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SCHEDULE 14A INFORMATION
------------------------
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
WISCONSIN ENERGY CORPORATION
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(Name of Registrant as Specified In Its Charter)
- - - - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed: April 28, 2000
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Notes:
Reg. (S) 240.14a-101.
SEC 1913 (3-99)
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Wisconsin Energy Corporation
Notice of 2000 Annual Meeting of Stockholders
Proxy Statement
Annual Financial Statements and Review of Operations
[WE APPEARS HERE]
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Notice of Annual Meeting of Stockholders
Proxy Statement
Proposal 1: Election of Directors 1
Other Matters 2
Voting of Shares 2
Independent Auditors 3
Corporate Governance 3
Compensation Committee Report on Executive Compensation 6
Executive Officers' Compensation 8
Certain Related Transactions 10
Employment and Severance Arrangements 10
Retirement Plans 11
Wisconsin Energy Corporation Common Stock Ownership 13
Section 16(a) Beneficial Ownership Reporting Compliance 14
2001 Annual Meeting 14
Availability of Form 10-K 14
Performance Graph 15
Annual Financial Statements and Review of Operations
Selected Financial and Operating Data A-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations A-3
Financial Statements and Notes A-30
Market For Common Equity and Related Stockholder Matters A-53
Business of the Company A-53
Directors and Executive Officers A-54
</TABLE>
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 28, 2000
To the Stockholders of Wisconsin Energy Corporation:
You are cordially invited to attend the 2000 Annual Meeting of Stockholders.
The meeting will be held in Milwaukee, Wisconsin as follows:
Tuesday, June 27, 2000
10:00 a.m., Central Time
Bradley Center
1001 North Fourth Street
Milwaukee, Wisconsin 53203-1314
A map showing the location of the meeting is on your proxy card.
During the meeting, stockholders will be asked to:
1. Elect three directors for terms expiring at the 2003 Annual Meeting of
Stockholders.
2. Consider any other matters which may properly come before the meeting.
The Chairman will also review company operations and answer questions from
stockholders.
Stockholders of record at the close of business on April 20, 2000 are entitled
to vote. Your vote is important. You may vote using the Internet, by
telephone, or by returning the enclosed proxy card in the envelope provided.
Instructions for voting via the Internet or by telephone are included on your
proxy card. Internet and telephone voting are being offered as a convenience to
you and as a step toward reducing costs.
The following pages provide additional details about the meeting as well as
other useful information.
By Order of the Board of Directors
/s/ Thomas H. Fehring
Thomas H. Fehring
Corporate Secretary
<PAGE>
PROXY STATEMENT
This proxy statement, dated April 28, 2000, is being furnished to stockholders
beginning on or about May 5, 2000, in connection with the solicitation of
proxies by the Wisconsin Energy Corporation ("WEC") Board of Directors to be
used at the Annual Meeting of Stockholders on June 27, 2000, at the Bradley
Center, 1001 North Fourth Street, Milwaukee, Wisconsin, and at all adjournments
of the meeting, for the purposes listed in the preceding Notice of Annual
Meeting of Stockholders.
PROPOSAL 1: ELECTION OF DIRECTORS--TERMS EXPIRING IN 2003
Overview. The WEC Bylaws provide that the directors be divided into three
classes, as nearly equal in size as possible. The term of one class expires each
year. The terms of Directors John F. Bergstrom, Barbara L. Bowles and Willie D.
Davis expire at the 2000 Annual Meeting. The Nominating and Board Affairs
Committee recommends that these three directors be re-elected for three year
terms. The committee, in selecting nominees for your consideration, considered
several factors, as described below.
Director Resignations. Directors John N. MacDonough and Julia B. North have
submitted their resignations pursuant to the Directors' Retirement and Tenure
Policy provisions of the Corporate Governance Guidelines. Those guidelines state
that directors who change employment or major responsibilities must submit their
resignation from the Board for consideration by the Nominating and Board Affairs
Committee. The Board accepted their resignations effective with the 2000 Annual
Meeting. The Board of Directors thanks Directors MacDonough and North for their
valuable service.
New Directors Elected. The Agreement and Plan of Merger relating to WEC's
acquisition of WICOR, Inc., which was approved by stockholders, specified that
George E. Wardeberg, WICOR's Chairman and Chief Executive Officer, and one other
WICOR director be elected to the WEC Board following the merger. The Board
elected Mr. Wardeberg and Willie D. Davis, President and Chief Executive Officer
of All Pro Broadcasting, Inc. and former director of WICOR, to the WEC Board.
They have been serving as WEC directors since April 26, 2000, the effective date
of the merger.
Mr. Wardeberg's initial term expires at the 2002 Annual Meeting. The merger
agreement provides that the Board will nominate and solicit proxies to elect Mr.
Wardeberg to serve as a director until the annual meeting in 2005, the year in
which he will attain age 70. Per the agreement, Mr. Davis is to serve until the
first annual meeting after the merger, which is this year's meeting, and then be
nominated to serve at least one additional three-year term.
Director Nominees. In accordance with the merger agreement, the Board has
nominated Mr. Davis for election at the 2000 Annual Meeting to serve a term
expiring in 2003. John F. Bergstrom and Barbara L. Bowles have also been
nominated by the Board to serve terms expiring at the 2003 Annual Meeting of
Stockholders and until their respective successors are duly elected and
qualified.
Each nominee has consented to being nominated and to serve if elected. In the
unlikely event that any nominee becomes unable to serve for any reason, the
proxies will be voted for a substitute nominee selected by the WEC Board upon
the recommendation of the Nominating and Board Affairs Committee.
The Board of Directors recommends that you vote FOR director nominees John F.
Bergstrom, Barbara L. Bowles and Willie D. Davis.
Biographical Data. Biographical data regarding each nominee and director is
shown below. Ages are as of December 31, 1999.
Nominees for Terms Expiring in 2003
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JOHN F. BERGSTROM. Age 53. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997; President and Chief Executive Officer of
Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and operates
numerous automobile sales and leasing businesses. Director of WEC since 1987.
Director of Wisconsin Electric Power Company, one of WEC's utility subsidiaries,
since 1985. Director of Bergstrom Corporation, Banta Corporation, First National
Bank-Fox Valley, Kimberly-Clark Corporation, Midwest Express Holdings, Inc.,
Universal Foods Corporation and The Green Bay Packers.
BARBARA L. BOWLES. Age 52. Founder, President and Chief Executive Officer of
The Kenwood Group, Inc. since 1989. The Kenwood Group is a Chicago-based
investment advisory firm that manages pension funds for corporations, public
institutions and endowments. Director of WEC and Wisconsin Electric since 1998.
Director of The Black & Decker Corporation, Fort James Corporation and Hyde Park
Bank and Trust Company.
WILLIE D. DAVIS. Age 65. President and Chief Executive Officer of All Pro
Broadcasting, Inc., since 1977. All Pro Broadcasting owns and operates radio
stations in Los Angeles and Milwaukee. Director of WEC and Wisconsin Electric
since April 26, 2000. Director of All Pro Broadcasting, Inc., Alliance Bank,
Bassett Furniture Industries Inc., The Dow Chemical Co., Johnson Controls,
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Inc., Kmart Corp., MGM Grand Inc., Metro-Goldwyn-Mayer, Inc., Rally's
Hamburgers, Inc., Sara Lee Corporation and Strong Capital Management, Inc.
Directors Continuing in Office--Terms Expiring in 2001
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ROBERT A. CORNOG. Age 59. Chairman of the Board, President and Chief Executive
Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is a developer,
manufacturer and distributor of professional hand and power tools, diagnostic
and shop equipment, and tool storage products. Director of WEC since 1993.
Director of Wisconsin Electric since 1994. Director of Snap-on Incorporated and
Johnson Controls, Inc.
RICHARD R. GRIGG. Age 51. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since 1995; Chief Nuclear Officer of
Wisconsin Electric from December 1996 to March 1998. President and Chief
Operating Officer of Wisconsin Natural Gas Company during 1995. Wisconsin
Natural was WEC's gas utility subsidiary and merged into Wisconsin Electric
effective January 1, 1996. Director of WEC since 1995. Director of Wisconsin
Electric since 1994. Director of WICOR since April 2000. Director of Wisconsin
Natural during 1995.
FREDERICK P. STRATTON, JR. Age 60. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines.
Director of WEC since 1987. Director of Wisconsin Electric since 1986. Director
of Briggs & Stratton Corporation, Bank One Corporation, Midwest Express
Holdings, Inc. and Weyco Group, Inc.
Directors Continuing in Office--Terms Expiring in 2002
- - - - - - ------------------------------------------------------
RICHARD A. ABDOO. Age 55. Chairman of the Board, President and Chief Executive
Officer of WEC since 1991. Chairman of the Board and Chief Executive Officer of
Wisconsin Electric since 1990. Chairman of the Board and director of WICOR and
Wisconsin Gas since April 2000. Director of WEC since 1988. Director of
Wisconsin Electric since 1989. Chairman of the Board and Chief Executive Officer
of Wisconsin Natural Gas Company from 1990 to 1995. Director of Wisconsin
Natural from 1989 to 1995. Director of Marshall & Ilsley Corporation, United
Wisconsin Services, Inc. and Universal Foods Corporation.
JOHN F. AHEARNE. Age 65. Director of the Ethics Program for the Sigma Xi Center
for Sigma Xi, The Scientific Research Society, an organization that publishes
American Scientist, provides grants to graduate students and conducts national
meetings on major scientific issues, since 1999. Executive Director of Sigma Xi
from 1989 to 1997, and Director of Sigma Xi Center from 1997 to 1999. Adjunct
Scholar of Resources for the Future, an economic research, non-profit institute,
since 1993. Lecturer and Adjunct Professor, Duke University, since 1995.
Commissioner of the United States Nuclear Regulatory Commission from 1978 to
1983, serving as its Chairman from 1979 to 1981. Member, National Academy of
Engineering. Director of WEC and Wisconsin Electric since 1994.
GEORGE E. WARDEBERG. Age 64. Vice Chairman of the Board of WEC and Director of
WEC and Wisconsin Electric since April 26, 2000. Director of WICOR since 1992.
Mr. Wardeberg has also held numerous positions with WICOR and its subsidiaries,
including Chairman and CEO of WICOR, Inc., from 1997 to April 2000. Director of
Marshall & Ilsley Corporation, M&I Data Services, Inc., and Twin Disc, Inc.
Each of the nine directors listed above are also directors of Wisconsin Gas
Company, a subsidiary of WICOR.
OTHER MATTERS
The WEC Bylaws set forth the requirements that must be followed should a
stockholder wish to propose any floor nominations for director or floor
proposals. The Bylaws state, among other things, that notice and certain other
documentation must be provided to WEC at least 70 days and not more than 100
days before the annual meeting. Since no such notice has been received, the
Board of Directors is not aware of any other matters that may properly come
before the meeting. If any other matters do properly come before the meeting,
including any stockholder proposal omitted from this proxy statement pursuant to
the SEC's proxy rules, the persons named as the proxies in the accompanying form
of proxy will vote the proxy in accordance with their best judgment.
VOTING OF SHARES
Stockholders of Record. Common stockholders of record at the close of business
on April 20, 2000, are entitled to vote on matters presented at the Annual
Meeting. On that date, there were 120,328,927 shares of WEC common stock
outstanding.
Each outstanding share is entitled to one vote upon each matter presented. A
majority of the votes entitled to be cast by the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum. Abstentions and
shares which are the subject of broker non-votes will count toward establishing
a quorum. A list of stockholders of record entitled to vote at the meeting will
be available for inspection by stockholders at WEC's principal business office
at 231 West Michigan Street, Milwaukee, Wisconsin, prior to the meeting. The
list will also be available on the day of the Annual Meeting at the meeting
site.
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Stockholders whose shares are held in the name of a broker, bank or other holder
of record are invited to attend the meeting, but may not vote at the meeting
unless they have first obtained a proxy, executed in the stockholder's favor,
from the holder of record.
Voting by Proxy. You may vote in person or by properly appointed proxy.
Electronic proxy voting by stockholders of record is now valid under Wisconsin
law. As a convenience to you and as a step toward reducing costs, we are
providing you with the option to vote by proxy via the Internet or via toll-free
touch-tone telephone. You may still, however, cast your vote by returning your
signed and dated proxy card.
Specific instructions to vote electronically are listed on your proxy card or
the information forwarded by your bank or broker. These procedures are designed
to authenticate your identity as a stockholder and to allow you to confirm that
your instructions have been properly recorded. Please be aware that if you vote
over the Internet, you may incur costs such as telephone and Internet access
charges for which you will be responsible. The Internet and telephone voting
facilities will close at 10:00 a.m. Central Time on June 27, 2000.
You may revoke your proxy by voting in person at the meeting, by written notice
to WEC's Corporate Secretary, or by executing and delivering a later-dated proxy
via the Internet, via telephone or by mail, in each case prior to the closing of
the polls. Attendance at the meeting will not in itself constitute revocation of
a proxy. All shares entitled to vote and represented by properly completed
proxies timely received and not revoked will be voted as you direct. If no
direction is given, the proxies will be voted as the Board of Directors
recommends.
If you are a participant in WEC's Stock Plus Investment Plan ("Stock Plus") or
own shares through investments in the WEC Common Stock Fund of Wisconsin
Electric's Employee Retirement Savings Plan (the "401(k) plan"), your proxy will
serve as voting instructions for your shares held in those plans. The
administrator for Stock Plus and the trustee for the 401(k) plan will vote
shares as you direct. If a proxy is not returned for shares held in Stock Plus,
the administrator will not vote those shares. If a proxy is not returned for
shares held in the 401(k) plan, the trustee will vote those shares in the same
proportion that all shares in the plan fund for which voting instructions have
been received are voted.
Solicitation of Proxies. WEC will bear the cost of the solicitation of proxies.
Employees of WEC or its subsidiaries may solicit proxies by mail, by telephone,
personally or by other communications, without compensation apart from their
normal salaries. It is not anticipated that any other persons will be engaged to
solicit proxies or that compensation will be paid for that purpose. However, WEC
may seek the services of an outside proxy solicitor in the event such services
become necessary.
Voting Requirements and Procedures. The voting requirements and procedures
described below are based upon the provisions of the Wisconsin Business
Corporation Law, WEC's charter documents and any other requirements applicable
to the matter to be voted upon.
Directors will be elected by a plurality of the votes cast by the shares
entitled to vote, as long as a quorum is present. "Plurality" means that the
individuals who receive the largest number of votes are elected as directors up
to the maximum number of directors to be chosen. Therefore, shares not voted,
whether by withheld authority or otherwise, have no effect in the election of
directors.
Fleet National Bank, which will also serve as inspector of election, will
tabulate the voted proxies.
INDEPENDENT AUDITORS
The Board, pursuant to a recommendation of its Audit Committee, selected the
firm of PricewaterhouseCoopers LLP as independent public accountant for WEC for
2000. PricewaterhouseCoopers or its predecessor has served as independent public
accountant for WEC since 1987 and for Wisconsin Electric continuously since
1932.
Representatives of the firm will attend the Annual Meeting to make a statement,
if they desire to do so, and to respond to appropriate questions that may be
directed to them.
CORPORATE GOVERNANCE
Corporate Governance Guidelines. The Board maintains Corporate Governance
Guidelines, which provide a framework from which it conducts business. The
Guidelines are annually reviewed to ensure that the Board is providing effective
governance over the affairs of the corporation. In 1999, these Guidelines were
reviewed and no changes were recommended. A copy of the Guidelines is available
upon request to the Corporate Secretary.
Evaluation of the Chief Executive Officer (CEO). The Board annually evaluates
the performance of the CEO. As part of this practice, the Compensation Committee
requests that independent directors provide written feedback to the Compensation
Committee chair. Feedback is requested on the CEO's performance relating to:
leadership and vision, financial stewardship, strategy development, management
development, effective communication to constituencies, and effective
representation of the corporation in community and industry affairs, as well as
other areas. The chair of the Compensation Committee shares the responses with
the CEO. The feedback is also used by the committee to determine appropriate
compensation for the CEO. This procedure
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allows the Board to consistently evaluate the CEO and to effectively communicate
the Board's expectations.
Self-Evaluation of the Board. The Board also annually evaluates its own
collective performance. Each director is asked to rate the performance of the
Board on such things as: providing appropriate oversight over key affairs of the
corporation (including its long-range goals, financial performance and strategic
plans), providing necessary and timely advice and counsel to the CEO,
communicating the Board's expectations and concerns to the CEO, having in place
effective processes to aid in its deliberations, monitoring of the issues and
trends affecting the corporation, and operating in a manner that ensures open
communication, objective and constructive participation and timely resolution of
issues.
The Nominating and Board Affairs Committee uses the results of this process as
part of its annual review of the Corporate Governance Guidelines and to foster
continuous improvement of the Board's activities.
Committees of the Board of Directors. Committees play a significant role in the
corporate governance practices of the Board. Principal responsibilities and
membership of the Board's standing committees are shown below. Committees of the
Board are generally comprised of outside, independent directors. Committees may
also include one or more non-directors who serve as ad hoc members due to their
considerable expertise in a particular field.
In 1999, members of the Audit Committee were Mr. Stratton (chair), Mr.
Bergstrom, Ms. Bowles, and Mr. MacDonough, all of whom are independent
directors. The committee operates under a charter approved by the Board. The
committee oversees the financial reporting and internal controls of WEC;
evaluates, reviews and approves the services of the independent public
accountant; recommends to the Board the independent public accountant to be
selected; recommends and reviews special audits or studies the committee
considers necessary or desirable; and reviews reports regarding compliance with
WEC's Code of Business Conduct. Both the independent public accountant and the
internal auditor may meet alone with the committee and are expected to contact
it on matters requiring its attention.
In 1999, members of the Compensation Committee were Mr. Cornog (chair), Dr.
Ahearne, Mr. Bergstrom, and Ms. North. The committee considers succession
planning issues and provides a competitive, performance-based executive
compensation program that enables WEC to attract and retain key individuals and
to motivate them to achieve WEC's short- and long-term goals. The committee also
provides a competitive director compensation program based on many of the same
criteria.
In 1999, members of the Executive Committee were Mr. Abdoo (chair), Dr. Ahearne,
Mr. Bergstrom, Mr. Cornog, Ms. North, and Mr. Stratton. The committee may
exercise all of the powers vested in the Board except action regarding dividends
or other distributions to stockholders, the filling of vacancies on the Board
and other powers, which by law may not be delegated to a committee.
In 1999, members of the Finance Committee were Mr. Bergstrom (chair), Ms.
Bowles, Mr. MacDonough, and Mr. Stratton. The committee reviews and monitors
WEC's current and long-range financial policies and strategies, including its
capital structure and dividend policy, and authorizes issuance of corporate debt
within limits set by the Board.
In 1999, members of the Nominating and Board Affairs Committee were Ms. North
(chair), Dr. Ahearne, Mr. Cornog, and Mr. Stratton. The committee establishes
and reviews corporate governance guidelines to ensure the Board is effectively
performing its fiduciary responsibilities to stockholders and recommends
candidates to be named as nominees of the Board for election as directors.
Stockholders may propose director candidates for consideration by the committee.
In 1999, members of the Nuclear Oversight Committee were Dr. Ahearne (chair),
Mr. Cornog and Mr. Grigg. Ad hoc members of the committee include three nuclear
industry experts: Dr. Thomas E. Murley, former director of the Nuclear
Regulatory Commission's Office of Nuclear Reactor Regulation; Dr. C. Frederick
Sears, formerly responsible for overseeing Northeast Utilities' nuclear and
environmental functions; and Mr. Hal B. Tucker, formerly responsible for
overseeing Duke Power Company's nuclear operations. The committee advises and
assists the Board in its responsibilities relating to overseeing the
corporation's nuclear operations.
Meetings of the Board and its Committees. The Board held 10 meetings during
1999. The number of committee meetings held in 1999 were: Audit - 3;
Compensation - 5; Executive - 0; Finance - 2; Nominating and Board Affairs - 1;
Nuclear Oversight - 3. The average meeting attendance during the year was 98%.
Compensation of the Board of Directors. In order to more closely link
directors' pay to performance and to further align the Board's interests with
stockholders, a portion of directors' fees is paid in WEC common stock.
Directors can elect to receive the fee in common stock or defer the fee in a WEC
phantom common stock account under the Directors' Deferred Compensation Plan.
During 1999, each nonemployee director received one annual retainer fee of
$18,000 for serving as a director of WEC and Wisconsin Electric paid half in WEC
common stock and half in cash. Nonemployee directors also receive an attendance
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fee of $1,500 for each Board or committee meeting attended. In addition, a per
diem fee of $1,000 for travel on company business is paid for each day on which
a Board or committee meeting is not also held. Nonemployee directors are also
paid $300 for each signed, written unanimous consent in lieu of a meeting.
Nonemployee chairs of the committees of the Board received a quarterly committee
chair retainer of $1,250. Employee directors receive no directors' fees.
Although certain WEC directors also served on the Wisconsin Electric board and
its compensation and finance committees in 1999, only single fees were paid for
meetings held by both boards or committees on the same day. In these cases, fees
were allocated between WEC and Wisconsin Electric based on services rendered.
Nonemployee directors may defer fees pursuant to the Directors' Deferred
Compensation Plan. Under the plan, fees may be deferred into an account which
accrues interest semiannually at the prime rate or into a WEC phantom common
stock account, the value of which will appreciate or depreciate based on the
market performance of WEC stock, as well as through the accumulation of any
reinvested dividends. Deferral amounts are credited to accounts in the name of
each participating director on the books of WEC, are unsecured and are payable
only in cash following termination of the director's service to WEC and its
subsidiaries. The deferred amounts will be paid out of the general corporate
assets or the trust described under "Retirement Plans" in this proxy statement.
Each nonemployee director annually receives an option to purchase shares of WEC
common stock under WEC's long-term incentive plan for serving as a director of
WEC and Wisconsin Electric. In 2000, the amount of shares was increased from
3,000 to 5,000 to reflect current market practices. Each option will have an
exercise price equal to the fair market value of the shares on the date the
option is granted and will be exercisable for 10 years after the date of grant.
Options vest over a three-year period; one-third on each anniversary of the
directors' election to the Board, with the exception of the 2000 grant which
will vest one-third on each anniversary of the grant date. Upon a change in
control of WEC, disability or death, or if the director leaves the Board after
completing a full term, these options shall become immediately exercisable. The
exercise price of an option may, at the nonemployee director's election, be paid
in cash or with previously-owned shares of common stock or a combination
thereof.
The company has established a Directors' Charitable Awards Program to help
further its policy of charitable giving. Under the program, the company intends
to contribute up to $100,000 per year for 10 years to a charitable
organization(s) chosen by each director, upon the director's death. Directors
are provided with one charitable award benefit for serving on the boards of WEC
and its subsidiaries. Beneficiary organizations under the program must be
approved by the Nominating and Board Affairs Committee. The program is funded by
life insurance on the lives of the Board members. Directors derive no financial
benefit from the program since all insurance proceeds and charitable deductions
accrue solely to the company. Because of the tax deductibility of these
charitable donations and the use of insurance as a funding vehicle, the long-
term cost to the company is expected to be modest.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Compensation Philosophy and Objectives. The Compensation Committee is
responsible for making decisions regarding compensation for the executives of
WEC and its principal subsidiaries. All of our members are independent
nonemployee directors. We seek to provide a competitive, performance-based
executive compensation program that enables WEC to attract and retain key
individuals and motivates them to achieve WEC's short- and long-term goals.
We believe that a substantial portion of executive compensation should be at
risk. As a result, WEC's compensation plans have been structured so that the
level of total compensation is strongly dependent upon achievement of business
results that are aligned with the interests of WEC's stockholders and customers.
In order to determine competitive compensation practices, we rely upon
compensation surveys provided to us by a compensation consultant. We believe
that the labor market for WEC executives is that of general industry in the
United States. As a result, we principally rely upon a survey of compensation
practices provided by similarly-sized companies in general industry. However, we
also recognize that a significant portion of WEC's business is in the energy
industry. Therefore, for executives whose positions principally relate to
utility operations, we place a greater emphasis upon compensation practices in
the energy industry.
The primary elements of WEC's executive compensation program are base salary,
annual incentive compensation, and long-term incentive compensation. For WEC
executives, compensation is targeted at the 50th percentile of general industry
practices.
Specific values of 1999 compensation for the Chief Executive Officer and the
four other most highly-compensated executive officers are shown in the Summary
Compensation Table. Our basis for determining each element of compensation is
described below.
Base Salary. For 1999, we adjusted base salaries to reflect updated survey
results of executive compensation practices for similar positions at comparable
companies. We also made some adjustments based on factors such as the relative
levels of individual experience, performance, responsibility, and contribution
to the results of company operations.
Annual Incentive Compensation. The Short-Term Performance Plan provides for
annual awards to executives based on achievement of pre-established
shareholder-, customer-, and employee-focused objectives. For 1999, awards were
targeted at 30% to 55% of base salary, based upon a review of competitive
practices for comparable positions at similarly-sized companies. All payments
under the plan are at risk--payments are only made if performance goals are
achieved, and awards may be less or greater than targeted amounts based on
performance.
Performance incentives for 1999 related to achievement of targeted earnings per
share, customer and employee satisfaction measures and operational goals.
Targeted earnings per share goals were based upon contributions to earnings by
each of WEC's principal subsidiaries. Operational goals were based upon energy
supply and transmission availability, delivery reliability, safety of
operations, and responsiveness to customers.
Goals are weighted differently depending on the executive's role in the
organization. In general, financial goals are weighted higher for the CEO;
operational goals are weighted higher for the COO and executives who head major
business units.
In January, 2000, we reviewed the extent to which 1999 performance goals were
met. For executives in WEC's utility operations, most financial, operational and
other goals were met or exceeded. Awards were granted to the named executive
officers as shown in the Summary Compensation Table.
