==================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
-------------------------------------------
Commission Registrant; State of Incorporation IRS Employer
File Number Address; and Telephone Number Identification
No.
----------- ---------------------------------- --------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
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WISCONSIN ENERGY CORPORATION
--------------------------------
AMENDMENT NO. 1
TO
1998 ANNUAL REPORT ON FORM 10-K
The undersigned Registrant hereby amends the following items,
financial statements, exhibits or other portions of its Annual Report for
the year ended December 31, 1998 on Form 10-K as set forth in the pages
attached hereto:
PART II
-------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In Item 8 of Wisconsin Energy Corporation's Annual Report on Form 10-K for
the year ended December 31, 1998, Wisconsin Energy's Consolidated Statement
of Cash Flows for each of the three years in the period ended
December 31, 1998 is hereby amended to correct several line descriptions in
the Financing Activities section. Specifically, the line descriptions
"Sale of - Common Stock", "Sale of - Long-term debt", Retirement of -
Preferred stock" and "Retirement of - Long-term debt" were inadvertently
left off of the original Consolidated Statement of Cash Flows filed on
March 31, 1999. These line descriptions are being added with this amended
Form 10-K. In addition, Wisconsin Energy's Consolidated Common Stock Equity
Statement for 1998 is hereby amended to add the "Net Income" line, which
was inadvertently left off of the original statement.
The remainder of Wisconsin Energy's Item 8, including the Financial
Statements, the Notes to Financial Statements and the Report of Independent
Accountants, is unchanged.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by
the undersigned, thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
----------------------------
(Registrant)
Date: April 13, 1999 By /s/ A. K. Klisurich
----------------------------
A. K. Klisurich, Controller -
Principal Accounting Officer
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<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 - Common stock 10,275 29,586 23,180
Long-term debt 313,610 47,000 238,809
Retirement of - Preferred stock - - (1)
Long-term debt (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
Net income 188,132 188,132
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
of construction (8,039) (1,157) (1,157)
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 - 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 $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
