<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17736 Name of Registrant ESELCO, INC.
MICHIGAN 38-2785176
State of Incorporation (I.R.S. Employer
Identification Number)
725 East Portage Avenue
SAULT STE. MARIE, MICHIGAN 49783
(Address of principal executive offices)
Registrant's telephone number, including area code (906) 632-2221
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK -$.007 PAR VALUE
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorportated by reference in Part III of this
Form 10-K or any amendment to this From 10-K [ X ]
The aggregate market value of voting stock (being Common Stock, $.007 Par Value)
held by non-affiliates, is computed at $37,217,016 based on 1,378,408 shares
held by non-affiliates and the average of the bid and ask prices for such stock
of $25.50 and $28.50, respectively, as reported by Kirkpatrick, Pettis, Smith,
Polian, Inc., Omaha, NE, a market-maker for the stock, on March 10, 1997.
-1-
<PAGE>
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of the date of this report: 1,540,592 shares of Common Stock, $.007
Par Value.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information appearing in Registrant's 1996 Annual Report to Security
Holders furnished to the Commission pursuant to Rule 14a-3(b) is incorporated by
reference in response to Part II.
Certain information appearing in the definitive Proxy Statement (filed or to be
filed pursuant to Regulation 14A) of ESELCO, Inc. with respect to the May 6,
1997 Annual Meeting of Shareholders is incorporated by reference herein in
response to Part III.
PART I
ITEM 1. BUSINESS
GENERAL
The Registrant ESELCO, Inc. is a non-operating holding company which
has two subsidiaries, Edison Sault Electric Company (Company) and Northern
Tree Service, Inc. (NTS).
NTS was founded in May, 1990 to provide tree trimming services to both
the Company and to outside parties. Edison Sault Electric Company is the
principal operating subsidiary of ESELCO and accounts for the vast majority
of ESELCO's total assets, revenue and income. Therefore, the following
discussion and analysis deals primarily with the operations of Edison Sault
Electric Company.
The Company is a public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in the Eastern Upper
Peninsula of Michigan.
The Company is a Michigan corporation organized in 1891. Its address
is 725 East Portage Avenue, Sault Ste. Marie, Michigan 49783.
The Company supplies electricity in the Eastern Upper Peninsula of
Michigan. This area includes the cities of Sault Ste. Marie, Manistique,
St. Ignace and Mackinac Island. On December 31, 1988, the Company acquired
approximately 1,900 customers from Wisconsin Electric Power Company. This
acquisition increased its service territory to over 2,000 square miles with
a population of approximately 55,000 people.
Large industrial accounts located within the Company service area are
Manistique Papers, Inc., located in Manistique, which produces primarily
newsprint; Lakehead Pipeline Company, which operates a crude oil pipeline
through the Company's service area; Michigan Limestone Operation Limited
Partnership's limestone quarry operation located in Cedarville, Michigan;
and Specialty Minerals Inc.'s (formerly Inland Steel operation) limestone
quarry operation at Gulliver, Michigan.
-2-
<PAGE>
Wholesale electric energy is supplied to the Cloverland Electric
Cooperative, Inc., an R.E.A. cooperative, serving adjoining rural areas.
Government facilities in the Company service area are the U.S. Coast
Guard area headquarters located in Sault Ste. Marie and a base in St.
Ignace, the U.S. Corps of Engineers, Soo Locks complex on the St. Marys
River, and the U.S. Immigration and Custom Services located at the
International Bridge Plaza in Sault Ste. Marie. The State of Michigan
maintains correctional facilities at Kinross and Manistique, and Lake
Superior State University, a four year university in Sault Ste. Marie.
Recreation and tourism are important factors in the economy of the
Company's service area. Lake Superior borders on the north of the Eastern
Upper Peninsula of Michigan, with the St. Marys River on the east and Lake
Huron and Lake Michigan on the south. In addition, there are a number of
inland lakes and rivers that provide extensive recreation areas along with
national, state and private parks and campgrounds serving the public. The
recreation business is a year around activity, with winter sports from
skiing to snowmobiling, spring fishing, summer water activities and the
fall colors and hunting. The famous resort center, Mackinac Island,
located in the Straits of Mackinac is served by submarine cable from the
Company's St. Ignace Division.
COMPETITION
The Company's electric business is substantially free from direct
competition from other electric utilities or commissions, but has
competition from other forms of energy, such as natural gas, coal, wood,
oil and other energy sources.
EMPLOYEES
The Company had 88 full time employees as of December 31, 1996.
Employees, other than officers, supervisors and non-union clerical staff,
are represented by the United States Steel Workers of America, Local 13547.
The Company and Union signed a three year contract in September, 1995.
Management considers its relations with its employees to be satisfactory.
The Company has reduced full time employment from 115 in 1980 to the
present 88. The Company has no full time professional employees engaged in
research and development activities.
REGULATION
The Company is subject to the jurisdiction of the Michigan Public
Service Commission (MPSC) with respect to rates, standards of service,
accounting and other matters. The Company is also subject to the
jurisdiction of the Federal Energy Regulatory Commission (FERC) under the
Federal Power Act with respect to rates, service, interconnections,
accounting and other matters in connection with its purchases and sales of
electricity for resale. The MPSC has jurisdiction over the issuance of
long-term securities and the FERC has jurisdiction over short-term
securities.
-3-
<PAGE>
RATES
Approximately 86% of the Company's revenues for 1996 were from retail
sales of electricity and 14% from sales of electricity for resale and other
miscellaneous revenue.
The last electric rate increase, effective November 17, 1982, was
authorized on November 16, 1982 by the MPSC in Case No. U-7235. This MPSC
Order granted a return on rate base of 9.30% which included a return on
common equity of 14%.
Under Michigan law, the Company (until 1996) filed an annual power
supply cost recovery plan to recover anticipated fuel and purchased power
costs for the following year. In addition to allowing the Company to
recover its power costs, this law provides for a return of over collection
or a surcharge for under collection of power costs at the close of the
year, both with interest.
On September 21, 1995, the MPSC approved the Company's application for
authority to implement price cap regulation. The Company implemented the
price cap order on January 1, 1996. For a description of the MPSC's
approval and the ensuing litigation, see item I 3(a) below ("Legal
Proceedings,") which description is incorporated herein by reference.
The MPSC in Case No. U-10662 prescribed depreciation rates to be used
by the Company to determine its annual accrual for depreciation. The order
in this case was issued November 10, 1994, effective for a period of five
years beginning January 1, 1995 and continuing through December 31, 1999.
The Company has FERC approved wholesale contracts for resale of
electric energy with Cloverland Electric Cooperative, Inc.
SEASONAL
The business of the Company is seasonal due to shorter daylight hours
and colder temperatures in the winter resulting in greater overall electric
consumption during that time.
ENVIRONMENTAL
IN 1993, Edison Sault received notification from the U.S.
Environmental Protection Agency (U.S. EPA) that it was being named a
"Potentially Responsible Party" at the Manistique River/ Harbor Area of
Concern (AOC) in Manistique, Michigan. There were a number of other
potentially responsible parties, some of whom have been notified by the
U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of
Concern" (AOC) due to PCBs which have been found in that area. An
Environmental Engineering/Cost Analysis (EECA) was submitted to the U.S.
EPA which provided an analysis of various methods of remediation for the
harbor. The EECA presented six alternatives of remediation action and
ultimately recommended a remediation method of in-place capping.
Management believed this to be the most prudent course of action. Although
the total ultimate cost of specific remedial action and Edison Sault's
potential liability were not known at that time, management had estimated
Edison Sault's minimum cost of this remedy to be $2.9 million.
-4-
<PAGE>
That figure represented an increase of $1.9 million from the amount
recorded during 1994. Certain other expenditures for investigation of
any necessary remedial action were incurred and are reflected in the
accompanying financial statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to
remediate the harbor through in-place capping at a total cost of $6.4
million, with the Edison Sault portion costing $3.2 million. Through
further negotiations, the U.S. EPA and the PRPs agreed to a cash-out
settlement whereby the PRPs would pay to the U.S. EPA the $6.4 million cost
of capping for the right to be absolved from any future legal actions
concerning PCB pollution. To effect this settlement, an Administrative
Order on Consent was executed by all parties in December, 1996 with
payments made to the U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on
this project. Edison Sault has retained legal assistance to start a
process of recovering these costs through several insurance entities. The
certainty and magnitude of insurance recovery is unknown at this time.
Edison Sault believes that the costs discussed above, including the
payment to the U.S. EPA to be relieved of future liability, is a legitimate
cost of doing business and would be recoverable through utility rates.
Further, in November 1993, the MPSC issued an order authorizing Edison
Sault to defer and amortize, over a period not to exceed ten years,
environmental assessment and remediation costs associated with the
Manistique River AOC. Therefore, Edison Sault has recorded a regulatory
asset in the amount of $3.2 million, plus unreimbursed cost of $300,000,
for a total of $3.5 million, which the Company will begin amortizing in
1997. Further costs related to this issue are not expected to have a
material impact on the Edison Sault's financial position or future results
of operations.
FRANCHISES - SERVICE AREA
The Company has 24 township and village franchises in the counties of
Chippewa, Delta, Mackinac and Schoolcraft, all in the State of Michigan.
The Company has franchises with the following cities in the service area,
as listed below, with their expiration date for electric service.
Franchise Type of Service Expiration Date
--------------- --------------- ---------------
Manistique Electric June 9, 2008
Mackinac Island Electric January 1, 2019
St. Ignace Electric April 20, 2001
The Company operates under a perpetual franchise in the City of Sault Ste.
Marie by virtue of Act. No. 264, Public Acts of Michigan, 1905.
The Company's distribution system and services are, for the most part,
located on or under public streets, alleys, avenues, highways and other
public places, or on private property not owned by the Company, with the
permission or consent, except to an inconsequential extent, of the
individual owners. The Company's distribution system located on or under
public streets and other public places were all installed under valid
franchises granted by appropriate local authorities.
RECENT DEVELOPMENTS
As previously disclosed in the Form 8-K filed by the Registrant, on
March 25, 1997 the Registrant and Wisconsin Energy Corporation announced
that they had entered into a letter of intent, setting forth the
preliminary terms of the potential acquisition of the Registrant by
Wisconsin Energy Corporation. Consummation of the proposed transaction
is contingent upon several conditions, including the negotiation and
execution of a definitive agreement, approval by the Boards of Directors
of both companies and the shareholders of the Registrant, receipt of all
appropriate regulatory approvals, and the effectiveness of a registration
statement to be filed with the Securities and Exchange Commission
covering the Wisconsin Energy Corporation shares to be issued in the
transaction. There can be no assurance as to the final terms of the
proposed transaction, that the conditions will be satisfied, or that the
proposed transaction will be consummated.
5
<PAGE>
ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT
The following officers of the Company were elected for one year or
until their successors have been elected and have qualified at the annual
Organizational Meeting of the Board of Directors last held in May, 1996.
All executive officers except Mr. Beedy hold identical positions with
Registrant.
Company
Position
Name Age Since Position with Company
-------------------- --- -------- ------------------------------
Thomas S. Nurnberger 78 1980 Director-Chairman of the Board
William R. Gregory 57 1972 Director- President
James L. Beedy 58 1986 Vice President - Engineering
David R. Hubbard 58 1977 Vice President - Finance
Donald Sawruk 49 1994 Executive Vice President
1989 Vice President
1987 Secretary
Steven L. Boeckman 42 1993 Vice President
1991 Treasurer
Donald C. Wilson 41 1995 Secretary
Ernest H. Maas 40 1996 Assistant Vice President
David H. Jirikovic 44 1996 Assistant Vice President
Paul A. Schemanski 33 1996 Assistant Vice President
ITEM 2. PROPERTIES
Registrant's only material asset is the common stock of the Company.
The Company's major source of power is its hydroelectric generating
plant located on the St. Marys River in Sault Ste. Marie, Michigan. In
addition, the Company owns and operates a diesel peaking station in its
service area.
Hydro generation is also purchased by the Company under contract from
the U.S. Corps of Engineers hydroelectric plant located within the Soo
Locks complex in Sault Ste. Marie. This contract, which was modified in
1996, has a tenure to November 1, 2040 and cannot be terminated by the
government prior to November 1, 2030.
The Company also owns a 138 KV submarine transmission cable circuit
which interconnects with Consumers Power Company in the Lower Peninsula of
Michigan. The Company owns and maintains two 138 KV substations which
connect a 46 mile 138 KV transmission line owned and maintained by
Cloverland Electric Cooperative. This line and the remainder of the
transmission facilities of both companies are operated under a Joint
Transmission Agreement dated May 1, 1977.
-6-
<PAGE>
The Company's electric transmission system extends from Sault Ste.
Marie to Manistique, approximately 130 miles to the southwest, and to St.
Ignace, approximately 50 miles to the south. Additional transmission lines
extend to Cedarville, some 40 miles to the southeast. In total, the
Company has 279 miles of transmission line in service as of December 31,
1996. Also, to serve its customers, the Company maintains 792 miles of
primary distribution lines. Service is rendered to its customers through
approximately 8,600 line transformers and 22,400 meters.
During 1996, the Company generated 27% of its total electric energy
requirements in its own hydro plant and purchased the remaining 73% as
shown below:
Megawatt Hours
Generated and Purchased
-----------------------
Company Generation 225,922
Purchases -
U.S. Corps of Engineers-Hydro 130,475
Consumers Power Company 306,330
American Electric Power Company 168,828
Upper Peninsula Power Company 7,352
Cloverland Electric Cooperative 8
----------
Total 838,915
===========
Hydro Megawatt hours generated and purchased provided 42% of the total
energy requirements.
All of the purchased power was delivered under firm contracts. The
Company's transmission system is directly interconnected with the systems
of Consumers Power Company and Cloverland Electric Cooperative. The
interconnection with Consumers Power Company has a capacity of 130,000 KW.
The Company purchases power from Consumers Power Company and American
Electric Power Company over this interconnection. Under contract with the
U.S. Corps of Engineers, the Company purchases the entire hydroelectric
generation from the St. Marys River plant, less Corps use, for
approximately 17,400 KW of power. Again under contract a certain amount of
the capacity is delivered to other government installations in the area.
The Company was assigned a contract between Wisconsin Electric Power
Company and Upper Peninsula Power Company (UPPC) to purchase power from
UPPC to serve a portion of the customers acquired from Wisconsin Electric
Power Company on December 31, 1988.
The Company's total average generating capability is 34,600 KW
consisting of the Edison Sault Hydro Plant with 29,800 KW and 4,800 KW from
the diesel generating plant. The water for the Company's hydroelectric
generating plant is leased under a contract with the U.S. Corps of
Engineers with a tenure to December 31, 2050. However, the Secretary of
the Army has the right to terminate the contract subsequent to December,
2025 by providing at least a five year termination notice. No such notice
can be given prior to December 31, 2020. Starting January 1, 1986, the
Company began paying for all water taken at predetermined rates with a
minimum annual payment of $100,000 per year. The total flow of water out
of Lake Superior, which in effect is the volume of water in the St. Marys
River, is under the direction and control of the International Joint
Commission. The International Joint Commission was created by the Boundary
Water Treaty of 1909 between the United States of America and Great
Britain, now represented by Canada. This
-7-
<PAGE>
Commission has placed limitations on the flow of water from Lake
Superior during certain months of 1973, 1977 and from 1981 through
1995. During any limited flow months, it is necessary for the
Company to purchase additional power from other electric
utilities and increase the use of the Company diesel generation.
The principal electric plants and properties are held subject to the
lien of the Company's Mortgage securing its First Mortgage Bonds.
ITEM 3. LEGAL PROCEEDINGS
(a) On September 21, 1995, the MPSC approved the Company's application for
authority to implement price cap regulation. The Company implemented the
price cap order on January 1, 1996. In the application, the Company
proposed that its base rates be capped at present levels, that its existing
power supply recovery (PSCR) factor be rolled into base rates, and that its
existing PSCR Clause be suspended. In addition, the MPSC required that the
Company give thirty (30) days notice rather than two (2) weeks notice for
rate decreases and that the Company file an application by October 1, 2000
to address its experience under the price cap mechanism. The Order also
allows the Company to file an application seeking an increase in rates only
under extraordinary circumstances.
On October 23, 1995 the Attorney General for the State of Michigan
filed an intervention and petition for rehearing in the Company's price cap
order. The Attorney General's intervention was based on the grounds that
the MPSC did not have authority to approve price cap regulation. On
December 21, 1995, the MPSC rejected the Attorney General's petition for
rehearing. On January 16, 1996, the Attorney General filed an appeal with
the Michigan Court of Appeals.
Legal counsel for the Company believes that the Attorney General's
appeal is without merit and that the Company will prevail. A decision in
this case is not expected until mid 1997.
(b) See Part I, Item 1. - Business - Environmental.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
The Tables appearing under the caption "Shareholder Information" in
the Registrant's 1996 Annual Report to Shareholders, pages 31 and 32, are
incorporated by reference herein.
-8-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information appearing under the caption "Six-Year Results of
Operations" in the Registrant's 1996 Annual Report to Shareholders, page
12, is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information appearing under the caption "Management's Discussion
and Analysis" in the Registrant's 1996 Annual Report to Shareholders, page
13 through 15, is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included on pages 16 through 30 of the 1996
Annual Report to Shareholders for the year ended December 31, 1996 are
incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of directors.