Long-Term Incentive Compensation. The committee administers WEC's 1993 Omnibus
Stock Incentive Plan. This is a stockholder approved, long-term incentive plan
designed to link the interests of executives and other key employees to long-
term shareholder value. It allows for various types of awards keyed to the
performance of WEC's common stock, including stock options and restricted stock
grants.
In 1999, we reviewed the long-term incentive program to ensure its effectiveness
in focusing WEC executives to achieve the corporation's long-term objectives.
Awards to named executive officers were granted as indicated in the Summary
Compensation Table.
Our committee believes that an important adjunct to the long-term incentive
program is significant stock ownership by participants. Accordingly, as a
condition of participating in the long-term incentive plan, we have implemented
stock ownership guidelines for participants. Guidelines for executive officers
range from 150% to 300% of base salary.
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Chief Executive Officer Compensation. Among our principal responsibilities is
the review of the Chief Executive Officer's performance and the determination of
the CEO's compensation.
In reviewing the performance of WEC's Chief Executive Officer, the Compensation
Committee chair requested that nonemployee directors provide a written
evaluation of the CEO's performance. The committee chair reviewed
theevaluations, met to discuss them with Mr. Abdoo, and factored the results
into the committee's compensation determinations.
The committee set Mr. Abdoo's base salary at $615,000 for 1999, in recognition
of the leadership he provides in shaping and guiding a financially strong
organization that is able to provide quality services to its customers at
competitive prices. This base salary approximates the 50th percentile of
comparably-sized companies in the survey of general industry compensation
practices.
Mr. Abdoo's annual incentives for 1999 were based upon achievement of financial,
customer, employee and operational initiatives. Performance goals were weighted
70% corporate financial, 20% operational, 5% toward improving customer
satisfaction and 5% employee related. His financial goals were based upon
achievement of targeted WEC earnings per share. Actual 1999 EPS results were 96%
of the targeted goal. Mr. Abdoo's customer goals were based upon a customer
satisfaction survey of residential and business customers. These goals were met
to varying degrees. His employee goal was based upon a survey of employee
perceptions and was partially met. His operational goals were based upon various
initiatives related to the company's utility and nonutility operations. These
goals were substantially exceeded.
The committee also noted the significant role of Mr. Abdoo during 1999 in the:
. establishment of an agreement to acquire WICOR, Inc.,
. creation of an independent system operator for the control of the
transmission system in the Midwest,
. development of the first independent transmission company in the United
States, which will be jointly owned by Wisconsin Energy and other Midwest
utilities,
. formation of a jointly owned company (Nuclear Management Company) to
oversee operations at the Company's Point Beach nuclear plant as well as
several other nuclear plants in the Midwest, and
. integration of the newly acquired Edison Sault Electric Company into the
WEC family of companies.
To specifically link a portion of his compensation to the achievement of WEC's
long-term goals, Mr. Abdoo was awarded long-term incentive compensation in the
form of stock options and restricted stock in 1999 as set forth in the "Long-
Term Compensation Awards" column of the Summary Compensation Table.
Compliance With Tax Regulations Regarding Executive Compensation. Section
162(m) of the Internal Revenue Code limits tax deductions for executive
compensation to $1 million, unless certain requirements are met. It is the
company's policy to take reasonable steps to obtain the corporate tax deduction
by qualifying for the exemptions from limitation on such deductibility under
Section 162(m).
Respectfully submitted to WEC's stockholders by the Compensation Committee of
the Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
Julia B. North
7
<PAGE>
EXECUTIVE OFFICERS' COMPENSATION
This table shows, for the last three fiscal years, compensation awarded to,
earned by or paid to WEC's Chief Executive Officer and each of WEC's other four
most highly-compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- -----------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Awards/(1)/ Options Compensation/(2)/
($) ($) ($) ($) (#) ($)
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Abdoo
Chairman of the Board, President 1999 615,000 295,343 8,767 218,504 40,000 33,873
and Chief Executive Officer 1998 585,000 209,935 11,176 235,000 40,000 64,996
1997 585,000 0 9,974 0 0 70,312
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
Richard R. Grigg
Vice President of WEC; 1999 340,000 261,180 4,413 109,252 20,000 18,083
President and Chief Operating 1998 330,000 102,002 6,983 117,500 20,000 29,359
Officer of WE 1997 320,000 137,927 6,176 0 0 33,881
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
Michael B. Sellman
Senior Vice President and Chief 1999 257,500 141,868 0 54,626 10,000 23,974
Nuclear Officer of WE 1998 208,333 113,754 9,465 58,750 10,000 5,863
(as of March 1998)
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
Calvin H. Baker
Treasurer of WEC; 1999 225,000 117,662 2,265 54,626 10,000 20,950
Vice President-Finance and 1998 205,000 85,363 2,318 58,750 10,000 17,499
Chief Financial Officer of WE 1997 190,000 32,666 1,889 0 0 16,046
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
Kristine M. Krause
Vice President-Fossil Operations 1999 225,000 114,168 563 54,626 10,000 20,975
of WE 1998 215,000 66,874 0 58,750 10,000 19,738
1997 205,000 26,454 0 0 0 19,770
- - - - - - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ On June 2, 1999, restricted stock awards were granted to Messrs. Abdoo,
Grigg, Sellman, Baker and Ms. Krause in the amounts of 8,000 shares, 4,000
shares, 2,000 shares, 2,000 shares, and 2,000 shares, respectively, which
are subject to forfeiture until vested. The dollar values shown for these
shares are based on the closing price of $27.313 per share on the grant
date. The shares awarded to these individuals are subject to a vesting
schedule dependent upon the attainment of cumulative earnings targets
based on company performance, with ultimate vesting occurring at the end
of ten years. However, earlier vesting may occur due to termination of
employment by death, disability, or normal retirement, a change in control
of the company, or action by the Compensation Committee. Dividends are
paid on shares of restricted stock at the same rate as on unrestricted
shares and are used to acquire additional restricted shares. As of
December 31, 1999, the named executive officers held the following number
of shares of restricted stock, including restricted dividends, with the
following values (based on a closing price of $19.375 on December 30,
1999): Mr. Abdoo - 17,039 shares ($330,130), Mr. Grigg- 8,519 shares
($165,055), Mr. Sellman, Mr. Baker, and Ms. Krause - 4,259 shares
($82,518) each.
/(2)/ All Other Compensation for 1999 for Messrs. Abdoo, Grigg, Sellman, Baker
and Ms. Krause, respectively, includes:
. employer matching of contributions by each named executive into the
401(k) plan in the amount of $5,000 for each named executive officer,
with the exception of Mr. Grigg who had $0.
8
<PAGE>
. "make whole" payments under the Executive Deferred Compensation Plan with
respect to matching in the 401(k) plan on deferred salary or salary
received but not otherwise eligible for matching in the amounts of $14,987,
$0, $5,025, $4,873, and $4,136, respectively, and
. the present value of interest projected to accrue for the executive's
benefit on the current year's insurance premiums paid by the company under
a split-dollar life insurance program in the amounts of $13,886, $18,083,
$13,949, $11,077, and $11,839, respectively.
Option Grants in Last Fiscal Year
This table shows additional data regarding the options summarized above.
<TABLE>
<CAPTION>
- - - - - - ------------------------------------------------------------------------------------------------
Individual Grants/(1)/ Grant Date Value
- - - - - - ------------------------------------------------------------------------------------------------
Percent of
Number of Total Grant
Securities Options Exercise Date
Underlying Granted to or Base Present
Options Employees in Price Expiration Value/(2)/
Name Granted (#) Fiscal Year (%) ($/Share) Date ($)
- - - - - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard A. Abdoo 40,000 11.27% 27.31 6/1/2009 $122,000
Richard R. Grigg 20,000 5.63% 27.31 6/1/2009 $ 61,000
Michael B. Sellman 10,000 2.82% 27.31 6/1/2009 $ 30,500
Calvin H. Baker 10,000 2.82% 27.31 6/1/2009 $ 30,500
Kristine M. Krause 10,000 2.82% 27.31 6/1/2009 $ 30,500
- - - - - - ------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Consists of incentive and non-qualified stock options to purchase shares
of WEC common stock granted pursuant to the 1993 Omnibus Stock Incentive
Plan on June 2, 1999. These options have exercise prices equal to the fair
market value of the WEC shares on the date of grant and first become
exercisable on the first anniversary of the grant date, with 25% of the
underlying shares becoming exercisable at that time, an additional 25% of
the option shares becoming exercisable on each successive anniversary
date, and full vesting on the fourth anniversary date. Upon a "change in
control" of WEC, as defined in the plan, or upon retirement, permanent
total disability or death of the option holder, these options shall become
immediately exercisable. These options were granted for a term of ten
years, subject to earlier termination in certain events related to
termination of employment. In the discretion of the Compensation
Committee, the exercise price may be paid by delivery or attestation of
already-owned shares. Tax withholding obligations related to exercise may
be satisfied by withholding shares otherwise deliverable upon exercise,
subject to certain conditions. Subject to the limitations of the 1993
Omnibus Stock Incentive Plan, the Compensation Committee has the power
with the participant's consent to modify or waive the restrictions on
vesting of these options, to amend these options and to grant extensions
or to accelerate these options.
/(2)/ An option pricing model (developed by Black-Scholes) was used to
determine the options' present value as of the date of the grant. The
assumptions used in the Black-Scholes equation are: market price of
stock: $27.31; exercise price of option: $27.31; stock volatility:
13.17%; annualized risk-free interest rate: 6.67%; exercise at the end of
10-year option term; and dividend yield: 5.71%. WEC's use of this model
should not be construed as an endorsement of its accuracy. The ultimate
value of the options, if any, will depend upon the future value of the
WEC common stock, which cannot be forecast with reasonable accuracy, and
on the optionee's investment decisions.
9
<PAGE>
Aggregated Fiscal Year-End Option Values
No stock options were exercised by the named executive officers in 1999. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the exercise
price and the year-end market price multiplied by the number of shares
underlying the option. Negative values are reported as zero.
<TABLE>
<CAPTION>
- - - - - - -------------------------------------------------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised In the Money Options
Unexercised Options at Fiscal Year-End at Fiscal Year-End
(#) ($)
-----------------------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - - - - - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard A. Abdoo 95,500 108,000 0 0
Richard R. Grigg 37,000 54,000 0 0
Michael B. Sellman 2,500 17,500 0 0
Calvin H. Baker 16,100 27,000 0 0
Kristine M. Krause 19,750 27,000 0 0
- - - - - - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CERTAIN RELATED TRANSACTIONS
Mr. Paul Donovan was hired by WEC in 1999 as Senior Vice President and Chief
Financial Officer. Under the terms of his employment offer letter, WEC agreed
to purchase his personal residence in Rockford, Illinois and lease back the
residence to him, to enable his family to remain in Rockford until he moves to
Wisconsin. The residence was purchased by Wispark Corporation, a subsidiary of
WEC, at its appraised fair market value and was leased back to Mr. Donovan at
its fair rental value under the terms of the employment letter. Should the
company sell the residence for more than the appraised market value, it is
obligated under the terms of the letter to pay the difference to Mr. Donovan.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
Pursuant to the merger agreement relating to WEC's acquisition of WICOR, on June
27, 1999, WEC adopted severance policies which became effective on April 26,
2000, when the merger occurred, replacing WEC's previous severance policy. The
policies provide for severance benefits to designated executives and other key
employees if within two years after the merger they are discharged without cause
or quit with good reason. WEC has approved changes to the severance policies to
allow for a deferral opportunity for participants who may become entitled to
benefits and to continue the policies after the end of a two-year period
following the WICOR merger.
Participants have been designated into one of four benefit levels. For the
individuals named in the Summary Compensation Table, Mr. Baker and Ms. Krause
are Tier 2 participants. Mr. Abdoo and Mr. Grigg do not participate in the
severance policy, but each have separate change in control and severance
agreements as described below. Mr. Sellman, who is transitioning to lead the
Nuclear Management Company, LLC ("NMC"), has similar coverage provided under an
agreement with the NMC, an entity in which WEC has an indirect ownership
interest through a subsidiary.
Tier 2 benefits provide generally for lump sum severance payments equal to three
times the sum of the current base salary and the highest bonus in the last three
years (or the then current target bonus, if higher), a pension lump sum for the
equivalent of three years' worth of additional service and three years'
continuation of health and life insurance coverages. An overall limit is placed
on benefits to avoid federal excise taxes under the "parachute payment"
provisions of the tax law.
The company has approved agreements with Messrs. Abdoo, Donovan and Grigg
providing for certain severance benefits if their employment is terminated by
the company other than for cause, death or disability in anticipation of or
following a change in control or by the executives for good reason following
such a change. They would also become entitled to benefits if they quit within
six months after completing one year of service following a change in control.
In the absence of a change in control, severance benefits would be provided if
their employment is terminated for any reason other than cause, death or
disability. The agreements would provide for a lump sum severance payment equal
to three times the sum of their highest annual base salary in effect in the last
three years and highest bonus amount. The highest bonus amount would be
calculated as the largest of the current target bonus for the fiscal year in
which employment termination occurs, the highest bonus paid in either the last
three fiscal years of the company prior to termination or the change in control,
or an amount calculated by multiplying the highest bonus percentage earned
during either of such three fiscal year periods times the highest yearly base
salary rate in effect during the three year period ending prior to termination.
The agreements also would provide for three years' continuation of health and
certain other welfare
10
<PAGE>
benefit coverages, eligibility for retiree health coverage thereafter,
continuation of the split-dollar life insurance program until the applicable
policy becomes paid up, a payment equal to the value of three additional years'
of participation in the applicable qualified and non-qualified retirement plans,
and a "gross-up" payment should any payments or benefits under the agreements
trigger federal excise taxes under the "parachute payment" provisions of the tax
law.
As provided in the merger agreement with WICOR, WEC entered into an employment
agreement with Mr. Wardeberg as of the effective time of the merger pursuant to
which Mr. Wardeberg will serve as Vice Chairman of the WEC Board of Directors
for a two-year term. The agreement provides for a base salary of not less than
the greater of his base salary from WICOR immediately before the effective time
of the merger, which was $580,000, or 90% of the base salary then payable to the
Chairman of the Board. The agreement also provides for a bonus of not less than
90% of that payable to the Chairman, with the total of base salary and bonus in
no event to be less than Mr. Wardeberg's total base salary and bonus from WICOR
for the 1999 calendar year. Mr. Wardeberg's total base salary and bonus from
WICOR for 1999 was $993,116. The base salary of the Chairman of the Board of WEC
at the effective time of the merger was $657,500 and his bonus for 1999 was
$295,343.
The employment agreement includes a grant of options for 100,000 shares of WEC
common stock, vesting over a three-year period and exercisable over a period
ending five years after Mr. Wardeberg ceases to serve as an officer or director
of WEC, with an exercise price equal to the fair market value of the common
stock as of the effective time of the merger. It also includes a special
pension benefit provision under WEC's Supplemental Executive Retirement Plan,
calculated as if Mr. Wardeberg had been employed by WEC since age 25, offset by
any WICOR pension benefits. Severance benefits are provided if his employment
is terminated by WEC other than for cause or by Mr. Wardeberg for good reason.
The agreement provides for a "gross-up" payment should any payments to Mr.
Wardeberg trigger federal excise taxes under the "parachute payment" provisions
of the tax law.
RETIREMENT PLANS
Wisconsin Electric maintains a defined benefit pension plan of the cash balance
type for most employees, including WEC executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, with an adjustment to reflect the Social Security
integrated benefit. In addition, individuals participating in the plan as of
December 31, 1995 received a special one-time transition credit amount equal to
a specified percentage varying with age multiplied by credited service and 1994
base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit, was also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to 5%
of base pay (including certain incentive payments, pre-tax deferrals and other
items), plus an interest credit on all prior accruals equal to 4% plus 75% of
the annual time-weighted trust investment return for the year in excess of 4%.
Additionally, the cash balance plan provides that up to an additional 2% of base
pay may be earned based upon achievement of earnings targets.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form.
Individuals who were participants in the plan on December 31, 1995 were
"grandfathered" such that they will not receive any lower retirement benefit
than would have been provided under the prior formula, had it continued, if they
terminate on or before January 1, 2011.
For the individuals listed in the Summary Compensation Table, except for Mr.
Sellman who has a special agreement described below, estimated benefits under
the prior plan formula are higher than under the cash balance plan formula. As
a result, their benefits would currently be determined by the prior plan benefit
formula. The following table shows estimated annual benefits payable in life
annuity form on normal retirement for persons in various compensation and years
of service classifications during 1999, based on the continuation of the prior
plan formula (including supplemental amounts providing additional benefits
described below in the "Other Retirement Benefits" section):
11
<PAGE>
<TABLE>
<CAPTION>
Pension Plan Table
----------------------------------------------------------------------------------------------------------------
Years of Service
----------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35 40
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 300,000 $ 75,256 $100,341 $125,426 $150,512 $164,742 $178,972
400,000 101,131 134,841 168,551 202,262 221,367 240,472
500,000 127,006 169,341 211,676 254,012 277,992 301,972
600,000 152,881 203,841 254,801 305,762 334,617 363,472
700,000 178,756 238,341 297,926 357,512 391,242 424,972
----------------------------------------------------------------------------------------------------------------
800,000 204,631 272,841 341,051 409,262 447,867 486,472
900,000 230,506 307,341 384,176 461,012 504,492 547,972
1,000,000 256,381 341,841 427,301 512,762 561,117 609,472
1,100,000 282,256 376,341 470,426 564,512 617,742 670,972
1,200,000 308,131 410,841 513,551 616,262 674,367 732,472
----------------------------------------------------------------------------------------------------------------
</TABLE>
The compensation for the individuals listed in the Summary Compensation Table in
the columns labeled "Salary" and "Bonus" is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans. Messrs. Abdoo, Grigg, Sellman, Baker and Ms. Krause,
currently have 24, 29, 2, 8 and 21 credited years of service, respectively.
As noted above, Mr. Sellman is not eligible under the prior plan benefit
formula. The estimated annual benefits payable in life annuity form at ages 60
and 65 for Mr. Sellman under the cash balance plan formula, utilizing current
assumptions under that plan and assuming average annual compensation increases
of approximately 4% and including supplemental amounts providing additional
benefits described below under "Other Retirement Benefits" are $114,922 and
$205,647, respectively.
Other Retirement Benefits. Designated officers of WEC and Wisconsin Electric,
including all of the individuals named in the Summary Compensation Table,
participate in the Supplemental Executive Retirement Plan ("SERP"). The SERP
provides monthly supplemental pension benefits to participants, which will be
paid out of unsecured corporate assets, or the grantor trust described below, as
follows: (i) an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be if
calculated without regard to any limitation imposed by the Internal Revenue Code
on pension benefits or covered compensation; and (ii) an amount calculated so as
to provide participants with a supplemental lifetime annuity, estimated to
amount to between 8% and 10% of final average compensation depending on which
pension payment option is selected. Except for a "change in control" of WEC, as
defined in the SERP, no payments are made until after the participant's
retirement or death.
WEC and/or Wisconsin Electric have entered into agreements with Messrs. Abdoo,
Baker, Donovan and Sellman who cannot accumulate by normal retirement age the
maximum number of years of credited service under the pension plan formula in
effect immediately before the change to the cash balance formula, as described
below:
. According to Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 58 or older substantially the same as those payable to
employees who are age 60 or older, who are in the same compensation bracket
and who became plan participants at the age of 25.
. According to Mr. Baker's agreement, Mr. Baker at retirement will receive
supplemental retirement payments which will make his total retirement
benefits at age 60 or older substantially the same as those payable to
employees who are in the same compensation bracket and who became plan
participants at the age of 25.
. According to Mr. Donovan's agreement, Mr. Donovan at retirement will
receive supplemental retirement payouts which will make his total
retirement benefits at age 55 or older substantially the same as those
payable to employees who are in the same compensation bracket and who
became plan participants at the age of 30, offset by the value of social
security benefits and with a special schedule to reflect early retirement
reduction factors applicable to Mr. Donovan between age 55 and 59.
. Mr. Sellman has a special contingent deferred compensation benefit under
which he would receive a lump sum payment on his termination of employment
with Wisconsin Electric at or after age 60 or because of disability, death
or discharge without cause at any time. However, if his employment with
Wisconsin Electric was terminated before age 60 so that he could become a
full-time employee of Nuclear Management Company, LLC, an entity in which
WEC has an indirect ownership interest through its subsidiary, WEC Nuclear
Corporation, and which was formed for the purpose of
12
<PAGE>
providing services in connection with the operation of nuclear power
plants, the benefit would not be forfeited unless his employment with NMC
ceased prior to his completion of three years of service with NMC or prior
to age 60 other than because of disability, death or discharge without
cause. The payment would be equal to the total amount that would have
resulted if an amount of $422,000 had been initially credited to him as of
January 1, 1998, in the Wisconsin Electric pension plan described above and
is credited with the same investment results as if held in such plan. This
amount has been included in the estimated annual life annuity benefits
information provided for Mr. Sellman described above. The benefit is
forfeitable should Mr. Sellman's employment cease prior to age 60 other
than because of disability, discharge without cause, or death.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund the SERP, the Executive Deferred Compensation Plan and the agreements with
Messrs. Abdoo, Baker, Donovan, Grigg and Sellman. The plans and agreements
provide for optional lump sum payments and, in the instance of a change in
control, and absent a deferral election, mandatory lump sum payouts without
regard to whether the executive's employment has terminated. In each case, the
interest rate benchmark formula for calculating the lump sum amount is the five-
year U. S. Treasury Note yield as of the last business day of the month prior to
date of payment.
WEC COMMON STOCK OWNERSHIP
Directors, Nominees and Executive Officers. The following table lists the
beneficial ownership of WEC common stock of each director, nominee, named
executive officer, and all of the directors and executive officers as a group as
of April 3, 2000. Included are shares owned by each individual's spouse, minor
children or any other relative sharing the same residence, as well as shares
held in a fiduciary capacity or held in WEC's Stock Plus and Wisconsin
Electric's 401(k) plan.
- - - - - - ---------------------------------------------------------
Number of
Name Shares
- - - - - - ---------------------------------------------------------
Richard A. Abdoo 162,382
John F. Ahearne 5,047
Calvin H. Baker 31,853
John F. Bergstrom 6,000
Barbara L. Bowles 2,891
Robert A. Cornog 7,363
Willie D. Davis 48,620
Richard R. Grigg 59,112
Kristine M. Krause 49,673
John N. MacDonough 3,825
Julia B. North 2,053
Michael B. Sellman 12,450
Frederick P. Stratton, Jr. 9,600
George E. Wardeberg 516,596
- - - - - - ---------------------------------------------------------
All above-named individuals and other executive officers as a group (17 persons)
beneficially own 1,007,642 shares, which amount is less than 1% of total WEC
common stock outstanding.
The shares listed above include shares that may be purchased within 60 days of
April 3, 2000, pursuant to outstanding stock options, as follows: Mr. Abdoo
(115,500), Mr. Baker (21,100), Mr. Davis (48,620), Mr. Grigg (47,000), Ms.
Krause (34,800), Mr. Sellman (7,500), Mr. Wardeberg (516,596), all outside
directors (3,000 each), except Ms. Bowles and Ms. North (2,000 each), and all
directors and executive officers as a group (847,266). Shares listed for Messrs.
Wardeberg and Davis represent options granted by WICOR which were converted to
outstanding WEC stock options on the effective date of the acquisition of WICOR.
In addition, all directors and executive officers as a group hold 43,089 share
units in the WEC phantom common stock account under WEC's deferred compensation
plans. Share units are intended to reflect the performance of WEC common stock
and are payable in cash. These holdings were included in the above table in
last year's proxy statement.
Except for unexercised options, each individual has sole voting and investment
power as to all shares listed for such individual, except the following
individuals have shared voting and/or investment power as indicated: Mr. Abdoo
(9,657), Mr. Baker (361), Mr. Cornog (2,350), Ms. Krause (5,732), Mr. Stratton
(3,600), and all directors and executive officers as a group (37,700).
Information on beneficially-owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as required for purposes of this proxy
statement. It is not necessarily to be construed as an admission of beneficial
ownership for other purposes.
13
<PAGE>
Owners of More than 5%. The following table shows stockholders who reported
beneficial ownership of more than 5% of WEC common stock.
- - - - - - ---------------------------------------------------------------
Number of Percent of WEC
Name and Address Shares Common Stock
- - - - - - ---------------------------------------------------------------
Sanford C. Bernstein & Co.,
Inc. (Sanford)
767 Fifth Avenue
New York, NY 10153 10,135,604 8.6%
- - - - - - ---------------------------------------------------------------
J. P. Morgan & Co. Inc.
60 Wall Street
New York, NY 10260 8,694,391 7.38%
- - - - - - ---------------------------------------------------------------
Dodge & Cox
One Sansome St., 35th Floor
San Francisco, CA 94104 6,040,300 5.1%
- - - - - - ---------------------------------------------------------------
Sanford and Dodge & Cox are registered investment advisers; J. P. Morgan is a
parent holding company. Sanford reported it has (i) sole power to dispose of
all shares, (ii) sole power to vote 5,913,414 shares, (iii) shared power to vote
1,034,357 shares, and (iv) shared power to dispose of zero shares. J. P. Morgan
reported that it has (i) sole power to dispose of 8,271,643 shares and shared
power to dispose of 180,050 shares and (ii) sole power to vote 6,027,046 shares
and shared power to vote 122,248 shares. Dodge & Cox reported that it has (i)
sole power to dispose of all shares, (ii) sole power to vote 5,536,750 shares,
(iii) shared power to vote 59,200 shares, and (iv) shared power to dispose of
zero shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, requires the corporation's
officers, directors, and persons owning more than ten percent of WEC's common
stock to file reports of ownership and changes in ownership of equity and
derivative securities of WEC with the Securities and Exchange Commission and the
New York Stock Exchange. To the company's knowledge, based on information
provided by the reporting persons, all applicable reporting requirements for
fiscal year 1999 or prior fiscal years were complied with in a timely manner,
except that one transaction was reported late on behalf of Mr. Cornog and two
transactions were reported late on behalf of Ms. Krause.
