UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 Commission Registrant; State of Incorporation IRS Employer File Number Address; and Telephone Number Identification No. ---------- --------------------------------- --------------- 001-09057 WISCONSIN ENERGY CORPORATION 39-1391525 (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 2949 Milwaukee, WI 53201 (414) 221-2345 001-01245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280 (A Wisconsin Corporation) 231 West Michigan Street P.O. Box 2046 Milwaukee, WI 53201 (414) 221-2345
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year EndedDecember 31, 2003
Commission
Registrant; State of Incorporation
IRS Employer
File Number
Address; and Telephone Number
Identification No.
001-01245
WISCONSIN ELECTRIC POWER COMPANY
39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Serial Preferred Stock, 3.60% Series, $100 Par Value
Six Per Cent. Preferred Stock, $100 Par Value
Indicate by check mark whether
each Registrantthe 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 thateach Registrantthe registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
each Registrant'sthe registrant's knowledge, in the definitiveProxyproxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the common
stockequity of WisconsinEnergy CorporationElectric Power Company held by non-affiliatesis approximately $2,018,037,000 based upon the reported last sale price of such securitiesas ofMarch 8, 2000.June 30, 2003 was zero. All of the common stock of Wisconsin Electric Power Company is held by Wisconsin Energy Corporation.Name of Each Exchange Registrant / Title of Each Class on Which Registered ----------------------------------- ---------------------- Securities Registered Pursuant to Section 12(b) of the Act: Wisconsin Energy Corporation Common Stock, $.01 Par Value New York Stock Exchange Wisconsin Electric Power Company None N/A Securities Registered Pursuant to Section 12(g) of the Act: Wisconsin Energy Corporation None Wisconsin Electric Power Company Serial Preferred Stock, 3.60% Series, $100 Par Value N/A Six Per Cent. Preferred Stock, $100 Par Value N/AIndicate the number of shares outstanding of each of the
Registrant'sregistrant's classes of common stock, as of the latest practicable date(March 8, 2000)(January 31, 2004):Wisconsin Energy Corporation Common Stock, $.01 Par Value, 120,031,967 shares outstanding. Wisconsin Electric Power Company Common Stock, $10 Par Value, 33,289,327 shares outstanding. Wisconsin Energy Corporation is the sole holder
Common Stock, $10 Par Value, 33,289,327 shares outstanding.
Documents Incorporated by Reference
Portions of Wisconsin Electric Power
Company Common Stock. Documents Incorporated by Reference ------------------------------------------ Portions of Wisconsin Energy Corporation'sCompany's definitiveProxy Statementinformation statement for its Annual Meeting of Stockholders, to be held onJune 27, 2000,April 30, 2004, are incorporated by reference into Part III hereof.Portions of Wisconsin Electric Power Company's definitive Information Statement for its Annual Meeting of Stockholders, to be held on June 22, 2000, are incorporated by reference into Part III hereof. This combined Form 10-K is separately filed by Wisconsin Energy Corporation and by Wisconsin Electric Power Company. Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf.
WISCONSIN ELECTRIC POWER COMPANY |
FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, |
TABLE OF CONTENTS | |
Item | Page |
PART I | |
1. | 4 |
2. | 18 |
3. Legal | 19 |
4. Submission of Matters to a Vote of Security | 20 |
Executive Officers of the | 20 |
PART II | |
5. Market for | 22 |
6. Selected Financial | 23 |
7. Management's Discussion | 25 |
7A.Quantitative and Qualitative Disclosures About Market | 55 |
8. Financial Statements and Supplementary | 56 |
9. Changes in and Disagreements with Accountants on Accounting and Financial | 84 |
9A. Controls and Procedures ................................................................................................................... | 84 |
PART III | |
10. Directors and Executive Officers of the | 84 |
11. Executive | 85 |
12. Security Ownership of Certain Beneficial Owners and | 85 |
13. Certain Relationships and Related | 85 |
14. Principal Accountant Fees and Services ..................................................................................................... | 85 |
PART IV | |
15. Exhibits, Financial Statement Schedules, and Reports on Form | 86 |
Signatures ........................................................................................................................................... | 87 |
Exhibit | E-1 |
PART I
--------
ITEM 1. BUSINESS
Wisconsin Energy Corporation was incorporated in the state of
Wisconsin in 1981 and became a holding company in 1986. Unless
qualified by the context used in this document, the terms
"Wisconsin Energy" or the "Company" refer to the holding company
and all of its subsidiaries. The operations of the Company and
its subsidiaries are conducted in a utility business segment and a
non-utility business segment. Wisconsin Energy's principal
subsidiary at December 31, 1999 was
ITEM 1. | BUSINESS |
INTRODUCTION
Wisconsin Electric Power Company ("(Wisconsin Electric), a wholly-owned subsidiary of Wisconsin Electric")Energy Corporation (Wisconsin Energy), an electric, gas and steam utility
which was incorporated in the state of Wisconsin in 1896. The
following discussion includes both Unless qualified by their context when used in this document, the terms the Company, Our, Us or We refer to Wisconsin Electric Power Company and its subsidiaries. We are an electric, gas and steam utility which serves approximately 1,068,000 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 428,700 gas customers in Wisconsin and about 460 steam customers in metro Milwaukee, Wisconsin. We maintain our principal executive offices in Milwaukee, Wisconsin.
We conduct our operations primarily in three operating segments: an electric utility segment, a natural gas utility segment and a steam utility segment. For further financial information about our business segments, see "Results of Operations" in Item 7 and "Note M -- Segment Reporting" in the Notes to Consolidated Financial Statements in Item 8.
Wisconsin Energy is also the parent company of Wisconsin Gas Company (Wisconsin Gas) a natural gas distribution utility, which serves customers throughout Wisconsin, and Edison Sault Electric Company (Edison Sault) an electric utility which serves customers in the Upper Peninsula of Michigan. Wisconsin Electric and Wisconsin Electric unless otherwise stated.
PENDING ACQUISITION OF WICOR, INC.: On June 27, 1999,Gas have combined common functions and operate under the trade name of "We Energies".
Power the Future Strategy: In late February 2001, Wisconsin Energy and WICOR, Inc.,filed a Wisconsin corporation, entered into an
Agreement and Plan of Merger providing for a strategic business
combination of Wisconsin Energy and WICOR. The merger will be
accounted for as a purchase transaction. WICOR is a diversified
holding companypetition with consolidated total assets of approximately
$1.1 billion at December 31, 1999 in utility and non-utility
energy subsidiaries as well as in pump manufacturing subsidiaries.
Following the merger, WICOR and its subsidiaries will become
subsidiaries of Wisconsin Energy. Consummation of the merger is
subject to the satisfaction of certain closing conditions
including regulatory approvals and Federal Trade Commission
clearance. The Federal Trade Commission has closed its review and
Wisconsin Electric has obtained approval of the Public Service Commission of Wisconsin (PSCW) starting the regulatory review process for a 10-year strategy, originally proposed in September 2000, to improve the supply and reliability of electricity in Wisconsin. The only remaining requiredAs part of Wisconsin Energy'sPower the Future strategy, Wisconsin Energy is: (1) investing in new natural gas-based and coal-based electric generating facilities, (2) upgrading our existing electric generating facilities and (3) investing in upgrades of our existing energy distribution system. Implementation of thePower the Future strategy is subject to a number of state and federal regulatory approvalapprovals. Additional information concerningPower the Future may be found below under "Environmental Compliance" as well as in Item 7.
Other: Bostco LLC (Bostco) is our non-utility subsidiary that develops and invests in real estate.
Cautionary Factors: Certain statements contained herein are "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-Looking Statements may be identified by reference to a future period or periods or by the use of forward looking terminology such as "may," "intends," "anticipates," "believes," "estimates," "expects," "forecasts," "objectives," "plans," "possible," "potential," "project" or similar terms or variations of these terms. Actual results may differ materially from those set forth in Forward-Looking Statements as a result of certain risks and uncertainties, including but not limited to, changes in political and economic conditions, equity and bond market fluctuations, varying weather conditions, governmental regulation and supervision, as well as other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission. The
regulatory approval process is expected to be completedCommission (SEC), including factors described throughout thi s document and in time
for the transaction to be consummated on or about April 26, 2000.
ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired
ESELCO, Inc. in a tax free reorganization accounted for as a
pooling of interests. Due to the immaterial nature of this
transaction, Wisconsin Energy has not restated any historical
financial or statistical information contained in this document.
For additional information, see "Factors Affecting Results, of
Operations - Mergers"Liquidity and Capital Resources" in Item 7 of this report. ESELCO was7.
UTILITY OPERATIONS
ELECTRIC UTILITY OPERATIONS
We are the parent company of Edison Sault Electric Company ("Edison Sault"),
anlargest electric utility serving customers in Michigan's eastern Upper
Peninsula. Wisconsin Energy is operating Wisconsin Electric and
Edison Sault, an electric utility, as separate subsidiaries within
their historical service territories. Unless otherwise noted, the discussion that follows includes Edison Sault's activity since
June 1, 1998.
Utility Segment
ELECTRIC OPERATIONS: Wisconsin Electric's electric operationsstate of Wisconsin. We generate, transmit, distribute and sell electric energy in a
territory of approximately 12,000 square miles with a population
estimated at 2,300,000 in southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Edison Sault generates, transmits,
distributes and sells electric energy in a territory of
approximately 2,000 square miles with a population of
approximately 55,000 in the eastern Upper Peninsula of Michigan.
GAS OPERATIONS: Wisconsin Electric's gas operations purchase,
distribute and sell natural gas to retail customers and transport
customer-owned gas in four distinct service areas of about 3,800
square miles in Wisconsin: west and south of the City of
Milwaukee, the Appleton area, the Prairie du Chien area and areas
within Iron and Vilas Counties. The gas service territory has an
estimated population of approximately 1,200,000.
STEAM OPERATIONS: Wisconsin Electric's steam operations
generate, distribute and sell steam supplied by its Valley and
Milwaukee County Power Plants. Steam is used by customers for
space heating and processing, hot water and humidification in the
metropolitan Milwaukee area.
Non-Utility Segment
Wisconsin Energy's non-utility operations seek to grow shareholder
value by leveraging on the Company's core competencies. Wisconsin
Energy's non-utility subsidiaries are involved in various
activities, among which are development, ownership and operation
of electric generating facilities; waste/energy by-product
utilization/recycling; and real estate development. For
information about the non-utility subsidiaries, see "Non-Utility
Segment" below.
* * * * *
For additional financial information about Wisconsin Energy's
business segments, see "Note K - Segment Reporting" in Wisconsin
Energy's Notes to Financial Statements
Electric Sales
See "Selected Operating Data" in Item 8 of this report.
Information6 for prior periods has been reclassified to reflect the
1999 change in the composition of Wisconsin Energy's reportable
segments. For additional financial information about Wisconsin
Electric's business segments, see "Note J - Segment Reporting" in
Wisconsin Electric's Notes to Financial Statements also in Item 8
of this report. For additional information concerning Wisconsin
Energy's acquisition of ESELCO and the pending acquisition of
WICOR, see "Factors Affecting Results of Operations - Mergers" in
Item 7 of this report.
Cautionary Factors
A number of forward-looking statements are included in this
document. When used, the terms, "anticipate," "believe,"
"estimate," "expect," "objective," "plan," "possible,"
"potential," "project" and similar expressions are intended to
identify such forward-looking statements. Forward-looking
statements are subject to certain risks, uncertainties and
assumptions which could cause actual results to differ materially
from those that are described, including the factors described in
Item 7 of this report.
UTILITY SEGMENT
ELECTRIC OPERATIONS
Electric Sales
See "Results of Operations - Utility Segment Pretax Operating
Results - Electric Utility Revenues, Gross Margins and Sales" in
Item 7 of this report for selected electric operating information
for Wisconsin Energy and additional selected electricutility operating information by customer class for Wisconsin Electric.
WISCONSIN ELECTRIC: Wisconsin Electric isduring the period 1999 through 2003.
We are authorized to provide retail electric service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities, and in certain territories in the state of Michigan pursuant to franchises granted by municipalities. Wisconsin ElectricWe also sellssell wholesale electric power.
Electric
Our electric energy sales by Wisconsin Electric to all classes of customers totaled approximately 30.630.7 million megawatt-hoursmegawatt hours (mwh) during 1999,2003, a 3.9%1.1% increase over 1998. Therefrom 2002. Approximately 0.4 million of megawatt-hour sales during 2003 were to Edison Sault. We had approximately 1,006,0001,068,000 electric customers at December 31, 1999,2003, an increase of 1.7%1.1% since December 31, 1998.
2002.
