconsin. Wisconsin Electric's
expected remediation of these sites is anticipated to be accomplished at an
aggregate cost of between $6 million and $11 million.
In Wisconsin Electric's February 13, 1997 Rate Order, the PSCW amplified
its position on the recovery of manufactured gas plant site remediation
costs. It reiterated its position that such costs should be deferred and
amortized and recovered, without carrying costs, in future rate cases.
Since the timing and recovery of MGP remediation costs will be affected by
the biennial rate case cycle, the timing and magnitude of remediation
expenditures, and their recovery may be affected.
M - TRANSACTIONS WITH ASSOCIATED COMPANIES
Managerial, financial, accounting, legal, data processing and other
services may be rendered between associated companies and are billed in
accordance with service agreements approved by the PSCW. Wisconsin
Electric received stockholder capital contributions from Wisconsin Energy
of $100 million in 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholder of Wisconsin Electric Power Company
In our opinion, the financial statements listed in the index appearing
under Item 14(a)(1) present fairly, in all material respects, the financial
position of Wisconsin Electric Power Company at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 27, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None for Wisconsin Energy nor for Wisconsin Electric.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WISCONSIN ENERGY: The information under "Proposal 1: Election of
Directors - Terms Expiring in Year 2002" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in Wisconsin Energy's definitive Proxy
Statement for its Annual Meeting of Stockholders to be held June 2, 1999
(the "1999 Annual Meeting Proxy Statement") is incorporated herein by
reference. Also see "Executive Officers of the Registrant" in Part I of
this report.
WISCONSIN ELECTRIC: The information under "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in Wisconsin
Electric's definitive Information Statement for its Annual Meeting of
Stockholders to be held May 26, 1999 (the "1999 Annual Meeting Information
Statement") is incorporated herein by reference. Also see "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
WISCONSIN ENERGY: The information under "Corporate Governance -
Compensation of the Board of Directors", "Executive Officers'
Compensation," "Severance Policy" and "Retirement Plans" in the 1999 Annual
Meeting Proxy Statement is incorporated herein by reference.
WISCONSIN ELECTRIC: The information under "Compensation," "Severance
Policy" and "Retirement Plans" in the 1999 Annual Meeting Information
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
WISCONSIN ENERGY: The security ownership information under "WEC Common
Stock Ownership" in the 1999 Annual Meeting Proxy Statement is incorporated
herein by reference.
WISCONSIN ELECTRIC: All of Wisconsin Electric's Common Stock (100% of
such class) is owned by the parent company, Wisconsin Energy Corporation,
231 West Michigan Street, P.O. Box 2949, Milwaukee, Wisconsin 53201. The
directors, director nominees and executive officers of Wisconsin Electric
do not own any of the voting securities of Wisconsin Electric. The
information concerning their beneficial ownership of Wisconsin Energy
Corporation stock set forth under "Stock ownership of Directors, Nominees
and Executive Officers" in the 1999 Annual Meeting Information Statement
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None for Wisconsin Energy nor for Wisconsin Electric.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT ACCOUNTANTS
INCLUDED IN PART II OF THIS REPORT
WISCONSIN ENERGY CORPORATION
Consolidated Income Statement for the three years ended December 31, 1998.
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998.
Consolidated Balance Sheet at December 31, 1998 and 1997.
Consolidated Capitalization Statement at December 31, 1998 and 1997.
Consolidated Common Stock Equity statement for the three years ended
December 31, 1998.
Notes to Financial Statements.
Report of Independent Accountants.
WISCONSIN ELECTRIC POWER COMPANY
Income Statement for the three years ended December 31, 1998.
Statement of Cash Flows for the three years ended December 31, 1998.
Balance Sheet at December 31, 1998 and 1997.
Capitalization Statement at December 31, 1998 and 1997.
Common Stock Equity Statement for the three years ended
December 31, 1998.
Notes to Financial Statements.
Report of Independent Accountants.
2. FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF THIS REPORT
WISCONSIN ENERGY CORPORATION
Schedule I Condensed Parent Company Financial Statements for the
three years ended December 31, 1998. Other schedules are omitted
because of the absence of conditions under which they are required or
because the required information is given in the financial statements
or notes thereto.
WISCONSIN ELECTRIC POWER COMPANY
Financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
3. EXHIBITS AND EXHIBIT INDEX
See the Exhibit Index included as the last part of this report, which
is incorporated herein by reference. Each Management Contract and
compensatory plan or arrangement required to be filed as an exhibit to
this report is identified in the Exhibit Index by two asterisks (**)
following the description of the exhibit.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by Wisconsin Energy or Wisconsin
Electric during the quarter ended December 31, 1998.
WISCONSIN ENERGY CORPORATION
INCOME STATEMENT
(Parent Company Only)
SECHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS
Year Ended December 31
----------------------
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Miscellaneous Income $ 1,921 $ 3,298 $ 1,576
Miscellaneous Expense 1,943 886 384
Interest Expense 3,193 67 43
Merger Expense 480 9,968 -
-------- ------- --------
(3,695) (7,623) 1,149
Income Taxes (1,054) (2,222) 303
-------- ------- --------
(2,641) (5,401) 846
Equity in Subsidiaries' Earnings 190,773 66,117 217,289
-------- ------- --------
Net Income $188,132 $60,716 $218,135
======== ======= ========
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
STATEMENT OF CASH FLOWS
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
Year Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Operating Activities
Net income $188,132 $ 60,716 $218,135
Reconciliation to cash
Equity in subsidiaries' earnings (190,773) (66,117) (217,289)
Dividends from subsidiaries 179,001 213,692 167,889
Other (679) 10,203 (3,794)
-------- -------- --------
Cash Provided by Operating Activities 175,681 218,494 164,941
Investing Activities
Equity investment in subsidiaries - net (19,000) (133,000) (3,101)
net
Change in notes receivable -
associated companies (43,100) 42,000 (17,975)
Other 2,691 75 195
-------- -------- --------
Cash Used in Investing Activities (59,409) (90,925) (20,881)
Financing Activities
Sale of common stock 10,275 29,586 23,180
Dividends on common stock (177,397) (172,714) (167,236)
Change in notes payable 66,562 - -
Change in notes payable -
associated companies (15,550) 15,550 -
-------- -------- --------
Cash Used in Financing Activities (116,110) (127,578) (144,056)
-------- -------- --------
Change in Cash and Cash Equivalents $ 162 $ (9) $ 4
======== ======== ========
Cash Paid For
Interest $ 2,984 $ - $ -
Income taxes (2,235) 345 (40)
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
BALANCE SHEET
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
December 31
-------------------
1998 1997
---- ----
(Thousands of Dollars)
Assets
Current Assets
Cash and cash equivalents $ 171 $ 9
Accounts and notes receivable
from associated companies 43,914 641
Other 2,113 2,943
---------- ----------
Total Current Assets 46,198 3,593
Property and Investments
Investment in subsidiary companies 1,927,726 1,878,464
Other 844 681
---------- ----------
Total Property and Investments 1,928,570 1,879,145
Deferred Charges 11,209 9,375
---------- ----------
Total Assets $1,985,977 $1,892,113
========== ==========
Liabilities and Equity
Current Liabilities
Accounts and notes payable $ 66,772 $ 324
Accounts and notes payable
to associated companies 113 15,770
Other 571 536
---------- ----------
Total Current Liabilities 67,456 16,630
Deferred Credits 12,627 9,762
Stockholders' Equity
Common stock 763,141 733,573
Retained earnings 143,901 153,757
Undistributed subsidiaries' earnings 998,852 978,391
---------- ----------
Total Stockholders' Equity 1,905,894 1,865,721
---------- ----------
Total Liabilities and Equity $1,985,977 $1,892,113
========== ==========
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
1.The condensed parent company financial statements and notes should be
read in conjunction with the consolidated financial statements and notes of
Wisconsin Energy Corporation appearing in this Annual Report on Form 10-K.
2.Various financing arrangements and regulatory requirements impose
certain restrictions on the ability of Wisconsin Electric Power Company, a
utility subsidiary of Wisconsin Energy Corporation to transfer funds to
Wisconsin Energy Corporation in the form of cash dividends, loans, or
advances. Under Wisconsin law, Wisconsin Electric is prohibited from
loaning funds, either directly or indirectly, to Wisconsin Energy.