Information appearing under the caption "Election of Directors" in
ESELCO's definitive Proxy Statement (filed or to be filed pursuant to
Regulation 14A) with respect to the May 6, 1997 Annual Meeting of
Shareholders is incorporated by reference herein.
(b) Identification of executive officers.
See Item 1a herein.
(c) Identification of certain significant employees.
None.
(d) Family relationships.
There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
(e) Business experience.
See Item 10 (a) and (b).
(f) Involvement in certain legal proceedings.
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation
of the ability and integrity of any director or executive officer
during the past five years.
-9-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information appearing under the caption "Remuneration of Directors
and Officers" in ESELCO's definitive Proxy Statement (filed or to be filed
pursuant to Regulation 14A) with respect to the May 6, 1997 Annual Meeting
of Shareholders is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the captions "Security Ownership of
Certain Beneficial Owners" and "Election of Director" in ESELCO's
definitive Proxy Statement (filed or to be filed pursuant to Regulation
14A) with respect to the May 7, 1997 Annual Meeting of Shareholders is
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 10-K
(a) 1. Financial Statements
Included in Part II of this report:
Statement of Income
Statement of Cash Flows
Statement of Financial Position
Statement of Capitalization
Statement of Changes in Retained Earnings
Notes to Financial Statements
Report of Independent Public Accountants
2. Financial Statement Schedules
Included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts
The Report of Independent Public Accountants on Financial
Statement Schedules for the three years ended December 31, 1996
is on page 30.
Schedules I, III and IV are omitted as not applicable because
required items or conditions are not met.
3. List of Exhibits
(See page 13 for Exhibit Index)
-10-
<PAGE>
(b) None.
(c) The Exhibits, if any, filed herewith are identified in (a) 3. above.
(d) The Financial Statement Schedules filed herewith are identified in (a)
2. above.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ESELCO, INC.
(Registrant)
By: /s/ WILLIAM R. GREGORY
--------------------------
WILLIAM R. GREGORY
Director and President
Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas S. Nurnberger /s/ David K. Easlick
- ----------------------------- ----------------------------
THOMAS S. NURNBERGER DAVID K. EASLICK
Chairman of the Board Director
Date: March 25, 1997 Date: March 25, 1997
/s/ Allan L. Grauer /s/ James S. Clinton
- ----------------------------- ----------------------------
ALLAN L. GRAUER JAMES S. CLINTON
Director Director
Date: March 25, 1997 Date: March 25, 1997
/s/ William R. Gregory
- -----------------------------
WILLIAM R. GREGORY
Director
Date: March 25, 1997
/s/ David R. Hubbard
- -----------------------------
DAVID R. HUBBARD
Vice President - Finance
Date: March 25, 1997
-12-
<PAGE>
EXHIBIT INDEX
FORM 10-K
1996
<TABLE>
<CAPTION>
Filed
-------------------------
No. Description of Exhibit Herewith By Reference
- ------- ---------------------------------------------------------------- --------- ------------
<S> <C> <C> <C>
(3) Articles of Incorporation as filed on January 6, 1989 - (d) *
(4) Instruments defining the rights of security holders, including
indentures:
(a) Mortgage and Deed of Trust as of March 1, 1952 - (a) *
(b) Supplemental Indenture dated as of February 1, 1957 - (a) *
(c) Second Supplemental Indenture dated as of January 1,
1964 - (a) *
(d) Third Supplemental Indenture dated as of February 1,
1968 - (a) *
(e) Fourth Supplemental Indenture dated as of September
15, 1975 - (a) *
(f) Fifth Supplemental Indenture dated as of October 1, 1986 - (b) *
(g) Sixth Supplemental Indenture dated as of April 1, 1989 - (d) *
(h) Seventh Supplemental Indenture dated as of February 1,
1992 - (e) *
(i) Debenture Indenture dated as of August 1, 1973 - (a) *
(j) Form of Long-Term Energy Thrift Notes - (c) *
(13) Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders.
(a) 1996 Annual Report to Shareholders *
(b) Form 10-Q or Quarterly Report to Security Holders N/A N/A
(21) Subsidiaries of the Registrant *
(23) Consent of Independent Public Accountants *
(27) Financial Data Schedule *
(99.1) Letter of Intent
(99.2) Shareholder Letter
</TABLE>
Key to Exhibits Incorporated by Reference:
(a) Filed with the Company's Registration Statement, Form S-16,
No. 2-67191, filed April 2, 1980.
(b) Filed with the Company's Form 10-K for 1986, dated March 30, 1987,
File No. 0-1158.
(c) Filed with the Company's Registration Statement, Amendment No. 2 to
Form S-3, No. 2-67191, filed February 16, 1988.
(d) Filed with the Registrant's Form 10-Q for June 30, 1989, dated
August 11, 1989, File No. 0-17736.
(e) Filed with the Registrant's Form 10-Q for March 31, 1992, dated
May 13, 1992, File No. 0-17736.
-13-
<PAGE>
[LETTERHEAD]
Report of Independent Public Accountants
To ESELCO, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in ESELCO, Inc.'s 1996 annual report
to shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 6, 1997. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules listed in
item 14(a) is the responsibility of the company's management and is presented
for purpose of complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This schedule has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
February 6, 1997.
-14-
<PAGE>
ESELCO, INC.
-------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Balance Provisions Reserse for purposes Balance
Beginning Charged to for which the End of
Description of Period Income Reserve was Provided Period
- -------------------- ------------ ------------ ---------------------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
----------------------------
RESERVE DEDUCTED
FROM ASSET IN
BALANCE SHEET -
Doubtful Accounts $32,000 $69,526 $69,526 $32,000
======== ======== ======= ========
YEAR ENDED DECEMBER 31, 1995
----------------------------
RESERVE DEDUCTED
FROM ASSET IN
BALANCE SHEET -
Doubtful Accounts $32,000 $52,060 $52,060 $32,000
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
-----------------------------
RESERVE DEDUCTED
FROM ASSET IN
BALANCE SHEET -
Doubtful Accounts $32,000 $81,391 $81,391 $32,000
======== ======== ======== =========
</TABLE>
-15-
<PAGE>
POWER
FOR
TODAY
AND
TOMORROW
[PHOTOGRAPH]
1996
ANNUAL
REPORT
ESELCO
<PAGE>
THE COMPANY
CONTENTS
IFC Company Profile
1 Financial Highlights
2 Shareholders' Letter
4 Power in Partnerships
6 Power in Planning
8 Power in Working Together
9 Area at a Glance
10 Power in Satisfaction
11 Selected Statistics
12 Six-year Results of Operations
13 Management's Discussion and Analysis
16 Statement of Income
17 Financial Position
18 Common Equity
19 Cash Flow
20 Capitalization
21 Notes to Financial Statements
30 Auditor's Report
31 Shareholders' Information
IBC Corporate Information
SERVICE AREA
[MAP]
SAULT STE. MARIE
ST. IGNACE
MANISTIQUE
ESELCO, Inc., is a Sault Ste. Marie, Michigan-based holding company formed in
1989. Edison Sault Electric Company (the Company), ESELCO's primary subsidiary,
is an electric utility that serves more than 21,000 residential, commercial, and
industrial customers throughout Michigan's Eastern Upper Peninsula.
Edison Sault Electric Company's ability to generate and sell low-cost
hydroelectric power allows its customers to enjoy some of the lowest electric
rates in the United States. The Company's hydro plant, a registered historical
engineering landmark, and the United States Army Corps of Engineers hydro plant
are the principal sources of generation of this low-cost power.
Northern Tree Service, Inc., is also a subsidiary of ESELCO, Inc. Northern Tree
Service provides tree trimming, right-of-way clearing, and tree removal services
to Edison Sault Electric Company, other utilities, municipalities, and private
individuals throughout the Upper Peninsula and Northern Lower Michigan.
Cloverland Electric Cooperative is Edison Sault Electric Company's largest
wholesale customer. Cloverland Electric and Edison Sault share several operating
facilities that enable both utilities to be more cost effective in the
distribution of electricity to their respective customers.
The Board of Directors of ESELCO, Inc., is committed to strategies and goals
that fulfill the needs of its shareholders and its customers. The effective use
of operational, financial, and human resources combined with quality customer
service is the best way to meet those requirements.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
for the Year Ended December 31 1996 1995 % Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL DATA
Total Operating Revenues (thousands) . . . . . . . . . . $ 37,500 $ 36,845 2%
Net Income Available for Common Stock (thousands). . . . $ 2,798 $ 2,365 18%
Return on Average Common Equity. . . . . . . . . . . . . 14.5% 13.3% 9%
COMMON STOCK DATA (1)
Earnings per Share . . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.61 15%
Dividends declared per Share . . . . . . . . . . . . . . $ 1.07 $ 1.00 7%
Book Value per Share (2) . . . . . . . . . . . . . . . . $ 13.99 $ 12.70 10%
Average Shares Outstanding . . . . . . . . . . . . . . . 1,510,907 1,469,112 3%
Average of the December 31 Bid/Ask
Price per Share at Year-end. . . . . . . . . . . . . . $ 25.38 $ 23.75 7%
</TABLE>
(1)retroactively adjusted for stock dividends
(2)excluding Unearned Compensation--ESOP & Restricted Stock Bonus Plan
BOOK VALUE AND
MARKET PRICE VALUE OF
COMMON STOCK AT YEAR-END
dollar price per share
[GRAPH]
17.33 9.74 20.67 9.96 23.38 10.78 23.25 11.71 23.75 12.40 25.38 13.13
'91 '92 '93 '94 '95 '96
COMMON STOCK OF THE COMPANY HAS AVERAGED A 1.9 MULTIPLE OF BOOK VALUE OVER THE
LAST SIX YEARS, WELL ABOVE THE INDUSTRY AVERAGE OF 1.4.
EARNINGS PER SHARE
AND DIVIDENDS DECLARED
dollars and cents
[GRAPH]
1.29 0.84 1.34 0.87 1.41 0.91 1.52 0.94 1.61 1.00 1.85 1.07
'91 '92 '93 '94 '95 '96
CONSISTENT EARNINGS GROWTH HAS ENABLED THE COMPANY TO INCREASE DIVIDENDS OVER
EACH OF THE LAST SIX YEARS (ADJUSTED FOR STOCK DIVIDENDS AND A 3-FOR-2 STOCK
SPLIT EFFECTIVE MAY 3, 1993).
1
ESELCO, Inc.
<PAGE>
LETTER TO SHAREHOLDERS
"...WE LOOK FORWARD TO CONTINUING THE ROLE OF A LOW-COST PROVIDER..."
RATE OF RETURN ON
AVERAGE COMMON
EQUITY
[GRAPH]
13.7 13.6 13.6 13.5 13.3 14.5
'91 '92 '93 '94 '95 '96
CONTINUOUS IMPROVEMENTS IN PRODUCTIVITY AND CAREFUL VIGILANCE OVER EXPENSES HAVE
ALLOWED THE COMPANY TO ENJOY CONSISTENTLY HIGH RETURNS.
We are pleased to report our financial results for 1996 that build upon a string
of years of strong financial performance since the early 1980's. Net income
increased $433,000, or 18%, to a new record high of $2,798,000, compared to
$2,365,000 in 1995. Earnings per average common share increased 15%, to $1.85,
compared to $1.61 in 1995. These numbers reflect an increase of 42,000 in the
average shares outstanding due to additional shares issued through our Dividend
Reinvestment Plan, a Restricted Stock Plan, and the 3% stock dividend paid in
May of 1996. Return on average common equity was 14.5%, as compared to 13.3% in
1995.
The year 1996 had many successes. The major one was the final settlement with
the United States Environmental Protection Agency (EPA) at Manistique Harbor in
Manistique, Michigan. Our settlement resulted in a cash payment to the EPA of
$3.2 million and relieves this Company of any future liability related to the
Manistique Harbor PCB contamination. This settlement agreement was signed on
December 31, 1996. Finally, after more than three years, this issue was
concluded. It is a proper business expense which will be deducted for federal
income tax purposes on our 1996 return. Further discussion of this subject can
be found in the Notes to the Financial Statements.
Here are some additional highlights of 1996 which, just as in previous years,
will provide the basis for our continued success in 1997:
- - Implementation of the transmission agreement with Wisconsin Electric Power
Company and Upper Peninsula Power Company continues. Project construction is
underway and is now expected to be completed in mid-1998 if a final route plan
can be agreed to by the end of 1997.
- - Because of this transmission agreement and our ability to bring competition
to the power supply business, we enjoyed the first year of a two-year contract
with American Electric Power which significantly reduced a portion of our
purchased power cost. This contract along with a price cap order, which we
received in the fall of 1995 and initially implemented during 1996, were the
major reasons for our increase in earnings as outlined above. This agreement is
even more valuable when you consider that total hydro output was 13 million
kilowatt-hours below budget due to down time of a major unit at the U.S.
Government Hydro Plant.
- - As the year came to a close, we executed two contracts with Consumers Power
Company that will assist our operating income in the years ahead. The first was
a new power supply agreement which is not only competitive, but gives us
additional flexibility in scheduling power supply needs in the future years. The
second was the agreement to purchase two submarine cables currently owned by
Consumers Power Company at our interconnection at the Straits of Mackinac. We
currently own four of the Strait's six cables, and this purchase will allow us
to stabilize purchased power cost in succeeding years.
1996 Annual Report
<PAGE>
- - We have continuously emphasized that the important reason for our success
is the cooperation and dedication of our employees as they implement our budget
objectives each year. This year was another year of success in the area of
control of expenses. For example, our canal remediation project reached a stage
of completion as we performed two years' work in a one-year period, resulting in
substantial savings due to decreased mobilization expenses and increased
efficiency.
While our earnings are impressive, we expect significant increases in expenses
associated with our transmission tie to the west and the write-off of the EPA
settlement.
As 1996 drew to a close and we began 1997, the most significant change for
ESELCO, Inc., was the decision by the Board of Directors to explore the
possibility of a business combination. Subsequently, we hired an outside
consultant to evaluate, on an independent basis, the value of this fine Company.
We are currently in preliminary discussions with several interested parties.
Shareholders will be kept informed as information can be made public.
We are proud of our financial record and the ability to share our success with
our shareholders. At the March 13, 1997, meeting our Board of Directors declared
a quarterly dividend on common stock of 28 CENTS per share. In addition, the
Board declared a 3% stock dividend. Both dividends are payable May 15, 1997, to
shareholders of record at the close of business May 1, 1997.
With confidence in the management team and employees, we look forward to
continuing the role of a low-cost provider that also gives reliable service to
its customers and continues to earn the confidence of its shareholders with
continued strong results.
We encourage you to fully review the text of this report that explains in
greater detail some of the comments made above. We invite you to contact us
personally or in writing if you have any questions.
Sincerely,
/s/ Thomas S. Nurnberger /s/ William R. Gregory
Thomas S. Nurnberger William R. Gregory
Chairman of the Board and President and Chief
Chief Policy Officer Executive Officer
/s/ Donald Sawruk
Donald Sawruk
Executive Vice President and Chief Operating Officer
[PHOTOGRAPH]
THOMAS S. NURNBERGER, CHAIRMAN OF THE BOARD AND CHIEF POLICY OFFICER; WILLIAM R.
GREGORY, PRESIDENT AND CHIEF EXECUTIVE OFFICER; DONALD SAWRUK, EXECUTIVE VICE
PRESIDENT AND CHIEF OPERATING OFFICER
3
ESELCO, Inc.
<PAGE>
POWER IN PARTNERSHIPS
REVENUE SOURCES
(dollars in millions)
[GRAPH]
Resale $4.4 12%
Other $1.2 3%
Commercial $13.9 37%
Residential $9.7 26%
Industrial $8.3 22%
COMMERCIAL REVENUES PROVIDE A SOLID BASE OF OPERATING PROFIT AND THE
OPPORTUNITIES FOR FUTURE GROWTH.
KILOWATT-HOUR SALES BY RATE CLASS
(000's omitted)
[GRAPH]
Resale 166,818 21%
Other 42,448 5%
Commercial 213,593 27%
Residential 158,315 20%
Industrial 213,052 27%
KWHR SALES FOR RESALE INCREASED 10% DURING 1996.
REVENUE
The sale of electricity by Edison Sault Electric Company (the Company) generates
the primary source of revenue for ESELCO, Inc. Total operating revenue for 1996
was $37,500,000, an increase of $655,000, or 2%, over 1995 revenue. The major
increase in revenue came from the Company's principal resale customer,
Cloverland Electric Cooperative, as this resale revenue increased $321,000, or
8%, over 1995.
Revenue from sales to the commercial customer group was up 2%, or $268,000, over
1995. Residential revenue increased 2%, or $140,000, over the previous year.
Revenue on sales to the Company's four industrial customers was unchanged during
1996. This was primarily due to a rate reduction to the Company's largest
industrial customer, Manistique Papers, Inc. This rate reduction went into
effect in May 1996. With this rate reduction, the Company also reached a five-
year sales agreement with Manistique Papers, Inc. to be their sole provider of
electric service. Revenue on sales to others, primarily government agencies,
decreased 5% from 1995 levels.
ELECTRIC SALES
Kilowatt-hour (kwhr) sales for 1996 were up 3%, or 25.4 million kwhr, over 1995.
Total energy sales for 1996 were 794.2 million kwhrs.
Total sales to Cloverland Electric Cooperative during 1996 were 205 million
kwhrs, an increase of 8% over 1995. This increase was driven mainly by the
opening of a refurbished correctional facility by the Michigan Department of
Corrections in Newberry. A major building expansion to their casino gaming
operations by the Bay Mills Tribe of Chippewa Indians in Brimley also made a
noticeable impact on sales to this resale customer.