2001 ANNUAL MEETING
Director Candidates. The Nominating and Board Affairs Committee and WEC Board
have approved director candidate selection criteria which are designed to
provide the Board with a diversity of experience to allow it to effectively meet
the many challenges WEC faces in today's changing environment. Stockholders
wishing to propose director candidates for consideration and recommendation by
the Nominating and Board Affairs Committee for election at the 2001 Annual
Meeting must submit the name(s) and qualifications of any proposed candidate(s)
to WEC's Corporate Secretary not later than October 13, 2000. The Bylaws state
that directors shall be stockholders of WEC.
Proposals of Stockholders. Stockholders who intend to have a proposal
considered for inclusion in the company's proxy materials for presentation at
the 2001 Annual Meeting of Stockholders must submit the proposal to the company
no later than December 30, 2000. Stockholders who intend to present a proposal
at the 2001 Annual Meeting of Stockholders without inclusion of such proposal in
the company's proxy materials, or who propose to nominate a person for election
as a director at the meeting, are required to provide notice of such proposal to
the company at least 70 days and not more than 100 days prior to the scheduled
date of the 2001 Annual Meeting.
AVAILABILITY OF FORM 10-K
A copy (without exhibits) of WEC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999, as filed with the Securities and Exchange
Commission, is available without charge to any stockholder of record or
beneficial owner of WEC common stock by writing to the Corporate Secretary,
Thomas H. Fehring, 231 West Michigan Street, P. O. Box 2949, Milwaukee,
Wisconsin 53201. In lieu of providing all stockholders with an Annual Report,
the WEC consolidated financial statements and certain other information found in
the Form 10-K follows this proxy statement.
14
<PAGE>
PERFORMANCE GRAPH
The following graph shows a comparison of the cumulative total return, assuming
reinvestment of dividends, over five years had $100 been invested at the close
of business on December 31, 1994 in each of (i) WEC common stock, (ii) the
Standard & Poor's ("S&P") 500 Index, and (iii) the Edison Electric Institute
Index of Investor-Owned Utilities ("EEI Index").
Additional, more detailed information about earnings is included in the Appendix
to this proxy statement.
FIVE-YEAR CUMULATIVE RETURN CHART
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Value of Investment at Year-End
- - - - - - -----------------------------------------------------------------------------------------------------------------------
12/31/1994 12/31/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999
- - - - - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wisconsin Energy Corporation $100 $124 $115 $129 $149 $ 98
S&P 500 $100 $137 $168 $224 $287 $347
EEI Index $100 $131 $133 $169 $192 $157
- - - - - - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
WISCONSIN ENERGY CORPORATION
1999 ANNUAL FINANCIAL STATEMENTS
and
REVIEW of OPERATIONS
<PAGE>
SELECTED FINANCIAL AND OPERATIONAL DATA
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Financial 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ----
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Year Ended December 31
Net income $ 208,989 $ 188,132 $ 60,716 (a) $ 218,135 $ 234,034
Earnings per share of common stock
(basic and diluted) $ 1.79 $ 1.65 $ 0.54 (a) $ 1.97 $ 2.13
Dividends per share of common stock $ 1.56 $ 1.555 $ 1.535 $ 1.5075 $ 1.455
Operating revenues
Energy
Utility $ 2,050,218 $ 1,979,986 $ 1,789,602 $ 1,773,820 $ 1,770,484
Non-Utility 193,240 34,108 6,959 - -
----------- ----------- ----------- ----------- -----------
Total energy 2,243,458 2,014,094 1,796,561 1,773,820 1,770,484
Other 29,181 25,339 10,368 13,647 6,503
----------- ----------- ----------- ----------- -----------
Total operating revenues $ 2,272,639 $ 2,039,433 $ 1,806,929 $ 1,787,467 $ 1,776,987
========== =========== =========== =========== ===========
At December 31
Total assets $ 6,233,120 $ 5,361,757 $ 5,037,684 $ 4,810,838 $ 4,560,735
Long-term debt and mandatorily redeemable trust
preferred securities $ 2,334,636 $ 1,749,024 $ 1,532,405 $ 1,416,067 $ 1,367,644
<CAPTION>
Energy Statistics 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Utility
Electric
Megawatt-hours sold 31,257,050 29,940,384 27,671,946 27,560,428 27,283,869
Customer (End of year) 1,027,785 1,010,318 978,835 968,735 955,616
Gas
Therms delivered (Thousands) 944,063 922,836 983,676 936,894 886,729
Customer (End of year) 398,508 388,478 376,732 367,275 357,030
Steam
Pounds sold (Millions) 2,914 2,773 3,161 2,705 2,532
Customer (End of year) 450 454 474 465 473
Non-Utility
Electric megawatt-hours sold 2,297,756 - - - -
</TABLE>
(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.
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(Thousands of Dollars Except Per Share Amounts)
-----------------------------------------------
March June
----------- ----------
Three Months Ended 1999 1998 1999 1998
- - - - - - ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $ 556,717 $ 515,677 $ 539,008 $ 475,576
Pretax operating income 100,316 92,584 102,031 67,783
Net income 53,511 49,048 48,903 28,854
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Earnings per share of common
stock (basic and diluted) $ 0.46 $ 0.43 $ 0.42 $ 0.25
<CAPTION>
September December
--------------- --------------
Three Months Ended 1999 1998 1999 1998
- - - - - - ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total operating revenues $ 591,297 $ 519,649 $ 585,617 $ 528,531
Pretax operating income 134,968 117,767 119,079 96,620
Net income 68,853 58,176 37,722 52,054
Earnings per share of common
stock (basic and diluted) $ 0.59 $ 0.50 $ 0.32 $ 0.45
</TABLE>
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.
<PAGE>
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. During 1999, approximately 89% of Wisconsin Energy's consolidated
operating revenues and 94% of Wisconsin Energy's consolidated pretax operating
income were attributable to Wisconsin Electric. As of December 31, 1999,
Wisconsin Electric accounted for approximately 81% of the Company's consolidated
total assets. The following discussion and analysis of financial condition and
results of operations includes both Wisconsin Energy and Wisconsin Electric
unless otherwise stated.
See "Note A - Summary of Significant Accounting Policies" in the Notes to
Financial Statements for information concerning the 1999 reclassification of
certain amounts in Wisconsin Energy's prior year financial statements to conform
to current year presentation.
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," "Liquidity and Capital Resources" and "Cautionary Factors."
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired
ESELCO, Inc. in a tax free reorganization accounted for as a pooling of
interests. Due to the immaterial nature of the transaction, Wisconsin Energy has
not restated any historical financial or statistical information. For additional
information, see "Factors Affecting Results of Operations - Mergers" below.
ESELCO was the parent of Edison Sault Electric Company, an electric utility
serving customers in Michigan's eastern Upper Peninsula ("Edison Sault"). Where
appropriate, discussions as well as financial and statistical information of
Wisconsin Energy include Edison Sault's operations since June 1, 1998.
RESULTS OF OPERATIONS
The following analysis of Wisconsin Energy's and Wisconsin Electric's results of
operations should be read in conjunction with the 1999 Financial Statements and
Notes to Financial Statements.
EARNINGS
During 1999, Wisconsin Energy's consolidated net income and earnings per share
of common stock increased to $209 million and $1.79 per share, respectively,
compared with $188 million and $1.65 per share, respectively, during 1998 and
compared with $61 million and $0.54 per share, respectively, during 1997. For
the same periods, Wisconsin Electric's earnings increased to $212 million during
1999 compared with $183 million during 1998 and $69 million during 1997.
Excluding the impact of a one-time charge of $18 million ($10.8 million, or
$0.09 per share for Wisconsin Energy, after tax) related to the settlement of
litigation, Wisconsin Energy's and Wisconsin Electric's earnings from continuing
operations during 1999 were $220 million and $223 million, respectively. The
following table summarizes contributions to Wisconsin Energy's earnings per
share (basic and diluted) by business segment during the comparative periods.
<TABLE>
<CAPTION>
% Change % Change
Earnings Per Share - 1998 1997
Wisconsin Energy 1999 1998 to 1999 1997 to 1998
- - - - - - -------------------- ---- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C>
Utility Operations $ 1.85 $ 1.62 14.2% $ 0.62 161.3%
Non-Utility Operations
Energy 0.02 (0.02) 200.0% (0.01) (100.0%)
Other (0.08) 0.05 (260.0%) (0.07) 171.4%
------ ------ ------
Total Earnings Per Share $ 1.79 $ 1.65 8.5% $ 0.54 205.6%
====== ====== ======
</TABLE>
<PAGE>
An analysis of the Company's pretax operating results by the utility and non-
utility business segments as well as an analysis of other income & expense items
follows.
UTILITY SEGMENT PRETAX OPERATING RESULTS
During 1999, Wisconsin Energy's and Wisconsin Electric's pretax utility
operating income increased by $64 million or 17.3% and by $60 million or 16.3%,
respectively, when compared to 1998 primarily due to increases in electric and
gas utility gross margins. During 1998, Wisconsin Energy's and Wisconsin
Electric's pretax utility operating income increased by $115 million or 44.5%
and by $110 million or 42.9%, respectively, when compared to 1997 primarily due
to increases in electric utility gross margins that were partially offset by
increased other operations and maintenance expenses.
Electric Utility Revenues, Gross Margins and Sales
WISCONSIN ENERGY: Primarily due to an increase in total electric utility
energy sales during 1999, Wisconsin Energy's total electric utility operating
revenues increased by $58 million or 3.5% and the gross margin on electric
utility operating revenues (total electric utility operating revenues less fuel
and purchased power expenses) increased by $61 million or 5.1% when compared to
1998.
During 1998, Wisconsin Energy's total electric utility operating revenues
increased by $252 million or 17.8% and the gross margin on electric utility
operating revenues increased by $235 million or 24.3% when compared to 1997.
Wisconsin Energy attributes these increases primarily to interim and final
electric retail rate increases for Wisconsin Electric in the Wisconsin
jurisdiction that became effective in the first half of 1998, to an increase in
total 1998 electric utility energy sales and to the return to service of Point
Beach Nuclear Plant during 1998.
The following table summarizes Wisconsin Energy's comparative total electric
utility operating revenues, gross margins and electric energy sales for 1999,
1998 and 1997.
<TABLE>
<CAPTION>
% Change % Change
Electric Utility Operations - 1998 1997
Wisconsin Energy 1999 1998 to 1999 1997 to 1998
- - - - - - ----------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Electric Gross Margin ($000's)
Total Operating Revenues $ 1,722,105 $ 1,663,632 3.5% $ 1,412,115 17.8%
Total Fuel & Purchased Power 458,863 461,365 (0.5%) 444,655 3.8%
----------- ----------- -----------
Gross Margin $ 1,263,242 $ 1,202,267 5.1% $ 967,460 24.3%
=========== =========== ===========
Total Electric Sales (Mwh) 31,257,050 29,940,384 4.4% 27,671,946 8.2%
Total Average Customers 1,017,620 1,005,184 1.2% 972,593 3.4%
</TABLE>
Further detail about Wisconsin Electric's contribution to Wisconsin Energy's
electric utility operating revenues, gross margins and energy sales follows.
WISCONSIN ELECTRIC: Largely due to higher total electric energy sales during
1999, Wisconsin Electric's total electric operating revenues increased by $47
million or 2.9% and the gross margin on electric operating revenues increased by
$52 million or 4.4% when compared to 1998. Lower fuel and purchased power
expenses during 1999 also contributed to the increase in gross margin.
As described below in further detail, Wisconsin Electric's total electric energy
sales increased by 3.9% during 1999 compared to 1998. While meeting this
increased demand during 1999, however, Wisconsin Electric was able to reduce
total fuel and purchased power expenses by $5 million or 1.1% between the
comparative periods. Wisconsin Electric accomplished this reduction in total
fuel and purchased power expenses by substituting lower cost generation during
1999, especially from its Point Beach Nuclear Plant, for the higher cost
generation and power purchases used to meet its demand for electricity during
1998.
<PAGE>
During 1998, Wisconsin Electric's total electric operating revenues increased by
$229 million or 16.2% compared to 1997 and the gross margin on electric
operating revenues increased by $224 million or 23.1%. 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 electric retail rate increase,
effective May 1, 1998, of $160 million or 12.7% on an annualized basis that
replaced the interim rate increase, and (3) a 6.5% increase in total electric
energy sales during 1998. The increase in gross margin during 1998 can also be
partly attributed to the availability of a lower cost mix of generation compared
to 1997.
Compared to 1997, Wisconsin Electric's total fuel and purchased power expenses
increased by $5 million or 1.2% during 1998. Increased availability of lower
cost generating capacity at Point Beach Nuclear Plant during 1998 allowed
Wisconsin Electric to generate 11.3% more electricity while permitting the
decrease in fuel costs. However, an increase in purchased power expenses more
than offset the decrease in fuel costs, 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 during 1998 and incurred a full twelve months of demand
charges for the first time under a long-term power purchase contract, resulting
in higher fixed contract 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.
<TABLE>
<CAPTION>
% Change % Change
Electric Utility Operations - 1998 1997
Wisconsin Electric 1999 1998 to 1999 1997 to 1998
- - - - - - ----------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Electric Gross Margin ($000's)
Operating Revenues
Residential $ 574,770 $ 571,378 0.6% $ 487,219 17.3%
Small Commercial/Industrial 510,094 487,549 4.6% 430,193 13.3%
Large Commercial/Industrial 451,164 450,138 0.2% 402,684 11.8%
Other-Retail/Municipal 51,219 51,211 - 55,246 (7.3%)
Resale-Utilities 79,139 60,927 29.9% 24,538 148.3%
Other Operating Revenues 21,891 20,200 8.4% 12,235 65.1%
----------- ----------- -----------
Total Operating Revenues 1,688,277 1,641,403 2.9% 1,412,115 16.2%
Fuel & Purchased Power
Fuel 305,169 308,374 (1.0%) 311,966 (1.2%)
Purchased Power 139,848 141,619 (1.3%) 132,689 6.7%
----------- ----------- -----------
Total Fuel & Purchased Power 445,017 449,993 (1.1%) 444,655 1.2%
----------- ----------- -----------
Gross Margin $ 1,243,260 $ 1,191,410 4.4% $ 967,460 23.1%
=========== =========== ===========
Sales (Mwh)
Residential 7,346,839 7,327,024 0.3% 6,863,569 6.8%
Small Commercial/Industrial 8,028,191 7,612,397 5.5% 7,433,087 2.4%
Large Commercial/Industrial 11,333,561 11,391,979 (0.5%) 11,021,476 3.4%
Other-Retail/Municipal 1,314,021 1,287,162 2.1% 1,412,623 (8.9%)
Resale-Utilities 2,597,256 1,856,601 39.9% 941,191 97.3%
----------- ----------- -----------
Total Electric Sales 30,619,868 29,475,163 3.9% 27,671,946 6.5%
=========== =========== ===========
Average Customers
Residential 897,333 886,635 1.2% 876,776 1.1%
Small Commercial/Industrial 95,964 94,675 1.4% 93,259 1.5%
Large Commercial/Industrial 716 720 (0.6%) 714 0.8%
Other-Retail/Municipal 1,880 1,804 4.2% 1,811 (0.4%)
Resale-Utilities 58 51 13.7% 33 54.5%
----------- ----------- -----------
Total Average Customers 995,951 983,885 1.2% 972,593 1.2%
=========== =========== ===========
</TABLE>
From August through mid-October 1999, the Empire and Tilden iron ore mines,
Wisconsin Electric's two largest electric retail customers, were temporarily
shut down for inventory reduction. As a result, electric energy sales to the
mines decreased 9.8% during 1999 compared to 1998. Excluding the Empire and
Tilden iron ore mines, total electric energy sales increased 5.1% and sales to
the remaining large commercial/industrial customers increased 2.0% between the
comparative periods. Sales for resale to other utilities increased 39.9% during
1999 primarily due to higher opportunity sales.
<PAGE>
When comparing 1999 electric sales with 1998, summer cooling load due to weather
was not a significant factor. As measured by cooling degree days, 1999 was 5.9%
cooler than 1998. However, 1999 and 1998 were 12.4% and 21.8% warmer than
normal, respectively.
During 1998, cooling load due to weather did contribute to the 6.5% increase in
total electric energy sales when compared to 1997, especially to residential and
small commercial/industrial customers who tend to be more weather sensitive and
contribute a higher margin to earnings. As measured by cooling degree days,
1998 was 96.6% warmer than 1997.
Electric energy sales to the Empire and Tilden iron ore mines increased 7.4%
from 1997 to 1998 primarily due to a temporary shutdown of the Tilden mine
during July and August 1997. Excluding the Empire and Tilden ore mines,
Wisconsin Electric's total 1998 electric energy sales increased 6.4% and sales
to the remaining large commercial/industrial customers increased 2.3% compared
to 1997. 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 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 increased 97.3% between
the comparative periods.
Gas Utility Revenues, Gross Margins and Therm Deliveries
Due in large part to increased retail gas sales during 1999 as described in
further detail below, especially to higher margin residential and
commercial/industrial customers, Wisconsin Electric's gross margin on gas
utility operating revenues (gas operating revenues less cost of gas sold)
increased by $12 million or 10.3% compared to 1998. In spite of the increase in
retail gas sales, however, the cost of gas sold decreased by 0.8% between the
comparative periods due to a decrease in the per unit cost of purchased gas.
Because changes in the cost of natural gas purchased at market prices were
included in customer rates through the purchased gas adjustment mechanism and
the gas cost recovery mechanism during the comparative periods, gas operating
revenues changed at approximately the same rate as the cost of gas sold and
gross margin was unaffected by such changes.
Despite an interim retail gas rate increase, effective from January 1, 1998
through April 30, 1998, of $19 million on an annualized basis and a final retail
gas rate increase, effective May 1, 1998, of $19 million or 5.4% on an
annualized basis that replaced the interim rate increase, total gas operating
revenues decreased by $59 million or 16.7% and the gross margin on gas utility
operating revenues decreased by $1 million or 0.8% during 1998 when compared to
1997. Total gas utility operating revenues and gross margin both declined in
1998 due to a significant decrease in retail gas sales, especially to
residential and commercial/industrial customers who contribute higher margins to
earnings than other customers. 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. As noted above, however, lower cost of gas sold
reduced operating revenues but not gross margin due to the purchased gas
adjustment mechanism.
For additional information concerning the purchased gas adjustment mechanism and
the gas cost recovery mechanism, which became effective during 1999, as well as
for information concerning Wisconsin Electric's 1998 Rate Order, see "Rates and
Regulatory Matters" below in "Factors Affecting Results of Operations." Other
operating revenues reflect adjustments for the over and under collection of gas
costs that were included in operating revenues from gas sales.
The following table summarizes Wisconsin Energy's comparative total gas utility
operating revenues, gross margins, retail gas sales and total therm deliveries
during 1999, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
% Change % Change
1998 1997
Gas Utility Operations 1999 1998 to 1999 1997 to 1998
- - - - - - ---------------------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gas Gross Margin ($000's)
Operating Revenues
Residential $193,766 $176,499 9.8% $221,968 (20.5%)
Commercial/Industrial 95,127 87,899 8.2% 113,609 (22.6%)
Interruptible 5,111 7,003 (27.0%) 8,970 (21.9%)
Interdepartmental 172 138 24.6% 3,096 (95.5%)
-------- -------- --------
Total Retail Gas Sales 294,176 271,539 8.3% 347,643 (21.9%)
Transported Customer Owned Gas 14,560 12,014 21.2% 11,295 6.4%
Transported-Interdepartmental 1,851 2,462 (24.8%) 2,105 17.0%
Other Operating Revenues (3,785) 9,833 (138.5%) (5,871) 267.5%
-------- -------- --------
Total Operating Revenues 306,802 295,848 3.7% 355,172 (16.7%)
Cost of Gas Sold 174,046 175,475 (0.8%) 233,877 (25.0%)
-------- -------- --------
Gross Margin $132,756 $120,373 10.3% $121,295 (0.8%)
======== ======== ========
Therms Delivered (000's)
Residential 329,005 289,509 13.6% 347,859 (16.8%)
Commercial/Industrial 195,328 182,033 7.3% 211,453 (13.9%)
Interruptible 15,914 22,872 (30.4%) 24,532 (6.8%)
Interdepartmental 339 398 (14.8%) 9,696 (95.9%)
-------- -------- --------
Total Retail Gas Sales 540,586 494,812 9.3% 593,540 (16.6%)
Transported Customer Owned Gas 347,918 349,443 (0.4%) 313,466 11.5%
Transported-Interdepartmental 55,559 78,581 (29.3%) 76,670 2.5%
-------- -------- --------
Total Gas Delivered 944,063 922,836 2.3% 983,676 (6.2%)
======== ======== ========
Average Customers
Residential 360,084 347,747 3.5% 339,002 2.6%
Commercial/Industrial 32,594 31,586 3.2% 30,594 3.2%
Interruptible 89 146 (39.0%) 170 (14.1%)
Interdepartmental - - - 2 (100.0%)
-------- -------- --------
Total Sales Customers 392,767 379,479 3.5% 369,768 2.6%
Transportation 328 271 21.0% 254 6.7%
Transportation-Interdepartmental 6 6 - 5 20.0%
-------- -------- --------
Total Average Customers 393,101 379,756 3.5% 370,027 2.6%
======== ======== ========
</TABLE>
During 1999, total therm deliveries of natural gas increased 2.3% and total
retail gas sales increased 9.3% compared to 1998 primarily due to a 13.6%
increase in sales to residential customers and a 7.3% increase in sales to
commercial/industrial customers. Residential and commercial/industrial sales
increased due to an increase in the number of customers and to an increase in
usage per customer, with the increase in sales per customer due in part to
colder weather during the heating months of 1999. As measured by heating degree
days, 1999 was 8.0% colder than 1998. However, 1999 was still 8.6% warmer than
normal while 1998 was 15.4% warmer than normal.
During 1999, total interdepartmental therm deliveries (interdepartmental retail
sales plus interdepartmental transport deliveries) decreased 29.2%. As noted in
the discussion about electric utility operations above, higher availability of
company-owned, low cost generation allowed Wisconsin Electric to change its
power supply mix during 1999 away from higher cost per unit gas-fired, company-
owned generating facilities. Excluding total interdepartmental therm
deliveries, total gas deliveries during 1999 increased 5.3% when compared to
1998.
During 1998, total therm deliveries of natural gas decreased 6.2% and total
retail gas sales decreased 16.6% compared to the same period in 1997 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
gas sales decreased 16.8% and 13.9%, respectfully, due in large part to warmer
weather during the heating months of 1998, which reduced heating needs.
During 1998, therm deliveries to the Whitewater Cogeneration Facility, owned by
an unaffiliated independent power producer, primarily contributed to an 11.5%
increase in transported customer owned gas deliveries compared to 1997. 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 Nuclear Plant, 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. Excluding deliveries to
Wisconsin Electric's facilities, total therm deliveries during 1998 decreased
6.0% compared to 1997.
<PAGE>
For further information concerning Wisconsin Electric's long-term power purchase
contract for electric energy from the Whitewater Cogeneration Facility, see
"Note H - Long-Term Debt" in the Notes to Financial Statements.
Utility Operating Expenses
OTHER OPERATIONS AND MAINTENANCE: During 1999, Wisconsin Energy's other
operation and maintenance expenses for the utility segment decreased by $10
million or 1.6% when compared to 1998, including a $13 million or 1.9% decrease
at Wisconsin Electric. The most significant changes in Wisconsin Electric's
other operations and maintenance expenses during 1999 include a $28 million
decrease in nuclear non-fuel expenses partially offset by a $5 million increase
in administrative and general expenses, a $2 million increase in payroll taxes,
a $3 million increase in electric transmission expenses and a $2 million
increase in non-fuel steam power generation expenses. Nuclear non-fuel expenses
decreased as a result of progress on various performance improvement
initiatives, while administrative and general expenses increased primarily due
to higher employee benefits paid and to increased staffing, which also increased
payroll taxes. Electric transmission expenses increased primarily due to higher
purchased power transmission fees during 1999, and non-fuel steam power
generation expenses increased as a result of an increase in the number of
maintenance outages at Wisconsin Electric's fossil-fuel power plants early in
1999 in anticipation of higher electric demand during the summer.
During 1998, Wisconsin Energy's other operation and maintenance expenses for the
utility segment increased by $109 million or 19.6% when 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-
fuel steam 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 Nuclear Plant. Also influencing
the 1998 increase in nuclear non-fuel expenses, Wisconsin Electric deferred $18
million of nuclear non-fuel operation expenses during 1997 which began to be
amortized to expense on a five-year straight line basis in 1998. 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. 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-fuel steam power generation expenses increased
primarily due to a scheduled maintenance outage during the second quarter of
1998 at Wisconsin Electric's Oak Creek Power Plant and to other reliability
improvement efforts throughout 1998.
For additional insight into Wisconsin Electric's nuclear operations and the
deferred nuclear non-fuel operations expenses, see "Nuclear Matters" below in
"Factors Affecting Results of Operations" and "Note E - Nuclear Operations" in
the Notes to Financial Statements. For further information concerning efforts
to address the change to the Year 2000, see "Year 2000 Technology Issues" below
in "Factors Affecting Results of Operations."
DEPRECIATION AND AMORTIZATION: Primarily due to an increase in average
depreciable property at Wisconsin Electric during 1999 as well as to an increase
in nuclear decommissioning expenses due to higher nuclear decommissioning trust
fund earnings, Wisconsin Energy's and Wisconsin Electric's utility segment
depreciation and amortization expenses increased by $14 million or 5.6% and $12
million or 5.1%, respectively, compared to 1998.