Wisconsin Energy Corporation does not believe that such restrictions will
affect its operations.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements and Prospectuses constituting part of the Registration
Statements listed below of Wisconsin Energy Corporation of our report dated
January 27, 1999 appearing in this Form 10-K.
1. Registration Statement on Form S-3 (Registration No. 333-24277) -
Stock Plus Investment Plan.
2. Registration Statement on Form S-8 (Registration No. 333-60383) -
Employee Retirement Savings Plan.
3. Registration Statement on Form S-8 (Registration No. 33-65225) -
1993 Omnibus Stock Incentive Plan.
4. Registration Statement on Form S-3 (Registration No. 333-73137) -
Trust Preferred Securities.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 29, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statement on
Form S-3 (No. 333-40319) of Wisconsin Electric Power Company of
our report dated January 27, 1999 appearing in this Form 10-K.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 29, 1999
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, therunto duly authorized.
WISCONSIN ENERGY CORPORATION
By /s/R. A. Abdoo
----------------------------
Date: March 25, 1999 R. A. Abdoo, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/R. A. Abdoo March 25, 1999
- ---------------------------------------------
R. A. Abdoo, Chairman of the Board, President
and Chief Executive Officer and Director
- - Principal Executive Officer
/s/R. R. Grigg March 25, 1999
- ---------------------------------------------
R. R. Grigg, Vice President and Director
/s/C. H. Baker March 25, 1999
- ---------------------------------------------
C. H. Baker, Treasurer and Chief Financial
Officer - Principal Financial Officer
/s/A. K. Klisurich March 25, 1999
- ---------------------------------------------
A. K. Klisurich, Controller -
Principal Accounting Officer
/s/J. F. Ahearne March 25, 1999
- ---------------------------------------------
J. F. Ahearne, Director
/s/J. F. Bergstrom March 25, 1999
- ---------------------------------------------
J. F. Bergstrom, Director
/s/ B. L. Bowles March 25, 1999
- ---------------------------------------------
B. L. Bowles, Director
/s/R. A. Cornog March 25, 1999
- ---------------------------------------------
R. A. Cornog, Director
/s/G. B. Johnson March 25, 1999
- ---------------------------------------------
G. B. Johnson, Director
/s/J. N. MacDonough March 25, 1999
- ---------------------------------------------
J. N. MacDonough, Director
/s/ J. B. North March 25, 1999
- ---------------------------------------------
J. B. North, Director
/s/F. P. Stratton, Jr. March 25, 1999
- ---------------------------------------------
F. P. Stratton, Jr., Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, therunto duly authorized.
WISCONSIN ELECTRIC POWER COMPANY
By /s/R. A. Abdoo
------------------------------------
Date: March 25, 1999 R. A. Abdoo, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/R. A. Abdoo March 25, 1999
- ---------------------------------------------
R. A. Abdoo, Chairman of the Board, Chief
Executive Officer and Director - Principal
Executive Officer
/s/R. R. Grigg March 25, 1999
- ---------------------------------------------
R. R. Grigg, President, Chief Operating Officer
and Director
/s/D. K. Porter March 25, 1999
- ---------------------------------------------
D. K. Porter, Senior Vice President and Director
/s/C. H. Baker March 25, 1999
- ---------------------------------------------
C. H. Baker, Vice President - Finance, Chief
Financial Officer - Principal Financial Officer
/s/A. K. Klisurich March 25, 1999
- ---------------------------------------------
A. K. Klisurich, Controller - Principal
Accounting Officer
/s/J. F. Ahearne March 25, 1999
- ---------------------------------------------
J. F. Ahearne, Director
/s/J. F. Bergstrom March 25, 1999
- ---------------------------------------------
J. F. Bergstrom, Director
/s/ B. L. Bowles March 25, 1999
- ---------------------------------------------
B. L. Bowles, Director
/s/R. A. Cornog March 25, 1999
- ---------------------------------------------
R. A. Cornog, Director
/s/G. B. Johnson March 25, 1999
- ---------------------------------------------
G. B. Johnson, Director
/s/J. N. MacDonough March 25, 1999
- ---------------------------------------------
J. N. Macdonough, Director
/s/J. B. North March 25, 1999
- ---------------------------------------------
J. B. North, Director
/s/F. P. Stratton, Jr. March 25, 1999
- ---------------------------------------------
F. P. Stratton, Jr., Director
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
EXHIBIT INDEX
to
Annual Report on Form 10-K
For the year ended December 31, 1998
The following exhibits are filed with or incorporated by reference in the
report with respect to Wisconsin Energy and/or Wisconsin Electric as
denoted by an "X" in the last two columns. (An asterisk (*) indicates
incorporation by reference pursuant to Exchange Act Rule 12b-32.)
Wisconsin Wisconsin
Number Exhibit Energy Electric
- ------ ------------------------------------- --------- ---------
3 Articles of Incorporation and By-laws
3.1 * Restated Articles of X
Incorporation of Wisconsin
Energy Corporation, as amended
and restated effective June
12, 1995. (Exhibit (3)-1 to
Wisconsin Energy Corporation's
Quarterly Report on Form 10-Q
for the quarter ended June 30,
1995, File No. 1-9057.)
3.2 * Bylaws of Wisconsin Energy X
Corporation, as amended to
December 17, 1997. (Exhibit
3.2 to Wisconsin Energy
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1997, File No.
1-9057.)
3.3 * Restated Articles of X
Incorporation of Wisconsin
Electric, as amended and
restated effective
January 10, 1995. (Exhibit
(3)-1 to Wisconsin Electric's
Annual Report of Form 10-K for
the year ended December 31, 1994,
File No. 1-1245.)
3.4 * Bylaws of Wisconsin Electric, X
as amended to December 17, 1997.
(Exhibit 3.2 to Wisconsin Electric's
Annual Report on Form 10-K for
the year ended December 31,
1997, File No. 1-1245.)
4 Instruments defining the rights of security
holders, including indentures
4.1 * Reference is made to Article X X
III of the Restated Articles
of Incorporation. (Exhibits
3.1 and 3.3 herein.)
Mortgage, Indenture, Supplemental Indenture or
Securities Resolution:
4.2 * Mortgage and Deed of Trust of X X
Wisconsin Electric, dated
October 28, 1938 (Exhibit B-1
under File No. 2-4340.)
4.3 * Second Supplemental Indenture X X
of Wisconsin Electric, dated
June 1, 1946 (Exhibit 7-C
under File No. 2-6422.)
4.4 * Third Supplemental Indenture X X
of Wisconsin Electric, dated
March 1, 1949 (Exhibit 7-C
under File No. 2-8456.)
4.5 * Fourth Supplemental Indenture X X
of Wisconsin Electric, dated
June 1, 1950 (Exhibit 7-D
under File No. 2-8456.)
4.6 * Fifth Supplemental Indenture X X
of Wisconsin Electric, dated
May 1, 1952 (Exhibit 4-G under
File No. 2-9588.)
4.7 * Sixth Supplemental Indenture X X
of Wisconsin Electric, dated
May 1, 1954 (Exhibit 4-H under
File No. 2-10846.)
4.8 * Seventh Supplemental Indenture X X
of Wisconsin Electric, dated
April 15, 1956 (Exhibit 4-I
under File No. 2-12400.)
4.9 * Eighth Supplemental Indenture X X
of Wisconsin Electric, dated
April 1, 1958 (Exhibit 2-I
under File No. 2-13937.)
4.10 * Ninth Supplemental Indenture X X
of Wisconsin Electric, dated
November 15, 1960 (Exhibit 2-J
under File No. 2-17087
4.11 * Tenth Supplemental Indenture X X
of Wisconsin Electric, dated
November 1, 1966 (Exhibit 2-K
under File No. 2-25593.)
4.12 * Eleventh Supplemental X X
Indenture of Wisconsin
Electric, dated November 15,
1967 (Exhibit 2-L under File
No. 2-27504.)
4.13 * Twelfth Supplemental Indenture X X
of Wisconsin Electric, dated
May 15, 1968 (Exhibit 2-M
under File No. 2-28799.)
4.14 * Thirteenth Supplemental X X
Indenture of Wisconsin
Electric, dated May 15, 1969
(Exhibit 2-N under File
No. 2-32629.)
4.15 * Fourteenth Supplemental X X
Indenture of Wisconsin
Electric, dated November 1,
1969 (Exhibit 2-O under File
No. 2-34942.)