Electric energySales Growth: Assuming moderate growth in the economy of our electric utility service territories and normal weather, we presently anticipate total retail and municipal electrickilowatt-hour sales are impacted by seasonal factors and varying
weather conditions from year-to-year. Wisconsin Electric, a
summer peaking utility as a result of cooling load, reached its
all-time electric peak demand obligation of 5,974 megawatts on
July 29, 1999. During the years 2000 through 2004, Wisconsin
Electric currently estimates that electric peak demand obligation
willto grow at an annualizeda compound annual rate of 0.5% to 6,118 megawatts by2.0% over the year 2004.
EDISON SAULT: Edison Sault is authorized to provide retail
electric service in certain territories in the state of Michigan
pursuant to franchises granted by municipalities. Edison Sault
also provides wholesale electric service under contract with one
rural cooperative.
Electric energy sales by Edison Sault to all classes of customers
totaled approximately 0.6 million megawatt-hours during 1999.
There were approximately 21,800 electric customers atfive-year period ending December 31, 1999, an increase of 1.8% since December 31, 1998.
Edison Sault, a winter peaking utility as a result of heating
load, reached its all-time peak electric demand of 138 megawatts
on January 14, 1999. Edison Sault's peak load growth during the
past five years has averaged between 1% and 2% per year. Edison
Sault expects this level of growth to continue into the
foreseeable future.
SALES TO LARGE ELECTRIC RETAIL CUSTOMERS: Wisconsin2008.
Sales To Large Electric providesRetail Customers: We provide electric utility service to a diversified base of large
commercial and industrial customers includingin such industries as mining, paper, foundry, food products and machinery production. Cleveland-Cliffs
Inc manages Wisconsin Electric's twoproduction, as well as to large retail chains.
Our largest retail electric customers the Empire and Tildenare two iron ore mines located in the Upper Peninsula of Michigan. Due to a two month shutdown of bothWe currently have special negotiated power-sales contracts with these mines during 1999, thethat expire in 2007. The combined electric energy sales forto the two mines accounted for 7.1% and 6.5% of Wisconsin Electric'sour total electric utility energy sales during 1999 compared2003 and 2002, respectively.
Sales to 8.2% of Wisconsin Electric's total sales
during 1998. Overall, sales to Wisconsin Electric's largest 100
electric customers exceed $375 million annually.
Edison Sault provides electric service to large industrial
accounts in the paper, crude oil pipeline and limestone quarry
industries as well as to several state and federal government
facilities.
SALES TO WHOLESALE CUSTOMERS:Wholesale Customers: During 1999, Wisconsin Electric2003, we sold wholesale electric energy to fivethree municipally owned systems, two rural cooperatives and two municipal joint action agencies located in the states of Wisconsin, Michigan and Illinois. WholesaleWe also made wholesale electric energy sales by Wisconsin Electric were also
made to 4834 other public utilities and power marketers throughout the region under rates approved by the Federal Energy Regulatory Commission.Commission (FERC). Wholesale sales accounted for approximately 12%9.5% of Wisconsin Electric'sour total electric energy sales and 7%5.0% of total electric operating revenues during 19992003 compared to 10%with 8.7% of total electric energy sales and 6%4.6% of total electric operating revenues during 1998.2002.
Electric System Reliability Matters: Electric energy sales are impacted by seasonal factors and varying weather conditions from year-to-year. As a summer peaking utility, we reached our all-time electric peak demand obligation of 6,376 megawatts on August 21, 2003. The summer period is the most relevant period for capacity planning purposes for us due to cooling load. We are a member of the MAIN reliability council. MAIN guidelines direct members to have a minimum 14.12% planning reserve margin in place prior to the upcoming peak season. PSCW guidelines for electric utilities in Wisconsin Electric's existing Federal Energy Regulatoryadvise a minimum 18% planning reserve margin. The Michigan Public Service Commission tariffs also provide for transmission service to its wholesale
customers. During 1999, Wisconsin Electric had 19 customers
taking transmission service.
ELECTRIC SYSTEM RELIABILITY MATTERS: In spite of several
episodes of hot and humid weather during the summer of 1999,
Wisconsin Electric(MPSC) has not provided guidelines in this area.
We had adequate capacity to meet all of itsour firm electric load obligations during 19992003 and expectsexpect to have adequate capacity to meet all of itsour firm obligations during 2000.
However, the Company anticipates that the regional electric energy
supply will remain tight during 2000. See2004. For additional information, see "Factors Affecting Results, of Operations - Electric System Reliability Matters"Liquidity and Capital Resources" in Item 7 of this report for7. For additional information concerning ongoing actions
in which Wisconsin Electric is currently involvedregarding our generation facilities, see Item 2.
Competition
Prior to improve
electric reliability in2003, the Midwest region.
Competition
Driven by a combination of market forces, regulatory and
legislative initiatives and technological changes, thenation's electric utility industry continueshad been following a trend towards restructuring and increased competition. See "Factors Affecting ResultsHowever, given electric reliability problems experienced in the eastern United States during the summer of Operations - Industry Restructuring2003 and Competition" in Item 7the state of this report for a description of competition issuesCalifornia in 2001 and 2002, which had previously restructured its electric industry framework, and given the current status of restructuring initiatives that are underway in regulatory jurisdictions where we primarily do business, we do not expect significant electric deregulation in Wisconsin Electricin the next five years. For additional information, see "Factors Affecting Results, Liquidity and Edison Sault currently
do business.
Capital Resources" in Item 7.
Electric Supply
The table below indicates Wisconsin Energy's and Wisconsin
Electric'sour sources of electric energy supply, for their electric
utility control areas, including net generation by fuel type, for the following years ended December 31.
31:
Estimate | Actual | ||||||
2004 (a) | 2003 | 2002 | 2001 | ||||
Coal | 58.6% | 59.4% | 59.2% | 62.2% | |||
Nuclear | 24.3% | 25.0% | 25.0% | 25.0% | |||
Hydroelectric | 1.2% | 1.1% | 1.4% | 1.1% | |||
Natural gas | 0.6% | 0.6% | 0.8% | 0.7% | |||
Oil and Other (b) | 0.1% | 0.1% | 0.1% | 0.1% | |||
Net Generation | 84.8% | 86.2% | 86.5% | 89.1% | |||
Purchased Power (c) | 15.2% | 13.8% | 13.5% | 10.9% | |||
Total | 100.0% | 100.0% | 100.0% | 100.0% | |||
(a) | Estimated assuming that there are no unforeseen contingencies such as unscheduled maintenance or repairs of |
(b) | Includes generation by |
(c) | Excludes |
Our net generation totaled 2827.8 million megawatt-hoursmegawatt hours during 19992003 compared with 27.6 million megawatt hours during 2002 and 28.7 million megawatt hours during 2001. The decline in 2002 generation was primarily due to 26 million
megawatt-hoursan increase in scheduled outages at our generating facilities. When compared with the past three years, net generation as a percent of our total electric energy supply is expected to decrease during 1998 and 24 million megawatt-hours during
1997. Net generation has increased2004 in eachlarge part due to the Port Washington unit retirements in anticipation of the pastconstruction of two years
duenatural gas-based generation facilities at the same site, one of which is expected to higher availabilitybecome operational in 2005. Purchased power is expected to be the primary source of Point Beach Nuclear Plant. The
dependable capability of Wisconsin Electric's generating stations
was 5,750 megawattsadditional electric energy supply required to meet load growth in August 1999 as more fully described in
Item 2 of this report.
Wisconsin Electric'sthe next year.
Our average total fuel and purchased power costs per million British
thermal unitsmegawatt hour by fuel type for the years ended December 31 are shown below.
2003 | 2002 | 2001 | ||||
Coal | $12.93 | $12.09 | $12.44 | |||
Nuclear | $4.79 | $5.04 | $5.78 | |||
Natural Gas | $93.42 | $60.56 | $72.31 | |||
Purchased Power | $39.89 | $34.50 | $39.66 |
The fuel costs for coal and nuclear generation was supplemented with
3.8 million megawatt-hoursare relatively stable as most of power purchases from neighboring
utilities, from an independent power producer with whom Wisconsin
Electric has athese fuel costs are under long-term power purchase contract,contracts. However, some of our coal contracts expire in the near future and we may incur increases in coal prices, subject to a minor
extent, from other sources. Wisconsin Electric purchased
4.5 million megawatt-hours and 5.5 million megawatt-hours of
electric energy during 1998 and 1997, respectively.
EDISON SAULT: During 1999, Edison Sault generated 24% of its
total electric energy requirements with its hydroelectric plantmarket conditions. The costs for natural gas and purchased power, which is primarily natural gas-based, are more volatile.
Our installed capacity by fuel type for the remaining 76% of such requirements. Edison
Sault's total average generating capabilityyears ended December 31, is 34.6 megawatts as
more fully described in Item 2 of this report.
Coal-Firedshown below.
2003 | 2002 | 2001 | ||||
Dependable capability in megawatts(a) | ||||||
Coal | 3,560 | 3,636 | 3,639 | |||
Nuclear | 1,036 | 1,022 | 1,022 | |||
Natural Gas/Oil (b) | 1,157 | 1,183 | 1,171 | |||
Hydro | 57 | 57 | 57 | |||
Total | 5,810 | 5,898 | 5,889 | |||
(a) | Dependable capability is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. The values were established by test and may change slightly from year to year. |
(b) | The dual fuel facilities burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or at the local gas distribution system that delivers gas to the plants. |
Coal-Based Generation
COAL SUPPLY: Wisconsin Electric diversifies
Coal Supply: We diversify the coal sourcessupply for itsour power plants in the states of Wisconsin and Michigan by purchasing coal from mines in northern and central Appalachia as well as from various western mines. During 2000,2004, 99% of Wisconsin Electric'sour projected coal requirements of 11.312.0 million tons will be under contract. Wisconsin Electric doescontracts, which are not tied to 2004 market pricing fluctuations. We do not anticipate any problem in procuring itsour remaining 20002004 coal requirements through short-term or spot purchases and inventory adjustments. Our coal-based generation consists of seven operating plants with a dependable capability of approximately 3,560 megawatts.
Following is a summary of the annual tonnage amounts for Wisconsin Electric'sour principal long-term coal contracts by the month and year in which the contracts expire.
Contracts |
| |
Dec. | 500,000-2,000,000 | |
Dec. | 4,800,000 | |
Dec. | 5,200,000 | |
Dec. | 1,200,000 |
As of the beginning of 2000, Wisconsin Electric2004, we had approximately a 124-day118-day supply of coal in inventory at its coal-firedour coal-based facilities.
Coal Deliveries: Approximately 80%75% of Wisconsin Electric's 2000our 2004 coal requirements are expected to be delivered by Wisconsin Electric-ownedour owned or leased unit trains. The unit trains will transport coal for the Oak Creek and Pleasant Prairie Power Plants from Pennsylvania, New Mexico and Wyoming mines. Coal from Pennsylvania and Colorado mines is also transported via rail to Lake Erie or Lake Michigan transfer docks and delivered to the Valley and Port Washington Power Plants by lake vessels. Coal from central Appalachia is shipped via rail to Lake Erie transfer docks and transported by lake vessel to Milwaukee where it is delivered to the Milwaukee County Power Plant by truck once it arrives by lake vessel in Milwaukee.truck. Montana and Wyoming coal for Presque Isle Power Plant is transported via rail to Superior, Wisconsin, placed in dock storage and reloaded into lake vessels for plant delivery. Central AppalachianAppalachia and Colorado coal bound for Presque Isle Power Plant is shipped via rail to Lake Erie and Lake Michigan (Chicago) coal transfer docks, respectively, for lake vessel deliverydel ivery to the plant.
During 1997, coal deliveries to certain Wisconsin Electric
generating facilities as well as to the electric generating
facilities of many other utilities were impaired by massive
congestion problems on the Union Pacific Railroad. Coal delivery
performance improved during 1998 and 1999, and Wisconsin Electric
does not anticipate problems during 2000. During the fall of
1997, Wisconsin Electric completed construction of a rail spur at
the Pleasant Prairie Power Plant, which burns over 40% of
Wisconsin Electric's annual coal requirements. The new rail spur,
connecting to the rail line of a competitor of the Union Pacific
Railroad, provides Wisconsin Electric with another means of
delivery to Pleasant Prairie.
PLEASANT PRAIRIE POWER PLANT: All of the estimated 2000 coal
requirements for this plant are presently under contract.
OAK CREEK POWER PLANT: All of the estimated 2000 coal
requirements for this plant are presently under contract or agreed
upon in principle.
PRESQUE ISLE POWER PLANT: All of the estimated 2000 coal
requirements for this plant are presently under contract.
EDGEWATER 5 GENERATING UNIT: Coal for this unit, in which
Wisconsin Electric has a 25% interest, is purchased by the
majority owner of the facility, Wisconsin Power and Light Company,
a subsidiary of Alliant Energy Resources.
VALLEY AND PORT WASHINGTON POWER PLANTS: Coal requirements for
these plants will be supplied in 2000 under existing contracts or
contracts that have been agreed upon in principle.
MILWAUKEE COUNTY POWER PLANT: Coal for this facility is
purchased by Wisconsin Electric through annual spot purchases.