During 1998, utility segment depreciation and amortization expense increased by
$6 million or 2.3% at Wisconsin Energy and by $4 million or 1.6% at Wisconsin
Electric when compared to 1997 primarily due to increased average depreciable
property and increased decommissioning expenses at Wisconsin Electric. The
effect of these increases, however, was offset to a large extent by a change in
the regulatory accounting treatment of pre-1991 contribution in aid of
construction balances at Wisconsin Electric, which reduced current period
depreciation expense. For further information, see "Note A - Summary of
Significant Accounting Policies" in the Notes to Financial Statements.
NON-UTILITY SEGMENT PRETAX OPERATING RESULTS
Due to growth in non-utility energy operations during 1999, including the
addition of independent power production revenues from two fossil-fueled power
plants acquired in April 1999, Wisconsin Energy's non-utility pretax operating
income increased by $17 million when compared to 1998. During 1998, Wisconsin
Energy's non-utility pretax operating income increased by $2 million when
compared to 1997 due to increased returns from its non-utility real estate
investment and development activities.
<PAGE>
<TABLE>
<CAPTION>
% Change % Change
1998 1997
Non-Utility Operations ($000) 1999 1998 to 1999 1997 to 1998
- - - - - - ----------------------------- ------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
Operating Revenues
Independent Power Production $101,087 $ - - $ - -
Energy Marketing, Trading
and Services 74,541 25,069 197.3% - -
Other 46,793 34,378 36.1% 17,327 98.4%
-------- ------- -------
Total Operating Revenues 222,421 59,447 274.2% 17,327 243.1%
Operating Expenses
Fuel and Purchased Power 129,217 24,871 419.5% - -
Other 72,832 31,582 130.6% 16,527 91.1%
-------- ------- -------
Total Operating Expenses 202,049 56,453 257.9% 16,527 241.6%
-------- ------- -------
Pretax Operating Income $ 20,372 $ 2,994 580.4% $ 800 274.3%
======== ======= =======
</TABLE>
For further information concerning the April 1999 non-utility power plant
acquisitions, see "Note B - Mergers & Acquisitions" in Wisconsin Energy's Notes
to Financial Statements.
NON-UTILITY OPERATING REVENUES: As a result of the power plant acquisitions
noted above, non-utility energy operations realized $101 million of operating
revenues during 1999 through the sale of 2,298,000 megawatt-hours of electric
energy in the New England region. In addition, non-utility energy operations
increased its operating revenues by $49 million during 1999 as a result of
increased energy marketing, trading and services activities. Compared to 1998,
other non-utility operating revenues increased by $12 million or 36.1% during
1999 including $9 million of additional ancillary revenues from energy
activities and $3 million of additional operating revenues from recycling
activities.
During 1998, non-utility energy operations began energy marketing, trading and
services activities, adding $25 million of operating revenues compared to 1997.
Between the comparative periods, other non-utility operating revenues increased
by $17 million including $8 million from real estate investment and development
activities and $7 million from recycling activities.
NON-UTILITY OPERATING EXPENSES: During 1999, the non-utility energy
operations' fuel and purchased power expenses increased by $104 million when
compared to 1998 due to independent power production activities that began in
the New England region during 1999 as well as to increased energy marketing,
trading and services activities. Other operating expenses increased by $41
million during 1999 primarily due to operation of the fossil-fueled power plants
acquired by non-utility energy operations in April 1999.
Compared to 1997, the non-utility energy operations' fuel and purchased power
expenses increased by $25 million due to energy marketing, trading and services
activities that began in 1998. Between the comparative periods, other operating
expenses increased by $15 million including $8 million from recycling activities
and $3 million from real estate investment and development activities and the
start-up of energy marketing, trading and services activities.
OTHER INCOME & EXPENSE ITEMS
OTHER INCOME AND DEDUCTIONS: During 1999, Wisconsin Energy's interest income
increased by $10 million or 36.9% when compared to 1998 primarily due to
increased loan investments made by Wisconsin Energy's non-utility segment.
Other income and deductions - other, net decreased by $23 million at Wisconsin
Energy and by $12 million at Wisconsin Electric primarily due to a one-time $18
million litigation settlement payment made by Wisconsin Electric in the fourth
quarter of 1999. For additional further information concerning Wisconsin
Energy's non-utility loan investments, see "Note K - Segment Reporting" in
Wisconsin Energy's Notes to Financial Statements. For additional information
concerning Wisconsin Electric's $18 million litigation settlement during the
fourth quarter of 1999, see "Legal Matters" below under "Factors Affecting
Results of Operations."
During 1998, merger expense decreased by $31 million at Wisconsin Energy when
compared to 1997, including $22 million which was attributable to Wisconsin
Electric. These decreases reflect a one-time write off of deferred
<PAGE>
merger costs during 1997 related to the terminated merger agreement with
Northern States Power Company. For further information concerning this
terminated merger agreement, see "Mergers" below under "Factors Affecting
Results of Operations." Compared to 1997, the net expense in other income and
deductions - other, net decreased by $45 million during 1998 at Wisconsin Energy
of which $37 million was attributable to Wisconsin Electric. Significantly
contributing to these decreased expenses, 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, see "Note L - Commitments and Contingencies" in Wisconsin Energy's
Notes to Financial Statements. In addition, the comparative net expense in other
income and deductions - other, net decreased during 1998 due to a $9 million
increase in net pretax miscellaneous income at Witech Corporation and a $4
million reduction in charitable donations by Wisconsin Electric. Witech
Corporation is a non-utility subsidiary of Wisconsin Energy.
INTEREST CHARGES AND OTHER: During 1999, Wisconsin Energy's interest on long-
term debt increased by $16 million or 14.5% when compared to 1998 primarily due
to the financing requirements necessary for the April 1999 non-utility segment
power plant acquisitions noted above. Between the comparative periods, other
interest expense increased by $5 million or 24.6% at Wisconsin Energy and by $3
million or 29.0% at Wisconsin Electric primarily due to increased 1999 short-
term borrowing levels. During 1999, Wisconsin Energy made approximately $11
million of distributions on preferred securities of a subsidiary trust that were
issued in March 1999. For further information concerning issuance of the trust
preferred securities, see "Note G - Trust Preferred Securities" in Wisconsin
Energy's Notes to Financial Statements.
Primarily due to increased short-term borrowing levels during 1998, Wisconsin
Energy's and Wisconsin Electric's other interest expense increased by $10
million or 102.4% and by $3 million or 34.7%, respectively, compared to 1997.
INCOME TAXES: During 1999, both Wisconsin Energy's and Wisconsin Electric's
income taxes increased by $19 million when compared to 1998 primarily due to
increased pretax income. Similarly, Wisconsin Energy's and Wisconsin Electric's
income taxes increased by $61 million and $62 million, respectively, during 1998
due to increased pretax income compared to 1997.
FACTORS AFFECTING RESULTS OF OPERATIONS
MERGERS
WICOR, INC: On June 27, 1999, Wisconsin Energy and WICOR, Inc., a Wisconsin
corporation [NYSE: WIC], entered into an Agreement and Plan of Merger providing
for a strategic business combination of Wisconsin Energy and WICOR. The merger
will be accounted for as a purchase transaction. WICOR is a diversified holding
company with consolidated total assets of approximately $1.1 billion at December
31, 1999 in utility and non-utility energy subsidiaries as well as in pump
manufacturing subsidiaries. Following the merger, WICOR and its subsidiaries,
including Wisconsin Gas Company, the largest natural gas distribution public
utility in Wisconsin, will become subsidiaries of Wisconsin Energy. The merger
agreement has been approved by the boards of directors and the shareholders of
Wisconsin Energy and WICOR.
Assuming timely realization of estimated cost savings and avoidances expected to
result from the merger, Wisconsin Energy expects the business combination to
result in increased earnings per share beginning in the first full year
following the merger. While no definitive synergies study has been performed,
net merger-related cost savings are anticipated to be approximately $35 million
annually beginning in the first full year after the merger. Savings are
expected from lower expenses for cost of gas, materials and services through
enhanced purchasing power, elimination of duplication through attrition, and
through sharing of resources. Additional cost savings are anticipated from
logical consolidation of common functions over time as well as from savings in
areas such as insurance and regulatory costs and legal, audit and consulting
fees.
Consummation of the merger is subject to the satisfaction of certain closing
conditions including approval by the Securities and Exchange Commission. In
early March 2000, the Federal Trade Commission closed its review of the
proposed acquisition. On March 15, 2000, the Public Service Commission of
Wisconsin issued its final decision approving the merger and providing for a
qualified five-year rate freeze for Wisconsin Electric's and Wisconsin Gas'
natural gas, electric and steam services beginning the later of January 1, 2001
or upon receipt of all state and federal approvals. The commission also found
that it was reasonable to allow the utilities to retain synergy savings
associated with the merger during the 5-year partial rate freeze period. The
regulatory approval process is expected to be completed in time for the
transaction to be consummated on or about April 26, 2000.
<PAGE>
For additional information concerning the WICOR merger, including information
about the purchase price and the form in which it may be paid, see "Note B -
Mergers & Acquisitions" in Wisconsin Energy's Notes to Financial Statements.
For further information concerning how Wisconsin Energy expects to finance the
acquisition of WICOR, see "Liquidity And Capital Resources - Capital
Requirements" below.
ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc.
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 Electric Company, an electric
utility which serves approximately 21,800 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.
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 the Agreement and Plan of Merger which provided for a
business combination of Wisconsin Energy and Northern States 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.
NUCLEAR MATTERS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 510-megawatt electric generating units at Point Beach Nuclear
Plant in Two Rivers, Wisconsin. During 1999, 1998 and 1997, Point Beach
provided 22%, 18% and 6% of Wisconsin Electric's net electric energy supply,
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.
From late 1996 through early 1999, Point Beach experienced several scheduled and
unscheduled outages or power reductions involving both generating units. As a
result of these outages and various performance improvement initiatives,
Wisconsin Electric's total nuclear operation and maintenance expenses, excluding
fuel and benefit overheads, increased from $107 million in 1997 to $156 million
in 1998 before falling to $128 million in 1999. Between 1997 and 1999,
availability of Point Beach increased significantly, and Wisconsin Electric
expects the reliability of the units to continue to improve during 2000 as these
improvement efforts progress. During 2000, Wisconsin Electric currently
anticipates that nuclear non-fuel operating and maintenance expenses will
decline from 1999 levels. 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
For information concerning Wisconsin Electric's deferral of approximately $18
million of nuclear non-fuel operating and maintenance costs during 1997, see
"Note E - Nuclear Operations" in the Notes to Financial Statements.
During scheduled refueling and maintenance outages of Point Beach Units 1 and 2
in 1998 and 1999, respectively, Wisconsin Electric initiated extended fuel
cycles that allow for operation of the units for periods longer than the
historical practice of refueling each unit annually.
Wisconsin Electric is currently forming an operating license renewal team which
is expected to complete a technical and economic evaluation of license renewal
by mid-2002. Based upon the results of this evaluation and subject to approval
by executive management and by the boards of directors of Wisconsin Electric and
Wisconsin Energy in the second half of 2002, Wisconsin Electric currently
anticipates seeking appropriate regulatory approvals, including submittal of an
application to the Nuclear Regulatory Commission, in 2003 for an extension of
the operating licenses for Point Beach Nuclear Plant for a period of up to 20
years.
<PAGE>
NUCLEAR MANAGEMENT COMPANY: In February 1999, WEC Nuclear Corporation, a
subsidiary of Wisconsin Energy, Northern States Power Company and WPS Nuclear
Corporation, a subsidiary of WPS Resources Corporation, announced the formation
of the Nuclear Management Company, LLC. In November 1999, an affiliate of
Alliant Energy Resources also became a member of the Nuclear Management Company.
The four participants or their affiliates operate a total of 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. Each
utility will continue to own its respective nuclear units, maintain exclusive
rights to the energy generated, and retain financial responsibility for safe
operation, maintenance and decommissioning.
The primary goals of the Nuclear Management Company are to identify and achieve
enhanced reliability and continued safe operation of the seven nuclear
generating units as well as to provide enhanced nuclear plant support and
operating services. The Nuclear Management Company will provide services to
Wisconsin Electric's Point Beach Nuclear Plant and, upon transfer of operating
authority under the operating licenses, will also be responsible for the day-to-
day operation of Point Beach.
During the fourth quarter of 1999, all participants in the Nuclear Management
Company, including Wisconsin Electric, filed applications with the Nuclear
Regulatory Commission to transfer applicable nuclear generating unit operating
authority under their operating licenses to the Nuclear Management Company.
Wisconsin Electric currently anticipates a decision by the Nuclear Regulatory
Commission on transfer of operating authority in the Spring of 2000. Also
during the fourth quarter of 1999, Wisconsin Electric submitted an affiliated
interest application with the Public Service Commission of Wisconsin for
approval of its nuclear power plant operating services agreement with the
Nuclear Management Company. WPS Resources Corporation and Northern States Power
Company also filed similar applications with their respective state regulatory
commissions. Assuming approval by all required regulatory authorities,
Wisconsin Electric currently expects the Nuclear Management Company to assume
operating responsibility for Point Beach with the transfer of operating
authority under the operating licenses in mid-2000.
SPENT FUEL STORAGE AND DISPOSAL: During 1995, Wisconsin Electric completed
construction of an Independent Spent Fuel Storage Installation for the temporary
dry storage of spent nuclear fuel at Point Beach. The Public Service Commission
of Wisconsin 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 Independent Spent Fuel Storage Installation. To date, eight VSC-24
casks, designed by Sierra Nuclear Corporation and containing a total of 192
spent fuel assemblies, have been loaded and moved. Wisconsin Electric currently
plans to load the four remaining 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
three alternative model TN-32 casks, designed by Transnuclear Corp., which
should be available by mid-2000. TN-32 dry storage casks have been previously
approved by the Nuclear Regulatory Commission for specific use at other nuclear
generating facilities in the United States, and Wisconsin Electric anticipates
that the Nuclear Regulatory Commission will certify use of TN-32 casks for use
at Point Beach in April 2000. In August 1998, the Public Service Commission of
Wisconsin 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 estimates that, with implementation of the extended fuel
cycles noted above, with the four remaining casks originally authorized by the
Public Service Commission of Wisconsin and with the remaining space in the spent
fuel pool, it has sufficient temporary spent fuel storage capacity to continue
operating Point Beach until the Spring of 2005. Wisconsin Electric currently
plans to apply to the Public Service Commission of Wisconsin in 2000 for
authority to load additional casks beyond the twelve that are currently
authorized.
Temporary spent fuel storage alternatives at Point Beach Nuclear Plant are
necessary until the United States Department of Energy takes ownership of and
permanently removes the spent fuel as mandated by the Nuclear Waste Policy Act
of 1982, as amended in 1987 (the "Waste Act"). Effective January 31, 1998, the
Department of Energy has failed to meet its contractual obligation to begin
removing spent fuel from Point Beach, a responsibility for which Wisconsin
Electric has paid a total of $163 million as of December 31, 1999. The
Department of Energy has indicated that it does not expect a permanent spent
fuel repository to be available any earlier than 2010. At this time, Wisconsin
Electric is unable to predict when the Department of Energy will actually begin
accepting spent nuclear fuel.
On August 24, 1999, Wisconsin Electric filed a petition for review and for writ
of mandamus in the United States Court of Appeals for the District of Columbia
Circuit seeking both monetary and non-monetary relief under its Standard
Contract with the Department of Energy as a result of the Department of Energy's
failure to comply with
<PAGE>
its unconditional obligation under the Waste Act to dispose of the spent nuclear
fuel at Point Beach Nuclear Plant. Wisconsin Electric requested a contract
modification requiring the Department of Energy to provide storage casks for the
spent fuel, to take title of the spent fuel when it is placed in dry storage at
Point Beach and to reimburse Wisconsin Electric for costs incurred as a result
of the Department of Energy's failure to comply with its obligations. On October
12, 1999, the government filed a motion to dismiss Wisconsin Electric's petition
for review on grounds of failure to exhaust administrative remedies and lack of
jurisdiction. On October 25, 1999, Wisconsin Electric filed a response to the
government's motion, asking the Appeals Court to deny the motion. On November
24, 1999, the Court ordered that the motion to dismiss be referred to a merits
panel and directed the parties to submit briefs on the merits with oral argument
scheduled for May 18, 2000.
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 have required the
Department of Energy to establish a temporary spent fuel repository in the state
of Nevada until a 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. During 1999, neither house of congress passed similar
legislation that had been introduced. The Senate and House passed a modified
version of temporary nuclear waste disposal legislation in February and March
2000, respectively. President Clinton has threatened to veto any legislation
which mandates a temporary spent fuel repository in Nevada.
LEGAL MATTERS
GIDDINGS & LEWIS INC./CITY OF WEST ALLIS LAWSUIT: In July 1999, a jury decided
against Wisconsin Electric and awarded the plaintiffs $4.5 million as actual
damages and $100 million in punitive damages in a lawsuit alleging that
Wisconsin Electric had placed contaminated wastes at two sites in the City of
West Allis, Wisconsin. Wisconsin Electric is preparing to file an appeal of the
case. In December 1999, in order to stop the post-judgment accrual of interest
at 12% per annum during the pendency of the appeal, Wisconsin Electric tendered
a contested liability payment of $110 million, appearing as part of Deferred
Charges and Other Assets - Other on the Balance Sheet, to the Milwaukee County
Clerk of Circuit Court representing the amount of the verdict and accrued
interest. In further post-trial proceedings, the plaintiffs filed a motion for
sanctions based upon representations made by Wisconsin Electric during trial.
The hearing on this matter occurred in February 2000. The matter was briefed by
the parties and oral argument is scheduled in April 2000. In the opinion of
management, based in part on the advice of legal counsel, the jury verdict was
not supported by the evidence or the law and the unprecedented award of punitive
damages of this magnitude was unwarranted and should therefore be reversed or
substantially reduced on appeal. As such, Wisconsin Electric has not
established a reserve for potential damages from this suit. For further
information, see "Note L - Commitments and Contingencies" in Wisconsin Energy's
Notes to Financial Statements.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: During the fourth quarter
of 1999, Wisconsin Electric and Wisconsin International Electric Power, Ltd.
reached settlement of litigation brought by Wisconsin International Electric
Power against Wisconsin Electric claiming that Wisconsin Electric had breached
contractual duties allegedly owed to the plaintiff relating to development of an
electric generating plant at Subic Bay in the Philippines. While Wisconsin
Electric does not believe that it breached any contractual duties allegedly owed
to the plaintiff, Wisconsin Electric paid Wisconsin International Electric
Power, Ltd. $18 million ($10.8 million, or $0.09 per share for Wisconsin Energy,
after tax) in November 1999 to settle the case, and the plaintiff's claims were
dismissed with prejudice. For further information, see "Note L - Commitments
and Contingencies" in Wisconsin Energy's Notes to Financial Statements.
ELECTRIC SYSTEM RELIABILITY MATTERS
In spite of several episodes of hot and humid weather during the summer of 1999,
Wisconsin Electric had adequate capacity to meet all of its firm electric load
obligations. Public appeals for conservation were not required, and the need to
interrupt or curtail service to non-firm customers who participate in load
management programs in exchange for discounted rates was greatly reduced from
recent years. All of Wisconsin Electric's generating plants were available and
in operation during the hottest periods in late July 1999, and all power
purchase commitments under firm contract were received.
Wisconsin Electric expects to have adequate capacity to meet all of its firm
load obligations during 2000. However, the Company anticipates that the
regional electric energy supply will remain tight during 2000. As a result of
this, or of extremely hot weather along with unexpected equipment
unavailability, Wisconsin Electric could be required to call upon load
management procedures during 2000, as it has in past years.
<PAGE>
Wisconsin Electric is proceeding with several long-term measures to enhance the
reliability of its own system and that of the midwestern region as discussed
below.
Electric Generation Initiatives
300-MEGAWATT CONTRACT WITH SOUTHERN ENERGY: In August 1998, Wisconsin Electric
signed an agreement with Atlanta-based Southern Energy, Inc. to purchase for
eight years the electric output from a 300-megawatt natural gas-fired peaking
power plant that Southern Energy is currently constructing in Neenah, Wisconsin.
The facility is scheduled for commercial operation by June 2000.
As a result of the existing regulatory environment in the state of Wisconsin,
Wisconsin Electric currently expects to utilize purchase power commitments
similar to the agreement with Southern Energy to meet its electric demand load
growth where appropriate.
GERMANTOWN GENERATION PROJECTS: Based upon updated load growth projections,
Wisconsin Electric determined that it needed additional generating capacity by
the summer of 2000. As a result, Wisconsin Electric is currently installing a
new 85-megawatt combustion turbine at its Germantown Power Plant that is
expected to be in service by June 2000. In addition, Wisconsin Electric is
installing inlet cooling facilities on the four existing combustion turbine
units at the Germantown Power Plant as well as on the new unit. Installation of
the inlet cooling facilities, which counteract the reduction in generating
capacity due to hot summer weather, is expected to be completed by mid-summer of
2000. A net increase in summer capacity of approximately 59 megawatts will be
available as a result of the inlet cooling facilities that are being installed.
Natural gas burning facilities are also being added at the Germantown Power
Plant 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 are being
installed on the existing units to reduce air emissions. The dual fuel project
is expected to be completed in 2003.
NEW RENEWABLE ELECTRIC ENERGY: In September 1999, Wisconsin Electric signed an
agreement to purchase 25.2 megawatts of capacity from a 29.7-megawatt wind farm
that FPL Energy Wisconsin Wind LLC plans to construct and operate near Allenton,
Wisconsin. Siting for the wind farm is pending. In October 1999, Wisconsin
Electric signed an agreement to purchase 7.7 megawatts of new landfill gas-
fueled generation capacity installed at several Waste Management, Inc.
landfills. All landfill gas facilities are expected to be on-line prior to the
end of 2000. The total 32.9 megawatts of renewable capacity will be used to
meet Wisconsin Electric's 27 megawatt share of a renewable energy mandate
included in 1997 Wisconsin Act 204 and support Wisconsin Electric's "energy for
tomorrow" renewable energy program.
In June 1999, Wisconsin Electric placed in service two 660 kilowatt Vestas V47
wind turbines. The wind turbines are located in southern Fond du Lac County in
the Town of Byron, Wisconsin. The electricity generated from this project is
being sold to "energy for tomorrow" customers.
Electric Transmission Initiatives
WISCONSIN ELECTRIC PROJECTS: Wisconsin Electric recently completed or is
currently involved in multiple projects designed to increase electric import
capability into eastern Wisconsin and to improve electric system reliability for
its customers. In June 1999, Wisconsin Electric completed the Northern
Interface Project which allows for 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. Also in June 1999,
Wisconsin Electric completed the Southern Interface Project which was 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 electric
transfer capability between northern Illinois and southern Wisconsin. In
September 1999, the Public Service Commission of Wisconsin authorized Wisconsin
Electric to proceed with the Oak Creek-Arcadian Transmission Upgrade Project,
intended to also improve system reliability in southeast Wisconsin. In December
1999, Wisconsin Electric filed an application with the Public Service Commission
of Wisconsin to upgrade transmission system facilities in downtown Milwaukee as
well as facilities serving the northern metropolitan Milwaukee area.
WISCONSIN RELIABILITY ASSESSMENT ORGANIZATION: The Wisconsin Reliability
Assessment Organization 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 Wisconsin
Reliability Assessment
<PAGE>
Organization, whose members include all of the state's other investor owned
utilities, staff from the Public Service Commission of Wisconsin, several
municipal utilities and cooperatives, and utilities from surrounding states.
In June 1999, the Wisconsin Reliability Assessment Organization issued a report
to the Public Service Commission of Wisconsin describing a recently completed
comprehensive study of transmission system reinforcement plans and the abilities
of those plans to achieve numerous technical, environmental and policy criteria.
Based upon the report, the Wisconsin Reliability Assessment Organization
recommended construction of a new 345 kilovolt transmission line between Duluth,
Minnesota and Wausau, Wisconsin. Wisconsin Public Service Corporation and
Minnesota Power Company, two unaffiliated investor owned utilities, have applied
to regulatory commissions in Wisconsin and Minnesota for authority to construct
this facility. Several groups are opposing the project and have indicated their
intent to intervene in proceedings before the Public Service Commission of
Wisconsin.
In addition to substantial generation system expansion throughout the state of
Wisconsin, the Wisconsin Reliability Assessment Organization's recommendations
assume that numerous other transmission system enhancement projects will be
completed including Wisconsin Electric's Oak Creek-Arcadian Transmission Upgrade
Project noted above and construction of a 230 kilovolt transmission line from
Chicago County, Minnesota to Amery, Wisconsin. Northern States Power Company,
an unaffiliated investor owned utility, and Dairyland Power Cooperative, an
unaffiliated electric cooperative, have applied for necessary certification for
the Chicago / Amery project.
MIDWEST ISO: Wisconsin Electric is currently participating in the formation of
a regional independent electric transmission system operator to promote
reliability in the Midwest (the "Midwest ISO"). In June 1999, the Public
Service Commission of Wisconsin granted Wisconsin Electric authority to transfer
control of its electric transmission system to the Midwest ISO. The Midwest ISO
installed its independent board of directors and hired its executive management
team during 1999 and plans to begin operation in 2001. Once established, the
American Transmission Company, LLC described below under "Industry Restructuring
and Competition" will become a member of the Midwest ISO.
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. The state of Illinois has passed
legislation that introduced retail electric choice for large customers in 1999
and introduces choice for all customers by May 2002. For information concerning
restructuring in the state of Michigan, see "Electric Utility Industry
Restructuring In Michigan" below. Congress continues to evaluate restructuring
proposals at the federal level. The Company cannot predict the ultimate timing
or impact of a restructured electric industry. Among others, the following
electric industry restructuring initiatives are underway in regulatory
jurisdictions where the Company currently does business.
State of Wisconsin
ELECTRIC UTILITY INDUSTRY INVESTIGATION IN WISCONSIN: The Public Service
Commission of Wisconsin is currently focusing on electric infrastructure issues
for the state of Wisconsin such as:
. Improvements to existing and addition of new electric
transmission lines in the state,
. Addition of new generating capacity in the state,
. Modifications to the regulatory process to facilitate
development of merchant generating plants,
. Development of a regional independent electric transmission
system operator, and
. Formation of a statewide transmission company.