4.16 * Fifteenth Supplemental X X
Indenture of Wisconsin
Electric, dated July 15, 1976
(Exhibit 2-P under File
No. 2-54211.)
4.17 * Sixteenth Supplemental X X
Indenture of Wisconsin
Electric, dated January 1,
1978 (Exhibit 2-Q under File
No. 2-61220.)
4.18 * Seventeenth Supplemental X X
Indenture of Wisconsin
Electric, dated May 1, 1978
(Exhibit 2-R under File
No. 2-61220.)
4.19 * Eighteenth Supplemental X X
Indenture of Wisconsin
Electric, dated May 15, 1978
(Exhibit 2-S under File
No. 2-61220.)
4.20 * Nineteenth Supplemental X X
Indenture of Wisconsin
Electric, dated August 1, 1979
(Exhibit (a)2(a) under File
No. 1-1245, 9/30/79 Wisconsin
Electric Form 10-Q.)
4.21 * Twentieth Supplemental X X
Indenture of Wisconsin
Electric, dated November 15,
1979 (Exhibit (a)2(a) under
File No. 1-1245, 12/31/79
Wisconsin Electric Form 10-K.)
4.22 * Twenty-First Supplemental X X
Indenture of Wisconsin
Electric, dated April 15,
1980 (Exhibit (4)-21 under File
No. 2-69488.)
4.23 * Twenty-Second Supplemental X X
Indenture of Wisconsin
Electric, dated December 1,
1980 (Exhibit (4)-1 under File
No. 1-1245, 12/31/80 Wisconsin
Electric Form 10-K.)
4.24 * Twenty-Third Supplemental X X
Indenture of Wisconsin
Electric, dated September 15,
1985 (Exhibit (4)-1 under File
No. 1-1245, 9/30/85 Wisconsin
Electric Form 10-Q.)
4.25 * Twenty-Fourth Supplemental X X
Indenture of Wisconsin
Electric, dated September 15,
1985 (Exhibit (4)-1 under File
No. 1-1245, 9/30/85 Wisconsin
Electric Form 10-Q.)
4.26 * Twenty-Fifth Supplemental X X
Indenture of Wisconsin
Electric, dated December 15,
1986 (Exhibit (4)-25 under
File No. 1-1245, 12/31/86
Wisconsin Electric Form 10-K.)
4.27 * Twenty-Sixth Supplemental X X
Indenture of Wisconsin
Electric, dated January 1,
1988 (Exhibit 4 under File
No. 1-1245, 1/26/88 Wisconsin
Electric Form 8-K.)
4.28 * Twenty-Seventh Supplemental X X
Indenture of Wisconsin
Electric, dated April 15,
1988 (Exhibit 4 under File
No. 1-1245, 3/31/88 Wisconsin
Electric Form 10-Q.)
4.29 * Twenty-Eighth Supplemental X X
Indenture of Wisconsin
Electric, dated September 1,
1989 (Exhibit 4 under File
No. 1-1245, 9/30/89 Wisconsin
Electric Form 10-Q.)
4.30 * Twenty-Ninth Supplemental X X
Indenture of Wisconsin
Electric, dated October 1,
1991 (Exhibit 4-1 under File
No. 1-1245, 12/31/91 Wisconsin
Electric Form 10-K.)
4.31 * Thirtieth Supplemental X X
Indenture of Wisconsin
Electric, dated December 1,
1991 (Exhibit 4-2 under File
No. 1-1245, 12/31/91 Wisconsin
Electric Form 10-K.)
4.32 * Thirty-First Supplemental X X
Indenture of Wisconsin
Electric, dated August 1, 1992
(Exhibit 4-1 under File No.
1-1245, 6/30/92 Wisconsin
Electric Form 10-Q.)
4.33 * Thirty-Second Supplemental X X
Indenture of Wisconsin
Electric, dated August 1, 1992
(Exhibit 4-2 under File
No. 1-1245, 6/30/92 Wisconsin
Electric Form 10-Q.)
4.34 * Thirty-Third Supplemental X X
Indenture of Wisconsin
Electric, dated October 1,
1992 (Exhibit 4-1 under File
No. 1-1245, 9/30/92 Wisconsin
Electric Form 10-Q.)
4.35 * Thirty-Fourth Supplemental X X
Indenture of Wisconsin
Electric, dated November 1,
1992 (Exhibit 4-2 under File
No. 1-1245, 9/30/92 Wisconsin
Electric Form 10-Q.)
4.36 * Thirty-Fifth Supplemental X X
Indenture of Wisconsin
Electric, dated December 15,
1992 (Exhibit 4-1 under File
No. 1-1245, 12/31/92 Wisconsin
Electric Form 10-K.)
4.37 * Thirty-Sixth Supplemental X X
Indenture of Wisconsin
Electric, dated January 15,
1993 (Exhibit 4-2 under File
No. 1-1245, 12/31/92 Wisconsin
Electric Form 10-K.)
4.38 * Thirty-Seventh Supplemental X X
Indenture of Wisconsin
Electric, dated March 15, 1993
(Exhibit 4-3 under File
No. 1-1245, 12/31/92 Wisconsin
Electric Form 10-K.)
4.39 * Thirty-Eighth Supplemental X X
Indenture of Wisconsin
Electric, dated August 1, 1993
(Exhibit (4)-1 under File
No. 1-1245, 6/30/93 Wisconsin
Electric Form 10-Q.)
4.40 * Thirty-Ninth Supplemental X X
Indenture of Wisconsin
Electric, dated September 15,
1993 (Exhibit (4)-1 under File
No. 1-1245, 9/30/93 Wisconsin
Electric Form 10-Q.)
4.41 * Fortieth Supplemental X X
Indenture of Wisconsin
Electric, dated January 1,
1996 (Exhibit (4)-1 under File
No. 1-1245, 1/1/96 Wisconsin
Electric Form 8-K.)
4.42 * Indenture for Debt Securities X X
of Wisconsin Electric (the
"Indenture"), dated December
1, 1995 (Exhibit (4)-1 under
File No. 1-1245, 12/31/95
Wisconsin Electric Form 10-K.)
4.43 * Securities Resolution No. 1 of X X
Wisconsin Electric under the
Indenture, dated December 5,
1995 (Exhibit (4)-2 under File
No. 1-1245, 12/31/95 Wisconsin
Electric Form 10-K.)
4.44 * Securities Resolution No. 2 of X X
Wisconsin Electric under the
Indenture, dated November 12,
1996 (Exhibit 4.44 under File
No. 1-9057, 12/31/96 Wisconsin
Energy Corporation Form 10-K.)
4.45 * Securities Resolution No. 3 of X X
Wisconsin Electric under the
Indenture, dated May 27, 1998
(Exhibit (4)-1 under File
No. 1-1245, 6/30/98 Wisconsin
Electric Form 10-Q.)
All agreements and instruments
with respect to long-term debt
not exceeding 10 percent of
the total assets of the
Registrant and its
subsidiaries on a consolidated
basis have been omitted as
permitted by related
instructions. The Registrant
agrees pursuant to Item
601(b)(4) of Regulation S-K to
furnish to the Securities and
Exchange Commission, upon
request, a copy of all such
agreements and instruments.
10 Material Contracts
10.1 * Employment arrangement with X X
Michael B. Sellman as Chief
Nuclear Officer of Wisconsin
Electric, effective March 2,
1998. (Exhibit 10.1 to
Wisconsin Energy Corporation's
Annual Report on Form 10-K for
the year ended December 31,
1997, File No. 1-9057.) ** See
Note.
10.2 * Supplemental Executive X
Retirement Plan of Wisconsin
Energy Corporation (as amended
and restated as of January 1,
1996). (Exhibit (10)-1 to
Wisconsin Energy Corporation's
Annual Report on Form 10-K for
the year ended December 31,
1995, File No. 1-9057.)** See
Note.
10.3 * Amended Non-Qualified Trust X X
Agreement by and between
Wisconsin Energy Corporation
and Firstar Trust Company
dated January 26, 1996,
regarding trust established to
provide a source of funds to
assist in meeting of the
liabilities under various
nonqualified deferred
compensation plans made
between Wisconsin Energy
Corporation or its
subsidiaries and various plan
participants. (Exhibit (10)-2
to Wisconsin Energy
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1995, File
No. 1-9057.)** See Note.