ENVIRONMENTAL MATTERS:
Environmental Matters: For information regarding emission restrictions, especially as they relate to coal-firedcoal-based generating facilities, see "Environmental Compliance" below.
.
Nuclear Generation
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates
Point Beach Nuclear Plant: We own two approximately 510-megawatt518-megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. Point Beach
provided approximately 6% of Wisconsin Electric's net electric
energy supply during 1997 compared to 18% during 1998 and 22%
during 1999, reflecting extended outages during 1997. The United States Nuclear Regulatory Commission (NRC) operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2. The Nuclear Management Company, LLC (NMC), which operates Point Beach for us, filed an application with the NRC in February 2004 to renew the operating licenses for both of our nuclear reactors for an additional 20 years. For additional information concerning Point Beach, see "Factors Affecting Results, of Operations - Nuclear Matters"Liquidity and Capital Resources" in Item 7 of this report.
NUCLEAR MANAGEMENT COMPANY: In mid-2000, Wisconsin Electric
currently expectsand "Note E -- Nuclear Operations" in the Notes to transfer operating responsibility for Point
Beach Nuclear Plant along with operating authority under the
plant's operating licenses to a management company, the Consolidated Financial Statements in Item 8.
Nuclear Management Company, LLC, which has been formed withCompany: NMC, owned by one of our affiliates and the affiliates of threefour other unaffiliated investor-owned utilities in the region.region, operates Point Beach. NMC provides services to eight nuclear generating units at six sites in the states of Wisconsin, Minnesota, Michigan, and Iowa with a total combined generating capacity of about 4,500 megawatts as of December 31, 2003. We continue to own Point Beach and retain exclusive rights to the energy generated by the plant as well as financial responsibility for the safe operation, maintenance and decommissioning of Point Beach. For further information, see "Factors Affecting Results, of
Operations - Nuclear Matters"Liquidity and Capital Resources" in Item 7 of this report.
NUCLEAR FUEL SUPPLY: Wisconsin Electric purchases7.
Nuclear Fuel Supply: We purchase uranium concentrates ("Yellowcake")(Yellowcake) and contracts for its conversion, enrichment and fabrication. Wisconsin Electric maintainsWe maintain title to the nuclear fuel until fabricated fuel assemblies are delivered to Point Beach, whereuponBeach; it is then sold to and leased back from the Wisconsin Electric Fuel Trust. For further information concerning this nuclear fuel lease, see "Note H" or "Note G --- Long-Term Debt" in Wisconsin Energy's or Wisconsin Electric'sthe Notes to Consolidated Financial Statements respectively, in Item 8 of this report.
URANIUM REQUIREMENTS: Wisconsin Electric requires8.
Uranium Requirements: We require approximately 400,000 pounds of Yellowcake to refuel a generating unit at Point Beach. During 1998, Wisconsin Electric initiatedPoint Beach has staggered, extended fuel cycles that are expected to average approximately 18 months in duration. The supply of Yellowcake for these refuelings is currently provided through one long-term contract, which provides between 60% tosupplies 100% of the annual requirements under
these staggered, extended fuel cycles. Wisconsin Electric may
exercise flexibility available in this contract and purchase
certain quantities of uranium on the spot market, should the
market conditions prove favorable. Negotiations for the supply of
the quantity of uranium not covered by the long-term contract will
be ongoing during 2000.
CONVERSION: Wisconsin Electric hasthrough 2007.
Conversion: We have a long-term contract with a provider of uranium conversion services to supply 75% of the conversion requirements for the Point Beach reactors from 2000
through 2004. Wisconsin Electric hasWe have an additional long-term conversion contract with a second conversion supplier to supply the remaining 25% of Wisconsin Electric'sour annual conversion requirements.
ENRICHMENT: Wisconsin Electric currently hasrequirements through 2004. We also have the option to utilize two long-termNMC fleet contracts for the supplyconversion services to meet approximately 45% of enriched uranium. The combination of
the twoour conversion requirements through 2007. We are currently pursuing additional contracts for conversion services for Point Beach beyond our 2004 requirements.
Enrichment: We effectively have one long-term contract that provides for 100% of the required enrichment services for the Point Beach reactors through the year 2006. The
final enriched uranium delivery under one of the enrichment
contracts is currently scheduled for November 2000.
FABRICATION:
Fabrication: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered under a contract with Westinghouse Electric CorporationCompany, LLC for the balance of the plant's current operating license. During 1995, an agreement was reached
between Wisconsin Electric and Westinghouse to supply Wisconsin
Electric with a new fuel design beginning in the fall of 1997.
The 1995 agreement was modified in November 1996 due to delayed
licensing of a new analysis method desired for the use of the new
fuel design. Current plans now assume initial use of the new fuel
design in the fall of the year 2000. The new fuel design is
expected to provide additional safety margin and cost savings and
to reduce the number of discharged spent fuel assemblies over the
remaining operating license.
SPENT FUEL STORAGE & DISPOSAL: Wisconsin Electric currently has
the capacity to store limited amounts of spent nuclear fuel in the
spent fuel pool at Point Beach Nuclear Plant. In addition,
Wisconsin Electric completed construction of an Independent Spentlicenses.
Used Fuel Storage Installation in 1995 for the temporary dry storage of
spent fuel at Point Beach.& Disposal: For information concerning spentused fuel storage and disposal issues, see "Factors Affecting Results, of
Operations - Nuclear Matters"Liquidity and Capital Resources" in Item 7 of this report.
NUCLEAR DECOMMISSIONING: Wisconsin Electric provides7.
Nuclear Decommissioning: We provide for costs associated with the eventual decommissioning of Point Beach through the use of an external trust fund. Payments to this fund, together with investment earnings,results, brought the balance in the trust fund at December 31, 19992003 to approximately $626$674.4 million. For additional information regarding decommissioning, see "Note E --- Nuclear Operations" in the Notes to Consolidated Financial Statements in Item 8
of this report.
NUCLEAR PLANT INSURANCE:8.
Nuclear Plant Insurance: For information regarding nuclear plant insurance, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 and "Note E - Nuclear Operations" in the Notes to Consolidated Financial Statements in Item 8.
Hydroelectric Generation
WISCONSIN ELECTRIC: Wisconsin Electric's
Our hydroelectric generating system consists of fifteenfourteen operating plants with a total installed capacity of approximately 9089 megawatts and a dependable capability of approximately 57 megawatts. OfThirteen of these fifteen plants fourteen are licensed by the Federal Energy
Regulatory Commission.FERC. The fifteenthfourteenth plant, with an installed generating capacity of approximately 2 megawatts, does not require a license. Four ofOf the fifteenthirteen licensed plants, twelve plants, representing 26a total of 85 megawatts of installed capacity, have received new long-term licenses from the Federal Energy Regulatory Commission. Wisconsin Electric is
in the process of sellingFERC, and one plant, the Sturgeon project, will not be relicensed and is intended to be removed. Removal of the Sturgeon project has commenced and will continue over the next several years.
Natural Gas-Based Generation
Our natural gas-based generation consists of four operating plants with an installed generating
capacitya dependable capability of approximately 1 megawatt to an independent party.
Wisconsin Electric is seeking renewal of the remaining eight
operating licenses from the Federal Energy Regulatory Commission
for licenses that expired or expire during the period 1998 to
2001. Key issues concerning relicensing of these eight plants
were covered by the Wilderness Shores Settlement Agreement, signed
in February 1997. The agreement was the culmination of more than
two years of negotiations between Wisconsin Electric and
representatives of the Wisconsin Department of Natural Resources,
the Michigan Department of Environmental Quality, the Michigan
Department of Natural Resources, the U.S. Fish and Wildlife
Service, the Wisconsin Department of Administration, the National
Park Service and two river/recreational organizations: the
Michigan Hydro Relicensing Coalition and the River Alliance of
Wisconsin. Wisconsin Electric expects the Wilderness Shores
Settlement Agreement to assure the continued profitable operation
of its hydroelectric system in the Upper Menominee River Basin as
well as the protection of associated land and water resources for
40 years following license renewal by the Federal Energy
Regulatory Commission.
Wisconsin Electric's hydroelectric facilities covered by the
Wilderness Shores Settlement Agreement are the Big Quinnesec
Falls, Kingsford, Michigamme Falls, Twin Falls, Lower Paint Dam,
Peavy Falls, Hemlock Falls and Way Dam Projects, representing a
total of 59 megawatts of installed capacity. In September 1999,
Wisconsin Electric filed an applicant-prepared environmental
assessment, license applications and the Wilderness Shores
Settlement Agreement with the Federal Energy Regulatory Commission
as well as a surrender application for the Sturgeon plant.
Wisconsin Electric expects the Federal Energy Regulatory
Commission to issue the orders related to this filing by October
2000.
For additional information concerning Wisconsin Electric's
hydroelectric generating facilities, see Item 2 in this report.
EDISON SAULT: Edison Sault's primary source of generation is its
30-megawatt hydroelectric generating plant located on the
St. Marys River in Sault Ste. Marie, Michigan. The water for this
facility is leased under a contract with the United States Corps
of Engineers with tenure to December 31, 2050. However, the
Secretary of the Army has the right to terminate the contract
subsequent to December 2020. Edison Sault pays for all water
taken from the St. Marys River at predetermined rates with a
minimum annual payment of $100,000. The total flow of water taken
out of Lake Superior, which in effect is the flow of water in the
St. Marys River, is under the direction and control of the
International Joint Commission, created by the Boundary Water
Treaty of 1909 between the United States and Great Britain, now
represented by Canada.
Water elevation levels on Lake Superior have been below normal
levels since May 1998. As a result, the International Joint
Commission has placed limitations on the flow of water from Lake
Superior that limits Edison Sault's amount of hydroelectric
generation. During any limited flow months, it is necessary for
Edison Sault to purchase additional power from other sources and
increase the use of Edison Sault's diesel generation.
Hydroelectric generation is also purchased by Edison Sault under
contract from the United States Corps of Engineers' hydroelectric
generating plant located within the Soo Locks complex on the
St. Marys River in Sault Ste. Marie, Michigan. This 17-megawatt
contract has a tenure to November 1, 2040 and cannot be terminated
by the United States government prior to November 1, 2030.
During 1999, hydroelectric energy provided 42% of Edison Sault's
total energy requirements of which 24% was generated by Edison
Sault's facility and 18% was purchased from the United States
Corps of Engineers.
Natural Gas-Fired Generation1,157 megawatts. The Concord and Paris Combustion Turbine Power Plants, Germantown Unit 5 and the Oak Creek combustion turbine use natural gas as their primary fuel, with fuel oil as backup. Natural gas is also used for boiler ignition and flame stabilization purposes forat the Pleasant Prairie and Oak Creek Power Plants. Gas for these plants is purchased on the spot market from gas marketers and/or producers and delivered on theour gas operations local distribution system of Wisconsin Electric's gas
operations.system. An interruptible balancing and storage agreement with ANR Pipeline Company is intended to facilitate the variable gas usage pattern of the combustion turbine plants.
Natural gas for the gas-firedgas-based boiler at the Milwaukee County Power Plant and for boiler ignition and flame stabilization at the Valley Power Plant is purchased under an agency agreement with a gas marketing company. The agent purchases natural gas and arranges for interstate pipeline transportation to Wisconsin Gas, the local gas distribution utility. The local gas distribution utilitiesWisconsin Gas then transport Wisconsin Electric'stransports our gas to each plant under interruptible tariffs.
Wisconsin Electric's
We also have power purchase agreements with Alliant Energy Neenah, LLC (Alliant), a subsidiary of Alliant Energy Corporation and LSP-Whitewater, LP, a subsidiary of Cogentrix, Inc., both of which utilize natural gas operationsas primary fuel and fuel oil as back-up fuel. LSP-Whitewater, LP is responsible for its own natural gas and fuel oil procurement for its Whitewater Cogeneration Facility. We procure and deliver fuel to Alliant's Neenah Energy Facility and receive the electric power produced, as discussed in "Purchase Power Commitments" below. We have another power purchase agreement with Calpine Corporation for peaking capacity from a Zion, Illinois facility, which began commercial operation during the summer of 2002. We procure and deliver natural gas to the plant and receive the electric power produced, similar to the Alliant agreement.
During 2003, the PSCW approved a program for a two-year period allowing us to hedge up to 75% of our estimated monthly gas purchases for electric generation. We include the costs of this risk management program in our fuel and purchased power costs.
We are the gas distribution utility for Concord, Paris, Pleasant Prairie, Whitewater Cogeneration Facility and Oak Creek Power Plants. Wisconsin Gas Company, an unaffiliated company, is the gas distribution utility for the Valley and Milwaukee County Power Plants. For information concerning Wisconsin Energy's pending
acquisition of Wisconsin Gas Company's parent company, WICOR,
Inc., see "Factors Affecting Results of Operations - Mergers" in
Item 7 of this report.