Following a 4% increase in 1995, commercial energy sales for 1996 rose 2% over
1995. Sales to the large commercial customer class and the small commercial
customer class were 90.1 million and 103.6 million kwhr, respectively. Two large
customers experienced a delay in becoming operational during 1996, which caused
sales to this customer group to grow modestly during the year. These facilities
are now fully operational and will have an impact on commercial sales for 1997.
Electric sales to the commercial heating and air-conditioning customers, which
are principally the motel and hotel industry, were up 5% during 1996.
Residential sales, primarily due to higher individual use per customer,
experienced a 2% rise during 1996. While total heating degree days for 1996 were
over 1995 and the 30-year average, the last quarter of 1996 was remarkably warm.
Total heating degree days for the last three months of 1996 were 9% under 1995
and 2% under the 30-year average for the same period. This unusually warm fourth
quarter influenced sales to the residential customer group.
Industrial energy sales increased 1% during 1996 to reach 213.0 million kwhrs.
Sales to Michigan Limestone Operations, a limestone quarry operation, rose 5%.
This is the second consecutive year that sales to this customer have risen by
5%. Energy
1996 Annual Report
<PAGE>
consumption to the other stone quarry served by the Company, Specialty Minerals,
Inc., increased 4% over 1995. This follows an 8% increase in 1993 and a 9%
increase in sales in 1994. Manistique Papers, Inc., the Company's largest
industrial customer, increased usage by 1.2 million kwhr, or 1%, over 1995.
Manistique Papers, Inc., initiated planning on a new project for 1997. This
project will have an impact on sales to this major customer.
Energy sales to others, which includes government facilities under contract for
services, increased by 3% over 1995 sales.
MANISTIQUE PAPERS, INC.-- MORE THAN A PARTNER
Kruger, Inc., a Montreal, Quebec, Canada-based forest product firm, owns
Manistique Papers, Inc. (MPI), which is located in Manistique. MPI is the only
paper mill in North America that uses 100% recycled magazines for its pulp. The
paper company's product mix includes newsprint, form bond for computer paper,
tray liner paper for the fast food industry, offset paper for the magazine
advertising inserts, and envelope paper.
Traditionally, a large portion of MPI's product mix has been the production of
newsprint. Competition in the newsprint market has made it difficult for MPI to
compete effectively with more modern production facilities. In response, the
paper company recently announced that due to "compelling market needs" of its
customers, it will increase its presence in the specialty paper market. The
paper company announced that it will enlarge its Manistique facility and install
new equipment that will expand its capabilities to produce quality specialty
paper. Providing new and competitively-priced quality products in response to
market needs is an important step toward securing the future of MPI.
Manistique Papers is uniquely sensitive to service interruptions. Edison Sault
personnel closely monitor the paper company's requirements and continuously
evaluate plans to maintain reliable service to their operations. The double
circuit 138 kv transmission line, scheduled for construction during 1998, is a
major commitment by Edison Sault to strengthen the system's reliability and
capability of service to Manistique Papers and the surrounding area.
Cost is also an important consideration for MPI, as they compete in a highly
competitive global market. Edison Sault has recognized this and responded by
developing a competitive rate agreement that allows Edison Sault to provide
exclusive electrical service to Manistique Papers through the year 2002.
Being responsive to the needs of customers is critical to the future success of
both Manistique Papers and Edison Sault. Both companies are confident they can
meet the challenge of providing superior service to their customers.
[PHOTOGRAPH]
MANISTIQUE PAPERS, INC.
LEIF CHRISTENSEN, PRESIDENT AND GENERAL MANAGER, AND JON JOHNSON, PLANT ENGINEER
"MANISTIQUE PAPERS AND EDISON SAULT ARE PARTNERS IN EACH OTHER'S SUCCESS.
RELIABLE, LOW-COST ELECTRIC SERVICE IS JUST ONE ELEMENT THAT ALLOWS US TO
PROVIDE NEW, HIGH QUALITY PAPER PRODUCTS AT A PRICE THE MARKETPLACE DEMANDS.
THIS CREATES VALUE THAT WILL INSURE OUR SUCCESS."
5
ESELCO, Inc.
<PAGE>
POWER IN PLANNING
"WE ARE PUTTING MUCH EMPHASIS ON IMPROVING EXISTING OPERATIONS TO BE SUCCESSFUL
IN THE FUTURE."
EXPENSES--
"HOW IT WAS SPENT"
(dollars in millions)
[GRAPH}
Reinvested $1.2 3%
Purchased Power
and Water $19.8 53%
Other Operations
and Maintenance $2.1 6%
Dividends $1.6 4%
Depreciation and
Interest $4.1 11%
Wages and Benefits $5.9 16%
Taxes $2.8 7%
TAKING ADVANTAGE OF THE COMPETITIVE POWER SUPPLY MARKET, THE COMPANY REDUCED ITS
LARGEST EXPENSE, PURCHASED POWER AND WATER, BY 3% DURING 1997.
ENGINEERING & OPERATIONS REPORT
The central Upper Peninsula transmission line was high on our priority list of
key projects in 1996. This line, when completed, will provide Edison Sault a
connection to the western transmission grid in Wisconsin, resulting in greater
system reliability and new sources of power.
A significant change in the scope of the transmission project was approved by
the Company in 1996 to provide further improvements to the system's reliability
and capabilities. We decided to construct a double circuit 138 kv transmission
line instead of the planned single circuit line. The dual events of signing a
letter of intent with Wisconsin Electric to purchase 20 Mw of power beginning in
1998 and the execution of a contract with Manistique Papers (our largest
customer) that guarantees they will be our customer until 2002, justified this
decision.
Early in 1996, the proposed route of the transmission line met with strong
opposition from affected property owners. All activities in the field were
suspended for several months because of this action. Subsequently, a Route
Advisory Committee was created with representatives from each township, the
National Forest Service, the Michigan Department of Natural Resources, and the
project sponsors. The responsibility given to the Committee was to investigate
various route alternatives. The Committee was to recommend a route that best
balanced the needs and concerns of the property owners, electric utilities, and
the public.
Direct involvement of representatives of the property owners was important to
make a route selection. The Committee was forceful in expressing the property
owners' desire for the route to transverse state and federal lands rather than
private properties. On Edison Sault's portion, the route of the transmission
line selected by the Committee will now affect only 16 private landowners versus
99 landowners on the original route.
The overall delay caused by the route selection process will result in the
planned September 1997 completion date being extended to July 1998.
OTHER MAJOR PROJECTS
The Company accomplished other major projects in 1996 on our voltage conversion
program designed to improve the quality of service at the distribution level.
Upgrading of the South Side Circuit in Sault Ste. Marie and the circuits in the
Engadine area provided the opportunity to retire two of our oldest substations.
On Mackinac Island, our line crews replaced the overhead cable structures that
provide electric power to the Island with underground facilities. This was the
last of four projects scheduled under a 1991 franchise agreement with the
Mackinac Island Park Commission to improve the aesthetics of our electrical
facilities.
1996 Annual Report
<PAGE>
Based on a comprehensive study by Harza Engineering Company, Edison Sault
embarked on a comprehensive plan to rehabilitate structural problems associated
with the floor and embankments of the hydro plant power canal. The total project
plan was originally bid for completion over a six-year period at a cost of $3.1
million. As a result of careful management and innovative construction
techniques, the project was accelerated and completed in four years at a cost of
$2.8 million.
FUTURE OPERATIONAL CHALLENGES
In these challenging and competitive times, we are putting much emphasis on
improving existing operations to be successful in the future. In conjunction
with the retirement of one of our Manistique meter readers, we will implement a
method of cost containment called Bimonthly Meter Reading. Beginning on January
1, 1997, we will read all meters in the Manistique Division, except major
accounts, every other month with an estimated reading rendered for those months
we do not read the meter.
We purchased two new bucket trucks and implemented one-person trouble call
procedures to improve productivity and customer service. The Company implemented
programs to provide cross-training of our Line, Meter, and Electrical Department
employees for greater flexibility and productivity.
We are also reviewing the possibility of an alliance agreement with one of our
major distributors to improve our purchasing and materials management systems.
The Company put a new Outage Report Management System into operation in 1996.
Lake Superior State University students designed this system as a student
project. When we receive an outage call, the computerized system retrieves key
customer information to help in handling and analyzing the trouble.
A COOPERATIVE COMMUNITY PARTNERSHIP
Lake Superior State University (LSSU), established in 1946, is located in Sault
Ste. Marie, Michigan, and has a student enrollment of more than 3,300 students
in both undergraduate and graduate degree programs. LSSU has a long and rich
tradition of offering technical programs in many diverse disciplines, including
engineering (electrical, electronic, mechanical, and robotics), nursing, medical
technology, criminal justice, fire science, and fish and wildlife management.
Edison Sault can take special pride in LSSU's growth because it has helped
foster this growth through cooperative education programs. Today, LSSU is one of
Edison Sault's largest customers, and we include many Edison Sault employees
among LSSU's alumni. Together the two institutions serve as an example of how
cooperation and teamwork can provide positive results and make the community and
region a better place.
[PHOTOGRAPH]
LAKE SUPERIOR STATE UNIVERSITY
DR. ROBERT ARBUCKLE,PRESIDENT, LAKE SUPERIOR STATE UNIVERSITY
"FOR YEARS, EDISON SAULT HAS BEEN A MODEL TO THE COMMUNITY FOR ITS LEADERSHIP
ROLE IN THE COMMUNITY THAT IT SUPPORTS. THE COMPANY'S PARTNERSHIP WITH LAKE
SUPERIOR STATE UNIVERSITY IS JUST ONE EXAMPLE. THEIR SUPPORT INCLUDES ASSISTANCE
IN THE CONSTRUCTION OF STUDENT FACILITIES; HIRING OF STUDENTS IN COOPERATIVE
EDUCATION PROGRAMS; AND THE NATIONALLY-RECOGNIZED AQUATIC RESEARCH LABORATORY.
WE LOOK FORWARD TO MANY MORE YEARS OF PRODUCTIVE PARTNERSHIP."
7
ESELCO, Inc.
<PAGE>
POWER IN WORKING TOGETHER
SAULT STE. MARIE TRIBE OF CHIPPEWA INDIANS
BERNARD BOUSCHOR, TRIBAL CHAIRMAN, SAULT STE. MARIE TRIBE OF CHIPPEWA INDIANS
"THE SAULT STE. MARIE TRIBE IS COMMITTED TO THE ADVANCEMENT OF OPPORTUNITIES
THAT WILL ENHANCE THE QUALITY OF LIFE FOR ALL ITS MEMBERSHIP. EDISON SAULT HAS
BEEN RESPONSIVE AND SUPPORTIVE TO OUR NEEDS AS WE CONTINUE TO BE AN ECONOMIC
FORCE THROUGHOUT THE STATE AND REGION."
[PHOTOGRAPH]
The Sault Ste. Marie Tribe of Chippewa Indians, based in Sault Ste. Marie, has
grown dramatically beyond the bounds of its local origins. Casino gaming
activities continue to be the core of the Soo Tribe's business activities with
casinos in Sault Ste. Marie, St. Ignace, Manistique, Hessel, and Christmas,
Michigan. With Michigan voter approval in November 1996, they may be allowed to
expand their gaming enterprises into the City of Detroit.
The Soo Tribe is keenly aware of the need to broaden their business
opportunities outside the gaming industry. They have actively pursued other
commercial ventures throughout Michigan and Canada to diversify their
opportunities. The Tribe currently has interests in 17 non-gaming businesses.
For 1995, Tribal business generated more than $325 million. The Tribe now
employs more than 2,950 employees, making it Northern Michigan's single largest
employer.
The Tribe has made significant efforts in human services and recreation
activities. With the 1995 completion of the Health Care Center in Sault Ste.
Marie, tribal members now have first-class health care facilities available to
meet their full health needs. They have also initiated an emergency walk-in
clinic with War Memorial Hospital in Sault Ste. Marie.
The 150,000-square-feet "Big Bear" Arena, formally opened to the public in
October 1996, is Northern Michigan's largest sports and fitness complex. Besides
a National Hockey League-sized ice rink and an Olympic-sized ice rink, the arena
offers health, recreation, and fitness programs to all area youth and adults.
The Tribe has actively contributed to recreational opportunities and facilities
in other areas and communities where they have a presence.
Proper planning assistance and coordination of services have been key to
addressing the Tribe's needs as they develop. Edison Sault personnel give close
attention to the Tribe's operational plans to insure the reliability and
capability of their service. Because of their growth and development, the
Company is making significant system enhancements that will provide additional
options to maximize the service to the Tribe's growing facilities.
We recognize the need and importance of supporting the Tribe with the operation
of its facilities. Consultive assistance has become an integral part of the
total service package that the Company provides. The Sault Ste. Marie Tribe of
Chippewa Indians and Edison Sault Electric are partners in opportunities and
improvements that will make a difference to those they serve.
1996 Annual Report
<PAGE>
AREA AT A GLANCE
Michigan's Eastern Upper Peninsula experienced another sound year in tourism and
commerce. For decades, this region has been a destination point for summer
visitors to enjoy pristine scenery and recreational opportunities. In recent
years, the growth and development of winter-related activities now attract a new
group of visitors to the region on a year-round basis.
A major attraction in Sault Ste. Marie is the Soo Locks on the St. Marys River.
The Detroit District Corps of Engineers operates and maintains this facility.
Since 1971, the first year the Corps made records available, more than 13.3
million people have visited the Locks to observe vessels passing through the
lock system. The Soo Locks averages more than 10,000 passages annually of boats
of different types, size, and nationalities. The primary commodities that they
transport through the Locks are taconite pellets for the steel industry, grain,
and western coal.
Mackinac Island, between Lake Michigan and Lake Huron in the Straits of
Mackinac, is internationally known for its unique charm and history which dates
to its original settlement by Father Jacques Marquette in 1670. The Mackinac
Island Chamber of Commerce estimates that as many as 15,000 tourists per day
visit this summer getaway where motorized vehicles are forbidden. Mackinac
Island State Park, a major island attraction, was originally recognized as the
second oldest national park in the United States. The federal government turned
the park over to the State of Michigan in 1895, and it became Michigan's first
state park.
The International Bridge, between the twin Soo's of Michigan and Ontario,
Canada, continues to be a bridge of commerce. The number of bridge crossings in
1996 reflected 3,231,000 vehicles entering Sault Ste. Marie, Michigan, a slight
increase over 1995. Canadian trade has become an integral segment of the local
economy. The majestic Mackinac Bridge, which joins Michigan's two peninsulas,
experienced another record of vehicle crossings, clearly showing the strength of
tourism in the Upper Peninsula. In 1996, 4,625,000 vehicles crossed this bridge,
a 1% increase over 1995.
The State of Michigan, operating four correctional facilities and two prison
camps, has become a mainstay of area employment. With the 1996 opening of
another correction facility in Newberry, Michigan, the area's state correctional
system now employs more than 2,000 people.
Soo Plastics and Hoover Precision Products, both in Sault Ste. Marie, have
announced plans to expand their manufacturing facilities during 1997. Other
manufacturers, such as Olofsson Corporation and Wohlert Products, continue to
develop new product lines and successfully compete for new business
opportunities. Wood product firms like Winlock Veneer and JAS Veneer are
established quality suppliers to the building industry.
We actively support both businesses and other economic opportunities that will
enhance the quality of life for those who live throughout Michigan's Eastern
Upper Peninsula.
"...PARTNERS IN OPPORTUNITIES AND IMPROVEMENTS THAT WILL MAKE A DIFFERENCE TO
THOSE THEY SERVE."
COMPARISON--
ESE'S RETAIL RATE
VS. THE NATIONAL AVERAGE
(average cents per Kilowatt-hour)
[GRAPH]
ESE Nation (Investor-owned Utilities)
Residential 6.11 8.80
Commercial 6.49 7.86
Industrial 3.90 4.92
CUSTOMERS OF EDISON SAULT ELECTRIC CONTINUE TO ENJOY RETAIL RATES THAT ARE
SIGNIFICANTLY LOWER THAN THE NATIONAL AVERAGE. RETAIL RATES HAVE BEEN CAPPED
THROUGH THE YEAR 2001.
(SOURCE: EDISON ELECTRIC INSTITUTE)
9
ESELCO, Inc.
<PAGE>
POWER IN SATISFACTION
TOTAL CUSTOMER SATISFACTION
Satisfied customers are the Company's best investment for future success. As
measured by the 1996 EDISON SAULT ELECTRIC COMPANY CUSTOMER SURVEY, conducted by
the Lake Superior State University's Center for Social Research, the Company
should enjoy continued success in the years ahead. According to survey results,
91% of the respondents gave Edison Sault a "very favorable" to "favorable"
rating of the services that we provide. This approval rating is consistent with
the previous CUSTOMER SURVEY completed in 1989. This is well above the 76%
national average approval ratings of public utilities as surveyed by the Edison
Electric Institute.
Edison Sault Electric's customers said they appreciated employee courtesy when
they experienced direct contact with the Company, whether it was under emergency
circumstances or general business activities. We received the following comment
from an Edison Sault customer:
"Whenever I have the opportunity to have contact with Edison employees, they
have been extremely courteous, helpful, and professional."
Continued employee focus on customer satisfaction by addressing their needs will
insure that the Company meets underlying goals of business and financial
success.