10.4 * Executive Deferred X
Compensation Plan of Wisconsin
Energy Corporation, effective
January 1, 1989, as amended
and restated as of January 1,
1996. (Exhibit (10)-3 to
Wisconsin Energy Corporation's
Annual Report on Form 10-K for
the year ended December 31,
1995, File No. 1-9057.)** See
Note.
10.5 * Directors' Deferred X
Compensation Plan of Wisconsin
Energy Corporation, effective
January 1, 1987, and as
restated as of January 1,
1996. (Exhibit (10)-4 to
Wisconsin Energy Corporation's
Annual Report on Form 10-K for
the year ended December 31,
1995, File No. 1-9057.)** See
Note.
10.6 * Forms of Stock Option X
Agreements under 1993 Omnibus
Stock Incentive Plan. (Exhibit
(10)-5 to Wisconsin Energy
Corporation's Annual Report on
Form 10-K for the year ended
December 31, 1995, File
No. 1-9057.)** See Note.
10.7 * Supplemental Benefits X X
Agreement between Wisconsin
Energy Corporation and Calvin
H. Baker dated November 21,
1994. (Exhibit (10)-7 to
Wisconsin Energy Corporation's
Annual Report on Form 10-K for
the year ended December 31,
1995, File No. 1-9057.)** See
Note.
10.8 * Supplemental Benefits X X
Agreement between Wisconsin
Energy Corporation and Richard
A. Abdoo dated November 21,
1994, and April 26, 1995
letter agreement. (Exhibit
(10)-1 to Wisconsin Energy
Corporation's 6/30/95 10-Q.)**
See Note.
10.9 * Wisconsin Energy Corporation X X
Senior Executive Severance
Policy, as adopted effective
April 28, 1995 and amended on
July 26, 1995. (Exhibit
(10)-3 to Wisconsin Energy
Corporation's 6/30/95 10-Q.)**
See Note.
10.10 1993 Ombibus Stock Incentive X
Plan adopted by the Board of
Directors on December 15,
1993, approved by shareholders
at the Annual Meeting of
Stockholders held on May 11,
1994, and amended by the Board
of Directors on May 19, 1998
offering performance-based
incentives and other equity
interests in Wisconsin Energy
Corporation to directors,
officers and other key
employees. ** See Note.
10.11 1998 Revised forms of award X
agreements under 1993 Omnibus
Stock Incentive Plan, as
amended, for non-qualified
stock option awards to non-
employee directors, restricted
stock awards, incentive stock
option awards and non-
qualified stock option
awards.** See Note.
10.12* Short-Term Performance Plan of X
Wisconsin Energy Corporation
effective January 1, 1992.
(Exhibit 10-3 to Wisconsin
Energy Corporation's 1991 Form
10-K in File No. 1-9057.)**
See Note.
10.13* Service Agreement dated X X
January 1, 1987, between
Wisconsin Electric, Wisconsin
Energy Corporation and other
non-utility affiliated
companies. (Exhibit (10)-(a)
to Wisconsin Electric's
Current Report on Form 8-K
dated January 2, 1987 in File
No. 1-1245.)
Note: Two asterisks (**) identify
management contracts and executive
compensation plans or arrangements
required to be filed as exhibits
pursuant to Item 14(c) of Form 10-K.
Certain compensatory plans in which
directors or executive officers of
Wisconsin Electric are eligible to
participate are not filed as Wisconsin
Electric exhibits in reliance on the
exclusion in Item 601(b)(10)(iii)(B)(6)
of Regulation S-K.
21 Subsidiaries of the registrant
21.1 Subsidiaries of Wisconsin X
Energy Corporation
23 Consents of experts and counsel
23.1 PricewaterhouseCoopers LLP - X X
Milwaukee, WI Consent of
Independent Accountants
appearing in this Annual
Report on Form 10-K for the
year ended December 31, 1998.
27 Financial data schedule
27.1 Financial Data Schedule for X X
the fiscal year ended
December 31, 1998.
99 Additional exhibits
99.1 Information furnished in lieu X
of the Form 11-K Annual
Report for Employee
Retirement Savings Plan for
the year ended December 31,
1998. (To be filed by
amendment.)
Exhibit 10.10
WISCONSIN ENERGY CORPORATION
OMNIBUS STOCK INCENTIVE PLAN
EFFECTIVE DECEMBER 15, 1993
As amended May 19, 1998
WISCONSIN ENERGY CORPORATION
OMNIBUS STOCK INCENTIVE PLAN
1. Purpose. The purpose of the 1993 Omnibus Stock Incentive Plan (the
"Plan") is to enable Wisconsin Energy Corporation (the "Company") to offer
directors, officers and key employees of the Company and its subsidiaries
performance-based incentives and other equity interests in the Company,
thereby attracting, retaining and rewarding such individuals and
strengthening the mutuality of interest between such individuals and the
Company's shareholders.
2. Administration. The Plan shall be administered by a committee (the
"Committee") which shall be the Compensation Committee of the Board of
Directors or another committee consisting of not less than two directors of
the Company appointed by the Board of Directors who are not employees. It
is intended that the Committee members shall, at all times, qualify as "non-
employee" directors within the meaning of Securities and Exchange
Commission Regulation Section 240.16b-3 and as "outside directors" within
the meaning of Section 162(m) of the Internal Revenue Code, as amended.
However, the failure to so qualify shall not affect the validity of any
actions taken by the Committee in accordance with the provisions of the
Plan. If for any reason the Committee does not qualify to administer the
Plan, the Board of Directors may appoint a new Committee so as to comply.
3. Eligibility. Benefits under the Plan shall be granted only to
directors, officers and key employees of the Company and its subsidiaries
selected initially and from time-to-time thereafter by the Committee on the
basis of the special importance of their services in the management,
development and operations of the Company and its subsidiaries.
4. Benefits. The benefits awarded under the Plan shall consist of
(a) stock options, (b) stock appreciation rights, (c) stock awards, and
(d) performance units. The Company may permit selected participants to
defer payments to them of some or all types of benefits awarded under the
Plan in accordance with procedures established by the Committee which are
intended to permit such deferrals to comply with the applicable
requirements of the Internal Revenue Code.
5. Shares Reserved. There is hereby reserved for issuance under the Plan
an aggregate of 4,000,000 shares of common stock of the Company which may
be authorized but unissued, treasury, or repurchased shares. All of such
shares may, but need not, be issued pursuant to the exercise of incentive
stock options. The maximum number of option shares which may be awarded to
any participant in any year during the term of the Plan is 100,000 shares.
No more than 350,000 shares may be issued as stock awards during the term
of the Plan. If there is a lapse, expiration, termination or cancellation
of any option prior to the issuance of shares thereunder or if shares are
issued and thereafter are reacquired by the Company pursuant to rights
reserved upon issuance thereof, those shares may again be used for new
awards under this Plan.
6. Stock Options. Stock options shall consist of options to purchase
shares of common stock of the Company and shall be either incentive stock
options or non-qualified stock options as determined by the Committee. The
option price shall be not less than 100% of the fair market value of the
shares on the date the option is granted and the price may be paid by check
or, in the discretion of the Committee, by means of tendering, either
directly or by attestation, shares of common stock of the Company then
owned by the participant. Stock options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee at grant; provided, however, that no stock option shall be
exercisable prior to six months after the option grant date nor later than
ten years after the grant date. The aggregate fair market value
(determined as of the time the option is granted) of the shares of common
stock with respect to which incentive stock options are exercisable for the
first time by a participant during any calendar year (under all option
plans of the Company and its subsidiaries) shall not exceed $100,000.
7. Stock Appreciation Rights. Stock appreciation rights may be granted
to the holder of any stock option granted hereunder and shall be subject to
such terms and conditions consistent with the Plan as the Committee shall
impose from time to time, including the following:
(a) A stock appreciation right may be granted with respect to a
stock option at the time of its grant or at any time thereafter
up to six months prior to its expiration.
(b) Stock appreciation rights will permit the holder to
surrender any related stock option or portion thereof which is
then exercisable and elect to receive in exchange therefor cash
in an amount equal to:
(i) The excess of the fair market value on the date
of such election of one share of common stock over the
option price, multiplied by
(ii) The number of shares covered by such option or
portion thereof which is so surrendered.
(c) The Committee shall have the discretion to satisfy a
participant's right to receive the amount of cash determined
under paragraph (b) hereof in whole or in part by the delivery of
common stock of the Company valued as of the date of the
participant's election.