Natural gas will beBoth the primary fuel for Germantown Power Plant Unit 5, an 85-megawatt unit presently under construction, and for
a 300-megawatt peaking power plant currently being built by a
subsidiary of SouthernAlliant's Neenah Energy Inc. in Neenah, Wisconsin.
Wisconsin Electric will purchase all of the power generated by
this new unaffiliated plant. Both facilities will beFacility are directly connected to the ANR Pipeline, with no gas distribution utility involvement. Firm gas transportation has been contracted for
during the peak summer period between the Joliet gas trading hub
south of Chicago, Illinois and the plant interconnects. Gas will
be purchased at the Joliet hub. For further information
concerning construction of Germantown Unit 5, see "Factors
Affecting Results of Operations - Electric System Reliability
Matters" in Item 7 of this report. For further information
concerning Southern Energy's 300-megawatt power plant, see
"Purchase Power Commitments" below.
Oil-Fired
Oil-Based Generation
Fuel oil is used for the combustion turbines at the Point Beach and Germantown and Port Washington Power Plants.Plants units 1-4. It is also used for boiler ignition and flame stabilization at the Presque Isle Power Plant, as backup for ignition at the Pleasant Prairie Power Plant and as a backup fuel for the natural gas-fired gasgas-based turbines discussed above. The natural gas facilities burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or in the local gas distribution system that delivers gas to the plants. Fuel oil requirements are purchased under partnering agreements with suppliers that assist Wisconsin
Electricus with inventory tracking and oil market price trends.
Subject to various regulatory approvals, four existing generating
units at the Germantown Power Plant will be converted, one unit
per year from 2001 to 2004, to dual fuel (natural gas and oil).
As noted above, a fifth dual fuel combustion turbine is planned to
begin commercial operation at Germantown Power Plant in 2000. For
further information about these Germantown Power Plant projects,
see "Factors Affecting Results of Operations - Electric System
Reliability Matters" in Item 7 of this report.
Purchase Power Commitments
WISCONSIN ELECTRIC:
To meet a portion of Wisconsin Electric'sour anticipated increase in future electric energy supply needs, Wisconsin Electric haswe have entered into separate long-term power purchase contracts with subsidiaries of CogentrixLSP-Whitewater, LP, Alliant, Calpine Corporation and Ameren Energy Inc. and
Southern Energy, Inc.
Marketing Company.
The contract with LSP-Whitewater, LP, a subsidiary of Cogentrix, Energy, Inc., for 236 megawatts of firm capacity from a gas-fired
cogeneration facilitythe gas-based Whitewater Cogeneration Facility located in Whitewater, Wisconsin, includes
nodoes not include any minimum energy requirements. Wisconsin Electric treats this
power purchase contract as a capital lease. For additional
information, see "Note H" or "Note G - Long-Term Debt" in
Wisconsin Energy's or Wisconsin Electric's Notes to Financial
Statements, respectively, in Item 8 of this report.
In August 1998, Wisconsin Electric entered into a power purchase
agreement with SEI-Wisconsin, a subsidiary of Southern
Alliant's Neenah Energy Inc., for SEI-Wisconsin to design, construct, own and operateFacility is a 300-megawatt gas turbine peaking facility in the town of Neenah, Wisconsin, and to provide the output of this facility to Wisconsin
Electric for eight years. The facility is scheduled forwhich began commercial operation by Juneoperations in May 2000. The purchase power agreement with Alliant is similar in structure to arrangements commonly referred to in the electric industry as a "tolling arrangement.arrangements." That is,
Wisconsin Electric deliversWe deliver fuel to the facility and takes awayreceive electric power. Wisconsin Electric pays SEI-WisconsinWe pay Alliant a "toll" to convert Wisconsin Electric'sour fuel into the electric energy. The entire output of the facility will beis available for Wisconsin
Electricus to dispatch during the eight year term of the agreement.
For further information, see "Factors Affecting Resultsagreement, which ends in May 2008.
Calpine Corporation's Zion, Illinois facility consists of Operations - Electric System Reliability Matters"three 150 MW gas turbine peaking units. Two units became commercial in Item 72002 and the third unit became commercial in 2003. All three units were under contract to us during 2003. We will also have the full 450 megawatts available for our use in 2004. This power purchase agreement is also a tolling agreement.
Ameren Energy Marketing's Elgin Energy Center, located in Elgin, Illinois, began commercial operation in fall 2002. It consists of this report.
As a resultfour, 116 megawatt combustion turbine units, one of the existing regulatory environment in the state of
Wisconsin,which will be under contract to Wisconsin Electric starting June 1, 2004. This agreement is also a tolling agreement and has a term of five years.
We currently expectsexpect to utilize new generating capacity identified in Wisconsin Energy'sPower the Future proposal, as well as purchase power commitments similar to the agreement with SEI-
Wisconsinindependent power producers to meet itsour electric demand load growth where
appropriate.
growth.
In the normal course of business, Wisconsin Electric utilizeswe utilize contracts of various duration for the forward purchase of electricity to meet load requirements in an economic manner and when the anticipated market price for electric energy is below Wisconsin Electric'sour expected incremental cost of generation. Contracts of this nature are one of the power supply resources Wisconsin Electric useswe use to meet itsour reliability requirements.
EDISON SAULT: To meet 76%
Electric Transmission
American Transmission Company: Effective January 1, 2001, we transferred all of its energy requirements, Edison
Sault purchased the following megawatt-hours from the following
sources under contracts during 1999.
ATC is owned and governed by the utilities that contributed facilities or capital in accordance with 1999 Wisconsin Act 9. At December 31, 2003, we owned approximately 34.6% of Commonwealth Edison Company, Madison GasATC.
ATC's sole business is to provide reliable, economic electric transmission service to all customers in a fair and Electric Company,
Northern States Power Company, Upper Peninsula Power Company,
Wisconsin Powerequitable manner. Specifically, ATC plans, constructs, operates, maintains and Light Company, Wisconsin Public Service
Corporation and the Marquette, Michigan Board of Light and Power.
These interconnectionsexpands transmission facilities it owns to provide for interchangeadequate and reliable transmission of powerelectric power. ATC is expected to assure
system reliability as well as facilitating accessprovide comparable service to generating
capacityall customers, including us, and to support effective competition in energy markets without favoring any market participant. ATC is regulated by the transferFERC for all rate terms and conditions of energy for economic purposes.
Wisconsin Electricservice and is a member of Mid-America Interconnected
Network, Inc., which is one of ten regional members of the North
American Electric Reliability Council. Membership in these groups
permits better utilization of reserve generating capacity and
coordination of long-range system planning and day-to-day
operations.
EDISON SAULT: Edison Sault's electric transmission system is
directly interconnected with the systems of Consumers Energy
Company and Cloverland Electric Cooperative. With completion of
the Central Upper Peninsula Transmission Project in the spring of
2000, Edison Sault will also be interconnected with the electric
transmission system of Wisconsin Electric. Edison Sault is
currently atransmission-owning member of the East Central Area Reliability Council,
another regionalMidwest Independent Transmission System Operator, Inc. (Midwest ISO). As of February 1, 2002, operational control of ATC's transmission system was transferred to the Midwest ISO. We are a non-transmission owning member and customer of the North American Electric Reliability
Council.
MIDWESTMidwest ISO.
We have contracted to provide, at cost, services required by ATC and which ATC is not able to provide itself at this time. Services include transmission line and substation operation and maintenance, engineering, project, real estate, environmental, supply chain, control center, accounting and miscellaneous services. We provided services with an
Midwest ISO: Wisconsin ElectricIn connection with its role as a FERC-approved Regional Transmission Organization (RTO), the Midwest ISO is in the process of developing a bid-based energy market which is currently participatingproposed to be implemented on December 1, 2004.
In the Midwest ISO, base transmission costs are currently being paid by load serving entities (LSEs) located in the formationservice territories of each Midwest ISO transmission owner in proportion to the load served by the LSE versus the total load of the service territory. This "license plate" rate design is scheduled to be replaced after a six-year phase-in of rates in Midwest ISO.
Lost Revenue Charges: The FERC permits transmission owning utilities that have not joined an RTO to propose a charge to recover revenues that would be lost as a result of RTO membership. These lost revenues result from FERC's requirement that, within an RTO and for transmission between the systems operated by the Midwest ISO and PJM Interconnection, LLC, entities that currently pay a transmission charge to move energy through or out of a regional independent electricneighboring transmission system will no longer pay this charge to the neighboring transmission system owner or operator to promote reliability and to ensure
nondiscriminatory open electricupon the neighboring transmission access in the
Midwest. system owner or operator joining an RTO.
For further information, see "Factors Affecting Results, of Operations - Electric System Reliability Matters"Liquidity and Capital Resources" in Item 7 of
this report.
TRANSMISSION COMPANY: In response to 1999 Wisconsin Act 9,
Wisconsin legislation enacted in October 1999, Wisconsin Electric
has agreed to join the American Transmission Company, LLC by
contributing its transmission assets in exchange for an equity
interest in the new company. For further information, see
"Factors Affecting Results of Operations - Industry Restructuring
and Competition" in Item 7 of this report.
7.
Renewable Electric Energy
1999
Wisconsin Act 9 alsoEnergy'sPower the Future plan includes a commitment to significantly increase the amount of renewable portfolio standardenergy generation we utilize beyond that will requirerequired by Wisconsin law. Our target is to provide 5% of retail electric sales in Wisconsin from renewable energy resources by the year 2011. In addition, we have an "Energy For Tomorrow®" renewable energy program to promote additional usage by our customers of energy produced from renewable resources.
Wisconsin's public benefits legislation requires that retail energy providers in the statesupply a minimum of
Wisconsin, like Wisconsin Electric, to obtain an increasing
percentage of their energy supply from renewable resources.
Beginning in 2001, retail energy providers must provide 0.5% of their Wisconsin retail electric sales from renewable energy with
the percentage increasing to 2.2% by the year 2011. In May 1999, the Public Service Commission of Wisconsin approved
Wisconsin Electric's request to expand its "energyWe met this requirement for tomorrow"
renewable energy program to allow participation of virtually all
of its firm load customers in Wisconsin. In November 1999, the
Michigan Public Service Commission approved Wisconsin Electric's
request to offer the "energy for tomorrow" renewable energy
program to all of its firm load customers in the state of
Michigan. The program currently has 11,300 participants.2003. For more information concerning efforts by Wisconsin Electric to obtain
additional sources of renewable electric energy,about public benefits see "Factors
Affecting Results of Operations - Electric System Reliability
Matters" in Item 7 of this report.
"Regulation" below.
GAS UTILITY OPERATIONS
Gas Deliveries
Wisconsin Electric is
We are authorized to provide retail gas distribution service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities. TotalWe also transport customer-owned gas. Our gas utility operates in three distinct service areas: west and south of the City of Milwaukee, the Appleton area, and areas within Iron and Vilas Counties, Wisconsin.
Gas Deliveries
Our gas utility business is highly seasonal due to the heating requirements of residential and commercial customers. Annual gas sales are also impacted by the variability of winter temperatures.
See "Selected Operating Data" in Item 6 for selected gas utility operating information by customer class during the period 1999 through 2003.
We delivered approximately 888.3 million therms delivered by Wisconsin Electric,of gas during 2003, including customer-owned transported gas, were approximately 944 million
therms during 1999, a 2.3% increase0.2% decrease compared to 1998.with 2002. At December 31, 1999, Wisconsin Electric was2003, we were transporting gas for approximately 370 customers who choose to purchase gas directly from other suppliers. Transported gas accounted for approximately 43%35% of our total thermsvolumes delivered during 1999, 46%2003, 38% during 19982002 and 40%39% during 1997. There were2001. We had approximately 398,500 natural428,700 gas customers at December 31, 1999,2003, an increase of approximately 2.6%2.0% since December 31, 1998.
See "Results of Operations - Utility Segment Pretax Operating
Results - Gas Utility Revenues, Gross Margins and Therm
Deliveries" in Item 7 of this report for additional selected gas
operating information by customer class.
Wisconsin Electric's2002.
Our maximum daily send-out during 19992003 was 692,649718,046 dekatherms on January 4, 1999. A dekatherm is equivalent22, 2003.
Sales to ten therms or one million British thermal units . Sales of gas
fluctuate with the heating cycle of the year and are also impacted
by varying weather conditions from year-to-year.
In July 1997, the Public Service Commission of Wisconsin approved
Wisconsin Electric's application to extend natural gas service to
more than 4,500 potential customers in northeastern Wisconsin.
When completed in 2002, the project will involve installation of
more than 350 miles of new gas main. As of the end of 1999,
approximately 3,400 customers have been connected and the
remainder are expected to be connected over the next three years.