The Public Service Commission of Wisconsin continues to maintain the position
that the question of whether to implement electric retail competition in
Wisconsin should ultimately be decided by the Wisconsin legislature. No such
legislation has been introduced in Wisconsin to date.
<PAGE>
TRANSMISSION COMPANY: Wisconsin Electric has agreed to join the American
Transmission Company, LLC by contributing its transmission assets in exchange
for an equity interest in the new company. As a result, Wisconsin Energy will
receive partial relief from statutory limits on its non-utility assets (the non-
utility asset cap) as authorized by 1999 Wisconsin Act 9. For additional
information, see "Rates and Regulatory Matters" below. Joining the American
Transmission Company is consistent with the Federal Energy Regulatory
Commission's Order No. 2000, designed to foster competition, efficiency and
reliability in the electric industry.
The American Transmission Company will be owned and governed in accordance with
1999 Wisconsin Act 9 by utilities that contribute facilities or capital.
Governance of the company will also include outside directors not associated
with the energy business. Stock of the American Transmission Company eventually
may be offered for public ownership.
The American Transmission Company's sole business will be to provide reliable,
economic transmission service to all customers in a fair and equitable manner.
Specifically, the American Transmission Company will plan, construct, operate,
maintain and expand transmission facilities it will own to provide for adequate
and reliable transmission of power. It will provide comparable service to all
customers, including Wisconsin Electric, and it will support effective
competition in energy markets without favoring any market participant.
Formation of the company will require federal and state regulatory approvals.
The American Transmission Company will be regulated by the Federal Energy
Regulatory Commission for all rate terms and conditions of service. The company
will be a transmission-owning member of the Midwest ISO as discussed in further
detail above under "Electric System Reliability Matters."
Wisconsin Electric outlined its proposed classification of transmission assets
in a February 2000 filing with the Public Service Commission of Wisconsin. A
ruling in that proceeding is expected in June 2000. Shortly thereafter,
Wisconsin Electric plans to file with both the Public Service Commission of
Wisconsin and the Federal Energy Regulatory Commission for permission to
transfer assets to the new company. Wisconsin Electric estimates that it will
transfer approximately $200 million in transmission utility assets at net book
value when the American Transmission Company becomes operational in late 2000.
Wisconsin Electric's transmission assets have traditionally contributed an
estimated 3% of Wisconsin Electric's total electric utility operating revenues.
While it is expected that Wisconsin Energy will receive earnings distributions
from the American Transmission Company in proportion to its ownership share, the
overall impact of the transaction on Wisconsin Energy earnings is not yet known.
AFFILIATE INTEREST POLICIES DOCKET: From late 1998 through early 2000, the
Public Service Commission of Wisconsin has reviewed the policies on standards of
conduct governing diversification of activities that can be performed within the
utility and utility affiliates. On February 17, 2000, the Public Service
Commission voted to continue to support the full allocation method which allows
utilities to continue to provide and sell products and services other than core
utility products as long as the costs are fully allocated and not subsidized by
ratepayers. During these proceedings, 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. The Public Service Commission
of Wisconsin still intends to look at a streamlined process for reviewing
complaints on a case-by-case basis and then is expected to issue an order on
this matter and close the docket.
PUBLIC BENEFITS: On October 27, 1999, the Wisconsin State legislature passed
public benefits legislation as part of the 1999-2001 biennial state budget, 1999
Wisconsin Act 9, which also included amendments to the non-utility asset cap
provisions of Wisconsin's public utility holding company law. The law creates
new funding of $44 million to be collected by utilities and remitted to the
Wisconsin Department of Administration. The law also requires utilities to
continue to collect the funds at existing levels for low-income, conservation
and environmental research and development programs and to begin transferring
the funds for these programs to the Department of Administration within a three-
year transition period. The utilities' traditional role of providing these
programs will be shifted to the Department of Administration, which will
administer the funds for a statewide public benefits program. The new law also
requires utilities to provide a specified proportion of its retail energy sales
in programs such as Wisconsin Electric's "energy for tomorrow" renewable energy
program. For additional information concerning the non-utility asset cap, see
"Rates and Regulatory Matters" below.
State of Michigan
ELECTRIC UTILITY INDUSTRY RESTRUCTURING IN MICHIGAN: In June 1999, in response
to earlier actions by the Michigan Public Service Commission to implement retail
access for all retail customers of regulated
<PAGE>
utilities and co-ops in the state of Michigan beginning January 1, 2002, the
Michigan Supreme Court ruled that the Michigan Public Service Commission did not
have authority to mandate direct access plans.
On September 1, 1999, Michigan's two largest utilities, Detroit Edison and
Consumers Energy Company, filed an agreement to voluntarily implement a phase-in
of direct access beginning in late 1999 followed by full access on January 1 ,
2002. In October 1999, the Michigan Public Service Commission's authority to
implement access on a voluntary basis was challenged in the courts. The
Michigan Public Service Commission is expected to continue to support its
authority to implement voluntary open access programs. Meanwhile, the phase-in
programs have begun for Detroit Edison and Consumers Energy Company.
In January 2000, a bill was introduced in the Michigan Senate providing for a
phase-in of direct access with full access on January 1, 2002. The bill
addresses market power concerns and remedies and contains modifications for
smaller utilities and co-ops. Wisconsin Electric believes that passage of the
bill as introduced is unlikely. However, a modified bill could be enacted by
late 2000.
During 1999, 6.8% of Wisconsin Energy's and 5.3% of Wisconsin Electric's total
utility operating revenues were under the jurisdiction of the Michigan Public
Service Commission.
Wholesale Competition
Wholesale sales of electric energy accounted for 7%, 6% and 5% of Wisconsin
Electric's total electric operating revenues in 1999, 1998 and 1997,
respectively. Wisconsin Electric attributes the increase in the past year to
additional sales for resale.
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 Public Service Commission of Wisconsin
regulates retail electric, steam and natural gas rates in the state of
Wisconsin, while the Federal Energy Regulatory Commission regulates wholesale
power, electric transmission and gas transportation service rates. The Michigan
Public Service Commission regulates retail electric rates in the state of
Michigan.
<TABLE>
<CAPTION>
Revenue Percent
Increase Change
Service (Decrease) in Rates Effective Date
- - - - - - ------- --------- -------- --------------
(Millions) (%)
<S> <C> <C> <C>
Retail electric, WI (a) $ 25.2 1.7% (a)
Retail gas (a) 11.6 3.3% (a)
Fuel electric, WI (7.8) (0.5%) 05/01/99
Retail electric, MI 2.1 6.0% 04/13/99
Retail electric, WI (b) 160.2 12.7% 05/01/98
Retail gas (b) 18.5 5.4% 05/01/98
Steam heating (b) 1.2 9.3% 05/01/98
Retail electric, WI (b) 134.9 10.7% 01/01/98
Retail gas (b) 18.5 5.5% 01/01/98
Steam heating (b) 0.8 6.3% 01/01/98
Fuel electric, WI (c) 11.9 1.0% 01/01/98
Fuel electric, WI (d) 15.3 1.2% 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 0.5% 02/18/97
</TABLE>
(a) Interim increase approved by the Public Service Commission of Wisconsin on
March 23, 2000. The interim increase will become effective upon the
issuance of a written order subject to any conditions imposed in the order.
A final order is expected in June 2000.
(b) The January 1, 1998 order was an interim order that was effective until the
May 1, 1998 final order was received from the Public Service Commission of
Wisconsin. The final May 1, 1998 order superseded the January 1, 1998
interim order.
<PAGE>
(c) A final order from the Public Service Commission of Wisconsin, dated
December 23, 1997, authorized a total increase in fuel revenue of $27.2
million less the amount of $15.3 million previously collected through an
interim order during 1997. See footnote (d). The remaining $11.9 million
under the final order was authorized during the period January 1, 1997
through April 30, 1998.
(d) An interim order from the Public Service Commission of Wisconsin, issued
May 23, 1997 was in effect through December 31, 1997 and resulted in a
$15.3 million increase in revenue from Wisconsin retail customers.
The Public Service Commission of Wisconsin requires that rate cases be conducted
once every two years. During 1999, Wisconsin Electric filed test year data for
the 2000/2001 biennial period. The next test year filing with the Public
Service Commission of Wisconsin under the current biennial cycle is scheduled to
be in 2001 for the 2002/2003 biennial period. However, as described in further
detail in "Note B - Mergers & Acquisitions" in Wisconsin Energy's Notes to
Financial Statements, the Public Service Commission of Wisconsin ordered, as a
condition of its approval of Wisconsin Energy's pending merger with WICOR, a
qualified five-year rate freeze following completion of Wisconsin Electric's
current pricing request for 2000/2001. A review of recent rate and regulatory
actions follows.
2000/2001 TEST YEARS: On September 17, 1999, Wisconsin Electric submitted an
application with the Public Service Commission of Wisconsin requesting
incremental price relief for specific capital investments for electric and gas
system reliability and safety and for a one-time accounting adjustment. The
application further recommended the adoption of performance-based measures and
incentives. In its application, Wisconsin Electric proposed a two-step price
increase. The first requested increase, to be effective January 1, 2000,
totaled $46 million (3.1%) for electric operations and $8 million (2.3%) for gas
operations. The second requested price increase, to be effective January 1,
2001, totaled $29 million (2.0%) for electric operations.
On December 23, 1999, Wisconsin Electric requested that interim price relief be
granted by the Public Service Commission of Wisconsin, subject to refund, as
soon as possible because it anticipated that a final order on its price request
would not be issued until June 2000. On an interim basis, Wisconsin Electric
requested a 3.1% increase on electric prices and a 2.3% increase on gas prices.
Wisconsin Electric withdrew its request to be allowed to implement performance-
based prices because some elements of the proposed performance-based price plan
are not compatible with the Public Service Commission of Wisconsin's approval of
the WICOR merger. Hearings on Wisconsin Electric's request for interim price
relief were held on February 9, 2000. On March 23, 2000, the Public Service
Commission of Wisconsin approved Wisconsin Electric's request for interim price
increases, authorizing a $25.2 million (1.7%) increase for electric operations
and an $11.6 million (3.3%) increase for gas operations. The interim increase
will become effective upon the issuance of a written interim order subject to
any conditions imposed in the order.
1998/1999 TEST YEARS: On December 23, 1997, the Public Service Commission of
Wisconsin 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 Public
Service Commission of Wisconsin 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 permanent rate increases, which replaced the interim rate
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
Michigan Public Service Commission showing a $3.8 million annual revenue
deficiency for its electric utility operations in the state of Michigan. On
April 12, 1999, the Michigan Public Service Commission issued an order
authorizing Wisconsin Electric to implement retail electric rate increases
effective April 13, 1999 in the amount of $2.1 million on an annualized basis.
The increase was based upon an authorized regulatory return on common equity of
11.0%.
1997 TEST YEAR: In an order dated February 13, 1997, the Public Service
Commission of Wisconsin 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
Public Service Commission of Wisconsin had determined that it required a special
full review
<PAGE>
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 Northern States Power Company discussed above under
"Mergers."
EDISON SAULT PRICE CAP: On August 22, 1995, Edison Sault filed an application
with the Michigan Public Service Commission 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 Michigan Public Service Commission 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 Michigan Public Service Commission by October 1,
2000 to address the experience under the price cap mechanism. The 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 Public Service
Commission of Wisconsin'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%.
As part of the Public Service Commission of Wisconsin'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 indicating no change in fuel costs compared to 1998. Following
subsequent discussions, the Public Service Commission of Wisconsin issued an
order effective May 1, 1999 authorizing Wisconsin Electric to implement a retail
revenue fuel credit of $.00033 per kilowatt-hour or approximately $7.8 million
on an annualized basis.
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 a cogeneration facility owned by an independent power producer with
whom Wisconsin Electric had entered into a long-term power purchase contract,
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.
Effective May 24, 1997, the Public Service Commission of Wisconsin approved a
$0.00109 per kilowatt-hour fuel surcharge for the 1997-1998 biennial period
based upon an estimated $50 million increase in fuel and purchased power costs
allocated to the Wisconsin jurisdiction during this biennial period. However,
this interim surcharge was superceded by a final December 23, 1997 Public
Service Commission of Wisconsin order. During 1997, Wisconsin Electric
collected $15.3 million through the interim surcharge.
On December 23, 1997, the Public Service Commission of Wisconsin issued a
combined final order on two 1997 Wisconsin Electric filings under Wisconsin's
fuel cost adjustment procedure, authorizing Wisconsin Electric to recover $11.9
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 $116
million of total excess fuel and purchased power costs incurred during 1997, it
recovered a total of $27.2 million as a result of the interim May 1997 and final
December 1997 orders, leaving $89 million unrecovered.
In December 1995, the Michigan Public Service Commission 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 E - Nuclear
Operations" in the Notes to Financial Statements for information regarding
authority granted to Wisconsin Electric by the Public Service Commission of
Wisconsin to defer certain non-fuel nuclear operation and maintenance costs
incurred during 1997.
PURCHASED GAS ADJUSTMENT MECHANISM: Purchased gas adjustment mechanisms have
been evaluated as part of an ongoing generic investigation by the Public Service
Commission of Wisconsin into the natural gas industry in the state of Wisconsin.
On July 1, 1997, Wisconsin Electric filed a modified dollar for dollar gas cost
recovery mechanism in accordance with a November 1996 order from the Public
Service Commission of Wisconsin. This filing, which was updated on June 30,
1998, was approved on March 23, 1999 and implemented July 1, 1999. The new gas
cost recovery mechanism includes after the fact prudence reviews by the Public
Service Commission of
<PAGE>
Wisconsin. Wisconsin Electric does not expect that the major portion of gas
costs that are currently passed through to customers will be subject to price
risk under the new gas cost recovery mechanism.
Prior to July 1, 1999, differences between the test year estimate and the actual
cost of purchased gas were accounted for and passed through to customers on a
dollar for dollar basis through a purchased gas adjustment clause.
NON-UTILITY ASSET CAP: On October 27, 1999, the Governor of the state of
Wisconsin signed Wisconsin's 1999-2001 biennial state budget, 1999 Wisconsin Act
9, which included amendments to Wisconsin's public utility holding company law.
As a result, Wisconsin Energy remains subject to certain restrictions which have
the potential of limiting diversification into non-utility activities. Under
the amended public utility holding company law, the sum of certain assets of all
non-utility affiliates in a holding company system may not exceed 25% of the
assets of all public utility affiliates. However, among other exemptions, the
amended law exempts energy-related assets and assets used for providing
environmental engineering services and for processing waste materials from being
counted against the asset cap provided that they are employed in qualifying
businesses. In addition, the amended law exempts the provision of metering
services and manufacturing, distributing or selling products for filtration,
pumping water or other fluids, processing or heating water, handling fluids or
other related activities.
As described in further detail above under "Industry Restructuring and
Competition," a voluntary state electric transmission company, the American
Transmission Company, LLC is being created as part of the amendment to
Wisconsin's public utility holding company law. For a public utility holding
company system to qualify for the amended non-utility asset cap rules, all of
its public utility affiliates are required to irrevocably transfer their
electric transmission facilities and rights of way in the state of Wisconsin to
the American Transmission Company in exchange for an ownership interest in the
American Transmission Company. Wisconsin Electric is currently working with
other electric transmission system owners in the state of Wisconsin to transfer
its electric transmission assets when the American Transmission Company becomes
operational in late 2000.
Other amendments to the non-utility asset cap provisions of the public utility
holding company law require public utility affiliates of a public utility
holding company, such as Wisconsin Electric, to commit to certain spending
levels for low-income residents and for conservation programs and to meet
certain renewable energy source targets as a percent of total retail energy
sales between 2000 and 2010. For further information, see "Industry
Restructuring and Competition" above. In addition, non-supervisory employees
must be retained for a 30 month period at the same wage and with similar
benefits in the event of any energy business acquisition.
ENVIRONMENTAL MATTERS
NATIONAL AMBIENT AIR QUALITY STANDARDS: In July 1997, the United States
Environmental Protection Agency revised the National Ambient Air Quality
Standards for ozone and particulate matter. Although specific emission control
requirements are not yet defined and despite legal challenges to these standards
that will impact compliance requirements and timing, Wisconsin Electric believes
that the revised standards will likely require significant reductions in sulfur
dioxide ("SO\\2\\") and nitrogen oxide ("NO\\x\\") 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 2003 through 2012, beginning with the ozone transport reductions
described below. Reductions associated with the new particulate matter
standards will likely be implemented in stages after the year 2010 and extending
to the year 2017. Beyond the cost estimates identified below, Wisconsin
Electric is currently unable to estimate the impact of the revised air quality
standards on its future liquidity, financial condition or results of operation.
OZONE NON-ATTAINMENT RULEMAKING: In October 1998, the Environmental Protection
Agency promulgated ozone transport rules to address transport of NO\\x\\ and
ozone into ozone non-attainment areas in the eastern half of the United States.
The rules would have required electric utilities in 22 eastern states and the
District of Columbia, including the state of Wisconsin, to significantly reduce
NO\\x\\ emissions by May 1, 2003. Affected states were required to submit their
respective state implementation plans to the Environmental Protection Agency by
September 1999. This submittal date was stayed pending the outcome of legal
challenges against the rule. A court decision on these challenges was issued on
March 3, 2000 excluding the state of Wisconsin but continuing to include
Michigan as one of 19 states in a region east of the Mississippi River that
would remain subject to the October 1998 rules. Further appeals are likely.
Independent of any court decisions, Wisconsin and the other states in the Lake
Michigan region are proceeding with rulemakings by December 2000 that will
require utilities, including Wisconsin Electric, to reduce NO\\x \\emissions as
part of separate existing 1-hour ozone attainment demonstration rules required
by the Environmental Protection Agency for the Lake Michigan region's severe
non-attainment areas.
<PAGE>
Wisconsin Electric is working with a variety of state and regional stakeholders
to provide input to the plan under development by the states of Wisconsin and
Michigan. Wisconsin Electric is evaluating various NO\\x\\ control techniques
under various regulatory scenarios to develop a least cost compliance plan and
currently expects to incur total capital costs of $150 million to $200 million
and annual operation and maintenance costs of $2 million to $10 million during
the period 2000 through 2004 to comply with such a plan. Wisconsin Electric
believes that compliance with the NO\\x\\ emission reductions as a result of the
Environmental Protection Agency's non-attainment rules will likely mitigate
costs to comply with the Environmental Protection Agency's July 1997 revisions
to the ozone National Ambient Air Quality Standards discussed above.
In January 2000, the Public Service Commission of Wisconsin approved Wisconsin
Electric's comprehensive plan to meet the Environmental Protection Agency
regulations, permitting recovery in rates of NO\\x\\ emission reduction costs
over an accelerated 10-year recovery period and requiring that these costs be
separately itemized on customer bills.
NON-UTILITY AIR QUALITY MATTERS: As a result of the Environmental Protection
Agency's October 1998 ozone transport rules and the regulations adopted by the
state of Connecticut to implement such rules, the Company's non-utility energy
operations expect to incur capital costs of $7.5 million to $15 million prior to
May 2003 at its two fossil-fueled power plants in the state of Connecticut.
In February 2000, legislation was introduced in the state of Connecticut's
legislature that would require additional NO\\x \\ and SO\\2\\ emission
reductions from the two power plants by 2003. Wisvest-Connecticut, LLC is
reviewing several methods to achieve compliance with the proposed legislation in
its present form. The Company expects to have the studies completed by the end
of 2000. If enacted in its present form, the pending legislation would require
Wisvest-Connecticut, LLC to make additional investments and may result in an
impairment of the assets. The details of that final legislation, including
required expenditures and the nature of any impairment, cannot be known at this
time. For additional information concerning the acquisition of the two
Connecticut power plants, see "Liquidity and Capital Resources - Investing
Activities" below as well as "Note B - Mergers & Acquisitions" 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. For further information, see "Note L - Commitments and Contingencies" in
Wisconsin Energy's Notes to Financial Statements.
ASH LANDFILL SITES: Wisconsin Electric aggressively seeks environmentally
acceptable, beneficial uses for its combustion byproducts. However, combustion
byproducts 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 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 of Wisconsin Electric.
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, competitive and regulatory 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 other factors referred to under "Cautionary Factors" below.
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 2.4%
over the five-year period ending December 31, 2004.
GAS DELIVERIES: Assuming moderate growth in the economy of its service
territory and normal weather, and excluding the effect of the WICOR merger, 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, 2004.
EMPLOYEES: Excluding the WICOR merger, the Company expects to add
approximately 260 full-time equivalent employees during 2000. Of these 260
full-time equivalent employees, approximately 220 are
<PAGE>
attributable to Wisconsin Electric, primarily in such key areas as distribution
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 35 full-time
equivalent non-utility employees are expected to be added by the Company's non-
utility energy operations during 2000. The Company anticipates adding
approximately 3,970 full-time equivalent employees when it acquires WICOR.
EFFECTS OF WEATHER
By the nature of its utility business segment, 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. Normal degree days are based upon a twenty year
average.
<TABLE>
<CAPTION>
% Change % Change
1998 1997
Degree Days 1999 1998 to 1999 1997 to 1998
----------- ---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Heating (6,912 Normal) 6,318 5,848 8.0% 7,101 (17.6%)
Cooling (670 Normal) 753 800 (5.9%) 407 96.6%
</TABLE>
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.
As part of the financing package used to acquire the two fossil-fueled power
plants in the state of Connecticut in April 1999, Wisvest-Connecticut, LLC
entered into an interest rate swap agreement to exchange fixed rate payment
obligations for variable rate receipt rights without exchanging the underlying
notional amounts. Other than this interest rate swap, the Company does not
utilize derivative financial instruments. 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. For additional information concerning the
acquisition of the two Connecticut power plants, see "Liquidity and Capital
Resources - Investing Activities" below as well as "Note B - Mergers &
Acquisitions" in Wisconsin Energy's Notes to Financial Statements.
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 below provides information about the long-term financial instruments
that were held by the Company at December 31, 1999 and that are sensitive to
changes in interest rates. For long-term debt, the table presents anticipated
principal cash flows by maturity date and the related annualized average
interest rate of the maturing
<PAGE>
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, 1999.
For the interest rate swap, the table presents notional amounts and weighted
average interest rates by expected (contractual) maturity dates. Notional
amounts are used to calculate the contractual payments to be exchanged under
contract. Weighted average variable rates are based upon implied forward rates
in the yield curve at the reporting date. Fair value of the interest rate swap
is the amount that Wisvest-Connecticut, LLC would receive if the outstanding
contract were terminated at the reporting date.
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value as of
---------------------- ----------------
2000 2001 2002 2003 2004 Thereafter Total 12/31/99
---- ---- ---- ---- ---- --------- ----- --------
(Millions of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Long-Term Debt
Wisconsin Electric $ 1.9 $ 1.9 $151.9 $ 1.9 $141.9 $1,051.2 $1,350.7 $ 1,278.4
Average Interest Rate 7.5% 7.5% 6.6% 7.5% 7.3% 7.2% 7.2%
Wisconsin Energy (a) $32.6 $21.7 $176.8 $16.5 $144.5 $1,194.0 $1,586.1 $ 1,497.3
Average Interest Rate 6.5% 6.8% 6.7% 6.9% 7.3% 7.2% 7.1%
Variable Rate Long-Term Debt
Wisconsin Electric - - - - - $ 165.4 $ 165.4 $ 165.4
Average Interest Rate 5.5% 5.5%
Wisconsin Energy (a) $15.8 $20.6 $ 35.1 $12.5 $ 10.3 $ 331.9 $ 426.2 $ 426.2
Average Interest Rate 7.6% 7.6% 7.9% 7.7% 7.5% 6.5% 6.8%
Interest Rate Swaps - Fixed
to Variable
Wisconsin Energy (a) (b) $ 3.0 $ 3.2 $ 3.5 $ 3.7 $ 4.0 $ 58.7 $ 76.1 ($3.1)
Average Pay Rate 5.99% 5.99% 5.99% 5.99% 5.99% 5.99% 5.99%
Average Receive Rate 6.58% 7.00% 7.05% 7.07% 7.10% 7.22% 7.00%
Trust Preferred Securities
Wisconsin Energy (a) - - - - - - $ 200.0 $ 156.0
Average Dividend Rate 6.85%
Preferred Stock Not Subject to
Mandatory Redemption
Wisconsin Electric
and Wisconsin Energy (a) - - - - - - $ 30.4 $ 18.0
Average Dividend Rate 4.0%
</TABLE>
(a) Wisconsin energy includes the holding company as well as all subsidiaries.
(b) Fair value that Wisvest-Connecticut, LLC would receive if the outstanding
interest rate swap agreement were terminated.
For additional information concerning Wisconsin Energy's short-term debt, long-
term debt and interest rate swap as well as its trust preferred securities and
preferred stock, see "Note I - Notes Payable," "Note H - Long-Term Debt," "Note
G - Trust Preferred Securities" and "Note F - Preferred Stock," respectively, in
Wisconsin Energy's 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, 1999, the Company had the following total trust fund assets at
fair value, primarily consisting of publicly traded debt and equity security
investments.
<PAGE>
<TABLE>
<CAPTION>
Wisconsin Energy Wisconsin Electric
--------------- -----------------
(Thousands of Dollars)
<S> <C> <C>
Pension trust funds $944,857 $915,218
Nuclear decommissioning trust fund 625,748 625,748
Other postretirement benefits trust funds 82,325 82,325
</TABLE>
For additional information concerning Wisconsin Energy's pension and other
postretirement benefits as well as nuclear decommissioning, see "Note J -
Benefits" and "Note E - Nuclear Operations," respectively, in Wisconsin Energy's
Notes to Financial Statements.