(d) In the event of the exercise of a stock appreciation right,
the number of shares reserved for issuance hereunder shall be
reduced by the number of shares covered by the stock option or
portion thereof surrendered.
8. Stock Awards. Stock awards will consist of common stock transferred
to participants without other payment therefor as additional compensation
for their services to the Company or one of its subsidiaries. A stock
award shall be subject to such terms and conditions as the Committee
determines appropriate including, without limitation, restrictions on the
sale or other disposition of such shares, the right of the Company to
reacquire such shares upon termination of the participant's employment
within specified periods and conditions requiring that the shares be earned
in whole or in part upon the achievement of performance goals established
by the Committee over a designated period of time. The goals established
by the Committee may include earnings per share, total return on
shareholder equity, or such other goals as may be established by the
Committee in its discretion.
9. Performance Units. Performance units shall consist of monetary units
granted to participants which may be earned in whole or in part if the
Company achieves certain performance goals established by the Committee
over a designated period of time. The initial performance units granted
under the Plan will be contingent dividend awards. The amount which a
participant can earn pursuant to a contingent dividend award will be
determined by reference to the actual dividends paid on a specified number
of shares of the Company's common stock for a specified number of years.
Part or all of the amount of contingent dividend award will be paid to the
participant if the Company's total shareholder return (appreciation in the
value of its stock plus dividends) over a stated period of time compares
favorably to the return earned by other companies in the Company's industry
peer group, except that there will be no payout if the Company's total
shareholder return is negative over the course of such period.
10. Non-transferability. Except as otherwise provided by the Committee,
stock options and other benefits granted under this Plan shall not be
transferable other than by will or the laws of descent and distribution and
each stock option and stock appreciation right shall be exercisable during
the participant's lifetime only by the participant or the participant's
guardian or legal representative.
11. Change in Control. In the event of a change in control of the
Company, all outstanding stock options and stock appreciation rights shall
become immediately exercisable and all other benefits shall immediately
vest with all performance goals deemed fully achieved. For these purposes,
change in control shall mean the occurrence of any of the following events,
as a result of one transaction or a series of transactions:
(a) any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, but excluding the
Company, its affiliates and any qualified or non-qualified plan
maintained by the Company or its affiliates) becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under
such Act), directly or indirectly, of securities of the Company
representing more than 20% of the combined voting power of the
Company's then outstanding securities;
(b) individuals who constitute a majority of the Board of
Directors of the Company immediately prior to a contested
election for positions on the Board cease to constitute a
majority as a result of such contested election;
(c) the Company is combined (by merger, share exchange,
consolidation, or otherwise) with another corporation and as a
result of such combination, less than 60% of the outstanding
securities of the surviving or resulting corporation are owned in
the aggregate by the former shareholders of the Company;
(d) the Company sells, leases, or otherwise transfers all or
substantially all of its properties or assets not in the ordinary
course of business to another person or entity; or
(e) the Board of Directors determines in its sole and absolute
discretion that there has been a change in control of the
Company.
These change in control provisions shall apply to successive changes
in control on an individual transaction basis.
12. Other Provisions. The award of any benefit under the Plan may also be
subject to other provisions (whether or not applicable to the benefit
awarded to any other participant) as the Committee determines appropriate,
including such provisions as may be required to comply with federal or
state securities laws and stock exchange requirements and understandings or
conditions as to the participant's employment.
13. Fair Market Value. The fair market value of the Company's common
stock at any time shall be determined in such manner as the Committee may
deem equitable or as required by applicable law or regulation.
14. Adjustment Provisions.
(a) If the Company shall at any time change the number of issued
shares of common stock without new consideration to the Company
(such as by stock dividend or stock split), the total number of
shares reserved for issuance under this Plan and the number of
shares covered by each outstanding benefit shall be adjusted so
that the aggregate consideration payable to or by the Company, if
any, shall not be changed.
(b) Notwithstanding any other provision of this Plan, and
without affecting the number of shares reserved or available
hereunder, the Board of Directors may authorize the issuance or
assumption of benefits in connection with any merger,
consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem
appropriate.
(c) In the event of any merger, consolidation or reorganization
of the Company with any other corporation, there shall be
substituted, on an equitable basis as determined by the
Committee, for each share of common stock then reserved for
issuance under the Plan and for each share of common stock then
subject to a benefit granted under the Plan, the number and kind
of shares of stock, other securities, cash or other property to
which holders of common stock of the Company will be entitled
pursuant to the transaction.
15. Taxes. The Company shall be entitled to withhold the amount of any
tax attributable to any shares deliverable under the Plan after giving the
person entitled to receive the shares notice as far in advance as
practicable and the Company may defer making delivery as to any benefit if
any such tax is payable until indemnified to its satisfaction. The
Committee may, in its discretion and subject to rules which it may adopt,
permit a participant to pay all or a portion of the taxes arising in
connection with any benefit under the Plan by electing to have the Company
withhold shares of common stock from the shares otherwise deliverable to
the participant, having a fair market value equal to the amount to be
withheld. Notwithstanding the provisions of paragraph 5 above, any such
withheld shares shall not become available again for new awards under this
Plan.
16. Term of Program; Amendment, Modification or Cancellation of Benefits.
No benefit shall be granted more than ten years after the date of the
approval of this Plan by the shareholders of the Company; provided,
however, that the terms and conditions applicable to any benefits granted
prior to such date may at any time be amended, modified or canceled by
mutual agreement between the Committee and the participant or any other
persons as may then have an interest therein.
17. Amendment or Discontinuation of Plan. The Board of Directors may
amend the Plan at any time, provided that no such amendment shall be
effective unless approved within 12 months after the date of the adoption
of such amendment by the affirmative vote of a majority of the shares
present, or represented, and entitled to vote at a meeting duly held if
such shareholder approval is required for the Plan to continue to comply
with the requirements of Securities and Exchange Commission Regulation
Section 240.16b-3. The Board of Directors may suspend the Plan or
discontinue the Plan at any time; provided, however, that no such action
shall adversely affect any outstanding benefit.
18. Shareholder Approval. The Plan was adopted by the Board of Directors
on December 15, 1993, subject to shareholder approval. The Plan and any
benefits granted thereunder shall be null and void if shareholder approval
is not obtained within twelve months of the adoption of the Plan by the
Board of Directors.
Exhibit 10.11
WISCONSIN ENERGY CORPORATION
NON-QUALIFIED STOCK OPTION AWARD
THIS NON-QUALIFIED STOCK OPTION, dated the 19th day of May, 1998, is
granted by WISCONSIN ENERGY CORPORATION (the "Company"), to Director (the
"Director") pursuant to the Company's 1993 Omnibus Stock Incentive Program
(the "Plan") as amended on May 19, 1998.
WHEREAS, the Company believes it to be in the best interests of the
Company, its subsidiaries and its stockholders for its directors to
increase their stock ownership in the Company in order that they will thus
have a greater incentive to direct the Company's affairs in such a way that
its shares may become more valuable; and
WHEREAS, the Director serves the Company or one of its subsidiaries as
director ("Covered Service");
NOW, THEREFORE, in consideration of these premises and the services to be
performed by the Director, the Company grants this stock option to the
Director on the following terms and conditions.
1. OPTION GRANT
------------
The Company grants to the Director an option to purchase a total of
Shares shares of Common Stock of the Company at an option price of
$29.344 per share. This option is not intended to qualify as an "incentive
stock option" within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
2. VESTING OF OPTION
-----------------
Except as otherwise provided herein, this option shall be exercisable only
prior to the expiration date hereof, and then only as set forth in the
following schedule:
Years from Date of Option Grant Shares Exercisable
------------------------------- ------------------
Less than 1 0%
At least 1 but less than 2 33.3%
At least 2 but less than 3 66.6%
At least 3 100%
Notwithstanding the foregoing, this option shall become immediately
exercisable in the event that all of a Director's Covered Service ceases
because of death or disability (which shall mean such illness or injury as
renders the Director unable to perform Covered Service) or all Covered
Service ceases for any other reason at or after age 60. In addition, this
option shall become fully exercisable upon a Change of Control of the
Company, as defined in paragraph 11 of the Plan, while the Director is in
Covered Service. Any unvested shares are immediately forfeited if the
Director leaves Covered Service for any reason other than death or
disability or prior to age 60. However, the Compensation Committee may, in
its discretion, vest options upon separation.