EMPLOYEE RETIREMENT
ROBERT W. KEIPER
Robert began his career with Edison Sault Electric Company on January 4, 1956,
in the Meter Department and then transferred to the Line Department. In 1976, he
transferred to the System Control Department at the hydro plant. Robert
transferred in 1993 to the St. Ignace Division as the Distribution Supervisor
and retired from that position in 1996.
[PHOTOGRAPH]
Robert W. Keiper
MARY L. BURNS
Mary started part-time reading meters in the rural area of the Manistique
Division. In 1977, she accepted the position of full-time Meter Reader in
Manistique. Mary retired from Edison Sault in early 1997.
[PHOTOGRAPH]
Mary L. Burns
JAMES M. MCDONALD
James started at Edison Sault Electric Company working in the Operation and
Maintenance Departments of the hydro plant. For a year, he worked as a Meter
Reader. James returned to the Maintenance Department at the hydro plant in 1991,
where he worked until his retirement in 1996. (no photo available)
JAMES L. YEACK
In 1971, James came to work in the Maintenance Department at the hydro plant.
During his career at Edison Sault Electric Company, he worked in the Stores
Department and Meter Department. Before his retirement in 1996, he returned to
the position of Repairman in the Maintenance Department at the hydro plant. (no
photo available)
1996 Annual Report
<PAGE>
SELECTED OPERATING STATISTICS FOR EDISON SAULT ELECTRIC
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Generation, Purchases and Sales
(Thousands of kilowatt-hours)
Net Generation:
Hydro (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 356,456 336,775 354,954 367,118 382,224 337,269
Diesel. . . . . . . . . . . . . . . . . . . . . . . . . . . . (59) 83 (61) 172 (41) (36)
Purchases from Other Utilities. . . . . . . . . . . . . . . . 482,518 473,912 420,784 376,077 338,056 350,732
-------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 838,915 810,770 775,677 743,367 720,239 687,965
Losses and Unaccounted for. . . . . . . . . . . . . . . . . . 42,617 39,898 38,164 35,756 33,563 32,128
Company Use . . . . . . . . . . . . . . . . . . . . . . . . . 2,072 2,026 1,977 2,158 1,947 1,521
-------- -------- -------- -------- -------- --------
Electricity Sold. . . . . . . . . . . . . . . . . . . . . . 794,226 768,846 735,536 705,453 684,729 654,316
-------- -------- -------- -------- -------- --------
Sales:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . 158,315 155,818 153,004 150,487 144,203 139,577
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . 213,593 209,491 200,913 188,415 173,141 168,647
Industrial. . . . . . . . . . . . . . . . . . . . . . . . . . 213,052 210,113 193,176 184,308 190,004 175,459
Firm Sales to Other Utilities . . . . . . . . . . . . . . . . 163,692 152,270 143,558 132,378 127,288 129,322
Negotiated
Government Accounts . . . . . . . . . . . . . . . . . . . . 40,016 38,603 42,312 46,749 47,481 38,522
Street Lighting . . . . . . . . . . . . . . . . . . . . . . . 2,432 2,551 2,573 2,569 2,546 2,557
-------- -------- -------- -------- -------- --------
Total Firm Customer Sales . . . . . . . . . . . . . . . . . 791,100 768,846 735,536 704,906 684,663 654,084
Non-Firm Sales to Other Utilities (Including Excess
Hydro Sales)(2). . . . . . . . . . . . . . . . . . . . . . . 3,126 0 0 547 66 232
-------- -------- -------- -------- -------- --------
Total Sales . . . . . . . . . . . . . . . . . . . . . . . . 794,226 768,846 735,536 705,453 684,729 654,316
-------- -------- -------- -------- -------- --------
Peak Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . 130,820 128,324 129,182 126,092 113,152 109,317
-------- -------- -------- -------- -------- --------
Number of Customers (Average)
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . 17,893 17,719 17,405 17,153 16,919 16,756
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,137 3,097 3,072 3,026 2,964 2,921
Industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 4 4 4 4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 42 42 42 42 44
-------- -------- -------- -------- -------- --------
Total Customers . . . . . . . . . . . . . . . . . . . . . . 21,075 20,862 20,523 20,225 19,929 19,725
-------- -------- -------- -------- -------- --------
Number of Full-Time Employees. . . . . . . . . . . . . . . . . . 88 90 91 91 93 93
-------- -------- -------- -------- -------- --------
Customers Per Employees. . . . . . . . . . . . . . . . . . . . . 239 232 226 222 214 212
-------- -------- -------- -------- -------- --------
Average Annual Use and Revenue
Per Residential Customers:
Kilowatt-hour . . . . . . . . . . . . . . . . . . . . . . . . 8,848 8,794 8,791 8,773 8,523 8,330
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 540 $ 538 $ 535 $ 525 $ 491 $ 488
Revenue per Kilowatt-hour . . . . . . . . . . . . . . . . . . 6.11CENTS 6.11CENTS 6.08CENTS 5.98CENTS 5.76CENTS 5.86CENTS
Per Commercial Customer:
Kilowatt-hour . . . . . . . . . . . . . . . . . . . . . . . . 68,088 67,643 65,401 62,265 58,415 57,736
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,419 $ 4,390 $ 4,216 $ 4,022 $ 3,632 $ 3,571
Revenue per Kilowatt-hour . . . . . . . . . . . . . . . . . . 6.49CENTS 6.49CENTS 6.45CENTS 6.46CENTS 6.22CENTS 6.19CENTS
</TABLE>
(1) Includes the output of 18 megawatt U.S. Government Hydro Plant which is
purchased net of generation requirements for Sault Locks complex operation.
(2) Represents sales of hydro energy generated in excess of need in period of
low consumer demand.
11
ESELCO, Inc.
<PAGE>
ESELCO, INC.
SIX-YEAR RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
for the Year Ended December 31 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Thousands of Dollars)
CONSOLIDATED STATEMENT OF INCOME
OPERATING REVENUES . . . . . . . . . . . . . . . $ 37,500 $ 36,845 $ 35,260 $ 33,573 $ 30,292 $ 29,070
---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Purchased power . . . . . . . . . . . . . . . . 18,851 19,531 18,279 17,051 14,771 14,025
Other operations and maintenance expenses . . . 8,886 8,148 8,511 8,506 7,557 7,164
Depreciation and amortization . . . . . . . . . 2,614 2,499 2,308 2,171 2,059 2,139
Property and other taxes. . . . . . . . . . . . 1,556 1,560 1,470 1,568 1,650 1,566
Income taxes. . . . . . . . . . . . . . . . . . 1,247 1,117 983 766 760 676
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses. . . . . . . . . . . 33,154 32,855 31,551 30,062 26,797 25,570
---------- ---------- ---------- ---------- ---------- ----------
Net operating income. . . . . . . . . . . . . 4,346 3,990 3,709 3,511 3,495 3,500
OTHER DEDUCTIONS--NET. . . . . . . . . . . . . . 1,548 1,625 1,509 1,513 1,630 1,717
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME AVAILABLE FOR COMMON STOCK. . . . . . $ 2,798 $ 2,365 $ 2,200 $ 1,998 $ 1,865 $ 1,783
---------- ---------- ---------- ---------- ---------- ----------
COMMON STOCK (A)
Average Shares Outstanding. . . . . . . . . . . 1,510,907 1,469,112 1,446,848 1,418,390 1,395,872 1,383,795
---------- ---------- ---------- ---------- ---------- ----------
Earnings Per Share. . . . . . . . . . . . . . . $ 1.85 $ 1.61 $ 1.52 $ 1.41 $ 1.34 $ 1.29
---------- ---------- ---------- ---------- ---------- ----------
Year End Shares Outstanding . . . . . . . . . . 1,540,592 1,481,104 1,457,328 1,434,830 1,403,764 1,390,025
---------- ---------- ---------- ---------- ---------- ----------
Book Value of Common Stock. . . . . . . . . . . $ 13.13 $ 12.40 $ 11.71 $ 10.78 $ 9.96 $ 9.74
---------- ---------- ---------- ---------- ---------- ----------
Annual Dividends
Declared Per Share (a). . . . . . . . . . . . $ 1.07 $ 1.00 $ 0.94 $ 0.91 $ 0.87 $ 0.84
---------- ---------- ---------- ---------- ---------- ----------
SELECTED BALANCE SHEET DATA
Net Utility Plant . . . . . . . . . . . . . . . $ 44,983 $ 43,481 $ 42,692 $ 40,828 $ 39,429 $ 38,940
---------- ---------- ---------- ---------- ---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . $ 57,156 $ 55,322 $ 51,070 $ 47,900 $ 46,592 $ 45,471
---------- ---------- ---------- ---------- ---------- ----------
Capitalization:
Common Equity . . . . . . . . . . . . . . . . $ 20,235 $ 18,364 $ 17,071 $ 15,470 $ 13,984 $ 13,539
Long-Term Debt
(Less current maturities) . . . . . . . . . 16,898 13,936 12,566 13,607 14,040 14,577
---------- ---------- ---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . $ 37,133 $ 32,300 $ 29,637 $ 29,077 $ 28,024 $ 28,116
---------- ---------- ---------- ---------- ---------- ----------
Long-Term Deferred
Tax Credits . . . . . . . . . . . . . . . . . $ 5,328 $ 4,140 $ 4,021 $ 3,847 $ 5,308 $ 5,289
---------- ---------- ---------- ---------- ---------- ----------
Notes Payable . . . . . . . . . . . . . . . . . $ 1,119 $ 3,652 $ 4,495 $ 3,475 $ 1,628 $ 1,548
---------- ---------- ---------- ---------- ---------- ----------
Capitalization Percentages:
Common Equity . . . . . . . . . . . . . . . . 54% 57% 58% 53% 50% 48%
Long-Term Debt
(Less current maturities) . . . . . . . . . 46% 43% 42% 47% 50% 52%
---------- ---------- ---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . . . . 100% 100% 100% 100% 100% 100%
---------- ---------- ---------- ---------- ---------- ----------
RETURN ON COMMON EQUITY
Average . . . . . . . . . . . . . . . . . . . . 14.5% 13.3% 13.5% 13.6% 13.6% 13.7%
---------- ---------- ---------- ---------- ---------- ----------
Year-end. . . . . . . . . . . . . . . . . . . . 13.8% 12.9% 12.9% 12.9% 13.3% 13.2%
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
(a) Retroactively adjusted for stock dividends.
12
1996 Annual Report
<PAGE>
ESELCO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
CORPORATE STRUCTURE
ESELCO, Inc. (ESELCO), is the parent holding company of Edison Sault Electric
Company (Edison Sault), ESEG, Inc. (ESEG), and Northern Tree Service, Inc.
(NTS). Edison Sault (Company) is engaged in the generation, purchase,
transmission, and sale of electric energy. NTS, its tree trimming subsidiary,
began operation in May of 1990. Edison Sault is the principal operating
subsidiary of ESELCO and accounts for the major share of ESELCO's total assets,
revenues, and income. Therefore, the following discussion and analysis deal
primarily with the operations of Edison Sault Electric Company.
SALES, EXPENSES, AND INCOME
For the year 1996, total kilowatt-hour sales and revenue increased 3% and 2%,
respectively, over 1995. Resale kwhr sales and revenue increased by 8% in 1996.
Residential kwhr sales and revenue increased 2% over 1995. The average number of
residential customers and use per customer increased 1% during 1996.
Commercial sales and revenue increased 2% during 1996 due to a 1% increase in
customers and use per customer.
Industrial sales increased 1% in 1996. Sales to Michigan Limestone, Specialty
Minerals, and Manistique Papers increased 5%, 4%, and 1%, respectively. Sales in
1996 to Lakehead Pipe Line, Inc., were approximately equal to 1995 sales. Total
1996 revenue from the industrial customers was approximately equal to 1995
levels due to a rate reduction to Manistique Papers during 1996.
During 1995, kwhr sales and operating revenues increased 5% over 1994. Sales to
the industrial, commercial, and residential customer classes increased 9%, 4%,
and 2%, respectively, during this period. Total revenue increased as a result of
the net increase in sales and an increase in purchased power revenue.
Total hydro plant output increased 6% during 1996 due to an increase in water
available for hydro generation. Power purchased from other utilities increased
2% in 1996 due to increased requirements. Purchased power expense in 1996 was
down 3% as a result of purchases from a lower-cost supplier for part of the
Company's requirements. During 1995, purchased power requirements increased by
13% due to a decrease in hydro output and increased requirements. Purchased
power expense increased 7% in 1995 as a result of increased requirements which
were partially offset by decreased costs from the U.S. Government hydro plant.
Other operations and maintenance expenses increased 9% over 1995. Payroll and
associated employee benefit costs increased approximately 9% in 1996. Pension
expense increased as a result of improvements made to the Bargaining Unit
Pension Plan and changes in actuarial assumptions. In addition, employee benefit
expense increased as a result of the Restricted Stock Plan that was approved by
shareholders in 1996. The Plan is discussed in more detail in the Notes to the
Financial Statements.
Fuel and water expense increased 16% as a result of increased water lease
payments made to the U.S. Government. The water lease payments increased due to
a larger quantity of water being available for hydro generation and higher
rates.
Major maintenance expense increased 20%, largely as a result of increased
maintenance expense associated with the Manistique diesels.
Depreciation and amortization increased 5% in 1996 due to an increase in
depreciable assets. Income taxes increased 12% in 1996 as a result of higher
taxable income.
During 1995, other operation and maintenance expenses decreased 4% from 1994
figures. Payroll and associated benefit costs increased 1% in 1995 due to
increases in employee benefit costs. The increase in payroll and
employee benefit costs was offset by decreases in other expenses. Depreciation
and amortization expense increased 8% during 1995 due to an increase in
depreciable assets and increased rates as approved by the Michigan Public
Service Commission (MPSC). Income taxes increased substantially in 1995 as a
result of higher taxable income.
Based on the previously described changes, earnings per common share restated
for stock dividends increased by 15% in 1996, as compared with a 6% increase for
1995.
RATES AND REGULATORY MATTERS
On August 22, 1995, Edison Sault filed an application with the MPSC for
authority to implement price cap regulation. In the application, the Company
proposed that its base rates be capped at present levels, that its existing
Power Supply Cost Recovery (PSCR) factor be rolled into base rates, and that its
existing PSCR Clause be suspended. The Company published the required notice of
opportunity to comment or request a hearing. No comments were received, and on
September 21, 1995, the MPSC approved the Company's application, subject to the
modification that the Company gives 30 days notice rather than two weeks notice
for rate decreases and that the Company file an application by October 1, 2000,
to address its experience under the price cap mechanism. With the latter
modification, the price cap authorization represents an experimental regulatory
mechanism. The order also allows Edison Sault to file an application seeking an
increase in rates only under extraordinary circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed an
intervention and petition for rehearing in the Company's Price Cap Order. The
Attorney General's intervention was based on the grounds that the MPSC did not
have authority to approve price cap regulation. On December 21, 1995, the MPSC
rejected the Attorney General's petition for rehearing. On January 19, 1996, the
13
<PAGE>
ESELCO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Attorney General filed an appeal with the Michigan Court of Appeals.
Legal counsel for the Company believes that the Attorney General's appeal is
without merit and that the Company will prevail. A decision in this case is
not expected until mid-1997. The Company implemented the Price Cap Order on
January 1, 1996.
In light of the Price Cap Order and other potential changes in the industry, the
Company continually reviews the applicability of accounting under SFAS 71. As
previously stated, the Price Cap Order is a five-year experimental regulatory
mechanism containing language allowing Edison Sault to seek rate relief for
costs incurred under extraordinary circumstances. In addition, final
implementation of the plan is subject to resolution of the Attorney General's
appeal. Based on a current evaluation of the factors affecting the applicability
of SFAS 71, the Company has determined that it is currently appropriate to
continue accounting in accordance with SFAS 71.
In the event the Company was to discontinue accounting under SFAS 71, the
accounting impact would be an extraordinary after-tax non-cash charge to
earnings in an amount represented largely by any unamortized net regulatory
assets existing at that point in time. The Company's regulatory assets and
liabilities are shown in Note B to the Financial Statements.
LIQUIDITY AND CAPITAL COMMITMENTS
INVESTING ACTIVITIES
ESELCO invested $4,266,000 in net property, plant, and equipment in 1996.
Included in this amount is approximately $840,000 related to the rebuilding of
the hydro canal in Sault Ste. Marie. During 1995, approximately $482,000 was
invested in this project. In addition to investments in net property, plant, and
equipment, $3,510,000 was spent to resolve the environmental issue discussed
under Environmental Matters.
For the three-year period ending December 31, 1996, Edison Sault made a net
investment of $12,024,000 in property, plant, and equipment.
CAPITAL REQUIREMENTS
In October 1994, Edison Sault entered a construction and joint use agreement
with Wisconsin Electric Power Company, Upper Peninsula Power Company, and
Cloverland Electric Cooperative. This agreement specifies each party's
responsibility in the construction of a new transmission line from Arnold,
Michigan, to Manistique, Michigan. Edison Sault continues to plan for the
construction of this new line. This project has an expected completion date of
mid-1998. Edison Sault expects that its share of the cost of this project will
be approximately $9.0 million with approximately $3.2 million of this being
spent in 1997. During 1996, $460,000 was invested in the new 138 kv interconnect
project.