COMMODITY PRICE RISK: In the normal course of business, the Company's utility
and non-utility power generation 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
obligations. 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. The Company 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 gas cost recovery mechanism in
Wisconsin mitigates most of the risk of gas cost variations. For additional
information concerning the fuel cost adjustment procedure and the purchased gas
adjustment mechanism, see "Rates and Regulatory Matters" above in "Factors
Affecting Results of Operations."
YEAR 2000 TECHNOLOGY ISSUES
Due to the successful efforts of the Company's Year 2000 program teams and
consistent with industry experience throughout the United States, Wisconsin
Energy and Wisconsin Electric had no significant problems with their business
application software nor with their infrastructure and process control systems
during the transition into the Year 2000. During the first quarter of 2000,
these teams are completing miscellaneous related clean-up work and disbanding.
There are no known significant residual Year 2000 matters outstanding at
Wisconsin Energy nor at Wisconsin Electric.
During 1998 and 1999, Wisconsin Energy incurred a total of $32.1 million of
expenses for its Year 2000 program of which $32.0 million is attributable to
Wisconsin Electric. In addition, Wisconsin Energy incurred capital expenditures
of $17.1 million during 1998 and 1999 for its Year 2000 program of which $16.7
million is attributable to Wisconsin Electric. In its May 1998 rate order from
the Public Service Commission of Wisconsin, Wisconsin Electric had received
approval for recovery in Wisconsin retail rates of approximately $13 million per
year of Year 2000-related expenses during the 1998-1999 biennial period. In
addition, the rate order included associated capital expenditures related to
Wisconsin Electric's Year 2000 program.
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 during 1999
that are significant to the Company.
In February 2000, the Financial Accounting Standards Board released for comment
an exposure draft of a Proposed Statement of Financial Accounting Standards
entitled "Accounting for Obligations Associated with the Retirement of Long-
Lived Assets" ("Proposed FAS"). The Proposed FAS would establish standards for
accounting for unavoidable obligations to retire tangible long-lived assets that
have been acquired or operated. The Proposed FAS would require the Company to
recognize the fair value of an obligation associated with the retirement of a
tangible long-lived asset as a liability when incurred and to correspondingly
capitalize those costs as an increase in the carrying amount of the related
long-lived asset. The capitalized costs would then be depreciated to expense
over the useful life of the asset. The Proposed FAS would require that,
subsequent to initial measurement, an entity recognize changes in the amount of
the liability resulting from the passage of time and revisions to either the
timing or amount of estimated cash flows. The Proposed FAS would be effective
for financial statements issued for fiscal years beginning after June 15, 2001.
<PAGE>
The scope of the Proposed FAS would include decommissioning costs for Point
Beach Nuclear Plant and may also apply to other facilities of the Company. The
Company has not yet assessed the specific applicability and implications of the
Proposed FAS. With respect to decommissioning costs for Point Beach Nuclear
Plant, 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 Nuclear Plant 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 Public Service Commission of Wisconsin 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 E - Nuclear Operations" in the Notes to Financial Statements.
REGULATORY ACCOUNTING: Wisconsin Energy's applicable utility subsidiaries,
Wisconsin Electric and Edison Sault Electric Company, operate under electric
utility rates which are subject to the approval of the Public Service Commission
of Wisconsin, the Michigan Public Service Commission and the Federal Energy
Regulatory Commission, and natural gas and steam utility rates that are subject
to the approval of the Public Service Commission of Wisconsin (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 prices 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 Michigan Public
Service Commission issued a five-year experimental price cap order for Edison
Sault's 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
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
OPERATING ACTIVITIES
During the three years ended December 31, 1999, total cash provided by operating
activities was $1.2 billion at Wisconsin Energy and at Wisconsin Electric.
After the payment of dividends, internal sources funded the following percent of
Wisconsin Energy's and Wisconsin Electric's total construction expenditures and
power plant acquisitions during the three years ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997 Total Period
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Wisconsin Energy 18.2% (a) (b) 72.7% 68.9% 43.7%
Wisconsin Electric 50.6% (b) 97.0% 67.2% 71.5%
</TABLE>
(a) Among other factors, decrease during 1999 due to $277 million acquisition
of two power plants by Wisvest-Connecticut, LLC in April 1999. For further
information, see "Note B- Mergers & Acquisitions" in Wisconsin Energy's
Notes to Financial Statements.
(b) Decrease during 1999 due in part to $110 million contested liability
payment during 1999 in a lawsuit alleging that Wisconsin Electric had
placed contaminated wastes at two sites in the City of West Allis,
Wisconsin. This contested liability payment reduced Wisconsin Energy's and
Wisconsin Electric's available internal funds from operating activities.
For further information, see "Note L"- Commitments and Contingencies" in
Wisconsin Energy's Notes to Financial Statements.
<PAGE>
INVESTING ACTIVITIES
Wisconsin Energy invested a net total of $1.8 billion in its businesses during
the three years ended December 31, 1999 of which $1.1 billion was at Wisconsin
Electric. Investments during this three-year period included $1.5 billion for
construction of or investment in new or improved facilities or projects: $0.9
billion for the construction of new or improved utility plant at Wisconsin
Electric and $0.6 billion for projects at Wisconsin Energy's remaining
subsidiaries. Additional investments during this three-year period included $61
million for the acquisition of nuclear fuel and $96 million for the eventual
decommissioning of Wisconsin Electric's Point Beach Nuclear Plant. The
following further summarizes the Company's significant construction or
investment projects during the three years ended December 31, 1999.
WISCONSIN ELECTRIC: Of the $0.9 billion of expenditures during the past three
years for new or improved utility plant at Wisconsin Electric, $158 million was
primarily for new or upgraded non-nuclear electric generation facilities and $62
million was primarily for new or upgraded nuclear generation facilities. In
addition, $75 million was for new or upgraded electric transmission facilities,
$534 million was primarily for new or upgraded electric and gas distribution
facilities, and $109 million was primarily for new or upgraded technology
initiatives, including efforts to prepare for the Year 2000, and, to a lesser
extent, for facility improvements. For additional information concerning the
Company's efforts to prepare for the Year 2000, see "Factors Affecting
Operations" above.
NON-UTILITY SEGMENT: Wisconsin Energy's net non-utility assets amounted to
approximately $1.1 billion at December 31, 1999, an increase of $804 million
over the past three years. Primary additions during this three-year period
included $621 million of energy related investments and $192 million of real
estate and recycling technology investments.
In April 1999, Wisvest-Connecticut, LLC, a wholly owned subsidiary of Wisvest
Corporation which is, in turn, a wholly owned subsidiary of Wisconsin Energy,
acquired two fossil-fueled power plants in the state of Connecticut for $277
million. Wisvest-Connecticut, LLC financed the acquisition through the issuance
of $195 million of long-term, nonrecourse notes; an equity contribution of $105
million from Wisvest Corporation by Wisconsin Energy; $30 million of working
capital arrangements and a $25 million letter of credit facility. For further
information concerning the Wisvest-Connecticut, LLC power plant acquisitions,
see "Note B - Mergers & Acquisitions" in Wisconsin Energy's Notes to Financial
Statements.
FINANCING ACTIVITIES
Financing activities during the three-year period ended December 31, 1999
included the issuance of $804 million of long-term debt of which $349 million
was issued by Wisconsin Electric. The proceeds of these new long-term debt
issues were used to retire maturing debt in the amount of $386 million,
including $351 million at Wisconsin Electric, and for other investing and
general corporate purposes. During 1999, WEC Capital Trust I, a Delaware
business trust of which Wisconsin Energy owns all of the outstanding common
securities, issued $200 million of trust preferred securities. During the three
years ended December 31, 1999, Wisconsin Energy and Wisconsin Electric increased
their short-term debt by $433 million and $219 million, respectively, and
Wisconsin Energy added $119 million of common equity from the issuance of new
shares through the Company's stock plans. No preferred stock was issued or
retired during this period. Dividends on Wisconsin Energy's common stock were
$182 million, $177 million and $173 million during 1999, 1998 and 1997,
respectively. Wisconsin Electric paid dividends to Wisconsin Energy of $180
million, $179 million and $214 million during 1999, 1998 and 1997, respectively,
and received a total of $250 million in capital contributions from Wisconsin
Energy during this three-year period.
During 1999, Wisconsin Energy issued 3,296,821 new shares of common stock which
were purchased by participants in the Company's stock plans with cash
investments and reinvested dividends aggregating $79 million.
During 1999, Wispark Corporation, a non-utility subsidiary of Wisconsin Energy,
secured $53 million of bank financing in the form of adjustable and fixed rate
mortgage notes due 2001-2012 to finance the construction or purchase of various
facilities.
In December 1999, Wisconsin Electric issued $150 million of 6-5/8% debentures
due 2002. Proceeds from the issue were used to reduce short-term borrowings and
for other general corporate purposes.
In November 1999, Wisconsin Energy Capital Corporation sold $200 million
aggregate principal amount of nine-month adjustable medium-term notes due August
16, 2000. The initial interest rate for the Wisconsin Energy Capital
Corporation medium-term notes was 6.16375%. The interest rate is reset
quarterly based on 3-month
<PAGE>
LIBOR plus 10 basis points. Proceeds from the notes were used to fund a $150
million capital contribution by Wisconsin Energy to Wisconsin Electric and to
reduce short-term borrowings and for other general corporate purposes.
In April 1999, Wisvest-Connecticut, LLC issued $210 million of nonrecourse
variable rate notes due 2005, the proceeds of which were used to help finance
the purchase of the two fossil-fueled power plants mentioned above and for
related working capital. Associated with issuance of this debt, Wisvest-
Connecticut, LLC entered into an interest rate swap agreement to exchange fixed
rate payment obligations for variable rate receipt rights without exchanging the
underlying notional amounts.
In March 1999, WEC Capital Trust I issued $200 million of 6.85% trust preferred
securities due March 31, 2039. WEC Capital Trust I used the proceeds from the
sale of the trust preferred securities to purchase corresponding junior
subordinated debentures due March 31, 2039 from Wisconsin Energy. Wisconsin
Energy used the proceeds from the sale of its junior subordinated debentures to
fund a capital contribution of approximately $105 million to Wisvest-
Connecticut, LLC for acquisition of the two fossil-fueled power plants mentioned
above and for repayment of short-term borrowings.
For additional information concerning the trust preferred securities and the
interest rate swap, see "Note G - Trust Preferred Securities" and "Note H -
Long-Term Debt," respectively, in Wisconsin Energy's Notes to Financial
Statements.
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.
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 finance 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.
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 REQUIREMENTS
CONSTRUCTION EXPENDITURES: Excluding the WICOR acquisition, the Company's
total construction budget for 2000 is approximately $660 million, including $412
million for Wisconsin Electric and $248 million for Wisconsin Energy's non-
utility subsidiaries as well as for Edison Sault.
Wisconsin Electric's $412 million of construction expenditures during 2000
include 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 and technology-related expenditures.
Of Wisconsin Energy's $248 million capital budget for the non-utility
subsidiaries and for Edison Sault, approximately $177 million is for non-utility
energy operations. The remaining capital budget is primarily for non-utility
real estate development and investment as well as recycling technology
activities.
<PAGE>
In September 1999, the City Council of Detroit, Michigan, awarded a 15 year
contract to Minergy Detroit, LLC, a wholly owned subsidiary of Minergy Corp.
which is in turn a wholly owned subsidiary of Wisconsin Energy, to recycle 500
to 600 dry tons per day of the city's wastewater solids into a glass aggregate
construction product used in the manufacture of floor tiles, roofing shingle
granules, sand blast grit and other construction materials. Minergy Detroit,
LLC expects to begin construction of a proposed $115 million recycling facility
project in the Delray area of Detroit in the fourth quarter of 2000 with startup
anticipated in 2002. The proposed facility would replace existing wastewater
solids incinerators operated by Detroit's Water and Sewer Department. The 15
year contract will be contingent upon obtaining proper performance bonding and
financing as well as upon reaching agreement with the City of Detroit on the
results of a series of post-startup tests of the proposed recycling facility.
Minergy Detroit, LLC has not yet identified specific financing plans for the
facility.
In November 1999, Calumet Energy Team, LLC signed two agreements with the City
of Chicago, Illinois. The first provides for the lease, purchase and
redevelopment of land for the purpose of constructing a 308-megawatt natural
gas-fired peaking power plant. The second is a ten year capacity reservation
agreement for 50 megawatts of plant capacity. Wisvest Corporation, a wholly
owned subsidiary of Wisconsin Energy, has an 82% ownership interest in Calumet
Energy Team, LLC. Permit approvals for this project are expected to be received
in the spring of 2000 with construction to begin thereafter. The facility is
anticipated to have a total project cost of approximately $140 million with
startup anticipated in the summer of 2001. While no specific plans have been
developed, Calumet Energy Team, LLC expects to obtain project financing for the
facility with remaining amounts to be funded by equity participants in the
project.
Wisconsin Energy intends to obtain the cash needed for the $1.2 billion
acquisition of WICOR, Inc. through the issuance of commercial paper. Wisconsin
Energy is arranging a $1.0 billion 364-day bank back-up credit facility and a
$0.5 billion 3-year bank back-up credit facility to provide credit support for
the issuance of Wisconsin Energy's commercial paper. In addition, Wisconsin
Energy will assume approximately $300 million of WICOR debt. For additional
information, see "Note B - Mergers & Acquisitions" in Wisconsin Energy's Notes
to Financial Statements.
Due to changing environmental and other regulations that especially impact the
Company's utility and non-utility energy segments, 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 United States
Environmental Protection Agency's and the state of Connecticut's evolving air
quality standards and for a discussion of the evolving utility industry,
respectively. Wisconsin Electric currently expects to spend approximately $300
million to $400 million for new construction in each of the next five years.
Wisconsin Energy is reviewing non-utility growth opportunities and strategic
dispositions on an ongoing basis. The Company 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. Currently, the Company is
conducting a strategic assessment of its portfolio of non-utility assets. The
Company may sell all or a portion of Wispark and Witech and a portion of its
ownership interest in certain Wisvest investments. As a result, the Company
expects that its future long-term capital requirements as well as its capital
resources may continue to vary from historical levels.
CAPITAL RESOURCES
Wisconsin Energy's and Wisconsin Electric's capitalization structures at
December 31 were:
<TABLE>
<CAPTION>
Wisconsin Energy Wisconsin Electric
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Equity 40.6% 46.6% 48.4% 47.5%
Preferred Stock 0.6% 0.7% 0.8% 0.9%
Trust Preferred Securities 4.0% - - -
Long - Term Debt (including
current maturities) 44.5% 45.7% 44.0% 45.5%
Short - Term Debt 10.3% 7.0% 6.8% 6.1%
------- ------- ------- -------
100.0% 100.0% 100.0% 100.0%
======= ======= ======= =======
</TABLE>
<PAGE>
Following announcement of the proposed merger with WICOR in the summer of 1999,
Moody's Investors Service ("Moody's"), Duff & Phelps Inc. ("D&P") and Fitch
Investors Service ("Fitch") reaffirmed their previous ratings of Wisconsin
Energy's and Wisconsin Electric's securities, and Standards & Poors Corporation
("S&P") placed its ratings of certain of Wisconsin Energy's securities on credit
watch with negative implications.
At the end of April 2000, in conjunction with consummation of Wisconsin Energy's
acquisition of WICOR, Moody's assigned a general corporate rating of A1 to
Wisconsin Energy and maintained its ratings of the debt securities of Wisconsin
Energy and Wisconsin Electric. D&P reaffirmed its long-term credit ratings of
Wisconsin Energy and Wisconsin Energy Capital Corporation as well as its short-
term rating of Wisconsin Electric, but downgraded its long-term credit ratings
of Wisconsin Electric. Fitch assigned initial credit ratings for Wisconsin
Energy, Wisconsin Energy Capital Corporation, WEC Capital Trust I trust
preferred securities and Wisconsin Electric commercial paper and reaffirmed its
long-term ratings of Wisconsin Electric. Also at the end of April 2000, S&P
lowered its ratings on Wisconsin Energy and Wisconsin Energy's subsidiaries
except for the short-term ratings of Wisconsin Electric which were reaffirmed.
In conjunction with its debt rating adjustments at the end of April 2000, S&P
removed all long-term ratings on Wisconsin Energy and its subsidiaries from
credit watch with negative implications, assigning a negative outlook.
The following table summarizes various ratings of Wisconsin Energy's and
Wisconsin Electric's debt by Standard & Poors Corporation, Moody's Investors
Service, Duff & Phelps Inc. and Fitch Investors Service as of the end of April
2000.
<TABLE>
<CAPTION>
S & P Moody's D & P Fitch
---- ------ ---- ----
<S> <C> <C> <C> <C>
Wisconsin Electric Power Company
Commercial Paper A-1+ P-1 D-1+ F-1+
Senior Secured Debt AA- Aa2 AA AA
Unsecured Debt A+ Aa3 AA- AA-
Preferred Stock A aa3 AA- AA-
Wisconsin Energy Corporation
Commercial Paper A-1 P-1 D-1 F-1
Wisconsin Energy Capital Corporation
Unsecured Debt A+ A1 A+ A+
WEC Capital Trust I
Trust Preferred Securities A- a1 A A
</TABLE>
The above ratings information has been updated to reflect changes subsequent to
the March 30, 2000 filing of Wisconsin Energy's and Wisconsin Electric's 1999
Annual Reports on Form 10-K and subsequent to the April 14, 2000 filing of
Amendment No. 1 to Wisconsin Energy's Annual Report on Form 10-K.
At December 31, 1999, Wisconsin Energy had $398 million of unused lines of bank
credit on a consolidated basis of which $128 million was at Wisconsin Electric.
The Company expects internal sources of funds from operations after the payment
of dividends to provide approximately 55% and 80% of Wisconsin Energy's and
Wisconsin Electric's respective construction expenditures for 2000. The
remaining cash requirements at Wisconsin Energy and Wisconsin Electric during
2000 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. Beyond 2000, capital requirements will be
met through internally generated funds supplemented, when required, by debt and
equity financings. 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.
<PAGE>
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of Wisconsin Energy or Wisconsin
Electric. Such statements are based upon management's current expectations and
are subject to risks and uncertainties that could cause Wisconsin Energy's or
Wisconsin Electric's actual results to differ materially from those contemplated
in the statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "possible," "potential," "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause Wisconsin Energy's or Wisconsin Electric's
actual results to differ materially from those contemplated in any forward-
looking statements include, among others, the following:
OPERATING, FINANCIAL AND INDUSTRY FACTORS
. Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of Wisconsin Electric's,
Edison Sault's or Wisvest's generating facilities; unscheduled generation
outages, maintenance or repairs; unanticipated changes in fossil fuel,
nuclear fuel, purchased power, gas supply or water supply costs or
availability due to higher demand, shortages, transportation problems or
other developments; nonperformance by electric energy or natural gas
suppliers under existing power purchase or gas supply contracts; nuclear or
environmental incidents; resolution of spent nuclear fuel storage and
disposal issues; electric transmission or gas pipeline system constraints;
unanticipated organizational structure or key personnel changes; collective
bargaining agreements with union employees or work stoppages; inflation
rates; or demographic and economic factors affecting utility service
territories or operating environment.
. Regulatory factors such as unanticipated changes in rate-setting policies or
procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; changes in the United States Nuclear Regulatory Commission's
regulations related to Point Beach Nuclear Plant; changes in the United
States Environmental Protection Agency's regulations as well as regulations
from the Wisconsin or Michigan Department of Natural Resources or the state
of Connecticut related to emissions from fossil-fuel-fired power plants; or
the siting approval process for new generation and transmission facilities.
. The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
. Consolidation of the industry as a result of the combination and acquisition
of utilities in the midwest, nationally and globally.
. Restrictions imposed by various financing arrangements and regulatory
requirements on the ability of Wisconsin Electric or other subsidiaries to
transfer funds to Wisconsin Energy in the form of cash dividends, loans or
advances.
. Changes in social attitudes regarding the utility and power industries.
. Customer business conditions including demand for their products or services
and supply of labor and material used in creating their products and
services.
. The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters
including the final outcome of the Giddings & Lewis, Inc./City of West
Allis lawsuit against Wisconsin Electric.
. Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
. Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
<PAGE>
. 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.
. Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; the cyclical nature of property values that could affect real
estate investments; risks associated with international investments,
including foreign currency valuations; unanticipated changes in
environmental or energy regulations; timely regulatory approval without
onerous conditions of potential acquisitions; risks associated with
minority investments, where there is a limited ability to control the
development, management or operation of the project; and the risk of higher
interest costs associated with potentially reduced securities ratings by
independent rating agencies as a result of these and other factors.
. Legislative or regulatory restrictions or caps on non-utility acquisitions,
investments or projects, including the state of Wisconsin's amended public
utility holding company law.
. Factors affecting foreign non-utility operations including foreign
governmental actions; foreign economic and currency risks; political
instability; and unanticipated changes in foreign environmental or energy
regulations.
. Other business or investment considerations that may be disclosed from time
to time in Wisconsin Energy's or Wisconsin Electric's Securities and
Exchange Commission filings or in other publicly disseminated written
documents.
BUSINESS COMBINATION FACTORS
. Consummation of the merger with WICOR, which will have a significant effect
on the future operations and financial position of Wisconsin Energy.
Specific factors include:
. Unanticipated costs or difficulties related to the integration of the
businesses of Wisconsin Energy and WICOR.
. Unexpected difficulties or delays in realizing anticipated net cost
savings or unanticipated effects of the qualified five-year
electric and gas rate freeze ordered by the Public Service
Commission of Wisconsin as a condition of approval of the merger.
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.