3. TERM OF OPTION
--------------
All rights to exercise this option shall terminate at the earliest of the
following dates:
(a) following cessation of all Covered Service, for any reason other
than death, vested options are exercisable for 5 years; or
(b) following cessation of all Covered Service because of death,
vested options are exercisable for 2 years; or
(c) ten years from date of grant.
4. METHOD OF EXERCISE
------------------
This option may be exercised only by appropriate notice in writing
delivered to the Corporate Secretary of the Company and accompanied by:
(1) a check payable to the order of the Company for the full purchase
price of the shares purchased, or delivery of shares of Common
Stock owned by the Director (or an attestation of the Director's
ownership of such shares in lieu of delivery) valued at fair
market value on the date of exercise, or some combination of a
check and use of such shares (and shares acquired in a prior
option exercise may not be used for this purpose until the shares
have been held by the Director for six months), and
(2) such other documents or representations as the Company may
reasonably request in order to comply with securities, tax or
other laws then applicable to the exercise of the option.
5. NON-TRANSFERABILITY; DEATH
--------------------------
This option is not transferable by the Director otherwise than by will or
the laws of descent and distribution and is exercisable during the
Director's lifetime only by the Director. If the Director dies after
cessation of all Covered Service, but during the option period and before
the expiration of the 5-year exercise period specified in paragraph 3(i)
hereof, this option may be exercised, to the extent otherwise vested, in
whole or in part and from time to time, in the manner described in
paragraph 4 hereof, by the Director's estate or the person to whom the
option passes by will or the laws of descent and distribution, but only
within a period of (a) two years after the Director's death or (b) ten
years from the date hereof, whichever period is shorter.
6. REGISTRATION
------------
If at any time during the option period the Company shall be advised by its
counsel that shares deliverable upon exercise of the option are required to
be registered under the Securities Act of 1933 ("Act") or any state
securities laws, or that delivery of the shares must be accompanied or
preceded by a prospectus meeting the requirements of that Act or such state
securities laws, the Company will use its best efforts to effect the
registration or provide the prospectus not later than a reasonable time
following each exercise of this option, but delivery of shares by the
Company may be deferred until the registration is effected or the
prospectus is available. The Director shall have no interest in shares
covered by this option until certificates for the shares are issued, or in
lieu of certificates, shares are credited to the Director's account in the
book-entry form.
7. ADJUSTMENTS
-----------
If the Company shall at any time change the number of shares of its Common
Stock without new consideration to the Company (such as by stock dividend,
stock split or similar transaction), the total number of shares then
remaining subject to purchase hereunder shall be changed in proportion to
the change in issued shares and the option price per share shall be
adjusted so that the total consideration payable to the Company upon the
purchase of all shares not theretofore purchased shall not be changed. If
during the term of this option, the Common Stock of the Company shall be
changed into another kind of stock or into securities of another
corporation, cash, evidence of indebtedness, other property or any
combination thereof (the "Acquisition Consideration"), whether as a result
of reorganization, sale, merger, consolidation, or other similar
transaction, the Committee shall cause adequate provision to be made
whereby the Director shall thereafter be entitled to receive upon the due
exercise of this option the Acquisition Consideration the Director would
have been entitled to receive for Common Stock acquired through exercise of
this option immediately prior to the effective date of such transaction.
8. WITHHOLDING
-----------
The Director will be responsible for any tax consequences that result from
the exercise of this option. The Director grants the Company full power
and authority to take any action it considers necessary or desirable in
order to comply with any applicable tax withholding or reporting
obligations.
9. IMPACT ON OTHER BENEFITS
------------------------
The income attributable to the exercise of this option shall not be
includable as compensation or earnings for purposes of any other benefit
plan or program offered by the Company or its subsidiaries.
IN WITNESS WHEREOF, the Company has caused the execution hereof by its duly
authorized officer and Director has agreed to the terms and conditions of
this option, all as of the date first above written.
WISCONSIN ENERGY CORPORATION
By: ----------------------------------
Corporate Secretary
----------------------------------
Director
WISCONSIN ENERGY CORPORATION
RESTRICTED STOCK AWARD
THIS RESTRICTED STOCK AWARD, dated this 19th day of May, 1998, is granted
by WISCONSIN ENERGY CORPORATION (the "Company") to Name (the "Employee"),
pursuant to the Company's 1993 Omnibus Stock Incentive Plan (the "Plan") as
amended on May 19, 1998.
WHEREAS, the Company believes it to be in the best interests of the
Company, its subsidiaries and its stockholders to provide an incentive for
certain of its key employees to work for and manage the affairs of the
Company in such a way that its shares become more valuable; and
WHEREAS, the Employee is employed by the Company or one of its subsidiaries
as an officer or key employee;
NOW, THEREFORE, in consideration of these premises and the services to be
performed by the Employee, the Company grants this Restricted Stock Award
to the Employee on the following terms and conditions.
1. AWARD
-----
The Company grants to the Employee a restricted stock award on May 19, 1998
(the "Award Date"), covering Rest_Stock shares of the common stock of the
Company (the "Restricted Stock").
2. RESTRICTION
-----------
The Restricted Stock shall become vested upon the first to occur, if any,
of the following events:
(a) The termination of the Employee's employment with the
Company or a subsidiary by reason of retirement, disability, or
death. For these purposes, "retirement" shall mean separation
from the service of the Company at or after the attainment of age
60, and "disability" shall mean separation from the service of
the Company because of such illness or injury as renders the
Employee unable to perform the material duties of the Employee's
job.
(b) The occurrence of a Change of Control of the Company as
defined in paragraph 11 of the Plan.
(c) Ten years from the date of this Award.
The period of time during which the shares covered by this Restricted Stock
Award are forfeitable is referred to as the "Restricted Period". If the
Employee's employment with the Company or one of its subsidiaries
terminates during the Restricted Period for any reason other than as
specified in subsection (a) above, the Restricted Stock shall be forfeited
to the Company on the date of such termination, without any further
obligations of the Company to the Employee and all rights of the Employee
with respect to the Restricted Stock shall terminate. The Compensation
Committee may, in its discretion, vest shares upon separation.
3. PERFORMANCE ACCELERATION GOALS
------------------------------
Notwithstanding Section 2, restrictions will be removed on M_10 shares of
the Restricted Stock and on any additional restricted shares acquired with
cash dividends on such Restricted Stock or acquired as a result of stock
dividends thereon for every year, on a cumulative basis, in which the
schedule of cumulative earnings identified in Appendix A is met or
exceeded. An illustration regarding the removal of restrictions based on
this Section is set forth in Appendix A and made a part hereof. If the
Company shall, at any time during the Restricted Period, change the number
of its issued and outstanding shares of common stock by means of a stock
dividend or a stock split without new consideration to the Company, the
schedule of cumulative earnings identified in Appendix A shall be adjusted
accordingly so that the incentive targets represented by such schedule are
preserved. In the event of any other change in the capital structure of
the Company or any other event regarding the Company during the Restricted
Period, the Compensation Committee may make such adjustment, if any,
respecting such schedule as it considers desirable. The Compensation
Committee may, in its discretion, permit earlier vesting.
4. RIGHTS DURING RESTRICTED PERIOD
-------------------------------
The Employee, during the Restricted Period, shall have the right to vote
the Restricted Stock; however, all cash dividends, stock dividends, stock
rights or other securities issued with respect to the Restricted Stock
(collectively, the "Proceeds") shall be forfeitable and subject to the same
restrictions as exist regarding the original shares of Restricted Stock.
All cash dividends will be used to acquire additional restricted shares.
The Restricted Stock shall be nontransferable during the Restricted Period,
except by will or the laws of descent and distribution.
5. CUSTODY
-------
The Restricted Stock may be credited to Employee in book entry form and
shall be held, along with any Proceeds, in custody by the Company or an
agent for the Company (including, as determined by the Company, under the
Company's Stock Plus Plan and any Proceeds may be applied as directed by
the Company) until the applicable restrictions have expired. If any
certificates are issued for shares of Restricted Stock or any of the
Proceeds during the Restricted Period, such certificates shall bear an
appropriate legend as determined by the Company referring to the applicable
terms, conditions and restrictions and the Employee shall deliver a signed,
blank stock power to the Company relating thereto.