SALES TO LARGE GAS CUSTOMERS: Wisconsin Electric providesLarge Gas Customers: We provide gas utility service to a diversified base of industrial customers who are largely within itsour electric service territory. Major industries served by Wisconsin Electric's gas operations include the paper, food products and fabricated metal products industries. During 1999, Wisconsin Electric'sFuel used for our electric operations took
delivery of 5.9% ofenergy supply represents our largest transportation customer.
Gas Deliveries Growth: We currently forecast total therm deliveries of natural gas to grow at an annual rate of approximately 0.8% over the five-year period ending December 31, 2008. This forecast reflects a current year normalized sales level and assumes moderate growth in the economy of our gas utility service territories and normal weather.
Competition
Competition in varying degrees exists between natural gas and other forms of energy available to consumers. Many of our large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternate fuels. We offer lower-priced interruptible rates and transportation services for these customers to enable them to reduce their energy costs and use gas rather than other fuels. Under gas transportation agreements, customers purchase gas directly from gas marketers and arrange with interstate pipelines and us to have the gas transported to the facilities where it is used. We earn substantially the same margin (difference between revenue and cost of gas) whether we sell and transport gas to customers or only transport their gas.
Our future ability to maintain our present share of the industrial dual-fuel market (the market that is equipped to use gas or other fuels) depends upon our success and the success of third-party gas marketers in obtaining long-term and short-term supplies of natural gas at competitive prices compared to 8.6% during
1998. No single retail customerother sources and in arranging or facilitating competitively-priced transportation service for those customers that desire to buy their own gas supplies.
Federal and state regulators continue to implement policies to bring more competition to the gas industry. For information concerning proceedings by the PSCW to consider how its regulation of gas operations accounted for
more than 1.9% of total gas therms sold and transported during
1999.
Gas Supply
Wisconsin Electric's gas operations has entered into more than 60
gas service contracts for supply, pipeline capacity, underground
storage and balancing services. Contracts vary in term from less
than one yeardistribution utilities should change to ten years. Gas supply contracts contain pricing
options that allow pricing at market rates orreflect the ability to fix
future prices for varying terms which Wisconsin Electric can
exercise to mitigate substantial market price fluctuations. The
gas from these contracts is used to meet customer requirements on
a daily basis and to fill storage during the warm months to be
withdrawn from storage during the heating season in order to meet
system gas demands.
The use of storage increases the load factor of supply contracts
and allows Wisconsin Electric to take advantage of seasonal price
differentials. Wisconsin Electric's gas operations has six firm
gas storage agreements with pipelines that allow daily withdrawals
of 300,564 dekatherms and an annual capacity of 15.9 million
dekatherms. The initial terms of these contracts vary with the
last one expiring in May 2006. Gas stored at these facilities is
purchased by Wisconsin Electric from a number of suppliers.
Wisconsin Electric has 26 transportation contracts, the last of
which expires in 2006, that it uses to meet daily customer
requirements and to inject and withdraw from gas storage. In each
case, subject to certain provisions, Wisconsin Electric's gas
operations can extend the terms of these contracts at the time the
agreements would otherwise expire.
Wisconsin Electric also has two contracts for salt dome storage
that provide seasonal gas supply backupchanging competitive environment in the event of well
freeze-off or other loss of supply.
Competition
Competition in the natural gas industry, continues to increase,
driven by a combination of market forces and regulatory
initiatives. Natural gas companies are now operating in a
competitive environment at the wholesale level, and regulators in
Wisconsin continue to evaluate competition at the retail level.
Acquisition of Wisconsin Gas Company
Upon consummation of the merger with WICOR, Inc., the Company will
acquire Wisconsin Gas Company, a wholly-owned subsidiary of WICOR
and the largest natural gas distribution utility in the state of
Wisconsin serving approximately 538,000 customers as of
December 31, 1999. For additional information concerning the
pending acquisition of WICOR, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7. While the gas utility distribution function is expected to remain a highly regulated, monopoly function, the sales of Operations - Mergers"the natural gas commodity and related services are expected to become increasingly subject to competition from third parties. However, it remains uncertain if and when the current economic disincentives for small customers to choose an alternative gas commodity supplier may be removed such that we begin to face competition for the sale of gas to our smaller firm customers.
Gas Supply, Pipeline Capacity and Storage
We have been able to meet our contractual obligations with both our suppliers and our customers despite periods of severe cold and unseasonably warm weather.
Pipeline Capacity and Storage: In addition to the Guardian pipeline that receives gas supply in the Joliet, Illinois market hub, the interstate pipelines serving Wisconsin originate in three major gas producing areas of North America: the Oklahoma and Texas basins, the Gulf of Mexico and western Canada. We have contracted for long-term firm capacity from each of these areas. This strategy reflects management's belief that overall supply security is enhanced by geographic diversification of the supply portfolios and that Canada represents an important long-term source of reliable, competitively-priced gas.
Because of the daily and seasonal variations in gas usage in Wisconsin, we have also contracted for substantial underground storage capacity, primarily in Michigan. Storage capacity enables us to manage significant changes in daily demand and to optimize our overall gas supply and capacity costs. We generally inject gas into storage during the spring and summer months and withdraw it in the winter months. As a result, we can contract for less long-line pipeline capacity than would otherwise be necessary and can purchase gas on a more uniform daily basis from suppliers year-round. Each of these capabilities enables us to reduce our overall costs.
We also maintain high deliverability storage in the mid-continent and Southeast production areas, as well as in our market area. This storage capacity is designed to deliver gas when other supplies cannot be delivered during extremely cold weather in the producing areas, which can reduce long-line supply.
We hold firm daily transportation and storage capacity entitlements from pipelines and other service providers under long-term contracts.
Term Gas Supply: We currently have contracts for firm supplies with terms in excess of 30 days with eight gas suppliers for gas acquired in the Chicago area hub and in the three producing areas discussed above. The pricing of the term contracts is based upon first of the month indices. Management believes that the volume of gas under contract is sufficient to meet our forecasted firm peak day demand.
Secondary Market Transactions: Capacity release is a mechanism by which pipeline long-line and storage capacity and gas supplies under contract can be resold in the secondary market. Local distribution companies, like our gas operations, must contract for capacity and supply sufficient to meet the firm peak day demand of their customers. Peak or near peak demand days generally occur only a few times each year. Capacity release facilitates higher utilization of contracted capacity and supply during those times when the full contracted capacity and supply are not needed by the utility, helping to mitigate the fixed costs associated with maintaining peak levels of capacity and gas supply. Through pre-arranged agreements and day-to-day electronic bulletin board postings, interested parties can purchase this excess capacity and supply. The proceeds from these transactions are passed through to ratepayers, subject to our gas cost incentive mechanism pursuant to which we have an opportunity to share in the cost savings. See "Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters" in Item 7 for information on the gas cost recovery mechanism and gas cost incentive mechanism. During 2003, we continued our active participation in the capacity release market.
Spot Market Gas Supply: We expect to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. We have supply relationships with a number of this report.
sellers from whom we purchases spot gas.
Hedging Gas Supply Prices: We have PSCW approval to hedge up to 50% of planned flowing gas and storage inventory supply using NYMEX based natural gas options. That approval allows us to pass 100% of the hedging costs (premiums and brokerage fees) and proceeds through our purchase gas adjustment mechanism. Hedge targets (volumes) are provided annually to the PSCW as part of our five-year gas supply plan filing.
To the extent that opportunities develop and our physical supply operating plans will support them, we also have PSCW approval to utilize NYMEX based natural gas derivatives to capture favorable forward market price differentials. That approval provides for 100% of the related proceeds to accrue to our gas cost recovery (incentive) mechanism.
Guardian Pipeline: In March 1999, WICOR, Inc. (WICOR), which was acquired by Wisconsin Energy in April 2000, announced the formation of a joint venture, Guardian Pipeline, L.L.C. (Guardian), to construct the Guardian interstate natural gas pipeline from the Joliet, Illinois market hub to southeastern Wisconsin. The Guardian pipeline is designed to serve the growing demand for natural gas in Wisconsin and northern Illinois. WICOR, WPS Investments, LLC, an affiliate of WPS Resources Corporation, and an affiliate of Northern Border Partners, LLP have equal co-ownership interests in Guardian. On March 14, 2001, the FERC issued a certificate of public convenience and necessity authorizing construction and operation of the Guardian pipeline. The Guardian pipeline began operation in December 2002 and we have been transporting natural gas on the pipeline since that time.
STEAM UTILITY OPERATIONS
Wisconsin Electric operates
Our steam utility generates, distributes and sells steam supplied by our Valley and Milwaukee County Power Plants. We operate a district steam system in downtown Milwaukee and the near south side of Milwaukee. Steam is supplied to this system from Wisconsin Electric'sour Valley Power Plant, a coal-firedcoal-based cogeneration facility. Wisconsin ElectricWe also operatesoperate the steam production and distribution facilities of the Milwaukee County Power Plant located on the Milwaukee County Grounds in Wauwatosa, Wisconsin.
Annual sales of steam fluctuate from year to year based upon system growth and variations in weather conditions. During 2003, the steam utility had $22.5 million of operating revenues from the sale of 3,073 million pounds of steam compared with $21.5 million of operating revenues from the sale of 3,001 million pounds of steam during 2002. As of December 31, 1999,2003 and 2002, steam was used by 450approximately 460 and 470 customers, respectively, for processing, space heating, domestic hot water and humidification.
UTILITY RATE MATTERS
See "Factors Affecting Results, of Operations -Liquidity and Capital Resources -- Rates and Regulatory Matters" in Item 7 of this report for a discussion of
rate matters, including recent rate changes, and for a discussion
of the tariffs and procedures with respect to recovery of changes
in the costs of fuel, purchased power and gas purchased for
resale.
UTILITY ENERGY EFFICIENCY
The Public Service Commission of Wisconsin continues to require
utilities such as Wisconsin Electric to meet electric and natural
gas energy efficiency goals for residential, small commercial and
low income customers. Goals for large commercial and industrial
customers were eliminated in 1997. Wisconsin Electric uses a
bidding process to hire contractors to accomplish its goals.
Wisconsin Electric has contracts for 100% of its residential and
small commercial energy efficiency goals for 2000. Wisconsin
Electric works cooperatively with state weatherization operators
and community organizations in achieving its low income energy
efficiency goals.
In a related matter, as part of 1999 Wisconsin Act 9,
responsibility for energy efficiency goals will be transferred
from utilities to the Wisconsin Department of Administration over
the next three years. For further information, see "Factors
Affecting Results of Operations - Industry Restructuring and
Competition" in Item 7 of this report.
NON-UTILITY SEGMENT
See "Note K - Segment Reporting" in Wisconsin Energy's Notes to
Financial Statements in Item 8 of this report for information
concerning non-utility operating revenues, pretax operating
income, net identifiable assets and construction expenditures
during each of the three years ended December 31, 1999.
NON-UTILITY ENERGY OPERATIONS
WISVEST CORPORATION: Wisvest Corporation develops, owns and
operates electric generating facilities and invests in other
energy-related entities. Current Wisvest operations and
investments include:
* A wholly-owned subsidiary, Wisvest-Connecticut, LLC, which
owns and operates two fossil-fueled power plants in the state of
Connecticut. The plants include the Bridgeport Harbor Station,
which has an active generating capacity of 590 megawatts, and the
New Haven Harbor Station, which has an active generating capacity
of 466 megawatts. For additional information concerning
acquisition of these plants during 1999, see "Note B - Mergers &
Acquisitions" in Wisconsin Energy's Notes to Financial Statements
in Item 8 of this report.
* A wholly-owned subsidiary, Griffin Energy Marketing, L.L.C.,
which markets energy related services and trades electricity.
* The chilled water production and distribution facilities that7.
REGULATION
We are part of the Milwaukee County Power Plant on the Milwaukee
County Grounds in Wauwatosa, Wisconsin.
* An investment in Calumet Energy Team, LLC, which signed two
agreements in November 1999 with the City of Chicago, Illinois.
The first provides for the lease, purchase and redevelopment of
land for the purpose of constructing a natural gas-fired peaking
power plant with a projected generating capacity of approximately
308 megawatts. The second is a ten year capacity reservation
agreement for 50 megawatts of plant capacity. The plant is
anticipated to be in commercial operation in June of 2001. For
additional information, see "Liquidity and Capital Resources -
Capital Requirements" in Item 7 of this report.
* Loans to SkyGen Energy Holdings LLC, which develops, owns and
operates independent power plants and cogeneration facilities.
Under certain circumstances, certain of the loans may be converted
in stages to minority equity ownership in SkyGen. For additional
information, see "Note K - Segment Reporting" in Wisconsin
Energy's Notes to Financial Statements in Item 8 of this report.
* Investments in other energy-related entities such as a
strategic energy management services company with a focus on
natural gas management and a cogeneration facility in the state of
Maine, the Androscoggin Cogeneration Center. For additional
information related to the Androscoggin Cogeneration Center, see
"Note L - Commitments and Contingencies" in Wisconsin Energy's
Notes to Financial Statements in Item 8 of this report.