In December 1996, the Company signed a purchase agreement with Consumers Power
Company for the purchase of a 138 kv submarine circuit across the Straits of
Mackinac. Since 1990 Edison Sault had leased these cables at an annual net lease
cost of approximately $466,000. The purchaser of the cables is ESEG, a wholly-
owned subsidiary of ESELCO, Inc. ESEG has not previously been an active
subsidiary of ESELCO. ESEG will lease the cables to Edison Sault under an
operating lease arrangement. The purchase and lease are subject to approval by
the Federal Energy Regulatory Commission (FERC). The cost of the purchase when
consummated in 1997 will be approximately $3.8 million.
CASH PROVIDED BY OPERATING
AND FINANCING ACTIVITIES
For the year ended December 31, 1996, cash provided by operating activities
totaled $6,932,000. Included in the figure for cash provided from operating
activities is an increase in deferred taxes of approximately $1.0 million due,
in large part, to tax matters relating to the timing of the expenditures made in
settlement of the environmental matter discussed elsewhere. After payment of
dividends, internal sources of funds provided 68% of the capital requirements
during 1996 and 70% of the capital requirements for the three-year period ending
December 31, 1996. ESELCO paid dividends of $1,634,000 in 1996 which represented
a 58% payout ratio. For the three-year period ending December 31, 1996, ESELCO
paid out $4,465,000 in dividends, or a 61% dividend payout ratio.
During 1996, Edison Sault borrowed $3.2 million under a bank term loan
agreement. The proceeds of this loan were used for payment to the U.S.
Environmental Protection Agency in settlement of the issue discussed under
environmental matters. In addition, ESEG has arranged bank secured term loan
financing for its planned acquisition of the 138 kv submarine cables described
above.
Edison Sault has authority to issue up to $10 million in short-term obligations.
Included in this authority is a line of credit in the amount of $4 million at
the prime rate. In addition, Edison Sault has authority to issue short-term
thrift notes to Michigan residents. The Company's short-term financing
requirements relate primarily to financing customer accounts receivable,
unbilled revenues resulting from cycle billing, and capital expenditures until
permanently financed. At December 31, 1996, the Company had approximately $7.6
million of unused bank line of credit and additional energy thrift note
authority. These two sources of short-term financing have been sufficient to
meet the Company's short-term capital requirements.
ESELCO's shareholders reinvested approximately $711,000 through the Dividend
Reinvestment Plan (DRP) in 1996. For the three-year period ending December 31,
1996, the DRP provided approximately $1.8 million of capital.
14
<PAGE>
ESELCO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Edison Sault also has authority to issue up to $10 million in Long-term Energy
Thrift Notes to Michigan residents. At December 31, 1996, there were $6,895,000
of Long-term Energy Thrift Notes outstanding, of which $5,355,000 are classified
as long-term debt on the statement of financial position.
At December 31, 1996, the Company's long-term debt from First Mortgage Bonds
totaled $7,995,000. The First Mortgage Bonds are secured by the utility plant of
Edison Sault. At December 31, 1996, there was approximately $10.4 million of
unutilized bond financing capability resulting from plant additions and bond
retirements.
At December 31, 1996, there was approximately $13.5 million of long-term
credit available under the Company's First Mortgage Bond Indentures and
Long-term Energy Thrift Note authorization.
CAPITAL STRUCTURE
ESELCO has maintained a relatively high ratio of common equity to total
capitalization as a result of its earnings growth, dividend reinvestment plan,
and low payout ratio. At December 31, 1996, common equity represented 49% of
total capitalization, including current maturities of long-term debt and short-
term debt. The ratio of common equity to total capitalization is relatively high
as compared with the rest of the industry and as such represents a fairly
conservative capital structure.
THE CAPITAL STRUCTURE OF ESELCO IS ILLUSTRATED BELOW:
Capitalization at December 31 1996 1995 1994
- --------------------------------------------------------------------------
Common equity 49% 49% 48%
Long-term debt (Including
current maturities) 48% 41% 39%
Short-term debt 3% 10% 13%
--- --- ---
Total 100% 100% 100%
With ESELCO's unutilized short and long-term financing sources and its
relatively conservative capital structure, ESELCO believes it is well positioned
to finance its future capital requirements.
ENVIRONMENTAL MATTERS
In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially Responsible
Party" at the Manistique River/ Harbor Area of Concern (AOC) in Manistique,
Michigan. There were a number of other potentially responsible parties, some of
whom have been notified by the U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural Resources,
identified the Manistique River and Harbor as an "Area of Concern" (AOC) due to
PCBs which have been found in that area. An Environmental Engineering/Cost
Analysis (EECA) was submitted to the U.S. EPA which provided an analysis of
various methods of remediation for the harbor. The EECA presented six
alternatives of remediation action and ultimately recommended a remediation
method of in-place capping. Management believed this to be the most prudent
course of action. Although the total ultimate cost of specific remedial action
and Edison Sault's potential liability were not known at that time, management
had estimated Edison Sault's minimum cost of this remedy to be $2.9 million.
That figure represented an increase of $1.9 million from the amount recorded
during 1994. Certain other expenditures for investigation of any necessary
remedial action were incurred and are reflected in the accompanying financial
statements. Future costs related to this issue are not expected to have a
material impact on Edison Sault's financial position or future results of
operations.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate the
harbor through in-place capping at a total cost of $6.4 million, with the Edison
Sault portion costing $3.2 million. Through further negotiations, the U.S. EPA
and the PRPs agreed to a cash-out settlement whereby the PRPs would pay to the
U.S. EPA the $6.4 million cost of capping for the right to be absolved from any
future legal actions concerning PCB pollution. To effect this settlement, an
Administrative Order on Consent was executed by all parties in December 1996,
with payments made to the U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this project.
Edison Sault has retained legal assistance to start a process of recovering
these costs through several insurance entities. The certainty and magnitude of
insurance recovery are unknown at this time.
Edison Sault believes that the costs discussed above, including the payment to
the U.S. EPA to be relieved of future liability, are a legitimate cost of doing
business and would be recoverable through utility rates. Further, in November
1993, the MPSC issued an order authorizing Edison Sault to defer and amortize,
over a period not to exceed 10 years, environmental assessment and remediation
costs associated with the Manistique River AOC. Therefore, Edison Sault has
recorded a regulatory asset in the amount of $3.2 million, plus unreimbursed
cost of $300,000, for a total of $3.5 million, which the Company will begin
amortizing in 1997.
OTHER MATTERS
On January 23, 1997, ESELCO issued a press release stating that it is in the
preliminary stages of discussion with possible acquirors. It also stated that
these discussions have been exploratory in nature and have not resulted in a
letter of intent or other agreement in principle and, thus, there can be no
assurance that any acquisition will be consummated.
15
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF INCOME
for the Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------
OPERATING REVENUES $37,499,931 $36,844,488 $35,260,292
----------- ----------- -----------
OPERATING EXPENSES
Operation--Purchased power $18,851,035 $19,531,448 $18,279,172
--Other 6,743,273 6,164,031 6,408,682
Maintenance 2,142,159 1,983,348 2,102,781
Depreciation and amortization 2,614,395 2,498,773 2,307,787
Property and other taxes 1,556,351 1,560,496 1,470,238
Income taxes 1,247,196 1,116,784 982,627
----------- ----------- -----------
Total operating expenses $33,154,409 $32,854,880 $31,551,287
----------- ----------- -----------
Net operating income $ 4,345,522 $ 3,989,608 $ 3,709,005
----------- ----------- -----------
OTHER INCOME (DEDUCTIONS), NET $ (47,594) $ (68,773) $ (31,114)
----------- ----------- -----------
INTEREST CHARGES
Interest on long-term debt $ 1,367,387 $ 1,243,954 $ 1,258,301
Other interest 132,456 311,915 219,182
----------- ----------- -----------
Total interest charges $ 1,499,843 $ 1,555,869 $ 1,477,483
----------- ----------- -----------
NET INCOME $ 2,798,085 $ 2,364,966 $ 2,200,408
----------- ----------- -----------
----------- ----------- -----------
EARNINGS PER AVERAGE SHARE OF
COMMON STOCK (a) $ 1.85 $ 1.61 $ 1.52
----------- ----------- -----------
----------- ----------- -----------
CASH DIVIDENDS DECLARED
PER SHARE OF COMMON STOCK (a) $ 1.07 $ 1.00 $ 0.94
----------- ----------- -----------
----------- ----------- -----------
AVERAGE COMMON SHARES OUTSTANDING (a) 1,510,907 1,469,112 1,446,848
----------- ----------- -----------
----------- ----------- -----------
(a) Retroactively adjusted for stock dividends.
( ) Denotes deduction.
See notes to financial statements.
16
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
for the Year Ended December 31 1996 1995
- --------------------------------------------------------------------------------
ASSETS
ELECTRIC PLANT, at original cost $ 71,802,321 $ 68,027,994
Less-Accumulated depreciation 29,671,038 27,465,011
------------ ------------
$ 42,131,283 $ 40,562,983
Asset acquired under capital lease 2,851,622 2,917,609
------------ ------------
$ 44,982,905 $ 43,480,592
------------ ------------
CURRENT ASSETS:
Cash $ 293,883 $ 302,845
Accounts receivable, less reserve of $32,000 2,999,783 3,396,213
Unbilled revenue 1,693,826 1,789,655
Materials and supplies, at average cost 1,148,046 1,191,419
Prepayments 1,966,932 1,765,406
------------ ------------
$ 8,102,470 $ 8,445,538
------------ ------------
OTHER ASSETS:
Debt expense, being amortized $ 28,972 $ 38,018
Regulatory asset 3,510,181 2,850,000
Other 531,193 508,106
------------ ------------
$ 4,070,346 $ 3,396,124
------------ ------------
$ 57,155,721 $ 55,322,254
------------ ------------
------------ ------------
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION (See Statement):
Common equity $ 20,234,722 $ 18,363,998
Preferred stock 0 0
Long-term debt (less current portion) 16,898,187 13,935,889
------------ ------------
$ 37,132,909 $ 32,299,887
------------ ------------
OTHER NONCURRENT LIABILITIES:
Obligation under capital lease $ 2,775,905 $ 2,851,622
Other 0 2,850,000
------------ ------------
$ 2,775,905 $ 5,701,622
------------ ------------
CURRENT LIABILITIES:
Notes payable $ 1,119,000 $ 3,652,000
Current portion of long-term debt 2,877,323 1,435,206
Current portion of lease obligation 75,717 65,987
Accounts payable 2,143,082 2,121,036
Dividends declared 415,960 373,873
Accrued taxes 1,754,101 2,115,320
Current deferred income taxes 66,755 81,108
Accrued interest 166,215 257,973
Other 270,116 243,993
------------ ------------
$ 8,888,269 $ 10,346,496
------------ ------------
DEFERRED CREDITS:
Deferred income taxes $ 4,454,626 $ 3,199,515
Net regulatory liability 1,193,526 1,292,861
Unamortized investment tax credit 873,181 940,998
Other 1,837,305 1,540,875
------------ ------------
$ 8,358,638 $ 6,974,249
------------ ------------
$ 57,155,721 $ 55,322,254
------------ ------------
------------ ------------
See notes to financial statements.
17
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Total
Capital Retained Unearned Common
Shares Amount Surplus Earnings Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 . . . . . . . . . . 1,311,431 $ 9,180 $ 11,721,959 $ 4,300,487 $ (561,994) $15,469,632
3% Stock Dividend . . . . . . . . . . . . . 39,209 274 881,928 (889,224) (7,022)
Common Stock issued under
Dividend Reinvestment Plan . . . . . . . 22,498 158 517,448 517,606
Net income. . . . . . . . . . . . . . . . . 2,200,408 2,200,408
Unearned compensation
--ESOP . . . . . . . . . . . . . . . . . 246,077 246,077
Cash Dividends--
Common Stock,
$.94 per share (a). . . . . . . . . . (1,355,732) (1,355,732)
---------- --------- ------------ ----------- ----------- -----------
Balance at December 31, 1994 . . . . . . . . . 1,373,138 $ 9,612 $ 13,121,335 $ 4,255,939 $ (315,917) $17,070,969
3% Stock Dividend . . . . . . . . . . . . . 41,061 287 887,863 (894,585) (6,435)
Common Stock issued under
Dividend Reinvestment Plan . . . . . . . 23,776 167 536,214 536,381
Net income. . . . . . . . . . . . . . . . . 2,364,966 2,364,966
Unearned compensation
--ESOP . . . . . . . . . . . . . . . . . (126,454) (126,454)
Cash Dividends--
Common Stock,
$1.00 per share (a) . . . . . . . . . (1,475,429) (1,475,429)
---------- --------- ------------ ----------- ----------- -----------
Balance at December 31, 1995 . . . . . . . . . 1,437,975 $ 10,066 $ 14,545,412 $ 4,250,891 $ (442,371) $18,363,998
3% Stock Dividend . . . . . . . . . . . . . 43,129 302 1,202,134 (1,210,551) (8,115)
Common Stock issued under
Dividend Reinvestment Plan . . . . . . . 27,988 196 710,655 710,851
Net income. . . . . . . . . . . . . . . . . 2,798,085 2,798,085
Unearned compensation
--ESOP & Restricted Stock
Bonus Plan . . . . . . . . . . . . . . . 31,500 220 878,000 (874,477) 3,743
Cash Dividends--
Common Stock,
$1.07 per share (a) . . . . . . . . . (1,633,840) (1,633,840)
---------- --------- ------------ ----------- ----------- -----------
Balance at December 31, 1996 . . . . . . . . . 1,540,592 $ 10,784 $ 17,336,201 $ 4,204,585 $(1,316,848) $20,234,722
---------- --------- ------------ ----------- ----------- -----------
---------- --------- ------------ ----------- ----------- -----------
</TABLE>
(a) Retroactively adjusted for stock dividends.
( ) Denotes deduction.
See notes to financial statements.
18
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
for the Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET CASH FLOW FROM (USED BY)
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,798,085 $ 2,364,966 $ 2,200,408
Noncash expenses, revenue, losses and gains included in income
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 2,706,428 2,605,376 2,414,827
Deferred taxes and charge equivalent to
investment tax credit, net of amortization. . . . . . . . . . . . . . . . 1,073,606 58,230 (77,343)
Net decrease (increase) in receivables and unbilled revenue. . . . . . . . . 492,259 (805,148) (227,875)
Net decrease (increase) in materials and supplies and prepayments. . . . . . (158,153) (613,593) 55,597
Net increase (decrease) in accounts payable,
accrued taxes, and other current liabilities. . . . . . . . . . . . . . . (313,050) 181,086 159,816
Increase (decrease) in interest accrued, but not paid. . . . . . . . . . . . (91,758) (78,833) (100,009)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,411 83,626 (2,113)
------------ ------------- -------------
Net cash from operating activities. . . . . . . . . . . . . . . . . . . . $ 6,931,828 $ 3,795,710 $ 4,623,326
------------ ------------- -------------
INVESTING ACTIVITIES
Acquisition of property, plant, and equipment . . . . . . . . . . . . . . . . . $ (4,296,974) $ (3,494,997) $ (4,371,649)
Proceeds from disposals of property, plant, and equipment . . . . . . . . . . . 31,292 53,545 54,312
EPA payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,510,181) 0 0
------------ ------------- -------------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . $ (7,775,863) $ (3,441,452) $ (4,317,337)
------------ ------------- -------------
FINANCING ACTIVITIES
Proceeds of short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,274,000 $ 16,752,000 $ 6,937,000
Payments to settle short-term debt. . . . . . . . . . . . . . . . . . . . . . . (12,807,000) (17,594,500) (5,917,000)
Issuance of long-term debt, net . . . . . . . . . . . . . . . . . . . . . . . . 5,701,000 2,674,000 402,000
Payments on long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,409,938) (1,212,153) (804,761)
Proceeds from sale of common stock. . . . . . . . . . . . . . . . . . . . . . . 710,851 536,381 517,606
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,633,840) (1,475,429) (1,355,732)
------------ ------------- -------------
Net cash (used) provided by financing activities. . . . . . . . . . . . . $ 835,073 $ (319,701) $ (220,887)
------------ ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . $ (8,962) $ 34,557 $ 85,102
CASH AND CASH EQUIVALENTS
AT THE BEGINNING OF THE YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . 302,845 268,288 183,186
------------ ------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR . . . . . . . . . . . . . . . . . $ 293,883 $ 302,845 $ 268,288
------------ ------------- -------------
------------ ------------- -------------
INTEREST PAID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,644,511 $ 1,637,731 $ 1,378,932
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to financial statements.