6. TAX WITHHOLDING
---------------
The Employee may satisfy any tax withholding obligations arising with
respect to the Restricted Stock in whole or in part by tendering a check to
the Company for any required amount, by election to have a portion of
shares withheld to defray all or a portion of any applicable taxes, or by
election to have the Company or its subsidiaries withhold the required
amounts from other compensation payable to the Employee.
7. IMPACT ON OTHER BENEFITS
------------------------
The value of the Restricted Stock awarded hereunder, either on the award
date or at the time such shares become vested, shall not be includable as
compensation or earnings for purposes of any other benefit plan or program
offered by the Company or its subsidiaries.
WISCONSIN ENERGY CORPORATION
By:
---------------------------------
Corporate Secretary
---------------------------------
Name
WISCONSIN ENERGY CORPORATION
INCENTIVE STOCK OPTION AWARD
THIS INCENTIVE STOCK OPTION, dated the 19th day of May, 1998, is granted by
WISCONSIN ENERGY CORPORATION (the "Company"), to Name (the "Employee")
pursuant to the Company's 1993 Omnibus Stock Incentive Program (the "Plan")
as amended on May 19, 1998.
WHEREAS, the Company believes it to be in the best interests of the
Company, its subsidiaries and its stockholders for its officers and other
key employees to obtain or increase their stock ownership interest in the
Company in order that they will thus have a greater incentive to work for
and manage the Company's affairs in such a way that its shares may become
more valuable; and
WHEREAS, the Employee is employed by the Company or one of its subsidiaries
as an officer or key employee;
NOW, THEREFORE, in consideration of these premises and the services to be
performed by the Employee, the Company grants this stock option to the
Employee on the following terms and conditions.
1. OPTION GRANT
------------
The Company grants to the employee an option to purchase a total of ISO
shares of Common Stock of the Company at an option price of $29.344 per
share. This option is intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. VESTING OF OPTION
-----------------
Except as otherwise provided herein, this option shall be exercisable only
prior to the expiration date hereof, and then only as set forth in the
following schedule:
Years from Date of Option % of Shares Exercisable
Granted -----------------------
-------------------------
Less than 1 0%
At least 1 but less than 2 25%
At least 2 but less than 3 50%
At least 3 but less than 4 75%
At least 4 100%
Notwithstanding the foregoing, this option shall become immediately
exercisable in the event that the Employee's employment with the Company or
a subsidiary terminates by reason of retirement, disability, or death. For
purposes of this option, "retirement" shall mean separation from the
service of the Company either at or at or after the attainment of age 55
and completion of at least ten years of service or at or after age 65, and
"disability" shall mean separation from the service of the Company because
of such illness or injury as renders the Employee unable to perform the
material duties of the Employee's job. In addition, this option shall
become fully exercisable upon a Change of Control of the Company, as
defined in paragraph 11 of the Plan, while the Employee is employed by the
Company. Any unvested shares are immediately forfeited if the Employee
ceases to be employed by the Company for any reason other than retirement,
disability, or death. However, the Compensation Committee may, in its
discretion, vest options upon separation.
3. TERM OF OPTION
--------------
All rights to exercise this option shall terminate at the earliest of the
following dates:
(i) three months after the termination of the Employee's employment
with the Company or a subsidiary for any reason other than
retirement, disability or death;
(ii) two years after the termination of employment by reason of
disability or death (provided that the option shall not be
treated as an incentive stock option if it is exercised more than
one year after termination by reason of permanent and total
disability within the meaning of Section 422(c)(6) of the Code);
(iii) five years after termination of employment by retirement (provided
that the option shall not be treated as an incentive stock option
if it is exercised more than three months after Employee's
termination of employment); or
(iv) ten years from the date of grant.
4. METHOD OF EXERCISE
------------------
This option may be exercised only by appropriate notice in writing
delivered to the Corporate Secretary of the Company and accompanied by:
(a) a check payable to the order of the Company for the full purchase
price of the shares purchased, or delivery of shares of Common
Stock owned by the Employee (or an attestation of the Employee's
ownership of such shares in lieu of delivery) valued at fair
market value on the date of exercise, or some combination of a
check and use of such shares (and shares acquired in a prior
option exercise may not be used for this purpose until the shares
have been held by the Employee for six months), and
(b) such other documents or representations (and satisfaction of any
applicable tax withholding obligations) as the Company may
reasonably request in order to comply with securities, tax or
other laws then applicable to the exercise of the option. This
option shall not be treated as an incentive stock option unless
it is exercised within the time limits permitted by applicable
tax laws.
5. NON-TRANSFERABILITY; DEATH
--------------------------
This option is not transferable by the Employee otherwise than by will or
the laws of descent and distribution and is exercisable during the
Employee's lifetime only by the Employee. If the Employee dies after
termination of employment but during the option period and before the
expiration of the applicable exercise period specified in paragraph 3
hereof, this option may be exercised, to the extent otherwise vested, in
whole or in part and from time to time, in the manner described in
paragraph 4 hereof, by the Employee's estate or the person to whom the
option passes by will or the laws of descent and distribution, but only
within a period of (a) two years after the Employee's death or (b) ten
years from the date hereof, whichever period is shorter.
6. REGISTRATION
------------
If at any time during the option period the Company shall be advised by its
counsel that shares deliverable upon exercise of the option are required to
be registered under the Securities Act of 1933 ("Act") or any state
securities laws, or that delivery of the shares must be accompanied or
preceded by a prospectus meeting the requirements of that Act or such state
securities laws, the Company will use its best efforts to effect the
registration or provide the prospectus not later than a reasonable time
following each exercise of this option, but delivery of shares by the
Company may be deferred until the registration is effected or the
prospectus is available. The Employee shall have no interest in shares
covered by this option until certificates for the shares are issued, or in
lieu of certificates, shares are credited to the Employee's account in the
book-entry form.
7. ADJUSTMENTS
-----------
If the Company shall at any time change the number of shares of its Common
Stock without new consideration to the Company (such as by stock dividend,
stock split or similar transaction), the total number of shares then
remaining subject to purchase hereunder shall be changed in proportion to
the change in issued shares and the option price per share shall be
adjusted so that the total consideration payable to the Company upon the
purchase of all shares not theretofore purchased shall not be changed. If
during the term of this option, the Common Stock of the Company shall be
changed into another kind of stock or into securities of another
corporation, cash, evidence of indebtedness, other property or any
combination thereof (the "Acquisition Consideration"), whether as a result
of reorganization, sale, merger, consolidation, or other similar
transaction, the Committee shall cause adequate provision to be made
whereby the Employee shall thereafter be entitled to receive upon the due
exercise of this option the Acquisition Consideration the Employee would
have been entitled to receive for Common Stock acquired through exercise of
this option immediately prior to the effective date of such transaction.
8. NOTICE OF DISPOSITION
---------------------
If the Employee disposes of any shares acquired on the exercise of this
option within either (a) two years after the date of option grant or (b)
one year after the date of option exercise, the Employee agrees to notify
the Company within seven days of such disposition.
9. IMPACT ON OTHER BENEFITS
------------------------
The income attributable to the exercise of this option shall not be
includable as compensation or earnings for purposes of any other benefit
plan or program offered by the Company or its subsidiaries.
IN WITNESS WHEREOF, the Company has caused the execution hereof by its duly
authorized officer and Employee has agreed to the terms and conditions of
this option, all as of the date first above written.
WISCONSIN ENERGY CORPORATION
By:
------------------------------------
Corporate Secretary
------------------------------------
Name
WISCONSIN ENERGY CORPORATION
INCENTIVE STOCK OPTION AWARD
THIS INCENTIVE STOCK OPTION, dated the 19th day of May, 1998, is granted by
WISCONSIN ENERGY CORPORATION (the "Company"), to Name (the "Employee")
pursuant to the Company's 1993 Omnibus Stock Incentive Program (the "Plan")
as amended on May 19, 1998.
WHEREAS, the Company believes it to be in the best interests of the
Company, its subsidiaries and its stockholders for its officers and other
key employees to obtain or increase their stock ownership interest in the
Company in order that they will thus have a greater incentive to work for
and manage the Company's affairs in such a way that its shares may become
more valuable; and
WHEREAS, the Employee is employed by the Company or one of its subsidiaries
as an officer or key employee;
NOW, THEREFORE, in consideration of these premises and the services to be
performed by the Employee, the Company grants this stock option to the
Employee on the following terms and conditions.