OTHER NON-UTILITY OPERATIONS
MINERGY CORP.: Minergy Corp. is engaged in the business of
developing and marketing proprietary technologies designed to
convert high volume industrial and municipal wastes into value-
added products. Current Minergy operations and investments
include:
* A facility in Neenah, Wisconsin, placed into commercial
operation during 1998, that recycles paper sludge from area paper
mills into two usable and salable products: glass aggregate and
steam. The plant also provides substantial environmental and
economic benefits to the area by providing an alternative to
landfilling paper sludge.
* A wholly-owned subsidiary, Minergy Detroit, LLC, which was
awarded a 15-year contract in September 1999 by the City of
Detroit, Michigan to recycle the city's wastewater solids into a
glass aggregate product used in the manufacture of floor tiles,
roofing shingle granules, sand blast grit and other construction
materials. Minergy Detroit, LLC expects to begin construction of
a proposed recycling facility in the fourth quarter of 2000 with
startup anticipated in 2002. For additional information about the
contract and related contingencies, see "Liquidity and Capital
Resources - Capital Requirements" in Item 7 of this report.
WISPARK CORPORATION: Wispark Corporation develops and invests in
real estate. While Wispark's core geographic area is southeastern
Wisconsin, it is currently developing properties in metropolitan
Minneapolis/St. Paul, Minnesota and Chicago, Illinois. Wispark's
initial development, LakeView Corporate Park, a 1,600-acre
business park located near Kenosha, Wisconsin, has developed 732
acres with over 6,816,000 square feet of buildings for 62
companies during its first eleven years of existence. Wispark is
also developing or has developed business parks such as those in
the following locations:
* Mitchell International Business Park - Cudahy, Wisconsin;
* Cottonwood Commerce Center - Hartland, Wisconsin;
* Business Park of Kenosha - Kenosha, Wisconsin;
* Westridge Business Park - New Berlin, Wisconsin;
* RidgeView Corporate Park - Pewaukee, Wisconsin;
* GrandView Business Park - Racine, Wisconsin;
* NorthWest Corporate Park - Elgin, Illinois;
* Grand Oak Business Park - Eagan, Minnesota; and
* Rice Creek Corporate Park - Shoreview, Minnesota.
In addition to developing business parks, Wispark has established
itself as one of southeastern Wisconsin's largest developers of
industrial buildings. In the last seven years, Wispark has
developed 3,315,000 square feet of buildings on a build-to-suit
basis, and just over 3,400,000 square feet of other building
space. Wispark has also developed mixed-use projects such as
Gaslight Pointe in Racine, Wisconsin and constructed a 120-room
Radisson Hotel and Conference Center in LakeView Corporate Park.
Wispark has also entered into a joint venture agreement to develop
Pabst Farms, a mixed use project in Oconomowoc / Summit,
Wisconsin.
WISCONSIN ENERGY CAPITAL CORPORATION: Wisconsin Energy Capital
Corporation, formerly Wisconsin Michigan Investment Corporation,
engages in investing and financing activities. Activities include
advances to affiliated companies and investments in financial
instruments and in partnerships developing low-and moderate-income
housing projects. Other investments may be made from time to
time. Wisconsin Energy Capital Corporation's subsidiary, WMF
Corp., engages in financing activities. Any funds obtained by WMF
Corp. through financing arrangements are advanced to Wisconsin
Energy Capital Corporation.
WEC NUCLEAR CORPORATION: WEC Nuclear Corporation has an
ownership interest in Nuclear Management Company, LLC. Formed
during the first quarter of 1999, it is intended that Nuclear
Management Company, LLC will provide services to Wisconsin
Electric in connection with Point Beach Nuclear Plant as well as
to other unaffiliated companies with nuclear generating
facilities. For additional information, see "Factors Affecting
Results of Operations - Nuclear Matters" in Item 7 of this report.
WEC INTERNATIONAL INC.: WEC International Inc. serves as
Wisconsin Energy's international investment vehicle. WEC
International, Inc. currently has investments in two joint
ventures in the Netherlands involving waste treatment and by-
product utilization activities.
WITECH CORPORATION: Witech Corporation is a venture capital
company operating in the state of Wisconsin. At December 31,
1999, Witech had investments in eleven companies and three funds
totaling more than $31 million. Among others, the companies
include an operator of a nationwide data communications network
for the agriculture industry, a manufacturer of electronic
components and a manufacturer of motor drives.
NORTHERN TREE SERVICE, INC.: Northern Tree Service, Inc., a
former subsidiary of ESELCO, Inc., is engaged in tree trimming in
the state of Michigan's eastern Upper Peninsula.
BADGER SERVICE COMPANY: Badger Service Company holds coal rights
in Indiana. Estimates indicate that 40 million tons of coal could
be recovered from this property with conventional mining
techniques. However, there are no current plans to develop the
property. Badger Service Company may sell or develop these rights
in the future as conditions warrant.
NON-UTILITY RESTRICTIONS
For information concerning restrictions, relaxed somewhat by 1999
Wisconsin Act 9, which limit diversification of Wisconsin Energy
into certain non-utility activities, see "Factors Affecting
Results of Operations - Rates and Regulatory Matters" in Item 7 of
this report. For information concerning restrictions on the
ability of Wisconsin Electric to transfer funds to Wisconsin
Energy, which could limit internal funds available for non-utility
operations, see "Note A - Summary of Significant Accounting
Policies" in Wisconsin Energy's Notes to Financial Statements in
Item 8 of this report.
REGULATION
WISCONSIN ENERGY: Wisconsin Energy is an exempt holding company
by order of the United States Securities and Exchange Commission under Section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended, and Rule 2 thereunder and, accordingly, isare exempt from thethat law's provisions other than with respect to certain acquisitions of securities of a public utility.
UTILITY SEGMENT: Wisconsin Electric is
We are subject to the regulation of the Public Service Commission of WisconsinPSCW as to retail electric, gas and steam rates in the state of Wisconsin, standards of service, issuance of securities, construction of certain new facilities, transactions with affiliates, levels of short-term
debt obligations, billing practices and various other matters. Wisconsin Electric and Edison SaultWe are bothsubject to regulation of the PSCW as to certain levels of short-term debt obligations. We are subject to the regulation of the Michigan Public Service CommissionMPSC as to the various matters associated with retail electric service in the state of Michigan as noted above except as to issuance of securities, construction of certain new facilities, levels of short-term debt obligations and advance approval of transactions with affiliates. Wisconsin Electric'sOur hydroelectric facilities are regulated by the Federal Energy Regulatory Commission.
Wisconsin Electric and Edison SaultFERC. We are subject to regulation of the Federal Energy Regulatory CommissionFERC with respect to wholesale power service electric transmission, and accounting. Edison
Sault is subject to regulationFor information on how our rates are set, see "Rates and Regulatory Matters" in Item 7.
The following table compares the source of our operating revenues by regulatory jurisdiction for each of the Federal Energy Regulatory
Commission with respect tothree years in the issuanceperiod ended December 31, 2003.
2003 | 2002 | 2001 | |||||||||
Amount | Percent | Amount | Percent | Amount | Percent | ||||||
(Millions of Dollars) | |||||||||||
Wisconsin | |||||||||||
Electric Utility -- Retail | $1,762.8 | 69.9% | $1,687.5 | 73.5% | $1,611.8 | 69.5% | |||||
Gas Utility -- Retail | 513.0 | 20.3% | 389.8 | 17.0% | 457.1 | 19.7% | |||||
Other Utility -- Retail | 22.4 | 0.9% | 21.5 | 0.9% | 21.8 | 1.0% | |||||
Total | 2,298.2 | 91.1% | 2,098.8 | 91.4% | 2,090.7 | 90.2% | |||||
Michigan | |||||||||||
Electric Utility -- Retail | 123.9 | 4.9% | 110.7 | 4.8% | 110.8 | 4.8% | |||||
FERC | |||||||||||
Electric Utility -- Wholesale | 99.8 | 4.0% | 86.4 | 3.8% | 117.2 | 5.0% | |||||
Total Utility Operating Revenues | $2,521.9 | 100.0% | $2,295.9 | 100.0% | $2,318.7 | 100.0% | |||||
For information concerning the implementation of certain securities.
full electric retail competition in the state of Michigan effective January 1, 2002, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Operation and construction relating to Wisconsin Electric'sour Point Beach Nuclear Plant facilities are subject to regulation by the United States Nuclear Regulatory Commission. Total flow of water
to Edison Sault's hydroelectric generating plant is under the
control of the International Joint Commission, created by the
Boundary Water Treaty of 1909 between the United States and Great
Britain, now represented by Canada. Wisconsin Electric's and
Edison Sault'sNRC. Our operations are also subject to regulations, where applicable, of the United States Environmental Protection Agency (EPA), the Wisconsin Department of Natural Resources (WDNR), the Michigan Department of Natural Resources and the Michigan Department of Environmental Quality.
In 1999, the Wisconsin State Legislature passed and the Governor
of Wisconsin signed into law 1999 Wisconsin Act 9, which, among
other things included public benefits legislation as well as
amendments relaxing the non-utility asset cap provisions of
Wisconsin's public utility holding company law. For additional
information, see "Factors Affecting Results of Operations -
Industry Restructuring and Competition" in Item 7 of this report.
Electric Reliability Legislation: In 1998, the Wisconsin State Legislature passed and the Governor of Wisconsin signed into law 1997 Wisconsin Act 204, intended to address concerns with electric reliability in the state of Wisconsin. The 1997 Wisconsin Act 204 included new requirements concerning market power, which utilities and their affiliates must meet in order to construct generating facilities. The requirements apply to electric utility facilities in excess of 100 megawatts.
Public Benefits: Public benefits legislation was included in 1999 Wisconsin Act 9. The Public Service Commissionlaw created new funding which is adjusted annually to be collected by all electric utilities and remitted to the Wisconsin Department of Wisconsin is
currently engaged in a rule making proceeding involving the
applicability of Act 204 to utility affiliates seeking to
construct facilities in the state of Wisconsin.
In 1994, the Public Service Commission of Wisconsin ordered the
state'sAdministration. The law also required utilities to competitively bid all new generation needscontinue to collect the funds at existing levels for low-income
This law also requires that retail energy providers supply 0.5% of their Wisconsin retail electric sales from renewable energy, which we did in 2003, with the state of Wisconsin. The
two-stage process establishedrequired minimum percentage increasing to 2.2% by the Public Service Commission of
Wisconsin consists of an all-parties (including utilities) bidding
procedure for fossil-fueled and renewable generation projects, and
the conventional Certificate of Public Convenience and Necessity
procedure for the winner or winners. In the first quarter of
1997, the Public Service Commission of Wisconsin extended this to
include repowering or upgrades of existing generation in excess of
12 megawatts. The Public Service Commission of Wisconsin is
currently reconsidering these requirements and has asked utilities
for their comments.
NON-UTILITY SEGMENT: Wisvest-Connecticut, LLC is an exempt
wholesale generator pursuant to Section 32 of the Public Utility
Holding Company Act of 1935. The Company is subject to regulation
of the Federal Energy Regulatory Commission with respect to
wholesale power service. Wisvest-Connecticut, LLC's operations
are also subject to regulations, where applicable, of the United
States Environmental Protection Agency and the Connecticut
Department of Environmental Protection.
year 2011.
ENVIRONMENTAL COMPLIANCE
ENVIRONMENTAL EXPENDITURES
Environmental Expenditures
Expenditures for environmental compliance and remediation issues noted below are included in anticipated constructioncapital expenditures described in "Liquidity and Capital Resources - Capital
Requirements"Resources" in Item 7 of this report.7. For discussion of additional environmental issues, see "Environmental Matters" in Item 3 of this report.3. For further information concerning air quality standards and rulemaking initiated by the United States
Environmental Protection Agency,EPA, including estimated capital,
operation and maintenance costs of compliance, see "Factors Affecting Results, of Operations - Environmental Matters"Liquidity and Capital Resources" in Item 7
of this report.
UTILITY SEGMENT: Compliance7.
Our compliance with federal, state and local environmental protection requirements resulted in capital expenditures by Wisconsin Electric of approximately $44$15 million in 1999, an increase of $212003 compared with $77 million over 1998.in 2002. Expenditures incurred during 19992003 primarily included costs associated with the installation of pollution abatement facilities at Wisconsin
Electric'sour power plants. SuchThese expenditures at Wisconsin Electric
are budgeted at approximately $24 million during 2000 and
$77 million during 2001. These projections for 2000 and 2001,
which are less than costs estimated in the Company's 1998 Annual
Report on Form 10-K due to a change in the timing of when these
costs are expected to be incurred, reflectapproximate $105 million during 2004, reflecting nitrogen oxide ("NOx"(NOx) and other pollution control equipment needed to comply with ozone non-attainmentvarious rules promulgated by the Environmental Protection Agency and Wisconsin's
one-hour ozone attainment plan.
Operation,EPA.