19
<PAGE>
ESELCO, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
<TABLE>
<CAPTION>
for the Year Ended December 31 1996 1995
- ------------------------------------------------------------------------------------------------------
Amount % Amount %
------------ --- ------------ ---
COMMON EQUITY
COMMON STOCK, par value $.007 per share
<S> <C> <C> <C> <C> <C> <C>
1996 1995
--------- ---------
Authorized shares. . . . 3,000,000 3,000,000
--------- ---------
--------- ---------
Outstanding shares . . . 1,540,592 1,437,975 $ 10,784 $ 10,066
--------- ---------
--------- ---------
Capital surplus. . . . . . . . . . . . . . . . . 17,336,201 14,545,412
Retained earnings. . . . . . . . . . . . . . . . 4,204,585 4,250,891
Unearned compensation--ESOP
and Restricted Stock Bonus Plan. . . . . . . . (1,316,848) (442,371)
------------ --- ------------
$ 20,234,722 54% $ 18,363,998 57%
------------ --- ------------
PREFERRED STOCK, value $.01 per share,
authorized 160,000 shares. . . . . . . . . . . . $ 0 0% $ 0 0%
------------ --- ------------
LONG-TERM DEBT of subsidiaries (less current portion)
First Mortgage Bonds:
Series D, 7.00%, due 1998. . . . . . . . . . . $ 855,000 $ 867,000
Series F, 10.31%, due 2001 . . . . . . . . . . 1,200,000 1,500,000
Series G, 10.25%, due 2009 . . . . . . . . . . 4,440,000 4,810,000
Series H, 7.90%, due 2002. . . . . . . . . . . 1,500,000 1,800,000
Energy Thrift Notes, 5.8%-10%, due 1997-2006 . . 5,355,000 4,414,000
Equipment Loan, floating rate, due 1998. . . . . 147,786 200,724
ESOP Loans of the Corporation,
floating rate, due 2000-2001 . . . . . . . . . 421,110 344,165
Term Loan, floating rate, due 1999 . . . . . . . 2,979,291 0
------------ --- ------------
$ 16,898,187 46% $ 13,935,889 43%
------------ --- ------------ ---
TOTAL CAPITALIZATION . . . . . . . . . . . . . $ 37,132,909 100% $ 32,299,887 100%
------------ --- ------------ ---
------------ --- ------------ ---
</TABLE>
20
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A
ORGANIZATION
The consolidated financial statements include the accounts of ESELCO, Inc.
(ESELCO), and its wholly-owned subsidiaries, Edison Sault Electric Company
(Edison Sault); ESEG, Inc. (ESEG); and Northern Tree Service, Inc. (NTS). Edison
Sault (Company) is engaged in the generation, purchase, transmission, and sale
of electric energy in the Eastern Upper Peninsula of Michigan. NTS is a tree
trimming subsidiary that began operation in May of 1990, but accounts for less
than one percent of total consolidated operating revenues.
NOTE B
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting records of Edison Sault are maintained in accordance with the
Uniform System of Accounts prescribed by the Federal Energy Regulatory
Commission (FERC) and the Michigan Public Service Commission (MPSC). The
preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates that could differ
from actual results.
UTILITY REGULATION
Edison Sault accounts for the effects of regulation under Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of
Regulations." As a result, the actions of regulators affect when revenues,
expenses, assets, and liabilities are recognized.
In accordance with SFAS 71, the Company capitalizes, as deferred regulatory
assets, costs which are expected to be recovered in future utility rates. The
Company also records, as deferred regulatory liabilities, costs which are to be
paid in the future. These consist primarily of amounts related to the adoption
of SFAS 109 and the environmental matter discussed in Note J.
RATES AND REGULATORY MATTERS
On August 22, 1995, Edison Sault filed an application with the MPSC for
authority to implement price cap regulation. In the application, the Company
proposed that its base rates be capped at present levels, that its existing
Power Supply Cost Recovery (PSCR) factor be rolled into base rates, and that its
existing PSCR Clause be suspended. The Company published the required notice of
opportunity to comment or request a hearing. No comments were received, and on
September 21, 1995, the MPSC approved the Company's application subject to the
modification that the Company gives 30 days notice rather than two weeks notice
for rate decreases and that the Company file an application by October 1, 2000,
to address its experience under the price cap mechanism. With the latter
modification, the price cap authorization represents an experimental regulatory
mechanism. The order also allows Edison Sault to file an application seeking an
increase in rates only under extraordinary circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed an
intervention and petition for rehearing in the Company's Price Cap Order. The
Attorney General's intervention was based on the grounds that the MPSC did not
have authority to approve price cap regulation. On December 21, 1995, the MPSC
rejected the Attorney General's petition for rehearing. On January 19, 1996, the
Attorney General filed an appeal with the Michigan Court of Appeals.
Legal counsel for the Company believes that the Attorney General's appeal is
without merit and that the Company will prevail. A decision in this case is not
expected until mid-1997. The Company implemented the Price Cap Order on
January 1, 1996.
In light of the Price Cap Order and other potential changes in the industry, the
Company continually reviews the applicability of accounting under SFAS 71. As
previously stated, the Price Cap Order is a five-year experimental regulatory
mechanism containing language allowing Edison Sault to seek rate relief for
costs incurred under extraordinary circumstances. In addition, final
implementation of the plan is subject to resolution of the Attorney General's
appeal. Based on a current evaluation of the factors affecting the applicability
of SFAS 71, the Company has determined that it is currently appropriate to
continue accounting in accordance with SFAS 71. In the event the Company was
to discontinue accounting under SFAS 71, the accounting impact would be an
extraordinary after-tax non-cash charge to earnings in an amount represented
largely by any unamortized net regulatory assets existing at that point in time.
THE FOLLOWING REGULATORY ASSETS AND (LIABILITIES) WERE REFLECTED IN THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31:
(Thousands of Dollars) 1996 1995 1994
- -----------------------------------------------------------------------------
SAFS 109
Regulatory assets . . . . . . $ 208 $ 219 $ 239
SAFS 109
Regulatory liability. . . . . (1,401) (1,512) (1,576)
--------- ---------- ---------
SAFS 109 Net
Regulatory liability. . . . . $ (1,193) $ (1,293) $ (1,337)
Environmental Matter
Regulatory asset. . . . . . . 3,510 2,850 1,000
--------- ---------- ---------
Total Net Regulatory
Asset (Liability) . . . . . . $ 2,317 $ 1,557 $ (337)
--------- ---------- ---------
--------- ---------- ---------
21
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
In accordance with SFAS 71, the Company has recorded a capital lease on its
statement of financial position and has been amortizing the capital lease asset
over the life of the lease. If the Company did not account for this in
accordance with SFAS 71, the asset value of the capital lease would be
approximately $660,000 less than what is reflected on its statement of financial
position at December 31, 1996.
REVENUES
Edison Sault records revenue monthly, as billed, on the basis of meter readings
throughout the month and includes an estimate of unbilled revenue relative to
power consumed from the meter reading date to the end of the month in the
current month's revenue.
For the first two years presented (1994 and 1995), Edison Sault was able to
recover changes in its power supply cost from its residential and commercial
customers through its Power Supply Cost Recovery Clause. The clause provided for
an annual reconciliation of actual costs to projected costs and settlement of
any over- or under-collection, both with interest. Edison Sault was able, on a
monthly basis, to pass on to its industrial customers substantially all changes
in its power supply costs from its suppliers, as it affects these customers.
As previously discussed, Edison Sault implemented price cap regulation January
1, 1996; and with this change, the PSCR clause was suspended.
Revenues resulting from sales to Cloverland Electric Cooperative represented
approximately 13% of total revenues for 1996, 12% for 1995, and 13% for 1994.
Revenues resulting from sales to Manistique Papers, Inc., represented
approximately 12% of total revenues for each year presented.
Customer receivables, electric sales, and resale revenues arise from operations
of Edison Sault which delivers electric energy to a diversified base of
residential, commercial, and industrial customers within the eastern portion of
Michigan's Upper Peninsula. Edison Sault continually reviews its customers'
credit-worthiness and requests deposits or refunds deposits based on that
review.
UTILITY PLANT--ELECTRIC
Utility plant is stated at original cost, including engineering, material,
labor, supervision, other related items, and an allowance for funds used during
construction.
Maintenance and repairs are charged to expense as incurred, while replacements
and betterments are capitalized. Upon the sale or retirement of an asset, the
original cost of the property retired, plus the cost of removal (less salvage)
is charged to accumulated depreciation.
Edison Sault depreciates the original cost of property
over its estimated useful life by the straight-line method
at composite rates approved by the MPSC. The composite
rate was approximately 3.8% for 1996 and 1995 and 3.6% for 1994.
CASH AND CASH EQUIVALENTS
ESELCO considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Other non-cash items relating to
the capitalized lease totaled approximately $66,000 in 1996, $58,000 in 1995,
and $50,000 in 1994.
OTHER
In 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be Disposed of." This statement imposed a
stricter criterion for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. The Company adopted this
standard on January 1, 1996. Adoption did not have an impact on the financial
position or results of operations due to the regulatory structure set forth in
the Price Cap Order previously discussed. This conclusion may change in the
future as competitive factors influence pricing in this industry.
22
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C
LONG-TERM DEBT
ANNUAL SINKING FUND REQUIREMENTS ON FIRST MORTGAGE BONDS AND MATURITIES OF LONG-
TERM DEBT FOR EACH OF THE FIVE YEARS SUBSEQUENT TO DECEMBER 31, 1996, ARE:
(Thousands of Dollars)
1997 . . . . . . . . . . . . . . $ 2,877
1998 . . . . . . . . . . . . . . $ 3,863
1999 . . . . . . . . . . . . . . $ 5,071
2000 . . . . . . . . . . . . . . $ 1,299
2001 . . . . . . . . . . . . . . $ 1,942
Substantially all of Edison Sault's utility plant is pledged
as collateral for the First Mortgage Bonds.
Edison Sault has authority to issue up to $10 million of Long-term Thrift Notes
to Michigan residents.
The provisions of Edison Sault's bond indentures and the short-term line of
credit agreement contain various covenants pertaining to the maintenance of debt
to equity ratios and the payment of dividends. Under the most restrictive of
these covenants, the declaration of cash dividends by Edison Sault is restricted
to $600,000, plus net income available for common stock and capital
contributions subsequent to January 1, 1992, after deducting all dividends paid
on common stock. At December 31, 1996, $6,294,000 of Edison Sault's retained
earnings are available for the declaration of dividends. There are no additional
restrictions on ESELCO's ability to pay dividends.
NOTE D
STOCKHOLDERS' INVESTMENT
EARNINGS PER SHARE
Earnings per average share of common stock are computed on the basis of the
weighted average number of common shares outstanding after giving retroactive
effect to the 3% stock dividends in each year presented. Shares granted under
the Restricted Stock Plan, which is described in Note H, have been included in
the calculation of earnings per share for 1996.
NOTE E
SHORT-TERM BORROWING ARRANGEMENTS
Edison Sault has authority to issue up to $10 million in short-term obligations.
Included in this authority, Edison Sault has available a line of credit in the
amount of $4 million at the prime rate with a bank in its service area. In
addition, Edison Sault has authority to issue Short-term Thrift Notes to
Michigan residents. These notes mature one year from the date of issue, with
interest at 2.5% to 3.0% below the New York prime rate, depending on the amount
of the note. Included in notes payable at December 31, 1996, are $719,000 in
thrift notes to Michigan residents.
23
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F
LEASES AND PURCHASED POWER AGREEMENTS
Edison Sault's hydroelectric plant at Sault Ste. Marie is operated by the
diversion of surplus waters of the St. Marys River. This surplus water is leased
under an agreement with the Secretary of the Army expiring in the year 2050.
Annual rentals under this lease were $886,000 in 1996, $759,000 in 1995, and
$754,000 in 1994, and are determined based on the amount of water used for power
generation. Edison Sault also leases certain office and computer equipment and
vehicles for which gross rentals were $73,000 in 1996, $99,000 in 1995, and
$121,000 in 1994 under agreements that extend up to six years.
Edison Sault purchased the output of a government-owned hydroelectric station in
Sault Ste. Marie, Michigan, under a contract which expires in the year 2040.
Payments under the contract were $1,914,000 annually, with modifications to such
payments for power outages and the cost of designated repairs in excess of the
federal share of such costs. Annual payments are subject to renegotiation every
five years. During 1996, the Company renegotiated the annual payment for the
five-year period starting in November of 1996. The new annual payment is
$1,820,000.
Edison Sault also purchases power from Consumers Power Company (Consumers) under
an agreement which expires in 2020, or 2010 under an early termination
provision. Rates under the agreement provide for capacity and energy charges
which are approved by the FERC. The cost of power purchased from Consumers
totaled $12,875,000, $17,638,000, and $16,228,000 for 1996, 1995, and 1994,
respectively.
During 1996, Edison Sault reached agreement with Consumers on a new purchase
power agreement which became effective January 1, 1997. Under this new
agreement, Edison Sault will purchase 35 megawatts of firm power and a variable
amount of interruptible power for a five-year period. After the initial five-
year period, Edison is obligated to purchase a minimum of 20 megawatts of firm
power through the contract term which remains the same as the previous
agreement.
During 1990, Edison Sault entered a 20-year capital lease with Consumers for two
138 kv cables across the Straits of Mackinac. ESEG has reached agreement with
Consumers for the purchase of these cables at an approximate cost of $3.8
million. In turn, ESEG will lease these cables to Edison Sault under an
operating lease arrangement. Both the purchase and lease of the cables are
subject to FERC approval.
Effective January 1, 1996, Edison Sault began purchasing 20 Mw of firm capacity
and energy from American Electric Power Company under the terms of two one-year
contracts. This purchase replaced a portion of the capacity and energy that had
been purchased under the wholesale contract with Consumers. The cost of this
power, including transmission charges for use of Consumers' system in 1996, was
$4,007,000.
Commencing January 1, 1998, Edison Sault will purchase 20 megawatts of firm
power from Wisconsin Electric Power Company under the terms of a 10-year
agreement.
24
<PAGE>
NOTE G
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES
THE FOLLOWING SUMMARIZES THE COMPONENTS OF INCOME TAX EXPENSE AND RECONCILES THE
STATUTORY FEDERAL INCOME TAX RATE TO THE EFFECTIVE RATE.
for the Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------
(Thousands of Dollars)
Income taxes--Currently payable. . . . $ 155 $ 1,045 $ 1,058
--------- -------- -------
--Deferred--Depreciation . . . $ 50 $ 103 $ 145
Property taxes . . 15 13 (101)
EPA matter . . . . 1,193 0 0
Other, net . . . . (98) 25 (49)
--------- -------- -------
$ 1,160 $ 141 $ (5)
--------- -------- -------
Amortization of deferred investment
tax credit. . . . . . . . . . . . . . $ (68) $ (69) $ (70)
--------- -------- -------
Income taxes per statement of income . $ 1,247 $ 1,117 $ 983
Allocated to other accounts. . . . . . (31) (38) (14)
--------- -------- -------
Total Income Taxes . . . . . . . . . . $ 1,216 $ 1,079 $ 969
--------- -------- -------
Total Income Taxes Paid. . . . . . . . $ 645 $ 1,045 $ 1,000
--------- -------- -------
--------- -------- -------
<TABLE>
<CAPTION>
for the Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands of Dollars) Amount % Amount % Amount %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at statutory rate . . . . . . . . $ 1,365 34.0% $ 1,171 34.0% $ 1,078 34.0%
Reduction in taxes resulting from--
Capitalized costs deducted
currently for tax purposes-. . . . . . . . . . (1) 0.0% (1) 0.0% (1) -0.1%
Depreciation and pension differences- . . . . . . 32 0.8% 38 1.1% 31 1.0%
Amortization of deferred investment tax credit. . (68) -1.7% (69) -2.0% (70) -2.2%
Refund of excess deferred taxes
resulting from reduction in tax rates- . . . . (74) -1.8% (43) -1.3% (58) -1.8%
Other, net. . . . . . . . . . . . . . . . . . . . (38) -1.0% (17) -0.5% (11) -0.3%
-------- ---- -------- ---- -------- ----
Total Income Taxes . . . . . . . . . . . . . . . . . $ 1,216 30.3% $ 1,079 31.3% $ 969 30.6%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</TABLE>
- - Accounting treatment in accordance with regulatory commission policy.
THE FOLLOWING SUMMARIZES THE PRINCIPAL COMPONENTS OF ESELCO'S DEFERRED TAX
ASSETS (LIABILITIES)
for the Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Property . . . . . . . . . . . . . . . $ (3,454) $ (3,305) $ (3,158)
EPA Regulatory Asset . . . . . . . . . (1,193) 0 0
Property taxes . . . . . . . . . . . . (210) (196) (183)
Other . . . . . . . . . . . . . . . 336 220 231
--------- -------- --------
Total . . . . . . . . . . . . . . . $ (4,521) $ (3,281) $ (3,110)
--------- -------- --------
Total Deferred Tax Assets. . . . . . . $ 2,243 $ 2,183 $ 2,188
Total Deferred Tax Liabilities . . . . (6,764) (5,464) (5,298)
--------- -------- --------
Total . . . . . . . . . . . . . . . $ (4,521) $ (3,281) $ (3,110)
--------- -------- --------
--------- -------- --------
25
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H
PENSION PLAN AND OTHER BENEFITS
Edison Sault has two trusteed, noncontributory, defined benefit pension plans,
covering substantially all management and bargaining unit employees. Annual
retirement benefits are based upon the employee's years of service and
compensation level. Edison Sault's funding policy is to contribute amounts to
the plans sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
Edison Sault may determine to be appropriate from time to time.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for both plans was raised to 7.5% as
of December 31, 1996. This change reduced the projected benefit obligation as of
December 31, 1996, by $641,000 for both plans. The plans' assets are invested
primarily in listed debt and equity securities and ESELCO's common stock. At
December 31, 1996, the pension plans held 51,000 shares of ESELCO common stock
with a market value of $1,254,000. During 1996, $53,000 of dividends were paid
on the shares held by the plans.