<PAGE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C>
Operating Revenues
Energy
Utility $2,050,218 $1,979,986 $1,789,602
Non-Utility 193,240 34,108 6,959
---------- ---------- ----------
Total Energy 2,243,458 2,014,094 1,796,561
Other 29,181 25,339 10,368
---------- ---------- ----------
Total Operating Revenues 2,272,639 2,039,433 1,806,929
Operating Expenses
Fuel (Note H) 352,979 308,385 311,966
Purchased power (Note H) 235,101 177,852 132,689
Cost of gas sold 174,046 175,475 233,877
Other operation and maintenance 708,758 691,535 569,237
Depreciation and amortization (Note A) 270,484 248,337 240,895
Property and revenue tax 74,877 63,095 60,218
---------- ---------- ----------
Total Operating Expenses 1,816,245 1,664,679 1,548,882
---------- ---------- ----------
Pretax Operating Income 456,394 374,754 258,047
Other Income and Deductions
Interest income 38,200 27,903 24,497
Allowance for other funds used
during construction (Note D) 3,770 2,936 3,349
Merger Expenses (Note B) (744) (563) (31,934)
Other (Note L) (27,011) (3,511) (48,306)
---------- ---------- ----------
Total Other Income and Deductions 14,215 26,765 (52,394)
Interest Charges and Other
Long-term debt 124,218 108,509 110,138
Other interest 24,095 19,337 9,552
Allowance for borrowed funds used
during construction (Note D) (9,546) (7,828) (6,961)
Distribution on preferred securities
of subsidiary trust 10,503 - -
Preferred dividend
requirement of subsidiary 1,203 1,203 1,203
---------- ---------- ----------
Total Interest Charges and Other 150,473 121,221 113,932
Income Taxes (Note C) 111,147 92,166 31,005
---------- ---------- ----------
Net Income $ 208,989 $ 188,132 $ 60,716
========== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 117,019 114,315 112,570
========== ========== ==========
Earnings Per Share of Common
Stock (Basic and Diluted) $ 1.79 $ 1.65 $ 0.54
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating Activities
Net income $ 208,989 $ 188,132 $ 60,716
Reconciliation to cash
Depreciation and amortization 270,484 248,337 240,895
Nuclear fuel expense - amortization 25,808 18,922 5,426
Conservation expense - amortization 22,498 22,498 22,498
Debt premium, discount & expense
amortization 3,859 4,202 7,930
Deferred income taxes - net 33,637 586 (3,952)
Investment tax credit - net (4,340) (3,434) (927)
Allowance for other funds used
during construction (3,770) (2,936) (3,349)
Write-off of merger costs - - 30,684
Write-down of equipment - - 30,000
Change in - Accounts receivable (52,245) (39,559) 5,736
Inventories (6,843) (562) (12,788)
Other current assets (56,070) 10,881 8,452
Accounts payable (13,409) 36,001 159
Other current liabilities 6,210 (11,572) 31,933
Other (Note A) (108,246) (4,195) (12,307)
--------- --------- ---------
Cash Provided by Operating Activities 326,562 467,301 411,106
Investing Activities
Construction expenditures (518,081) (398,982) (345,908)
Acquisition of power plants (276,792) - -
Allowance for borrowed funds used
during construction (9,546) (7,828) (6,961)
Nuclear fuel (18,596) (17,533) (24,496)
Nuclear decommissioning trust (37,358) (31,379) (27,248)
Other (48,155) (29,552) 25,531
--------- --------- ---------
Cash Used in Investing Activities (908,528) (485,274) (379,082)
Financing Activities
Sale of - Common stock 79,146 10,275 29,586
Long-term debt 443,170 313,610 47,000
Mandatorily redeemable trust
preferred securities 193,700 - -
Retirement of long-term debt (115,501) (93,023) (177,725)
Change in short-term debt 220,641 (38,496) 250,688
Dividends on stock - Common (182,316) (177,397) (172,714)
--------- --------- ---------
Cash Provided by (Used in)
Financing Activities 638,840 14,969 (23,165)
--------- --------- ---------
Change in Cash and Cash Equivalents 56,874 (3,004) 8,859
Cash and Cash Equivalents at
Beginning of Period 16,603 19,607 10,748
--------- --------- ---------
Cash and Cash Equivalents at
End of Period $ 73,477 $ 16,603 $ 19,607
========= ========= =========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 156,149 $ 133,244 $ 111,383
Income taxes 114,872 103,855 42,859
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(Thousands of Dollars)
<S> <C> <C>
Property, Plant and Equipment (Note A)
Electric utility $ 5,153,388 $ 4,900,836
Gas utility 552,405 523,187
Steam utility 63,461 62,832
Common utility 391,793 420,750
Energy non-utility 198,954 -
Other property 351,057 256,912
----------- -----------
6,711,058 6,164,517
Accumulated provision for depreciation (3,249,978) (3,021,548)
----------- -----------
3,461,080 3,142,969
Construction work in progress 174,778 135,544
Leased facilities - net (Note H) 127,327 133,007
Nuclear fuel - net (Note H) 83,393 87,660
----------- -----------
Net Property, Plant and Equipment 3,846,578 3,499,180
Investments
Nuclear decommissioning trust fund (Note E) 625,748 518,505
Other 324,574 277,171
----------- -----------
Total Investments 950,322 795,676
Current Assets
Cash and cash equivalents 73,477 16,603
Accounts receivable, net of allowance for
doubtful accounts - $17,564 and $16,653 242,348 190,103
Accrued utility revenues 134,566 130,518
Fossil fuel (at average cost) 143,628 123,618
Materials and supplies (at average cost) 87,987 75,434
Prepayments 111,599 68,745
Other 12,266 3,098
----------- -----------
Total Current Assets 805,871 608,119
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note C) 197,988 199,372
Deferred regulatory assets (Note A) 216,879 225,464
Other 215,482 33,946
----------- -----------
Total Deferred Charges and Other Assets 630,349 458,782
----------- -----------
Total Assets $ 6,233,120 $ 5,361,757
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization (See Capitalization Statement)
Common stock equity $2,007,744 $1,903,105
Preferred stock (Note F) 30,450 30,450
Company-obligated, mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the
Company (Note G) 200,000 -
Long-term debt (Note H) 2,134,636 1,749,024
---------- ----------
Total Capitalization 4,372,830 3,682,579
Current Liabilities
Long-term debt due currently (Note H) 69,085 119,140
Notes payable (Note I) 507,500 286,859
Accounts payable 174,043 187,452
Payroll and vacation accrued 35,552 29,578
Taxes accrued - income and other 41,959 38,177
Interest accrued 22,155 20,755
Other 48,273 53,219
---------- ----------
Total Current Liabilities 898,567 735,180
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note C) 624,864 570,750
Accumulated deferred investment tax credits 79,876 84,216
Deferred regulatory liabilities (Note A) 124,813 159,078
Other 132,170 129,954
---------- ----------
Total Deferred Credits and Other Liabilities 961,723 943,998
Commitments and Contingencies (Note L)
---------- ----------
Total Capitalization and Liabilities $6,233,120 $5,361,757
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
<TABLE>
<CAPTION>
1999 1998
-------- --------
(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 - 118,904,210 and 115,607,389 shares $ 1,189 $ 1,156
Other paid in capital 838,308 759,195
Retained earnings 1,170,765 1,144,092
Unearned compensation - restricted stock award (2,518) (1,338)
---------- ----------
Total Common Stock Equity 2,007,744 1,903,105
Preferred Stock - Wisconsin Electric Power Company, 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 F) 30,450 30,450
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the Company (Note G) 200,000 -
Long-Term Debt
First mortgage bonds
Wisconsin Electric Power Company - 6-1/2% to 7-1/4% due 1999-2004 140,000 231,000
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 5,200 6,170
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/2% to 9.47% due 2002-2095 629,900 480,600
Notes (secured)
Northern Tree Service, Inc. - Variable rate due 2003 - 36
Wispark Corporation - Variable rate due 2000-2008 54,897 15,463
7.20% to 8.67% due 2002-2012 15,687 2,469
Wisvest Corporation - 6.36% effective rate due 2006 7,664 8,758
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006-2030 165,350 165,350
6.36% effective rate due 2006 8,436 9,642
Edison Sault Electric Company - 6.55% to 8.00% due 1999-2008 5,448 6,756
Variable rate due 1999 - 2,750
Wisconsin Energy Capital Corporation - 6.22% to 6.85% due 2000-2005 74,600 74,600
6.21% to 6.94% due 2008-2028 125,400 125,400
Wisvest Corporation - Variable rate due 2005 205,927 -
WMF Corp. - 9.1% due 2001 1,310 1,880
Obligations under capital leases - Wisconsin Electric Power Company 215,899 189,980
Unamortized discount - net (24,440) (25,133
Long-term debt due currently (69,085) (119,140
---------- ----------
Total Long-Term Debt (Note H) 2,134,636 1,749,024
---------- ----------
Total Capitalization $4,372,830 $3,682,579
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
<TABLE>
<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, 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
Net income 208,989 208,989
Common stock cash dividends
$1.56 per share (182,316) (182,316)
Sale of common stock 3,296,821 33 79,113 79,146
Restricted stock award (1,180) (1,180)
----------- -------- ---------- ---------- ------------ ----------
Balance - December 31, 1999 118,904,210 $1,189 $838,308 $1,170,765 ($2,518) $2,007,744
=========== ======== ========== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
WISCONSIN ENERGY CORPORATION
NOTES TO CONSOLIDATED 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; and its non-utility subsidiaries, Wisvest Corporation,
Minergy Corp., Wispark Corporation, Wisconsin Energy Capital Corporation, WEC
Nuclear Corporation, WEC International, Inc., Witech Corporation, Northern Tree
Service, Inc., Badger Service Company and other non-utility companies. All
significant intercompany transactions and balances have been eliminated from the
financial statements.
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.
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.
RECLASSIFICATIONS: Certain prior year financial statement amounts have been
reclassified to conform to their current year presentation.
Due to recent acquisitions by Wisconsin Energy that have increased the size of
Wisconsin Energy's non-utility operations and assets, Wisconsin Energy and
Wisconsin Electric have modified their income statement and balance sheet
presentations. The primary income statement modifications include reclassifying
the results of non-utility operations from Other Income and Deductions to the
various lines within operating income and disclosing operating income before
income taxes. This modification does not change net income. The primary
balance sheet modification includes reclassification of utility and non-utility
property and plant and the related accumulated provision for depreciation into a
new category called Property, Plant and Equipment. This modification does not
change total assets.
REVENUES: 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 AND DEPRECIATION: Property is recorded at cost. Additions to and
significant replacements of property are charged to property, plant and
equipment at cost; minor items are charged to maintenance expense. Cost includes
material, labor and capitalized interest or allowance for funds used during
construction (see Note D).
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.
Depreciation expense is accrued at straight line rates over the estimated useful
lives of the assets.
Utility depreciation 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 1999 and 1998 and 4.5% in 1997.
Nuclear plant decommissioning is accrued as depreciation expense (see Note E).
In its 1998 Rate Order, the Public Service Commission of Wisconsin 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 $22.8 million in 1999 and $22.9 million
in 1998 compared to $3.5 million in 1997. General plant and software are
amortized over periods approved by the state regulatory commissions.
The estimated useful lives for non-utility equipment is 3 to 15 years and for
non-utility buildings it is 30 to 40 years.
<PAGE>
GOODWILL: Goodwill represents the excess of acquisition costs over the fair
market value of the net assets of acquired businesses and is amortized on a
straight line basis over its estimated life. The Company reviews the carrying
value of goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment would
be determined based on a comparison of the undiscounted future operating cash
flows anticipated to be generated during the remaining life of the goodwill to
the carrying value. Measurement of any impairment loss would be based on
discounted operating cash flows.
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.
<TABLE>
<CAPTION>
1999 1998
---- ----
(Thousands of Dollars)
<S> <C> <C>
Deferred Regulatory Assets
Deferred income taxes $155,337 $160,941
Department of Energy assessments 21,123 24,841
Deferred nuclear costs 11,787 15,324
Purchase power commitment 22,054 13,379
Other 6,578 10,979
-------- --------
Total Deferred Regulatory Assets $216,879 $225,464
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $117,824 $142,483
Tax and interest refunds 2,335 8,667
Other 4,654 7,928
-------- --------
Total Deferred Regulatory Liabilities $124,813 $159,078
======== ========
</TABLE>
Wisconsin Electric directs a variety of demand-side management programs to help
foster energy conservation by its customers. As authorized by the Public
Service Commission of Wisconsin, Wisconsin Electric capitalized certain
conservation program costs prior to 1995. Utility rates approved by the Public
Service Commission of Wisconsin provide for a current return on these
conservation investments. Included in Investments on the Consolidated Balance
Sheet at December 31, 1999 and 1998 are conservation investments of $23.4
million and $46.4 million, respectively, which are amortized to income based
upon Public Service Commission of Wisconsin order.
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). In 1999, Wisconsin Electric recorded a $110
million cash payment, included in Operating Activities - Other, related to a
contested July 1999 jury verdict (see Note L).
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
("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities ("FAS 133"). Pursuant to
Statement of Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FAS 133,
which was issued by the FASB on June 30, 1999, FAS 133 will be adopted by
Wisconsin Energy on January 1, 2001. FAS 133 requires that all derivative
investments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are
<PAGE>
then recorded each period in current earnings or in other comprehensive income,
depending upon how the derivative is designated. Wisconsin Energy is currently
evaluating FAS 133 and has not yet identified the implications of adoption.
B - MERGERS & ACQUISITIONS
WICOR, INC.: On June 27, 1999, Wisconsin Energy and WICOR, Inc., a Wisconsin
corporation, entered into an Agreement and Plan of Merger providing for a
strategic business combination of Wisconsin Energy and WICOR. WICOR is a
diversified holding company with total assets of approximately $1.1 billion at
December 31, 1999 in utility and non-utility energy subsidiaries as well as in
pump manufacturing subsidiaries. Following the merger, WICOR and its
subsidiaries will become subsidiaries of Wisconsin Energy. The merger agreement
has been approved by the boards of directors and the shareholders of Wisconsin
Energy and WICOR.
The transaction is intended to qualify as a tax-free reorganization to the
extent that shares of Wisconsin Energy common stock are issued in the merger and
will be accounted for as a purchase transaction. Under the terms of the
agreement, Wisconsin Energy will acquire all of the outstanding shares of WICOR
common stock for a fixed price of $31.50 for each WICOR share representing a
total purchase price of approximately $1.2 billion at December 31, 1999. In
addition, WICOR had approximately $300 million of assumable debt outstanding at
December 31, 1999.
The agreement calls for at least 40% of the purchase price to be paid in
Wisconsin Energy common stock with the balance paid in cash. Wisconsin Energy
has the option to increase the percentage of stock to 60%. The actual stock
exchange ratio will depend upon the average closing prices of Wisconsin Energy
common stock on the New York Stock Exchange during a valuation period consisting
of ten trading days ending with the fifth trading day prior to closing. Under
the terms of the merger agreement, if the average closing price of Wisconsin
Energy common stock is less than $22.00 per share, Wisconsin Energy may and most
likely will elect to pay all cash. Wisconsin Energy common stock closed at
$19-1/4 per share on December 31, 1999.
The Public Service Commission of Wisconsin approved the merger in January 2000
with a written order in March 2000. As part of its approval, the Public Service
Commission of Wisconsin ordered a qualified five-year rate freeze to begin
following completion of Wisconsin Electric's current pricing request for 2000-
2001. While the Company's retail electric, gas and steam rates in the state of
Wisconsin will be frozen for five years, the Company can request review and
approval of price changes every two years to address increased costs for such
reasons as government mandates and reliability upgrades. During this qualified
five-year rate freeze period, Wisconsin Electric will continue to reflect
changes in fuel and gas costs in its rates. In March 2000, the Federal Trade
Commission closed its review of the proposed acquisition. Consummation of the
merger is subject to the satisfaction of certain remaining closing conditions
including approval by the Securities and Exchange Commission under the Public
Utility Holding Company Act of 1935, as amended. The regulatory approval
process is expected to be completed in time for the transaction to be
consummated on or about April 26, 2000.
UNITED ILLUMINATING GENERATING PLANTS: In April 1999, Wisvest-Connecticut, LLC,
a wholly owned subsidiary of Wisvest Corporation, acquired two fossil-fueled
power plants in the state of Connecticut for $277 million from The United
Illuminating Company, an unaffiliated investor-owned utility in New Haven,
Connecticut. Pursuant to the agreement, Wisvest-Connecticut, LLC purchased the
Bridgeport Harbor Station, which has an active generating capacity of 590
megawatts, as well as the New Haven Harbor Station, which has an active
generating capacity of 466 megawatts. Wisconsin Energy accounted for the
transaction under the purchase method of accounting. Included in Deferred
Charges and Other Assets - Other on the Consolidated Balance Sheet at December
31, 1999 is $57 million of related goodwill which is being amortized over a 30-
year estimated life. Due to the immaterial nature of the transaction, Wisconsin
Energy has not presented pro forma financial information.
ESELCO, INC.: On May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. in a
tax-free reorganization accounted for as a pooling of interests. ESELCO was the
parent company of Edison Sault, an electric utility serving approximately 21,800
residential, commercial and industrial customers in Michigan's eastern Upper
Peninsula. In connection with the acquisition, Wisconsin Energy issued
2,407,275 shares of Wisconsin Energy common stock for the outstanding shares 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 represented ESELCO's consolidated net income during the first
five months of 1998. Wisconsin Energy is operating Edison Sault as a separate
utility subsidiary.
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
<PAGE>
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.
C - INCOME TAXES
The Company follows the liability method in accounting for income taxes as
prescribed by Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes ("FAS 109"). 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.
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.
<TABLE>
<CAPTION>
Income Tax Expense 1999 1998 1997
- - - - - - ------------------ ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Current tax expense $ 81,850 $ 95,014 $35,884
Deferred income taxes - net 33,637 586 (3,952)
Investment tax credit - net (4,340) (3,434) (927)
-------- -------- -------
Total Tax Expense $111,147 $ 92,166 $31,005
======== ======== =======
Income Before Income Taxes
and Preferred Dividend $321,339 $281,501 $92,924
======== ======== =======
Expected tax at federal statutory rate $112,469 $ 98,525 $32,523
State income tax net of federal tax benefit 16,622 13,550 6,176
Unrealized capital loss - - 2,321
Flowback of prior contributions in aid of
construction (8,080) (8,039) (1,157)
Investment tax credit restored (4,592) (4,729) (4,487)
Low-income housing credits (2,627) (2,846) (2,831)
Excess federal deferred income tax amortization (2,598) (3,810) (2,681)
Other (no item over 5% of expected tax) (47) (485) 1,141
-------- -------- -------
Total Tax Expense $111,147 $ 92,166 $31,005
======== ======== =======
</TABLE>
Following is a summary of deferred income taxes under FAS 109 at December 31.
<TABLE>
<CAPTION>
Deferred Income Taxes 1999 1998
- - - - - - --------------------- ---- ----
(Thousands of Dollars)
<S> <C> <C>
Deferred Income Tax Assets
Decommissioning trust $ 44,237 $ 48,812
Construction advances 61,838 55,696
Employee benefits 42,204 38,430
Other 49,709 56,434
-------- --------
Total Deferred Income Tax Asset $197,988 $199,372
======== ========
Deferred Income Tax Liabilities
Property related $576,370 $553,393
Contested liability payment (Note L) 43,859 -
Other 4,635 17,357
-------- --------
Total deferred Income Tax Liabilities $624,864 $570,750
======== ========
</TABLE>
<PAGE>
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).
D - ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for funds used during construction 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 Public Service Commission of Wisconsin, Wisconsin Electric's
allowance for funds used during construction was capitalized during the
following periods on 50% of construction work in progress at the following
rates:
. June 1, 1998 - December 31, 1999 10.21%
. February 18, 1997 - May 31, 1998 10.29%
. January 1, 1997 - February 17, 1997 10.17%
E - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates two
approximately 510-megawatt electric generating units at Point Beach Nuclear
Plant in Two Rivers, Wisconsin. During 1999, 1998 and 1997, Point Beach
provided 22%, 18% and 6%, 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 Public Service Commission of Wisconsin 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 Public Service Commission of
Wisconsin 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, 1999, $12 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 $6.3 million.
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 at Point Beach. Under policies
issued by NEIL, the insured member is liable for a retrospective premium
adjustment
<PAGE>
in the event of catastrophic losses exceeding the full financial resources of
NEIL. Wisconsin Electric's maximum retrospective liability under its policies is
$8.9 million.
Wisconsin Electric also maintains insurance with NEIL covering business
interruption and extra expenses during any prolonged accidental outage 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 $3.7 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 currently 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 1999 dollars is $518 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 Public Service Commission of Wisconsin, 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 the 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.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Decommissioning costs $ 17,673 $15,461 $ 11,402
Earnings 19,685 15,918 15,846
-------- ------- ---------
Depreciation Expense $ 37,358 $31,379 $ 27,248
======== ======= =========
Total costs accrued to date $357,714 $ 320,356
Unrealized gain 268,034 198,149
-------- ---------
Accumulated Provision for Depreciation $625,748 $ 518,505
======== ======= =========
</TABLE>
DECONTAMINATION AND DECOMMISSIONING FUND: The Energy Policy Act of 1992
established 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, 1999,
Wisconsin Electric has recorded its remaining estimated liability equal to
projected special assessments of $18.8 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
eight years. In Wisconsin Electric's 1998 Rate Order, the Public Service
Commission of Wisconsin approved recovery over the 1998-1999 biennial period of
D&D Fund costs disallowed in 1997.
<PAGE>
F - 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 $18.0 million and
$20.2 million at December 31, 1999 and 1998, respectively.
G - TRUST PREFERRED SECURITIES
In March 1999, WEC Capital Trust I, a Delaware business trust of which Wisconsin
Energy owns all of the outstanding common securities, issued $200 million of
6.85% trust preferred securities to the public. The sole asset of WEC Capital
Trust I is $206 million of 6.85% junior subordinated debentures issued by
Wisconsin Energy and due March 31, 2039. The terms and interest payments on
these debentures correspond to the terms and distributions on the trust
preferred securities. Wisconsin Energy used the proceeds from the sale of its
junior subordinated debentures to fund a capital contribution of approximately
$105 million to Wisvest-Connecticut, LLC for acquisition in mid-April 1999 of
two fossil-fueled power plants (see Note B) and for repayment of short-term
borrowings. WEC Capital Trust I has been consolidated into Wisconsin Energy's
financial statements.
For tax purposes, Wisconsin Energy is allowed to deduct an amount equal to the
distributions on the trust preferred securities. Wisconsin Energy may elect to
defer interest payments on the debentures for up to 20 consecutive quarters,
causing corresponding distributions on the trust preferred securities to also be
deferred. In case of a deferral, interest and distributions will continue to
accrue, along with quarterly compounding interest on the deferred amounts.
Wisconsin Energy may redeem all or a portion of the debentures after March 25,
2004, requiring an equal amount of trust preferred securities to be redeemed at
face value plus accrued and unpaid distributions. Wisconsin Energy has entered
into a limited guarantee of payment of distributions, redemption payments and
payments in liquidation with respect to the trust preferred securities. This
guarantee, when considered together with Wisconsin Energy's obligations under
the related debentures and indenture and the applicable declaration of trust,
provide a full and unconditional guarantee by Wisconsin Energy of amounts due on
the outstanding trust preferred securities.
The fair value of Wisconsin Energy's trust preferred securities was $156.0
million at December 31, 1999.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking fund
requirements through 2004 for the aggregate amount of long-term debt outstanding
(excluding obligations under capital lease) at December 31, 1999 follow.
<TABLE>
<CAPTION>
(Thousands of Dollars)
<S> <C>
2000 $ 48,432
2001 42,276
2002 211,363
2003 29,509
2004 154,344
</TABLE>
Sinking fund requirements for the years 2000 through 2004, included in the
preceding table, are $78.0 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.
<PAGE>
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.
In April 1999, Wisvest-Connecticut, LLC issued $210 million of nonrecourse
variable rate notes due December 31, 2005, the proceeds of which were used to
help finance the acquisition of two fossil-fueled power plants (see Note B) and
for related working capital. Associated with issuance of this debt, Wisvest-
Connecticut, LLC has entered into an interest rate swap agreement to exchange
fixed rate payment obligations for variable rate receipt rights without
exchanging the underlying notional amounts. This agreement, which expires on
December 31, 2005, serves to convert variable rate debt under Wisvest-
Connecticut, LLC's long-term nonrecourse notes to fixed rate debt to reduce the
impact of interest rate fluctuations. The variable rate is based upon a three-
month LIBOR rate and the fixed rated is 5.99%. At year-end 1999, three-month
LIBOR was 6.18375%. The notional amounts parallel a portion of the underlying
debt levels and are used to measure interest to be paid or received and do not
represent an exposure to credit loss. The notional amount of Wisvest-
Connecticut, LLC's interest rate swaps was $76.1 million at December 31, 1999.
This notional amount decreases on a quarterly basis over the remaining term of
the agreement. The difference between the amounts paid and received under the
interest rate swap is accrued as interest rates change and is recorded as an
adjustment to interest expense over the life of the hedged agreement. Wisvest-
Connecticut, LLC is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap. However, it does not anticipate any
losses from this agreement, which is with a major financial institution.
In December 1999, Wisconsin Electric issued $150 million of 6-5/8% debentures
due 2002. 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.
During 1999, Wispark Corporation secured $53 million of bank financing in the
form of adjustable and fixed rate mortgage notes due 2001-2012 to finance the
construction or purchase of various facilities.
Following is Wisconsin Energy's long-term debt outstanding at December 31.
<PAGE>
<TABLE>
<CAPTION>
Long - Term Debt 1999 1998
- - - - - - ---------------- ---- ----
(Thousands of Dollars)
<S> <C> <C>
First Mortgage Bonds
Wisconsin Electric Power Company- 6-1/2% Series due 1999 $ - $ 40,000
6-5/8% Series due 1999 - 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 F due 2001 600 900
7.90% Series H due 2002 900 1,200
10-1/4% Series G due 2009 3,700 4,070
Debentures (unsecured)
Wisconsin Electric Power Company- 6-5/8% due 2002 150,000 -
6-5/8% due 2006 200,000 200,000
9.47% due 2006 4,900 5,600
8-1/4% due 2022 25,000 25,000
6-1/2% due 2028 150,000 150,000
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 8,264 7,886
Variable rate due 2001 12,414 4,070
Variable rate due 2002 26,296 -
Variable rate due 2003 3,000 -
Variable rate due 2008 4,923 3,507
7.68% due 2002 6,072 -
7.71% due 2002 4,404 -
7.4% due 2003 2,433 2,469
7.2% due 2004 479 -
8.67% due 2012 2,299 -
Wisvest Corporation- 6.36% effective rate due 2006 7,664 8,758
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 8,436 9,642
Edison Sault Electric Company- 6.55% - 8.00% due 2000-2008 5,448 6,756
Variable rate due 1999 - 2,750
Wisconsin Energy Capital Corporation- 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 25,400
6.21% due 2008 20,000 20,000
6.51% due 2013 30,000 30,000
6.94% due 2028 50,000 50,000
Wisvest Corporation- Variable rate due 2005 205,927 -
WMF Corp.- 9.1% due 2001 1,310 1,880
Obligations under capital leases - Wisconsin Electric Power Company 215,899 189,980
Unamortized discount - net (24,440) (25,133
Long-term debt due currently (69,085) (119,140
---------- ----------
Total Long-Term Debt $2,134,636 $1,749,024
========== ==========
</TABLE>
Following is additional information concerning the variable rate notes
outstanding and their corresponding interest rates at December 31, 1999.
<TABLE>
<CAPTION>
Variable Rate Notes Interest Rate
------------------- -------------
(Thousands of Dollars)
<S> <C> <C>
Wispark Corporation $ 8,264 Due 2000 7.57%
4,070 Due 2001 7.68%
8,344 Due 2001 7.57%
9,703 Due 2002 7.97625%
12,477 Due 2002 7.9788%
4,116 Due 2002 7.9786%
3,000 Due 2003 7.9786%
4,923 Due 2008 7.60%
Wisconsin Electric Power Company 67,000 Due 2016 5.50%
98,350 Due 2006-2030 5.45%
Wisvest Corporation 114,853 Due 2005 7.535%
76,074 Due 2005 7.55875%
15,000 Due 2005 7.535%
</TABLE>
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
<PAGE>
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 $3.5 million, $3.1 million
and $0.9 million during 1999, 1998 and 1997, 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. The contract, for 236 megawatts of firm capacity
from a gas-fired cogeneration facility, 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 the facility in September 1997, imputed
interest costs on the capitalized purchase power obligation were $23.4 million,
$22.9 million and $6.5 million during 1999, 1998 and 1997, respectively, and
total amortization costs of the leased facilities were $5.7 million during 1999
and 1998 and $1.6 million during 1997. 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 $20.4 million, $20.3
million and $5.6 million during 1999, 1998 and 1997, respectively.
Following is a summary of Wisconsin Electric's nuclear fuel and leased
facilities at December 31.
<TABLE>
<CAPTION>
1999 1998
---- ----
(Thousands of Dollars)
<S> <C> <C>
Nuclear Fuel
Under capital lease $112,595 $100,809
Accumulated provision for amortization (51,799) (62,888)
In process/stock 22,597 49,739
-------- --------
Total Nuclear Fuel $ 83,393 $ 87,660
======== ========
Leased Facilities
Long-term purchase power commitment $140,312 $140,312
Accumulated provision for amortization (12,985) (7,305)
-------- --------
Total Leased Facilities $127,327 $133,007
======== ========
</TABLE>
Future minimum lease payments under the capital leases and the present value of
the net minimum lease payments as of December 31, 1999 are as follows:
<PAGE>
<TABLE>
<CAPTION>
Purchase
Nuclear Power
Fuel Lease Commitment Total
---------- ---------- -----
(Thousands of Dollars)
<S> <C> <C> <C>
2000 $ 31,559 $ 25,031 $ 56,590
2001 20,649 25,968 46,617
2002 13,418 26,961 40,379
2003 4,959 27,954 32,913
2004 1,922 29,004 30,926
Later Years - 531,187 531,187
------- -------- --------
Total Minimum Lease Payments 72,507 666,105 738,612
Less: Estimated Executory Costs - (136,229) (136,229)
------- -------- --------
Net Minimum Lease Payments 72,507 529,876 602,383
Less: Interest (5,989) (380,495) (386,484)
------- -------- --------
Present Value of Net Minimum Lease Payments 66,518 149,381 215,899
Less: Due Currently (28,917) - (28,917)
------- -------- --------
$ 37,601 $ 149,381 $ 186,982
======= ======== ========
</TABLE>
FAIR VALUE: The carrying amount of Wisconsin Energy's long-term debt
outstanding (excluding obligations under capital lease) was $2,012 million and
$1,703 million at December 31, 1999 and 1998, respectively, with a fair value of
$1,924 million and $1,789 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.