We estimate our operation, maintenance and depreciation expenses for Wisconsin
Electric's fly ash removal equipment and other environmental protection systems are estimated to have been approximately $37$51 million during 19992003 and 1998 and $30$46 million during 1997.
NON-UTILITY SEGMENT: Wisvest-Connecticut, LLC, a wholly owned
subsidiary of Wisvest Corporation, acquired two fossil-fueled
power plants in the state of Connecticut in April 1999. Wisvest-
Connecticut, LLC and all fossil / steam electric generating
stations in a 19 state region east of the Mississippi River will
be affected by the ozone non-attainment rules promulgated by the
United States Environmental Protection Agency. The state of
Connecticut has adopted the Environmental Protection Agency's
requirements which will require affected plants, including those
owned by Wisvest-Connecticut, LLC, to reduce NOx emissions.
Wisvest-Connecticut, LLC currently estimates that efforts to
reduce these emissions and meet the existing regulatory
requirements would require between $7.5 million and $15 million in
capital expenditures prior to May 2003.
For further information concerning air quality standards and
rulemaking initiated by the state of Connecticut, see "Factors
Affecting Results of Operations - Environmental Matters" in Item 7
of this report.
Sub-surface, non-aqueous petroleum liquids have been identified at
both power plant sites that were acquired by Wisvest-
Connecticut, LLC. Based upon recent environmental studies, the
Company currently estimates that it will incur approximately
$3.3 million during the three years ending December 31, 2002 to
treat and remediate these sites. These expenditures are expected
to bring the two sites into compliance with applicable standards
in the state of Connecticut.
SOLID WASTE LANDFILLS
Wisconsin Electric and Edison Sault2002.
Solid Waste Landfills
We provide for the disposal of non-ash related solid wastes and hazardous wastes through licensed independent contractors, but federal statutory provisions impose joint and several liability on the generators of waste for certain cleanup costs. Remediation-related activity pertaining to
specific sites is discussed below.
GIDDINGS AND LEWIS, INC./CITY OF WEST ALLIS LAWSUIT: In July
1999, a jury decided against Wisconsin ElectricCurrently there are no active cases.
Giddings and awarded the
plaintiffs $4.5 million as actual damages and $100 million in
punitive damages in a lawsuit alleging that Wisconsin Electric had
placed contaminated wastes at two sites in the Lewis, Inc./City of West Allis Wisconsin. Wisconsin Electric is preparing to file an appeal of
the case.Lawsuit: For additional information about this matter, see "Note L" or "Note K -O -- Commitments and Contingencies" in Wisconsin Energy's or Wisconsin
Electric'sthe Notes to Consolidated Financial Statements respectively, in Item 8
of this report.
WEST AVENUE LANDFILL: During 1996, Wisconsin Electric was
informed by the City of Waukesha that it has been identified as a
"responsible party" at a former Waukesha landfill which the city
will be remediating under Wisconsin state law. The City of
Waukesha invoked a new statutory negotiation procedure to attempt
to obtain consensual agreement regarding responsible parties and
remediation cost sharing and hired a private environmental
allocation consultant to apportion cost shares in an attempt to
promote voluntary settlement. The consultant issued a non-binding
final allocation report assigning a zero share of responsibility
to Wisconsin Electric. The matter is pending further action by
the City of Waukesha.
ASH LANDFILLS
Wisconsin Electric aggressively seeks environmentally acceptable,
beneficial uses for its combustion byproducts. However,
combustion byproducts have been, and to some degree continue to
be, disposed of in company-owned, licensed landfills. 8.
Coal-Ash Landfills
Some early designed and constructed coal-ash landfills may allow the release of low levels of constituents resulting in the need for various levels of remediation. Where Wisconsin Electric haswe have become aware of these conditions, efforts have been expended to define the nature and extent of any release, and work has been performed to address these conditions. The costs of these efforts are includedFor additional information, see "Note O -- Commitments and Contingencies" in the environmental operating and maintenance costs for Wisconsin
Electric.Notes to Consolidated Financial Statements in Item 8. Sites currently undergoing remediation and/or monitoring include:
HIGHWAY 59 LANDFILL: In 1989, a sulfate plume
Lakeside Property: During 2001, we completed an investigation of property that was detectedused primarily for coal storage, fuel oil transport and coal ash disposal in the groundwater beneath a Wisconsin Electric-owned former ash
landfill located in the Townsupport of Waukesha, Wisconsin. After
notifying the Wisconsin Department of Natural Resources, Wisconsin
Electric initiated a five-year expanded monitoring program. In
July 1995, Wisconsin Electric prepared an environmental
contamination assessment of the landfill and submitted the report
to the Wisconsin Department of Natural Resources. Wisconsin
Electric has petitioned the City of Waukesha to extend city water
service to residents of the Town of Waukesha affected by
contamination from the site. The City Council has agreed to
extend service at Wisconsin Electric's cost. In addition to
providing city water to the nine affected residents, Wisconsin
Electric anticipates excavating saturated ash from and capping the
landfill. Total remediation cost for the site is anticipated to
be $6 million.
KANSAS AVE. LANDFILL: The Kansas Ave. site, located in the City
of St. Francis, Wisconsin, was a small landfill area used to
support the operations of Wisconsin Electric's former Lakeside Power Plant. Wisconsin Electric has entered into an agreementPlant in St. Francis, Wisconsin. Excavation and utilization of residual coal at the site, slope stabilization and cover construction have been completed. Currently, discussion is taking place with neighbors and other interested parties to determine ultimate use of the Wisconsin Departmentremediated property and some other adjacent land also owned by us. Future costs for remediation of Natural Resources to place a
cover over the former ash landfill site. Expenses associated with
a cover installationthis site are expectedestimated to be minimal. No groundwater
treatment is planned at this time.
OAK CREEK NORTH LANDFILL:approximately $2.8 million.
Oak Creek North Landfill: Groundwater impactsimpairments at this landfill, located in the City of Oak Creek, Wisconsin, prompted Wisconsin
Electricus to investigate, during 1998, the condition of the existing cover and other conditions at the site. Surface water drainage improvements were implemented at this site during 1999 and 2000, which are expected to eliminate
Manufactured Gas Plant Sites
We are reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. See "Note L" or "Note K -O -- Commitments and Contingencies" in Wisconsin Energy's or Wisconsin Electric'sthe Notes to Consolidated Financial Statements respectively, in Item 8 of this report.
AIR QUALITY
8.
Air Quality
The 1990 amendments to the Federal Clean Air Act mandate significant nationwide reductions in air emissions. The most significant sections of this law applicable to the country's electric utilities are the acid rain and ozone nonattainment provisionsprovisions. The acid rain provisions are scheduled to limit sulfur dioxideSO2 and nitrogen oxideNOx emissions in phases. Phase I became effective in 1995 and Phase II becomesbecame effective during the year 2000. The
Company hasWe have met the requirements of Phase I. The Phase II requirements of the 1990 amendments to the Federal Clean Air Act
are expected to havehaving a minimal future impacts on the Company's
utilitiesimpact because of existing cost effective compliance strategies and previous actions taken.
Ozone nonattainment rules implemented by the state of Wisconsin and ozone transport rules implemented by the state of Michigan, both under authority of the Federal Clean Air Act, will limit NOx emissions in phases ending in 2007.
See "Factors Affecting Results, of Operations - Environment
Matters"Liquidity and Capital Resources" in Item 7 of this report for information concerning National Ambient Air Quality Standards established during 1997 by the United States Environmental Protection AgencyEPA and ozone non-
attainmentnon-attainment rulemaking promulgated by the Environmental Protection
AgencyEPA during 1998.
OTHER
YEAR 2000 TECHNOLOGY ISSUES: Due
Wisconsin Energy'sPower the Futurestrategyprovides a plan to meet the growing demand for electricity while using environmentally friendly equipment. UnderPower the Future,Wisconsin Energy plans to build four new generating units, a total of 2,320 megawatts of capacity, at a total cost of approximately $2.8 billion (in year of occurrence dollars). We will lease the plants from our affiliate. When the plants are completed, Wisconsin Energy expects to own approximately 1,090-megawatts of new natural gas-based generation and 1,030-megawatts of new coal-based generation. Wisconsin Energy plans to build the two coal units at the site of our existing Oak Creek Power Plant. Wisconsin Energy anticipates that two unaffiliated entities together will own approximately 17% or 204-megawatts of these two units. The Oak Creek units will use a supercritical pulverized coal design and state-of-the-art emission controls. The two natural gas-based units are being construct ed at our existing Port Washington Power Plant site, where older, less efficient coal-based units installed before 1950 are being retired. Implementation of Wisconsin Energy'sPower the Futureplan also provides for upgrades to our existing power plants and modernization to increase efficiency and reduce emissions. As a result of the use of the latest emission reduction technologies on the new units, and the installation of equipment to reduce emissions on certain of our existing coal-based units, the plan results in a significant reduction in SO2, NOx, and mercury emissions. In addition to the successful effortspositive environmental attributes of the Company's Year 2000 program teamsgeneration technologies, the plan involves an increased commitment to conservation and consistent with industry
experience throughout the United States, Wisconsin Energy and
Wisconsin Electric had no significant problems with their business
application software nor with their infrastructure and process
control systems during the transition into the Year 2000.renewable fuels, as well as a commitment to address greenhouse gas issues. For further information about Wisconsin Energy'sPower the Future strategy, see "Factors Affecting Results of Operations
- - - Year 2000 Technology Issues""Corporate Developments" in Item 7 of this report.
RESEARCH AND DEVELOPMENT: 7.
OTHER
Research and Development: We had immaterial research and development expenditures by Wisconsin Electric amounted to $8 million during 1999,
$7.5 million during 1998 and $8.5 million during 1997. Such
expenditures werein the last three years, primarily for improvement of service and abatement of air and water pollution.pollution by the electric utility operations. Research and development activities include work done by employees, consultants and contractors, plus sponsorship of research by industry associations.
EMPLOYEES: The Company added 470 employees during 1999 including
approximately 225 new employees at Wisconsin Electric. About half
of the new employees at Wisconsin Electric replaced existing
contract employees. Of the approximately 245 new non-utility
segment employees added during 1999, approximately 200 are
attributable to Wisvest-Connecticut, LLC's acquisition of two
fossil-fueled power plants during 1999.
Employees: At December 31, 1999, the
following number2003, we had 5,146 total employees of individuals were employed by Wisconsin Energy
and its subsidiaries.
The employees represented under labor agreements were with the following bargaining units as of December 31, 1999.
2003.
Number of Employees | Expiration Date of | ||
Local 2150 of International Brotherhood of Electrical Workers |
|
| |
Local 317 of International Union of Operating Engineers |
|
| |
Local 12005 of United Steel Workers of America |
|
| |
Local 7-0111 of Paper, |
|
| |
Local 510 of International Brotherhood of Electrical Workers |
|
| |
Total | 3,542 | ||
* |
ITEM 2. | PROPERTIES |
We own our principal properties of Wisconsin Energy and its subsidiaries
are owned in feeoutright except that the major portion of utility electric transmission andutility distribution lines, and steam utility distribution mains and gas utility distribution mains and services are located, for the most part, on or in streets and highways and on land owned by others. Substantially all utility plant isof our fixed properties and franchises are subject to a first mortgage liens.
UTILITY SEGMENT
WISCONSIN ELECTRIC: Wisconsin Electric ownslien.
Effective January 1, 2001, we exited the electric transmission business by contributing all of our transmission assets to ATC in exchange for an equity interest in this new company. For further information, see "Electric Utility Operations" in Item 1.