THE PLANS' FUNDED STATUS AND EXPENSE AT DECEMBER 31, ARE AS FOLLOWS:
1996 1995 1994
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Actuarial present value of benefit obligations:
Vested Benefit Obligation . . . . . . . . $ (9,032) $ (8,857)
--------- ----------
Accumulated Benefit Obligation. . . . . . $ (9,887) $ (9,692)
--------- ----------
Projected benefit obligation. . . . . . . $ (10,696) $ (10,532)
Plan assets at fair value. . . . . . . . . . 9,170 8,606
--------- ----------
Projected benefit obligation
(in excess of) or less than plan assets . $ (1,526) $ (1,926)
Unrecognized net loss. . . . . . . . . . . . 766 856
Unrecognized net obligation at
January 1, net of amortization. . . . . . 634 942
Additional liability . . . . . . . . . . . . (592) (958)
--------- ----------
Net Pension (liability) Recognized
in the Statement of Financial Position. . $ (718) $ (1,086)
--------- ----------
Net pension expense combined for both plans,
included the following components:
Service cost-benefits earned during the
period. . . . . . . . . . . . . . . . . . $ 285 $ 211 $ 221
Interest cost on projected benefit
obligations . . . . . . . . . . . . . . . 755 680 648
Actual return on plan assets . . . . . . . . (623) (1,237) 32
Net amortization and deferral. . . . . . . . (32) 619 (642)
--------- ---------- -------
Net Pension Expense. . . . . . . . . . . . . $ 385 $ 273 $ 259
--------- ---------- -------
Rates used for calculation (%):
Discount rate . . . . . . . . . . . . . . 7.5% 7.0% 8.0%
Assumed rate of increase in salary levels 3.5-4.0% 3.5-4.0% 4.5%
Expected long-term return on investments. 9.0% 9.0% 9.0%
Edison Sault accrues postretirement benefits (such as health care benefits)
during the years an employee provides services in accordance with SFAS 106.
The 1996 costs were calculated using the health care plan in effect January 1,
1996. The accumulated postretirement benefit obligation was calculated by the
actuary as of January 1, 1996, using a discount rate of 7.0%. Effective December
31, 1996, the discount rate used for valuing the accumulated postretirement
benefit obligation was raised to 7.5%. The health care cost trend rate used by
the actuary for the January 1, 1996, valuation was 10.6%, then decreasing
gradually to 5.0% by the year 2004. The health care cost trend rate used by the
actuary for the December 31, 1996, valuation was 9.4%, then decreasing gradually
to 5.0% by the year 2004. A 1% increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation as of December 31,
1996, by $80,000 and the net periodic postretirement benefit cost for 1996 by
$6,000.
26
<PAGE>
THE FUNDED STATUS OF THE POSTRETIREMENT BENEFIT PLAN IS RECONCILED WITH THE
RECORDED LIABILITY AS FOLLOWS:
for the Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------
(Thousands of Dollars)
Accumulated Postretirement Benefit
Obligation (APBO):
Retirees. . . . . . . . . . . . . . . . $ (669) $ (629) $ (727)
Eligible for retirement . . . . . . . . (209) (205) (216)
Not yet eligible. . . . . . . . . . . . (236) (268) (227)
--------- ---------- -------
Total APBO . . . . . . . . . . . . . . . . . $ (1,114) $ (1,102) $(1,170)
Plan assets at fair value . . . . . . . 0 0 0
--------- ---------- -------
Total APBO in excess of plan assets. . . . . $ (1,114) $ (1,102) $(1,170)
Unrecognized transition obligation. . . 1,038 1,103 1,168
Unrecognized net (gains)/losses . . . . (314) (306) (214)
--------- ---------- -------
Net Postretirement Benefit Liability
Recognized in the Statement of
Financial Position at December 31,. . . . $ (390) $ (305) $ (216)
--------- ---------- -------
--------- ---------- -------
Net postretirement benefit expense:
Service cost. . . . . . . . . . . . . . $ 15 $ 14 $ 15
Interest cost . . . . . . . . . . . . . 78 86 109
Amortization of transition obligation . 65 65 65
Net amortization and deferral . . . . . (13) (13) 0
--------- ---------- -------
Net Postretirement Benefit Expense . . . . . $ 145 $ 152 $ 189
--------- ---------- -------
--------- ---------- -------
Postretirement benefit expense reconciled
to the accrued cost:
Beginning net benefit liability . . . . $ (305) $ (216) $ (106)
Net benefit expense . . . . . . . . . . (145) (152) (189)
Actual premium paid . . . . . . . . . . 60 63 79
--------- ---------- -------
Net Postretirement Benefit Liability
Recognized in the Statement of Financial
Position at December 31,. . . . . . . . . $ (390) $ (305) $ (216)
--------- ---------- -------
--------- ---------- -------
Edison Sault has an employee stock ownership plan (ESOP) which covers
substantially all its non-bargaining unit employees. In accordance with
applicable accounting rules, ESELCO has recorded the ESOP indebtedness for the
following loans in current and long-term debt on its balance sheet, with an
offsetting charge to common stock equity captioned "Unearned compensation--
ESOP."
In December 1992, the plan borrowed $625,000 to purchase 20,000 shares of
ESELCO, Inc. common stock. Dividends and other income received by the trust and
used for this debt service in 1996 were approximately $127,000. Interest expense
on this debt incurred by the trust in 1996 was $14,000.
In February 1995, the plan borrowed $357,000 to purchase an additional 15,445
shares of ESELCO, Inc., common stock. Dividends and other income received by the
trust and used for this debt service in 1996 were $108,000. Interest expense on
this debt incurred by the trust in 1996 was $15,000.
In April 1996, the plan borrowed $364,000 to purchase 13,120 shares of ESELCO,
Inc., common stock. Dividends and other income received by the trust and used
for this debt service in 1996 were $63,000. Interest expense on this debt
incurred by the trust in 1996 was $18,000.
The market value of the total allocated shares held by the ESOP amounted to
$3,649,000 at December 31, 1996.
Edison Sault has an unfunded, nonqualified Supplemental Executive Retirement
Plan (SERP) that provides benefits which are integrated with its Management
Pension Plan. The projected benefit obligation for service rendered to date for
the plan was $396,000 as of December 31, 1996, and the accrued liability of the
plan included in ESELCO's Statement of Financial Position at December 31, 1996,
was $334,000. Expense recognized under the plan in 1996 was $102,000.
In May 1996, stockholders approved adoption of the Restricted Stock Bonus Plan.
Under this plan, ESELCO can,
27
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
from time to time, grant to officers or other key employees awards of restricted
stock. The maximum number of shares reserved for this purpose is 50,000 shares.
In 1996, 31,500 shares, with a total fair market value of $878,000 were granted
to the officers of the Company. Under the terms of agreements with each of the
recipients, shares are not vested for a five-year period following the grant and
the shares are forfeited if a recipient leaves the employment of the Company
prior to the five-year holding period. The Restricted Stock Committee can, at
their discretion, accelerate the vesting of these shares. In addition, a change
in control of ESELCO, Inc., would accelerate the vesting. In accordance with
SFAS 123--Accounting for Stock Based Compensation, the Company recorded
compensation expense in the amount of $117,000 in 1996.
NOTE I
QUARTERLY FINANCIAL DATA (UNAUDITED)
UNAUDITED QUARTERLY FINANCIAL DATA PERTAINING TO RESULTS OF OPERATIONS ARE SHOWN
BELOW:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------
(Thousands of Dollars except per share amounts)
1996
<S> <C> <C> <C> <C>
Operating Revenue. . . . . . . . . . . . . . . . . . $ 9,777 $ 8,948 $ 9,045 $ 9,730
Operating Income . . . . . . . . . . . . . . . . . . 897 1,094 1,185 1,170
Net Income Available for Common Stock. . . . . . . . 531 685 779 803
Earnings per Average Share of Common Stock (a) . . . 0.36 0.46 0.51 0.52
1995
Operating Revenue. . . . . . . . . . . . . . . . . . $ 9,232 $ 8,834 $ 9,399 $ 9,380
Operating Income . . . . . . . . . . . . . . . . . . 887 912 1,075 1,116
Net Income Available for Common Stock. . . . . . . . 488 490 654 733
Earnings per Average Share of Common Stock (a) . . . 0.33 0.33 0.45 0.50
</TABLE>
(a) Retroactively adjusted for stock dividends.
28
<PAGE>
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially Responsible
Party" at the Manistique River/ Harbor Area of Concern (AOC) in Manistique,
Michigan. There were a number of other potentially responsible parties, some of
whom have been notified by the U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural Resources,
identified the Manistique River and Harbor as an "Area of Concern" (AOC) due to
PCBs which have been found in that area. An Environmental Engineering/Cost
Analysis (EECA) was submitted to the U.S. EPA which provided an analysis of
various methods of remediation for the harbor. The EECA presented six
alternatives of remediation action and ultimately recommended a remediation
method of in-place capping. Management believed this to be the most prudent
course of action. Although the total ultimate cost of specific remedial action
and Edison Sault's potential liability were not known at that time, management
had estimated Edison Sault's minimum cost of this remedy to be $2.9 million.
That figure represented an increase of $1.9 million from the amount recorded
during 1994. Certain other expenditures for investigation of any necessary
remedial action were incurred and are reflected in the accompanying financial
statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate the
harbor through in-place capping at a total cost of $6.4 million, with the Edison
Sault portion costing $3.2 million. Through further negotiations, the U.S. EPA
and the PRPs agreed to a cash-out settlement whereby the PRPs would pay to the
U.S. EPA the $6.4 million cost of capping for the right to be absolved from any
future legal actions concerning PCB pollution. To effect this settlement, an
Administrative Order on Consent was executed by all parties in December 1996
with payments made to the U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this project.
Edison Sault has retained legal assistance to start a process of recovering
these costs through several insurance entities. The certainty and magnitude of
insurance recovery is unknown at this time.
Edison Sault believes that the costs discussed above, including the payment to
the U.S. EPA to be relieved of future liability, are a legitimate cost of doing
business and would be recoverable through utility rates. Further, in November
1993, the MPSC issued an order authorizing Edison Sault to defer and amortize,
over a period not to exceed 10 years, environmental assessment and remediation
costs associated with the Manistique River AOC. Therefore, Edison Sault has
recorded a regulatory asset in the amount of $3.2 million, plus unreimbursed
cost of $300,000, for a total of $3.5 million, which the Company will begin
amortizing in 1997. Future costs related to this issue are not expected to have
a material impact on Edison Sault's financial position or future results of
operations.
OTHER MATTERS
In October 1994, Edison Sault entered a construction and joint use agreement
with Wisconsin Electric Power Company, Upper Peninsula Power Company, and
Cloverland Electric Cooperative. This agreement specifies each party's
responsibility in the construction of a new transmission line from Arnold,
Michigan, to Manistique, Michigan. Edison Sault continues to plan for the
construction of this new line. This project has an expected completion date of
mid-1998. Edison Sault expects that its share of the cost of this project will
be approximately $9.0 million with approximately $3.2 million of this being
spent in 1997. During 1996, $460,000 was invested in the new 138 kv interconnect
project.
In December 1996, ESEG signed a purchase agreement with Consumers Power Company
for the purchase of a 138 kv submarine circuit across the Straits of Mackinac.
Since 1990, Edison Sault had leased these cables at an annual net lease cost of
approximately $466,000. The purchaser of the cables is ESEG, a wholly-owned
subsidiary of ESELCO, Inc. ESEG has not previously been an active subsidiary of
ESELCO. ESEG will lease the cables to Edison Sault under an operating lease
arrangement. The purchase and lease are subject to approval by FERC. The cost of
the purchase when consummated will be approximately $3.8 million.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ESELCO, Inc.:
We have audited the accompanying consolidated statements of financial position
and capitalization of ESELCO, Inc. (a Michigan corporation), and subsidiaries as
of December 31, 1996 and 1995, and the related consolidated statements of
income, changes in common equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ESELCO, Inc., and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Detroit, Michigan
February 6, 1997
30
<PAGE>
ESELCO, INC.
SHAREHOLDERS INFORMATION
ANNUAL SHAREHOLDERS' MEETING
Tuesday, May 6, 1997--10:00 a.m.
Lake Superior State University
Cisler Center--Crow's Nest
(north side of Cisler Center, lower level)
Sault Ste. Marie, Michigan
If you are not able to attend, please return your proxy card so that your vote
will be counted.
STOCK TRANSFER
The Company is the transfer agent and dividend distribution agent for its common
stock. To change ownership in your common stock, contact: Stock Department,
ESELCO, Inc., 725 East Portage Avenue, Sault Ste. Marie, Michigan, 49783. The
telephone number is (906) 632-5158, FAX (906) 632-8444.
To transfer stock, the stock assignment form on the reverse side of the stock
certificate must be completed and the signature(s) guaranteed either by a
commercial bank, credit union, savings association, or a brokerage firm that is
a member of one of the major stock exchanges.
ADDRESS CHANGES
If you move, please advise the Company of your former and current addresses. For
your protection, changes must be reported in writing.
DUPLICATE MAILINGS
Some shareholders hold stock registered in similar, but different names (for
example, John B. Smith and J. B. Smith). We are required by law to create a
separate account for each name and to mail separate dividend checks and proxy
material to each account. If you receive multiple annual reports, you may
request that we stop sending you duplicates of this publication by telling us
which account(s) to drop from the annual report mailing list. Proxies and
dividend checks must still be mailed separately to each account.
PURPOSE OF ANNUAL REPORT
This annual report is produced to give shareholder and other interested parties
information concerning the Company. It is not issued in connection with the sale
or, offer for sale or, solicitation to buy securities.
BUYING AND SELLING STOCK
The stock of the Company is sold in the over-the-counter (OTC) market and is
available through most stockbrokers. The stock is named as ESELCO (NASDAQ ticker
symbol EDSE) and is listed in the "E" section of the OTC daily stock
transactions.
The following firms are market makers in our common stock and follow the stock
quite closely. Feel free to contact them should you wish more information:
KIRKPATRICK PETTIS STIFEL, NICOLAUS & COMPANY, INCORPORATED
10250 Regency Circle 500 North Broadway
Suite 200 St. Louis, MO 63102
Omaha, NE 68114
Toll Free: 800-776-5777 Toll Free:800-488-0970
RONEY & COMPANY EDWARD JONES & CO.
2 Buhl Building 201 Progress Parkway
Detroit, MI 48226 Maryland Heights, MO 63043
Phone: 616-347-3961 Phone: 906-632-1783
HOWE BARNES INVESTMENTS
2805 North College Drive
Durango, CO 81301
Toll Free: 800-231-6417
LOST OR STOLEN CERTIFICATES
Please notify us immediately if a certificate is lost, stolen, or destroyed. The
Company will send you instructions on how to replace it and will also arrange
for a "stop transfer" on its records to prevent an unauthorized transfer of the
stock. If you find the missing certificate, please report it to the Company
immediately so the "stop transfer" can be removed.
Investor information, Form 10-K, and the Financial Statements and Financial
Statement Schedules are available without charge from:
Donald C. Wilson
Corporate Secretary, ESELCO, Inc.
725 East Portage Avenue
Sault Ste. Marie MI 49783
Email address: [email protected]
ESELCO, Inc. Home Page: http://www.eselco.com
31
<PAGE>
ESELCO, INC.
SHAREHOLDERS INFORMATION
ESTIMATED PAYMENT
DATES FOR DIVIDENDS
Common stock dividend record and payment dates estimated for 1997 are:
RECORD DATE PAYMENT DATE
February 1 February 17
May 1 May 15
August 1 August 15
November 3 November 17
The record date for voting at the Annual Meeting is March 20, 1997.
CLOSING PRICE--DECEMBER 31, 1996
The closing Bid and Ask price on our common stock, as carried on the national
market system on the over-the-counter market for December 31, 1996, was:
Bid--$24.75 and Ask--$26.00.
COMMON STOCK--
HIGH AND LOW TRADES
(in Dollars)
Quarter 1996 1995
- ----------------------------------------------------------
1st. . . . . . . $23.00-$26.25 $21.50-$24.25
2nd. . . . . . . $25.25-$28.75 $20.75-$23.00
3rd. . . . . . . $24.00-$26.75 $21.00-$23.00
4th. . . . . . . $24.00-$26.00 $21.50-$25.00
COMMON STOCK ISSUE--
DIVIDENDS DECLARED PER SHARE
(in Dollars) (adjusted for stock dividends)
Quarter 1st 2nd 3rd 4th
- ------------------------------------------------------------
1996 . . . . . . $0.26 $0.27 $0.27 $0.27
1995 . . . . . . $0.25 $0.25 $0.25 $0.25
1994 . . . . . . $0.23 $0.23 $0.24 $0.24
<PAGE>
ESELCO,INC.