1. OPTION GRANT
------------
The Company grants to the employee an option to purchase a total of ISO
shares of Common Stock of the Company at an option price of $29.344 per
share. This option is intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
2. VESTING OF OPTION
-----------------
Except as otherwise provided herein, this option shall be exercisable only
prior to the expiration date hereof, and then only as set forth in the
following schedule:
Years from Date of Option % of Shares Exercisable
Granted -----------------------
------------------------
Less than 1 0%
At least 1 but less than 2 25%
At least 2 but less than 3 50%
At least 3 but less than 4 75%
At least 4 100%
Notwithstanding the foregoing, this option shall become immediately
exercisable in the event that the Employee's employment with the Company or
a subsidiary terminates by reason of retirement, disability, or death. For
purposes of this option, "retirement" shall mean separation from the
service of the Company either at or at or after the attainment of age 55
and completion of at least ten years of service or at or after age 65, and
"disability" shall mean separation from the service of the Company because
of such illness or injury as renders the Employee unable to perform the
material duties of the Employee's job. In addition, this option shall
become fully exercisable upon a Change of Control of the Company, as
defined in paragraph 11 of the Plan, while the Employee is employed by the
Company. Any unvested shares are immediately forfeited if the Employee
ceases to be employed by the Company for any reason other than retirement,
disability, or death. However, the Compensation Committee may, in its
discretion, vest options upon separation.
3. TERM OF OPTION
--------------
All rights to exercise this option shall terminate at the earliest of the
following dates:
(i) three months after the termination of the Employee's employment
with the Company or a subsidiary for any reason other than
retirement, disability or death;
(ii) two years after the termination of employment by reason of
disability or death (provided that the option shall not be
treated as an incentive stock option if it is exercised more than
one year after termination by reason of permanent and total
disability within the meaning of Section 422(c)(6) of the Code);
(iii) five years after termination of employment by retirement (provided
that the option shall not be treated as an incentive stock option
if it is exercised more than three months after Employee's
termination of employment); or
(iv) ten years from the date of grant.
4. METHOD OF EXERCISE
------------------
This option may be exercised only by appropriate notice in writing
delivered to the Corporate Secretary of the Company and accompanied by:
(a) a check payable to the order of the Company for the full purchase
price of the shares purchased, or delivery of shares of Common
Stock owned by the Employee (or an attestation of the Employee's
ownership of such shares in lieu of delivery) valued at fair
market value on the date of exercise, or some combination of a
check and use of such shares (and shares acquired in a prior
option exercise may not be used for this purpose until the shares
have been held by the Employee for six months), and
(b) such other documents or representations (and satisfaction of any
applicable tax withholding obligations) as the Company may
reasonably request in order to comply with securities, tax or
other laws then applicable to the exercise of the option. This
option shall not be treated as an incentive stock option unless
it is exercised within the time limits permitted by applicable
tax laws.
5. NON-TRANSFERABILITY; DEATH
--------------------------
This option is not transferable by the Employee otherwise than by will or
the laws of descent and distribution and is exercisable during the
Employee's lifetime only by the Employee. If the Employee dies after
termination of employment but during the option period and before the
expiration of the applicable exercise period specified in paragraph 3
hereof, this option may be exercised, to the extent otherwise vested, in
whole or in part and from time to time, in the manner described in
paragraph 4 hereof, by the Employee's estate or the person to whom the
option passes by will or the laws of descent and distribution, but only
within a period of (a) two years after the Employee's death or (b) ten
years from the date hereof, whichever period is shorter.
6. REGISTRATION
------------
If at any time during the option period the Company shall be advised by its
counsel that shares deliverable upon exercise of the option are required to
be registered under the Securities Act of 1933 ("Act") or any state
securities laws, or that delivery of the shares must be accompanied or
preceded by a prospectus meeting the requirements of that Act or such state
securities laws, the Company will use its best efforts to effect the
registration or provide the prospectus not later than a reasonable time
following each exercise of this option, but delivery of shares by the
Company may be deferred until the registration is effected or the
prospectus is available. The Employee shall have no interest in shares
covered by this option until certificates for the shares are issued, or in
lieu of certificates, shares are credited to the Employee's account in the
book-entry form.
7. ADJUSTMENTS
-----------
If the Company shall at any time change the number of shares of its Common
Stock without new consideration to the Company (such as by stock dividend,
stock split or similar transaction), the total number of shares then
remaining subject to purchase hereunder shall be changed in proportion to
the change in issued shares and the option price per share shall be
adjusted so that the total consideration payable to the Company upon the
purchase of all shares not theretofore purchased shall not be changed. If
during the term of this option, the Common Stock of the Company shall be
changed into another kind of stock or into securities of another
corporation, cash, evidence of indebtedness, other property or any
combination thereof (the "Acquisition Consideration"), whether as a result
of reorganization, sale, merger, consolidation, or other similar
transaction, the Committee shall cause adequate provision to be made
whereby the Employee shall thereafter be entitled to receive upon the due
exercise of this option the Acquisition Consideration the Employee would
have been entitled to receive for Common Stock acquired through exercise of
this option immediately prior to the effective date of such transaction.
8. NOTICE OF DISPOSITION
---------------------
If the Employee disposes of any shares acquired on the exercise of this
option within either (a) two years after the date of option grant or (b)
one year after the date of option exercise, the Employee agrees to notify
the Company within seven days of such disposition.
9. IMPACT ON OTHER BENEFITS
------------------------
The income attributable to the exercise of this option shall not be
includable as compensation or earnings for purposes of any other benefit
plan or program offered by the Company or its subsidiaries.
IN WITNESS WHEREOF, the Company has caused the execution hereof by its duly
authorized officer and Employee has agreed to the terms and conditions of
this option, all as of the date first above written.
WISCONSIN ENERGY CORPORATION
By:
--------------------------------------
Corporate Secretary
--------------------------------------
Name
Exhibit 21.1
Wisconsin Energy Corporation
The following are subsidiaries of Wisconsin Energy Corporation
Badger Service Company
Edison Sault Electric Company
Minergy Corp., formerly Minergy Corporation
Northern Tree Service, Inc.
WEC International Inc.
WEC Nuclear Corp.*, formerly WEC Sub Corp.
Wisconsin Electric Power Company
Wisconsin Energy Capital Corporation, formerly Wisconsin
Michigan Investment Corporation
Wispark Corporation
Wisvest Corporation
Witech Corporation
* Non-operating companies.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED FINANCIAL STATEMENTS OF WISCONSIN ENERGY
CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<CURRENCY> U.S. DOLLARS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<PERIOD-TYPE> 12-MOS
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,238,385
<OTHER-PROPERTY-AND-INVEST> 1,056,471
<TOTAL-CURRENT-ASSETS> 608,119
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 458,782
<TOTAL-ASSETS> 5,361,757
<COMMON> 1,156
<CAPITAL-SURPLUS-PAID-IN> 759,195
<RETAINED-EARNINGS> 1,142,754
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,903,105
0
30,450
<LONG-TERM-DEBT-NET> 1,175,252
<SHORT-TERM-NOTES> 51,503
<LONG-TERM-NOTES-PAYABLE> 403,341
<COMMERCIAL-PAPER-OBLIGATIONS> 235,356
<LONG-TERM-DEBT-CURRENT-PORT> 99,591
0
<CAPITAL-LEASE-OBLIGATIONS> 170,431
<LEASES-CURRENT> 19,549
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,273,179
<TOT-CAPITALIZATION-AND-LIAB> 5,361,757
<GROSS-OPERATING-REVENUE> 1,979,986
<INCOME-TAX-EXPENSE> 94,780
<OTHER-OPERATING-EXPENSES> 1,608,503
<TOTAL-OPERATING-EXPENSES> 1,703,283
<OPERATING-INCOME-LOSS> 276,703
<OTHER-INCOME-NET> 32,650
<INCOME-BEFORE-INTEREST-EXPEN> 309,353
<TOTAL-INTEREST-EXPENSE> 120,018
<NET-INCOME> 189,335
1,203
<EARNINGS-AVAILABLE-FOR-COMM> 188,132
<COMMON-STOCK-DIVIDENDS> 177,397
<TOTAL-INTEREST-ON-BONDS> 94,346
<CASH-FLOW-OPERATIONS> 459,951
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<FN>
See financial statements and notes in the accompanying 10-K.