The fair value of the interest rate swap is the amount that Wisvest-Connecticut,
LLC would receive if the outstanding contract were terminated at the reporting
date. Wisvest-Connecticut, LLC would have received $3.1 million to terminate
the contract at December 31, 1999.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Banks $ 50,899 6.32% $ 51,503 5.42%
Commercial paper 256,601 6.20% 235,356 5.35%
Medium-term notes due in less
than one year 200,000 6.16% - -
--------
$507,500 $286,859
======== ========
</TABLE>
In November 1999, Wisconsin Energy Capital Corporation sold $200 million
aggregate principal amount of nine-month adjustable medium-term notes due August
16, 2000. The initial interest rate for the Wisconsin Energy Capital
Corporation medium-term notes was 6.16375%. The interest rate is reset
quarterly based on 3-month LIBOR plus 10 basis points. Proceeds from the notes
were used to fund a $150 million capital contribution by Wisconsin Energy to
Wisconsin Electric and to reduce short-term borrowings and for other general
corporate purposes.
Unused lines of credit for short-term borrowing amounted to $398 million at
December 31, 1999 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.
<PAGE>
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
Pension & Postretirement Plan Status 1999 1998 1999 1998
- - - - - - ------------------------------------ ---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit Obligation at January 1 $ 729,100 $ 649,256 $ 180,767 $ 148,181
Service cost 15,697 12,503 3,338 2,660
Interest cost 49,526 46,831 12,508 11,751
Plan participants' contributions - - 5,096 5,908
Plan amendments - - - 3,737
Actuarial (gain) loss (8,854) 52,508 7,713 22,333
Acquisitions 17,711 13,676 - 1,862
Benefits paid (47,443) (45,674) (15,294) (15,665)
-------- -------- --------- ---------
Benefit Obligation at December 31 $ 755,737 $ 729,100 $ 194,128 $ 180,767
-------- -------- --------- ---------
Change in Plan Assets
Fair Value at January 1 $ 839,659 $ 761,881 $ 68,913 $ 59,841
Actual return on plan assets 137,261 104,658 13,015 8,515
Employer contributions 1,180 7,551 10,495 10,252
Plan participants' contributions - - 5,096 5,908
Acquisitions 14,200 11,243 - -
Benefits paid (47,443) (45,674) (15,194) (15,603)
-------- -------- --------- ---------
Fair Value at December 31 $ 944,857 $ 839,659 $ 82,325 $ 68,913
-------- -------- --------- ---------
Funded Status of Plans
Funded status at December 31 $ 189,120 $ 110,559 $ 111,803 ($111,854)
Unrecognized
Net actuarial (gain) loss (199,018) (117,185) 5,557 4,673
Prior service cost 28,534 31,646 2,365 2,582
Net transition obligation (asset) (23,424) (27,220) 60,284 64,918
-------- -------- --------- ---------
Net Accrued Benefit Cost ($4,788) ($2,200) ($43,597) ($39,681)
======== ======== ========= =========
Funded Status of Plans with Net
Benefit Obligations at December 31
Fair value of plan assets $ 22,290 $ 11,168 $ 82,325 $ 68,444
Benefit obligation (24,461) (14,664) (194,128) (180,494)
-------- -------- --------- ---------
Net Benefit Obligation ($2,171) ($3,496) ($111,803) ($112,050)
======== ======== ========= =========
</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
------------------------------ ---------------------------
Benefit Plan Cost Components 1999 1998 1997 1999 1998 1997
- - - - - - ---------------------------- ---- ---- ---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Net Periodic Benefit Cost
Service cost $ 15,697 $ 12,503 $ 9,216 $ 3,338 $ 2,660 $ 1,911
Interest cost 49,526 46,831 45,613 12,508 11,751 10,343
Expected return on plan assets (64,309) (57,384) (51,592) (5,804) (5,008) (4,085)
Amortization of
Transition obligation (asset) (3,795) (3,798) (3,802) 4,635 4,615 4,586
Prior service cost 3,112 3,090 3,061 217 217 (100)
Actuarial loss (gain) 28 7 - 118 (270) (235)
-------- -------- -------- ------- ------- -------
Net Periodic Benefit Cost $ 259 $ 1,249 $ 2,496 $15,012 $13,965 $12,420
======== ======== ======== ======= ======= =======
Weighted-Average Assumptions
at December 31 (%)
Discount rate 7.5 6.75 7.25 7.5 6.75 7.25
Expected return on plan asset 9.0 9.0 9.0 9.0 9.0 9.0
Rate of compensation increase 3.0 to 3.0 to 4.75 to 4.75 to 3.0 to 4.75 to
5.0 5.0 5.0 5.0 5.0 5.0
</TABLE>
<PAGE>
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 BENEFITS 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, 1999 was 10.0% for all
plan participants decreasing gradually to 5.0% in 2005 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:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
---------- -----------
(Thousands of Dollars)
<S> <C> <C>
Effect on
Postretirement benefit obligation $19,390 ($17,132)
Total of service and interest cost components 1,878 (1,634)
</TABLE>
SAVINGS PLAN: The Company sponsors a defined contribution savings plan which
allows employees to contribute a portion of their pretax and/or after tax income
in accordance with plan specified guidelines. The Company matches 50% of
employee contributions up to 6% of the employee's annual compensation. Matching
contributions charged to expense amounted to $9.1 million, $7.4 million and $6.8
million during 1999, 1998 and 1997, respectively.
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, 1999 under the Omnibus Stock Incentive
Plan.
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
OSIP Stock Options Options Price Options Price Options Price
- - - - - - ------------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 858,700 $28.531 530,200 $27.999 523,900 $28.038
Granted 346,000 $27.313 331,500 $29.372 40,000 $27.653
Exercised - - (3,000) $27.375 - -
Forfeited - - - - (33,700) $28.085
--------- ------- -------
Outstanding at December 31 1,204,700 $28.181 858,700 $28.531 530,200 $27.999
========= ======= =======
</TABLE>
As of December 31, 1999, the 1,204,700 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 7.7 years. Under "cliff vesting"
<PAGE>
terms, 527,200 of these options are exercisable four years after the grant date,
while 632,500 of these options vest on a straight-line "graded" basis over a
four-year period from the grant date and 45,000 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, 1999, the 287,700 of exercisable options outstanding under the
OSIP are exercisable at per share prices of between $26.813 and $30.188 with a
weighted average remaining contractual life of 5.4 years.
Each stock option granted prior to 1999 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 1999, 1998 and 1997 would have been immaterial.
During 1999, 1998 and 1997, the Company granted to certain key employees
restricted shares of common stock under the OSIP at their weighted-average fair
market values on the grant date.
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
OSIP Restricted Shares of Market of Market of Market
- - - - - - ---------------------- Shares Price Shares Price Shares Price
------ ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 55,750 6,000 -
Granted 51,500 $27.4060 49,750 $28.6213 6,000 $28.8140
------- ------ ------
Outstanding at December 31 107,250 55,750 6,000
======= ====== ======
</TABLE>
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 1999, 1998 and
1997 was immaterial.
K - SEGMENT REPORTING
Wisconsin Energy, a holding company with subsidiaries in utility and non-utility
businesses, has two reportable operating segments. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly in deciding how to allocate
resources or in assessing performance. Wisconsin Energy previously had
organized its electric, gas and steam utility operating segments based upon how
its principal subsidiary, Wisconsin Electric, organized its segments. During
1999, Wisconsin Energy changed its reportable operating segments due to an
increase in non-utility energy assets and revenues. Wisconsin Energy's
reportable operating segments now include a utility and a non-utility energy
segment.
The reportable utility energy segment includes Wisconsin Energy's two utility
subsidiaries, Wisconsin Electric Power Company and Edison Sault Electric
Company. This segment derives its revenues from electric, gas and steam
operations. Electric operations engage in the generation, transmission,
distribution and sale of electric energy in southeastern (including Metropolitan
Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of
Michigan. Gas operations engage in the purchase, distribution and sale of
natural gas to retail
<PAGE>
customers and the transportation of customer-owned gas in four service areas in
southeastern, east central, western and northern Wisconsin. Steam operations
engage in the production, distribution and sale of steam to space heating and
processing customers in the Milwaukee, Wisconsin area.
The reportable non-utility energy segment derives its revenues from activities
including independent power production and energy marketing, services and
trading.
The following table summarizes the reportable operating segments of Wisconsin
Energy for the years ended December 31.
<TABLE>
<CAPTION>
Reportable Operating Segments (a)
----------------------------------------------------------
Energy
----------------------
Utility Non-Utility Subtotal Other (b) Total
------- ----------- -------- -------- -----
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
1999
Operating Revenues (c) $2,050,218 $193,240 $2,243,458 $ 29,181 $2,272,639
Depreciation and Amortization 256,910 7,037 263,947 6,537 270,484
Pretax Operating Income (d) 436,022 19,721 455,743 651 456,394
Segment Assets 5,129,003 640,949 5,769,952 386,620 6,156,572
Construction Expenditures 356,671 43,039 399,710 118,162 517,872
1998
Operating Revenues (c) $1,979,986 $ 34,108 $2,014,094 $ 25,339 $2,039,433
Depreciation and Amortization 243,271 1,203 244,474 3,863 248,337
Pretax Operating Income (d) 371,760 (876) 370,884 3,870 374,754
Segment Assets 4,839,017 169,216 5,008,233 287,444 5,295,677
Construction Expenditures 336,015 243 336,258 62,510 398,768
1997
Operating Revenues (c) $1,789,602 $ 6,959 $1,796,561 $ 10,368 $1,806,929
Depreciation and Amortization 237,699 1,125 238,824 2,071 240,895
Pretax Operating Income (d) 257,247 149 257,396 651 258,047
Segment Assets 4,667,840 59,426 4,727,266 241,323 4,968,589
Construction Expenditures 260,649 576 261,225 84,638 345,863
</TABLE>
(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) Other includes non-utility real estate investment and development and non-
utility investments in recycling technology.
(c) Intersegment revenues are not material.
(d) Interest income and interest expense are not included in segment pretax
operating income.
Included in non-utility energy segment assets, Wisvest Corporation had $141.4
million of loans receivable outstanding as of December 31, 1999 under two loan
facilities with SkyGen Energy Holdings LLC (with its affiliate defined as
"SkyGen"). SkyGen develops, owns and operates independent power plants and
cogeneration facilities. SkyGen has approximately 350 megawatts of generation
plants in operation, 1,500 megawatts under construction and 2,500 megawatts in
advanced development. The loan facilities follow Wisvest Corporation's 1997
collaboration with SkyGen to develop and jointly own the Androscoggin Energy
Center, a 160-megawatt cogeneration facility located in Jay, Maine.
The first loan, in the amount of $30 million, provides secured short-term
financing for the purchase of combustion turbines associated with various SkyGen
power projects. Under certain circumstances, the second loan may be converted
in stages to a minority equity ownership of 25% to up to 49.9% in SkyGen Energy
Holdings LLC. Following any such conversion, management control remains with
SkyGen. As of December 31, 1998 and 1997, Wisvest Corporation had $66.4 million
and $15.0 million of loans receivable from SkyGen. The fair value of these
loans in all periods equals their face value.
<PAGE>
A reconciliation of the totals reported for the operating segments to the
applicable line items in the financial statements is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Assets
Reportable segments $5,769,952 $5,008,233 $4,727,266
Other non-utility - operating (a) 386,620 287,444 241,323
Other non-utility (b) 76,548 66,080 69,095
---------- --------- ----------
Total Assets $6,233,120 $5,361,757 $5,037,684
========== ========== ==========
Construction Expenditures
Reportable segments $ 399,710 $ 336,258 $ 261,225
Other non-utility - operating (a) 118,162 62,510 84,638
Other non-utility (b) 209 214 45
---------- ---------- ----------
Total Construction Expenditures $ 518,081 $ 398,982 $ 345,908
========== ========== ==========
</TABLE>
(a) Other includes non-utility real estate investment and development and non-
utility investments in recycling technology.
(b) Primarily venture capital and other property and investments.
L - COMMITMENTS AND CONTINGENCIES
GIDDINGS & LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: In July 1996, Giddings &
Lewis, Inc., Kearney & Trecker Corporation, now a part of Giddings & Lewis,
Inc., and the City of West Allis brought an action in the Milwaukee County
Circuit Court alleging that Wisconsin Electric had deposited cyanide
contaminated wood chips in 1959 at two sites in West Allis, Wisconsin owned by
the plaintiffs. Environmental remediation at both sites was completed several
years ago, with the current owners paying for disposal of materials found on
their respective portions of the sites. Internal investigations led Wisconsin
Electric to believe that it was not the source of this waste.
In July 1999, a jury issued a verdict against Wisconsin Electric awarding the
plaintiffs $4.5 million in compensatory damages for clean-up costs and loss of
property value and $100 million in punitive damages. In October 1999, the
Circuit Court denied Wisconsin Electric's post trial motions and directed that
judgment on the verdict be entered. Wisconsin Electric has filed notice of
appeal of the judgment to the Wisconsin Court of Appeals.
In December 1999, in order to stop the post-judgment accrual of interest at 12%
during the pendency of the appeal, Wisconsin Electric tendered a contested
liability payment of $110 million, which is part of Deferred Charges and Other
Assets - Other on the Consolidated Balance Sheet, to the Milwaukee County Clerk
of Circuit Court representing the amount of the verdict and accrued interest.
Under Wisconsin law, the plaintiffs are liable to Wisconsin Electric upon
reversal or reduction of the judgment for the applicable amount of the funds
tendered with interest.
In further post-trial proceedings, the plaintiffs filed with the Circuit Court a
motion for sanctions based upon representations made by Wisconsin Electric
during trial that Wisconsin Electric had no insurance coverage for the punitive
damage award. The Circuit Court held hearings on the sanctions issue in
February 2000. Wisconsin Electric vigorously defended against the plaintiffs'
allegations and does not believe that a basis for sanctions based upon
intentional misrepresentation exists. The Circuit Court is requiring further
briefing on the matter and will hear oral argument in April 2000.
In the opinion of management, based in part on the advice of legal counsel, the
jury verdict was not supported by the evidence or the law and the unprecedented
award of punitive damages of this magnitude was unwarranted and should therefore
be reversed or substantially reduced on appeal. As such, Wisconsin Electric has
not established a reserve for potential damages from this suit.
<PAGE>
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
former manufactured gas plant sites in the Cities of Burlington and Kenosha,
Wisconsin. Wisconsin Electric also expects to begin remediation at sites in
Fort Atkinson and Waukesha, Wisconsin in 2001. Wisconsin Electric's expected
remediation of these sites is anticipated to be accomplished at an aggregate
cost of between $8 million and $13 million.
In Wisconsin Electric's February 13, 1997 Rate Order, the Public Service
Commission of Wisconsin 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.
KIMBERLY COGENERATION EQUIPMENT: In conjunction with the proposed construction
of an electric cogeneration facility in Kimberly, Wisconsin, Wisconsin Electric
purchased three combustion turbines, three heat recovery boilers and a steam
turbine (the "Equipment"). Following a change in the status of the original
project and an extensive review of other potential uses, Wisvest Corporation
agreed to use the Equipment in a joint independent power project. 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 Other Income and Deductions -
Other 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 Energy
Center.
In a related matter, Wisconsin Electric and Wisconsin International Electric
Power, Ltd reached agreement during 1999 on settlement of litigation brought by
Wisconsin International Electric Power against Wisconsin Electric claiming that
Wisconsin Electric had breached contractual duties allegedly owed to the
plaintiff relating to the development of an electric generating plant at Subic
Bay in the Philippines involving the Equipment. While Wisconsin Electric does
not believe that it breached any contractual duties allegedly owed to the
plaintiff, Wisconsin Electric paid the plaintiff $18 million ($10.8 million, or
$0.09 per share for Wisconsin Energy, after tax) in November 1999 to settle the
case, and the plaintiff's claims were dismissed with prejudice.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements appearing on pages A-30
through A-51 of this report present fairly, in all material respects, the
financial position of Wisconsin Energy Corporation and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 25, 2000
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1999, based on the number of Wisconsin Energy Corporation
stockholder accounts (including accounts in Wisconsin Energy's dividend
reinvestment and stock purchase plan), there were 91,062 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. Wisconsin
Energy reviews its dividend policy on a regular basis. Subject to any
regulatory restrictions or other limitations on the payment of dividends, future
dividends will be at the discretion of the board of directors and will depend
upon, among other factors, earnings, financial condition and other requirements.
STOCK PLUS INVESTMENT PLAN: In April 2000, Wisconsin Energy discovered that,
due to an administrative error, sales of Wisconsin Energy common stock under
Wisconsin Energy's dividend reinvestment and stock purchase plan, the Stock Plus
Investment Plan, exceeded the amount of shares registered for the Plan under the
Securities Act of 1933 beginning in December 1999. Upon discovery of the error,
Wisconsin Energy promptly took steps to register additional shares for the Plan.
The oversales amounted to 124,622 shares in December 1999 for an aggregate of
$2,451,702; a total of 615,754 shares in the first quarter of 2000 for an
aggregate of $11,242,716; and 78,963 shares through April 3, 2000 for an
aggregate of $1,576,794.
RANGE OF WISCONSIN ENERGY COMMON STOCK PRICES AND DIVIDENDS:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Quarter High Low Dividend High Low Dividend
- - - - - - ------- ---- --- ------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C>
First $31-9/16 $25-1/16 $ .390 $31 27 $ .385
Second 28-1/8 25-1/16 .390 31-11/16 28-1/2 .390
Third 26 22-7/16 .390 32 27-3/8 .390
Fourth 24-3/16 19-1/16 .390 34 30 .390
------ ------
Year $31-9/16 $19-1/16 $1.560 $34 $27 $1.555
====== ======
</TABLE>
BUSINESS OF THE COMPANY
Wisconsin Energy Corporation is a holding company with subsidiaries in utility
and non-utility businesses. Its principal subsidiary is Wisconsin Electric
Power Company.
Wisconsin Electric engages in the generation, transmission, distribution and
sale of electric power in an area of about 12,000 square miles in the
southeastern, east central and northern portions of the state of Wisconsin and
in the Upper Peninsula of Michigan. The area's estimated total population is
approximately 2.3 million, which includes metropolitan Milwaukee, Wisconsin. In
addition, Wisconsin Electric purchases natural gas, transports gas to Wisconsin
through pipeline companies and distributes and sells it in a territory of about
3,800 square miles in four distinct areas of Wisconsin: west and south of the
city of Milwaukee, the Appleton area, the Prairie du Chien area
<PAGE>
and areas within Iron and Vilas Counties. The gas service territory has an
estimated population of approximately 1.2 million. Wisconsin Electric also
provides steam service for space heating and manufacturing processes and for hot
water and humidification to approximately 450 customers in the metropolitan
Milwaukee area.
Edison Sault Electric Company, a wholly owned electric utility subsidiary of
Wisconsin Energy, generates, transmits, distributes and sells electric power in
a territory of approximately 2,000 square miles with a population of
approximately 55,000 in the eastern Upper Peninsula of Michigan.
Wisvest Corporation; Minergy Corp.; Wispark Corporation Wisconsin Energy Capital
Corporation, formerly Wisconsin Michigan Investment Corporation; WEC
International, Inc.; Witech Corporation; Northern Tree Service, Inc.; Badger
Service Company and other non-utility subsidiaries of Wisconsin Energy seek to
grow shareholder value by leveraging on the Company's core competencies.
Wisconsin Energy's non-utility subsidiaries are involved in various activities,
primary among which are development, ownership and operation of electric
generating facilities and investment in other energy-related entities;
waste/energy by-product utilization; and real estate development.
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The information under "Proposal 1: Election of Directors-Terms Expiring in Year
2003" in Wisconsin Energy's definitive proxy statement dated April 28, 2000,
attached hereto, is incorporated herein by reference.
EXECUTIVE OFFICERS
The figures in parenthesis indicate age and years of service with Wisconsin
Energy and/or Wisconsin Electric as of December 31, 1999.
Richard A. Abdoo (55; 24)
Chairman of the Board,
President and Chief Executive Officer of
Wisconsin Energy. Chairman of the Board
and Chief Executive Officer of Wisconsin Electric.
Paul Donovan (52; *)
Senior Vice President and Chief
Financial Officer of Wisconsin Energy.
Richard R. Grigg (51; 29)
Vice President of Wisconsin Energy. President
and Chief Operating Officer of Wisconsin Electric.
Calvin H. Baker (56; 8)
Treasurer of Wisconsin Energy. Vice President -
Finance and Chief Financial Officer of Wisconsin Electric.
Anne K. Klisurich (52; 27)
Controller of Wisconsin Energy and of
Wisconsin Electric.
Kristine M. Krause (45; 21)
Vice President - Fossil Operations
of Wisconsin Electric.
David K. Porter (56; 30)
Senior Vice President of Wisconsin Electric.
Michael B. Sellman (52, 1)
Senior Vice President - Nuclear Power
Business Unit and Chief Nuclear Officer
of Wisconsin Electric.
__________
* Mr. Donovan's service with Wisconsin Energy began in 1999.
<PAGE>
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<PAGE>
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Vote your Proxy by any one of the following methods!
- - - - - - -----------------
Vote by Telephone
- - - - - - -----------------
It's fast, convenient, and immediate! Call Toll-free on a Touch Tone Phone
1-877-779-8683
Follow these four easy steps:
- - - - - - -----------------------------
1. Read the accompanying Proxy Statement and Proxy Card
2. Call the Toll-free number 1-877-779-8683
3. Enter your 14 digit Voter Control Number located on your Proxy Card
above your name
4. Follow the recorded instructions
Your vote is important!
Call 1-877-779-8683 anytime!
- - - - - - ----------------
Vote by Internet
- - - - - - ----------------
It's fast, convenient, and your vote is immediately confirmed and posted.
www.eproxyvote.com/wec
Follow these four easy steps:
- - - - - - -----------------------------
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2. Go to the website www.eproxyvote.com/wec
3. Enter your 14 digit Voter Control Number located on your Proxy Card
above your name
4. Follow the instructions provided
Your vote is important!
Go to www.eproxyvote.com/wec anytime!
Do not return your Proxy Card if you are voting by Telephone or Internet.
Please see the reverse side of this card
if you plan to attend the Annual Meeting.
- - - - - - ------------
Vote by Mail
- - - - - - ------------
To vote by mail, detach and return the proxy card below.
- - - - - - -------------------------------------------------------------------------------
[X] Please mark boxes as in this example.
The Board of Directors recommends a vote FOR Proposal 1.
- - - - - - -------------------------------------------------------------------------------
1. Elect FOR ALL NOMINEES WITHHELD FROM ALL
(01) John F. Bergstrom, [_] [_]
(02) Barbara L. Bowles, and
(03) Willie D. Davis
- - - - - - -----------------------------------------------------
For, except vote withhold from the above nominee(s):
I plan to attend the Annual Meeting [_]
- - - - - - --------------------------------------------------------------------------------
Where no voting instructions are given, the shares represented by this Proxy
will be VOTED FOR Proposal 1.
Please sign exactly as name(s) appears hereon. Joint owners should each sign
personally. When signing as executor, administrator, corporation officer,
attorney, agent, trustee, guardian, or in other representative capacity, please
state your full title as such.
Signature:______________________________________ Date: ________________________
Signature:______________________________________ Date: ________________________
(If held jointly)
<PAGE>
Wisconsin Energy Corporation
Annual Meeting of Stockholders
10:00 a.m. Central Time
Tuesday, June 27, 2000
The map to the right shows the location of the Bradley Center, the site of our
Annual Meeting. The shaded gray areas represent public parking lots and
structures in the vicinity of the Bradley Center. Parking is available at a
nominal cost.
[MAP APPEARS HERE ]
Please bring this card with you to the meeting.
Name: ________________________________________
______________________________________________
Address: _____________________________________
______________________________________________
- - - - - - --------------------------------------------------------------------------------
WISCONSIN ENERGY CORPORATION
PROXY/VOTING INSTRUCTIONS FOR ANNUAL MEETING OF STOCKHOLDERS
June 27, 2000
[WISCONSIN ENERGY LOG APPEARS HERE]
- - - - - - --------------------------------------------------------------------------------
This PROXY is solicited by the Board of directors for use at the Annual
Meeting of Stockholders on June 27, 2000. Your shares of stock will be voted as
you specify. If no choice is specified, your proxy will be voted "FOR"
Proposal 1.
By signing this PROXY, you revoke all prior proxies and appoint Richard A. Abdoo
and Thomas H. Fehring, or either of them, as proxies, with the power to appoint
substitutes, to vote your shares on the matters shown below and on any other
matters which may come before the Annual Meeting of Stockholders and all
adjournments of the Meeting.
1. Elect John F. Bergstrom, Barbara L. Bowles, and Willie D. Davis as
Directors.
If you hold shares in Wisconsin Energy Corporation's Stock Plus Investment Plan
or Wisconsin Electric Power Company's Employee Retirement Savings Plan, this
proxy constitutes voting instructions for any shares so held by the undersigned.
SEE REVERSE SIDE. If you wish to vote in accordance with the Board of Directors'
recommendation, we encourage you to vote by telephone or internet, or just sign
and date the reverse side of this card; you need not mark any voting boxes.
---------------
| SEE REVERSE |
| SIDE |
---------------