CORPORATE INFORMATION
[Photograph]
DAVID K. EASLICK, WILLIAM R. GREGORY, ALLAN L. GRAUER, JAMES S. CLINTON, THOMAS
S. NURNBERGER
BOARD OF DIRECTORS
Thomas S. Nurnberger
Chairman, ESELCO, Inc., and Edison Sault Electric Company
CHAIRMAN OF SALARY AND COMPENSATION COMMITTEE
Allan L. Grauer
Vice Chairman, ESELCO, Inc., and Edison Sault Electric Company
CHAIRMAN OF PENSION COMMITTEE
Retired Vice President, General Counsel, Secretary/Director, Northwestern Bell
Telephone Company
Counsel to the law firm of Kutak Rock
William R. Gregory
President, ESELCO, Inc., and Edison Sault Electric Company
CHAIRMAN OF STRATEGIC PLANNING COMMITTEE
James S. Clinton
Director, CHAIRMAN OF FINANCE COMMITTEE
Chairman and CEO, H.T.I. Corporation
David K. Easlick
Director, CHAIRMAN OF AUDIT COMMITTEE AND RESTRICTED STOCK BONUS PLAN COMMITTEE
Director and Retired Chairman, Michigan Bell Telephone Company
OFFICERS
Thomas S. Nurnberger (19)
CHAIRMAN OF THE BOARD AND CHIEF POLICY OFFICER
William R. Gregory (29)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Donald Sawruk (26)
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER
David R. Hubbard (25)
VICE PRESIDENT--FINANCE
James L. Beedy (31)
VICE PRESIDENT--ENGINEERING
Steven L. Boeckman (7)
VICE PRESIDENT/TREASURER
Donald C. Wilson (9)
CORPORATE SECRETARY
Ernest H. Maas (12)
ASSISTANT VICE PRESIDENT--ENGINEERING
David H. Jirikovic (7)
ASSISTANT VICE PRESIDENT--OPERATIONS
Paul A. Schemanski (7)
ASSISTANT VICE PRESIDENT--INFORMATION SYSTEMS
( ) Years of Service
ALL DIRECTORS AND OFFICERS HOLD SIMILAR POSITIONS WITH ESELCO, INC., AND EDISON
SAULT ELECTRIC COMPANY WITH THE EXCEPTION OF MESSRS. BEEDY, MAAS, JIRIKOVIC, AND
SCHEMANSKI WHO ARE NOT OFFICERS OF ESELCO, INC.
[LOGO]
- --------------------------------------------------------------------------------
NORTHERN TREE SERVICE, INC.
CORPORATE INFORMATION
DIRECTORS
Steven L. Boeckman, PRESIDENT
Allan L. Grauer, ESELCO VICE CHAIRMAN
William R. Gregory, ESELCO DIRECTOR
John D. Peacock, ATTORNEY AT LAW
Donald Sawruk, ESELCO EXECUTIVE VICE PRESIDENT
OFFICERS
William R. Gregory, CHAIRMAN
Steven L. Boeckman, PRESIDENT
Donald Sawruk, SECRETARY
<PAGE>
[LOGO]
725 E. Portage Ave. Sault Ste. Marie, MI 49783
Phone (906) 632-2221 Fax (906) 632-8444
<PAGE>
ESELCO, INC.
------------
EXHIBIT 21 - SUBSIDIARIES
---------------------------
Jurisdiction of
Name Incorporation
----------------------------- ---------------
Edison Sault Electric Company U.S.A.
Michigan
Northern Tree Service, Inc. U.S.A.
Michigan
-16-
<PAGE>
[LETTERHEAD]
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10K of our report dated February 6, 1997 included in
ESELCO Inc.'s annual report to shareholders. It should be noted that we have
not audited any financial statements of the company subsequent to December 31,
1996 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Detroit, Michigan
March 27, 1997.
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 42,131,283
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 8,102,470
<TOTAL-DEFERRED-CHARGES> 4,070,346
<OTHER-ASSETS> 2,851,622
<TOTAL-ASSETS> 57,155,721
<COMMON> 10,784
<CAPITAL-SURPLUS-PAID-IN> 17,336,201
<RETAINED-EARNINGS> 4,204,585
<TOTAL-COMMON-STOCKHOLDERS-EQ> 20,234,722
0
0
<LONG-TERM-DEBT-NET> 16,898,187
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 1,119,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,877,323
0
<CAPITAL-LEASE-OBLIGATIONS> 2,775,905
<LEASES-CURRENT> 75,717
<OTHER-ITEMS-CAPITAL-AND-LIAB> 13,174,867
<TOT-CAPITALIZATION-AND-LIAB> 57,155,721
<GROSS-OPERATING-REVENUE> 37,499,931
<INCOME-TAX-EXPENSE> 1,247,196
<OTHER-OPERATING-EXPENSES> 31,907,213
<TOTAL-OPERATING-EXPENSES> 33,154,409
<OPERATING-INCOME-LOSS> 4,345,522
<OTHER-INCOME-NET> (47,594)
<INCOME-BEFORE-INTEREST-EXPEN> 4,297,928
<TOTAL-INTEREST-EXPENSE> 1,499,843
<NET-INCOME> 2,798,085
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,798,085
<COMMON-STOCK-DIVIDENDS> 1,633,840
<TOTAL-INTEREST-ON-BONDS> 850,565
<CASH-FLOW-OPERATIONS> 6,931,828
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
</TABLE>
<PAGE>
Exhibit 99.1
March 24, 1997
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
725 East Portage Avenue
Sault Ste. Marie, MI 49733
Gentlemen:
This letter (the "Letter of Intent") outlines the basic terms of the
proposed acquisition by Wisconsin Energy Corporation ("WEC") of all the
outstanding shares of common stock of ESELCO, Inc. ("ESELCO"), including all
options and shares of Restricted Stock (the "Shares"), on the terms and
conditions set forth in this Letter of Intent (the "Transaction"). This
Letter of Intent has been approved by the Board of Directors of ESELCO. The
parties acknowledge that WEC is a party to an Amended and Restated Agreement
and Plan of Merger with Northern States Power Company ("NSP") and other
parties dated as of April 28, 1995 as amended and restated on July 26, 1995
(the "Primergy Agreement"). Upon the closing of the transactions described in
the Primergy Agreement, WEC and NSP will enter into a business combination,
WEC's name will be changed to Primergy Corporation and Primergy Corporation
will continue to be bound by the terms of this Letter of Intent, provided
that the accomplishment of the closing of the transactions described in the
Primergy Agreement is not a condition to the closing of the Transaction
described in this Letter of Intent.
The Transaction will be accomplished as follows:
1. FORM OF TRANSACTION. The Transaction is proposed to be
accomplished by a tax-free merger of ESELCO with a subsidiary of WEC.
2. CONSIDERATION. In connection with the effectiveness of the
Transaction, all of the Shares will be converted into shares of WEC common
stock based on a value of $44.50 (the "Per Share Value") for each of the
Shares. ESELCO has informed WEC that, following ESELCO's 3% stock dividend
which was declared on March 13, 1997, there will be 1,593,765 Shares
outstanding which results in a total value in the Transaction for all of the
Shares of $70,922,542. The exact number of shares of WEC common stock to be
issued in the
<PAGE>
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 2
Transaction will be determined by dividing the Per Share Value by the average
of the closing prices of WEC Common Stock as reported in The New York Stock
Exchange-Composite Transactions on each of the ten (10) consecutive trading
days immediately preceding the Closing Date.
3. INVESTIGATION.
(a) ACCESS. ESELCO hereby grants to WEC, and the agents,
accountants, attorneys and representatives of WEC, reasonable access, upon
reasonable notice and during normal business hours, to all of the books,
records, financial statements, facilities, key personnel and other documents
and materials relating to ESELCO's financial condition, assets, liabilities
and business.
(b) MERGER AGREEMENT. The execution of the definitive Merger
Agreement described below is subject to a complete legal, financial and
business review by WEC of the financial condition, assets, liabilities and
business of ESELCO.
(c) CONFIDENTIALITY AGREEMENT. The existing Confidentiality
Agreement between ESELCO and WEC dated January 16, 1997 shall remain in full
force and effect.
4. MERGER AGREEMENT
(a) PREPARATION. The parties will negotiate and prepare a
mutually acceptable Merger Agreement and other appropriate agreements
containing representations, warranties, agreements, conditions and
indemnities normally associated with transactions similar to the Transaction,
including:
(i) APPROVALS. A condition to the obligations of all parties
that all applicable filings, consents and expirations of waiting periods
required by law, regulatory authorities or presently existing contracts shall
have been obtained, including any required approvals of the Michigan Public
Service Commission, the Federal Energy Regulatory Commission, the Securities
and Exchange Commission, the Public Service Commission of Wisconsin, NSP and
the completion of any required Hart-Scott-Rodino filings and the expiration
or early termination of all applicable waiting periods thereunder.
<PAGE>
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 3
(ii) SHAREHOLDER APPROVAL. A condition to the obligations
of WEC and ESELCO that all necessary Shareholder approvals shall have been
obtained by ESELCO.
(iii) BOARD APPROVALS. A condition to the obligations of WEC
and ESELCO that the Board of Directors of each of WEC and ESELCO shall have
approved the definitive Merger Agreement described below.
(iv) TAX STATUS; POOLING. A condition to the obligations of
WEC and ESELCO that reasonable assurances have been received that the
Transaction is a tax-free reorganization and that the Transaction will be
accounted for as a pooling of interests.
(v) FAIRNESS OPINION. A condition to the obligations of WEC
and ESELCO that the Board of Directors of ESELCO shall have received an
opinion of ESELCO's financial advisor to the effect that the terms of the
Transaction are fair to the Shareholders of ESELCO from a financial point of
view.
(vi) NO ESELCO CHANGE. A condition to WEC's obligation that
there shall be: (A) no material adverse changes in the financial condition,
property, business, operations, results of operations or prospects of ESELCO;
and (B) no more than 1,593,765 Shares outstanding on the Closing Date.
(vii) NO WEC CHANGE. A condition to ESELCO's obligation that
there shall be no material adverse changes in the consolidated financial
condition, property, business, operations, results of operations or prospects
of WEC, except that the status of the transactions described in the Primergy
Agreement shall not be considered by ESELCO pursuant to this condition.
(b) SIGNING. WEC will cause its counsel to immediately prepare
the first draft of the definitive Merger Agreement. It is anticipated that
the definitive Merger Agreement will be signed as soon as possible, but in
any event on or prior to May 15, 1997.
5. OTHER TRANSACTIONS.
(a) DEFINITIONS. As used in this Letter of Intent, the following
terms shall have the meanings specified:
<PAGE>
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 4
(i) "Company" shall mean ESELCO or any of its subsidiaries.
(ii) "Other Offer" shall mean any inquiry, proposal or offer
relating in any manner to an Other Transaction.
(iii) "Other Transaction" shall mean any of the following on
or prior to June 1, 1997, other than the Transaction with WEC as contemplated
by this Letter of Intent: (A) a merger, consolidation, share exchange,
exchange of securities, reorganization, business combination or other similar
transaction involving the Company; (B) a sale, transfer or other disposition
of all or a significant portion of the assets of the Company in a single
transaction or series of related transactions; (C) a sale of, or tender offer
or exchange offer for, or acquisition by any person or group of beneficial
ownership of, a substantial interest in the outstanding capital stock of the
Company in a single transaction or series of related transactions; or (D) a
public announcement of a proposal, plan, intention or agreement to do any of
the foregoing.
(iv) "Special Event" shall mean any of the following to occur
on or prior to June 1, 1997: (A) a person unrelated to WEC has consummated,
or has publicly announced or proposed (and subsequently consummates after
June 1, 1997), an Other Transaction; or (B) a person unrelated to WEC has
consummated an Other Transaction or the Company has entered into an agreement
with respect to an Other Transaction; or (C) ESELCO shall have terminated
this Letter of Intent for the purpose of pursuing an Other Offer or Other
Transaction.
(b) TERMINATION OF DISCUSSIONS. ESELCO shall immediately cease
and cause to be terminated all existing discussions and negotiations, if any,
with any parties conducted prior to the date of this Letter of Intent with
respect to any Other Transaction, except that ESELCO may notify such other
parties that the discussions and negotiations are terminated.
(c) NON SOLICITATION. ESELCO shall not, and shall not permit its
subsidiaries or officers, directors, employees, agents or other
representatives of the Company (including, without limitation, any investment
banker, attorney or accountant retained or engaged by the Company) to,
solicit, initiate, facilitate, encourage, negotiate with respect to, discuss
or agree to, any
<PAGE>
ESELCO, INC.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 5
Other Offer or any Other Transaction, except to the extent required by the
fiduciary duties of the Company's officers and Board of Directors under
applicable law if so advised by a written opinion of outside counsel. ESELCO
shall notify WEC orally and in writing within twenty-four (24) hours
following receipt by the Chairman of the Board or President of ESELCO of any
Other Offer, including the terms and conditions of any such Other Offer and
the person making such Other Offer, except to the extent that ESELCO may be
prohibited from so doing by a contract entered into prior to the date of this
Letter of Intent. ESELCO shall give WEC five (5) calendar days prior notice
and an opportunity to negotiate with ESELCO before entering into, executing
or agreeing to any Other Offer or Other Transaction. Nothing in this Section
5 of this Letter of Intent shall prohibit ESELCO from taking and disclosing
to ESELCO's stockholders a position contemplated by Rule 14e-2(a) under the
Securities Exchange Act of 1934, as amended, with respect to an Other
Transaction by means of a tender offer.
(d) TERMINATION. ESELCO may, by notice to WEC at any time prior
to the effective time of the Transaction described in this Letter of Intent,
terminate this Letter of Intent if the Company enters into, executes or
agrees to an Other Offer or Other Transaction following a determination by
the Board of Directors of ESELCO on the written advice of counsel that such
action is required by its fiduciary duties under applicable law and
compliance by ESELCO with the provisions of Section 5(c) of this Letter of
Intent.
(e) SPECIAL FEE. In order to induce WEC to enter into this Letter
of Intent and to compensate WEC for the time and expenses incurred in
connection with this Letter of Intent and the Transaction described in this
Letter of Intent and the losses suffered by WEC from foregone opportunities,
ESELCO shall pay $2,000,000 to WEC in immediately available funds promptly
after the occurrence of a Special Event.
(f) NOTICES. Any notices by ESELCO to WEC pursuant to this Section
5 of this Letter of Intent shall: (i) if made orally, be made to any one of
the following: Richard A. Abdoo at 414-221-2118 or David K. Porter at
414-221-2500 or Patrick M. Ryan at 414-277-5181; and (ii) if made in writing,
be made by telecopy to all of the following: Richard A. Abdoo at 414-221-2172
and David K. Porter at 414-221-2732 and Patrick M. Ryan at 414-271-3552.
<PAGE>
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 6
6. PUBLICITY. The parties each agree that they will not make public
statements regarding the Transaction contemplated by this Letter of Intent
without first consulting the other party hereto in order that such public
statement may be jointly issued by the parties, except to the extent required
by law.
7. LETTER OF INTENT. This letter is intended to be, and shall be
construed only as, a Letter of Intent and is not and shall not be a binding
agreement and the respective rights and obligations of WEC and ESELCO remain
to be defined in the definitive Merger Agreement, into which this Letter of
Intent and all prior discussions shall merge; provided that: (a) the
obligations of ESELCO under Sections 3(a), 3(c), 5 and 6 of this Letter of
Intent shall be binding upon ESELCO when this Letter of Intent shall be
executed by the parties; and (b) the obligations of WEC under Sections 3(c)
and 6 of this Letter of Intent shall be binding upon WEC when this Letter of
Intent shall be executed by the parties.
8. TERMINATION. If this Letter of Intent is executed and delivered by
ESELCO, this Letter of Intent shall terminate: (a) in accordance with the
provisions of Section 5(d) of this Letter of Intent; or (b) unless the
definitive Merger Agreement on mutually acceptable terms is executed in
accordance with Section 4(b) of this Letter of Intent.
9. COUNTERPARTS. This Letter of Intent may be executed in several
counterparts, each of which shall be deemed an original, but such
counterparts shall together constitute one agreement.
<PAGE>
ESELCO, Inc.
Attention: William R. Gregory, President
and Chief Executive Officer
March 24, 1997
Page 7
If the foregoing correctly sets forth your intent and agreements, kindly
signify by executing and returning the enclosed copy of this letter. I look
forward to your prompt response.
Very truly yours,
WISCONSIN ENERGY CORPORATION
By: /s/ Richard A. Abdoo
---------------------------
Richard A. Abdoo, Chairman
of the Board, President and
Chief Executive Officer
The foregoing letter correctly sets forth our intent
concerning the Transaction and our agreement as to the terms of Sections
3(a), 3(c), 5 and 6.
Dated: March 24, 1997
ESELCO, INC.
By: /s/William R. Gregory
------------------------------
William R. Gregory, President
and Chief Executive Officer
<PAGE>
Exhibit 99.2
To Our Shareholders:
On March 25, 1997 ESELCO, Inc. and Wisconsin Energy Corporation announced
that they had entered into a letter of intent, setting forth the preliminary
terms of the potential acquisition of ESELCO, Inc. by Wisconsin Energy
Corporation. All outstanding shares of ESELCO, Inc. common stock would be
converted into shares of Wisconsin Energy Corporation common stock based on a
value of $44.50 for each share of ESELCO, Inc. common stock in a transaction
proposed to be structured as a tax-free reorganization. The total purchase
price would be approximately $71 million. The exact number of shares of
Wisconsin Energy Corporation common stock to be issued in the transaction
would be determined by dividing $44.50 by the average closing prices of
Wisconsin Energy Corporation common stock during a specified period prior to
closing.
Consummation of the proposed transaction is contingent upon several
conditions, including the negotiation and execution of a definitive
agreement, approval by the Boards of Directors of both companies and the
shareholders of ESELCO, Inc., receipt of all appropriate regulatory
approvals, and the effectiveness of a registration statement to be filed with
the Securities and Exchange Commission covering the Wisconsin Energy
Corporation shares to be issued in the transaction. There can be no assurance
as to the final terms of the proposed transaction, that the conditions will
be satisfied, or that the proposed transaction will be consummated.
Shareholders are not being asked to vote on the proposed transaction with
Wisconsin Energy Corporation at the annual meeting of shareholders, which
will occur on May 6, 1997. If the proposed transaction proceeds, shareholders
would be provided a proxy statement describing the terms of the proposed
transaction and would be asked to vote with respect to the proposed
transaction at a special meeting of shareholders.
William R. Gregory
President and Chief Executive Officer