We own the following generating stations with 1999dependable capabilities as indicated.
|
|
| Dependable Capability | ||||||
July | December | ||||||||
Steam Plants | |||||||||
Point Beach | Nuclear | 2 | 1,026 | 1,036 | |||||
Oak Creek | Coal | 4 | 1,135 | 1,139 | |||||
Presque Isle | Coal | 9 | 618 | 618 | |||||
Pleasant Prairie | Coal | 2 | 1,224 | 1,234 | |||||
Port Washington (b) | Coal | 3 | 225 | 225 | |||||
Valley | Coal | 2 | 267 | 227 | |||||
Edgewater 5 (c) | Coal | 1 | 106 | 106 | |||||
Milwaukee County | Coal | 3 | 10 | 11 | |||||
Total Steam Plants | 26 | 4,611 | 4,596 | ||||||
Hydro Plants (14 in number) | 37 | 55 | 57 | ||||||
Germantown Combustion Turbines (d) | Gas/Oil | 5 | 345 | 345 | |||||
Concord Combustion Turbines (d) | Gas/Oil | 4 | 376 | 376 | |||||
Paris Combustion Turbines (d) | Gas/Oil | 4 | 400 | 394 | |||||
Other Combustion Turbines & Diesel (b) (d) | Gas/Oil | 4 | 38 | 42 | |||||
Total System | 80 | 5,825 | 5,810 | ||||||
(a) | Dependable capability is the net power output under average operating conditions with equipment in an average state of repair as of a given month in a given year. Changing seasonal conditions are responsible for the different capabilities reported for the winter and summer periods in the above table. The values were established by test and may change slightly from year to year. |
(b) | We retired Units 4 and 6 effective January 1, 2003, which resulted in a decrease of 97 megawatts. We intend to retire the remaining coal units in the fall of 2004. |
(c) | We have a 25% interest in Edgewater 5 Generating Unit, which is operated by |
(d) | The dual fuel facilities burn oil only if natural gas is not available due to constraints on the natural gas pipeline and/or at |
As of December 31, 1999, Wisconsin Electric's electric transmission
and distribution system had 2,870 miles of transmission circuits,
of which 711 miles were operating at 345 kilovolts, 123 miles at
230 kilovolts, 1,652 miles at 138 kilovolts, and 384 miles at
voltage levels less than 138 kilovolts. At December 31, 1999,
Wisconsin Electric was operating 21,927 pole miles2003, we operated approximately 21,900 pole-miles of overhead distribution lines and 16,29519,800 miles of underground distribution cable as well as 350approximately 345 distribution substations and 233,726260,200 line transformers. For information concerning the pending transfer of
Wisconsin Electric's electric transmission assets to the American
Transmission Company, LLC in exchange for an ownership interest in
this new company, see "Factors Affecting Results of Operations -
Industry Restructuring and Competition" in Item 7 of this report.
As of December 31, 1999, the2003, our gas distribution system included approximately 7,8958,800 miles of mains connected at 22 gate stations to the pipeline transmission systems of ANR Pipeline Company, Guardian, Natural Gas Pipeline Company of America, Northern Natural Pipeline Company and Great Lakes Transmission Company. Wisconsin Electric
hasWe have a liquefied natural gas storage plant which converts and stores in liquefied form natural gas received during periods of low consumption. The liquefied natural gas storage plant has a send-out capability of 70,000 dekatherms
per day. Wisconsin
ElectricWe also hashave propane air systems for peaking purposes. These propane air systems will provide approximately 7,0002,400 dekatherms per day of supply to the system.
At
As of December 31, 1999,2003, the combined steam systems supplied by the Valley and Milwaukee County Power Plants consisted of approximately 43 miles of both high pressure and low pressure steam piping, 8.89.0 miles of walkable tunnels and other pressure regulating equipment.
Wisconsin Electric owns
We own various office buildings and service centers throughout itsour service area.
EDISON SAULT: Edison Sault's major source of electric energy is
its 29.8-megawatt hydroelectric generating plant on the St. Marys
River in Sault Ste. Marie, Michigan.
ITEM 3. | LEGAL PROCEEDINGS |
In addition Edison Sault
ownsto those legal proceedings discussed in our reports to the SEC, we are currently, and operates a 4.8-megawatt diesel-fired peaking power plant.
Edison Sault owns two 138 kilovolt submarine transmission cable
circuits which interconnect with Consumers Energy Companyfrom time to time, subject to claims and suits arising in the Lower Peninsulaordinary course of Michigan, as well as two 138 kilovolt
substations which interconnectbusiness. Although the results of these legal proceedings cannot be predicted with certainty, management believes, after consultation with legal counsel, that the ultimate resolution of these proceedings will not have a 46 mile, 138 kilovolt
transmission line owned and operated by Cloverland Electric
Cooperative. In total, Edison Sault had 282 miles of transmission
line in service as of December 31, 1999 and maintained 792 miles
of primary distribution lines. Edison Sault renders service to
its customers through approximately 8,600 line transformers.
NON-UTILITY SEGMENT
WISVEST CORPORATION: Wisvest owns a chilled water production and
distribution facility located in Milwaukee County, Wisconsin.
Wisvest-Connecticut, LLC, a wholly owned subsidiary of Wisvest
Corporation, owns two fossil-fueled power plants in the state of
Connecticut: the Bridgeport Harbor Station with an active
generating capacity of 590 megawatts, and the New Haven Harbor
Station with an active generating capacity of 466 megawatts.
WISPARK CORPORATION: Wispark properties include the following
commercial and industrial parks in the state of Wisconsin:
LakeView, located near Kenosha; GrandView in Racine County,
RidgeView in Pewaukee; Westridge in New Berlin, Mitchell
International in Milwaukee County, and Cottonwood Commerce in
Hartland. Wispark also owns Gaslight Pointe, a residential and
commercial complex located in Racine, the Radisson Hotel and
Conference Center in Kenosha plus other properties located in
Wisconsin Electric's service territories that are held for future
development. Wispark is also developing other real estate
property located in the states of Illinois and Minnesota.
MINERGY CORP.: Minergy owns a glass aggregate facility located
in Neenah, Wisconsin
OTHER: Badger Service Company holds rights to coal in an area of
8,568 acres in Knox County, Indiana.
ITEM 3. LEGAL PROCEEDINGS
material adverse effect on our financial statements.
ENVIRONMENTAL MATTERS
The Company is
We are subject to federal, state and certain local laws and regulations governing the environmental aspects of itsour operations. The CompanyManagement believes that, perhaps with immaterial exceptions, itsour existing facilities are in compliance with applicable environmental requirements.
See "Environmental Compliance" in Item 1, of this report, which is incorporated by reference herein, for a discussion of matters related to certain solid waste and ashcoal-ash landfills, manufactured gas plant sites and air quality.
GIDDINGS
Giddings & LEWIS, INC.Lewis, Inc./CITY OF WEST ALLIS LAWSUIT:City of West Allis Lawsuit: See "Factors
Affecting Results of Operations - Legal Matters""Note O -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 7 of this
report8 for matters related to a July 1999 jury verdict against
Wisconsin Electric inthe settlement of a lawsuit alleging that Wisconsin Electric had placed contaminated wastes at two sites in the City of West Allis, Wisconsin.
UTILITY RATE MATTERS
WISCONSIN RETAIL JURISDICTION:
See "Factors Affecting Results, of
Operations - RatesLiquidity and Regulatory Matters"Capital Resources" in Item 7 of this
report for information concerning (1) Wisconsin Electric's pending
request beforerate matters in the Public Service Commission of Wisconsin for
electricjurisdictions where we do business.
OTHER MATTERS
Used Nuclear Fuel Storage and gas increases related to the 2000/2001 test years,
(2) rate orders issued by the Public Service Commission of
Wisconsin for the 1998/1999 and 1997 test years, (3) an interim
rate order issued by the Public Service Commission of Wisconsin
for the 1998 test year, (4) Wisconsin's fuel cost adjustment
procedure, (5) a fuel credit and a fuel surcharge approved by the
Public Service Commission of Wisconsin during 1999 and 1997,
respectively, (6) approval by the Public Service Commission of
Wisconsin during 1997 for Wisconsin Electric to defer certain
excess non-fuel nuclear operation and maintenance costs, and
(7) Wisconsin's purchase gas adjustment and gas cost recovery
mechanisms. See "Note B - Mergers & Acquisitions" in Wisconsin
Energy's Notes to Financial Statements in Item 8 of this report
for information concerning a qualified five-year electric, gas and
steam rate freeze ordered by the Public Service Commission of
Wisconsin as a condition of approval of Wisconsin Energy's pending
acquisition of WICOR, Inc.
MICHIGAN RETAIL ELECTRIC JURISDICTION:Removal: See "Factors Affecting Results, of Operations - RatesLiquidity and Regulatory Matters"Capital Resources" in Item 7 of
this report for information concerning (1) a Wisconsin Electric
rate order issued by the Michigan Public Service Commission for
the 1998 test year, (2) Edison Sault's temporary price cap
approved by the Michigan Public Service Commission, and
(3) Michigan's Power Supply Cost Recovery Clause.
WHOLESALE ELECTRIC JURISDICTION: Some customers served under
Wisconsin Electric's and Edison Sault's wholesale rates are
subject to automatic fuel adjustment or purchased power pass
through provisions to reflect varying fuel and purchased power
costs.
OTHER MATTERS
MINERGY GLASS AGGREGATE PLANT SUIT: In 1996, three individuals
and two environmental organizations filed an action in Circuit
Court for Winnebago County against Minergy Corp., a non-utility
subsidiary of Wisconsin Energy, against the City of Neenah,
Wisconsin, and against a paper company, challenging the legality
of the city's lease of certain land to Minergy for construction
and operations of a facility that recycles paper sludge from area
paper mills into glass aggregate and steam. The plaintiffs
alleged that the lease violated the public trust doctrine under
Wisconsin law and requested that the court declare the lease a
public nuisance and grant a permanent injunction against
construction of the facility. On December 17, 1999, the parties
reached settlement of the litigation on a non-material basis.
SPENT NUCLEAR FUEL STORAGE & REMOVAL: See "Factors Affecting
Results of Operations - Nuclear Matters" in Item 7 of this report for information concerning the United States Department of Energy's breach of a contract with Wisconsin Electricus that required the United States Department of Energy to begin permanently removing spentused nuclear fuel from Point Beach Nuclear Plant by January 31, 1998.
URANIUM ENRICHMENT CHARGES: On August 25, 1999,
Stray Voltage: In recent years, several actions by dairy farmers have been commenced or claims made against us for loss of milk production and other damages to livestock allegedly caused by stray voltage resulting from the U.S. Courtoperation of Appeals for the Federal Circuit reversed an August 12, 1998
decision of the U.S. Court of Federal Claims which had granted the
government's motion for summary judgment dismissingour electrical system. One such action is currently pending. The claims of
Wisconsin Electric and six other utilities for damages by reason
of overcharges for uranium enrichment services provided by the
Department of Energy. The damages sought by Wisconsin Electric
total $1.3 million. The Court of Appeals remanded themade against us in this case are not expected to the
Court of Federal Claims for trial. The matter is pending.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: See "Factors
Affecting Results of Operations - Legal Matters" in Item 7 of this
report for information concerning settlement during the fourth
quarter of 1999 of litigation claiming that Wisconsin Electric had
breached contractual duties allegedly owed to the plaintiff
relating to the development of an electric generating plant at
Subic Bay in the Philippines.
WICOR, INC. SHAREHOLDER SUIT: In September 1999,have a stipulation
of settlement was entered into with respect to an action filed in
July 1999 by a shareholder of WICOR, Inc. against WICOR, all of
the members of its board of directors, and Wisconsin Energy. The
complaint sought certification as a class action suitmaterial adverse effect on behalf of
all WICOR shareholders, an injunction against proceeding with the
pending merger of WICOR with Wisconsin Energy, an auction or open
bidding process for the sale of WICOR, and unspecified damages.
As provided in the stipulation of settlement, the merger agreement
was amended on September 9, 1999 to remove a provision
contractually obligating WICOR to resist another acquisition
proposal that is not a superior proposal to Wisconsin Energy's and
to reduce from $30 million to $25 million the amount of the break-
up fee payable by WICOR to Wisconsin Energy if WICOR pursues or
closes another transaction instead of completing the merger with
Wisconsin Energy. The settlement was approved by the court on
January 24, 2000. Consummation of the settlement is subject to,
and the related amendments to the merger agreement are conditioned
upon, consummation of the merger.
STRAY VOLTAGE: our financial statements.
On July 11, 1996, the Public Service Commission
of WisconsinPSCW issued its final order regarding the stray voltage policies of Wisconsin's investor ownedinvestor-owned utilities. The order clarified the definition of stray voltage, affirmed the level at which utility action is required, and appropriately placed some of the responsibility for this issue in the hands of the customer. Additionally, the order established a uniform stray voltage tariff which delineates utility responsibility and provides for the recovery of costs associated with unnecessary customer demanded services. While this action has been
On June 25, 2003, the Wisconsin Supreme Court upheld a Court of Appeals decision that affirmed a jury's verdict against Wisconsin Electric for loss of
milk production and other damages allegedly caused byus awarding $1.2 million to the plaintiffs in a stray voltage resulting fromlawsuit. The Wisconsin Supreme Court rejected the operation of its electrical system. At
the present time, four such actions are pending. Wisconsin
Electric does not believe, however,argument that these or any other claims
thus far made or threatened against Wisconsin Electric by reasonif a utility company's measurement of stray voltage will resultis below the PSCW "level of concern," such company cannot be found negligent in any substantial liabilitystray voltage cases. The Supreme Court decision held that PSCW regulations regarding stray voltage were only minimum standards to be considered by a jury in stray voltage litigation. However, the Supreme Court remanded back to the trial court its requirement imposed on its
part. Currently, there are no cases pending or threatened against
Edison Sault.
ELECTROMAGNETIC FIELDS:us to replace a cable with an ungrounded distribution line.
On February 26, 2004, a Wisconsin jury awarded $850,000 to a dairy farmer who alleged that our distribution system caused damage to his livestock. We intend to appeal this decision.
Electromagnetic Fields: Claims have been made or threatened against electric utilities across the country for bodily injury, disease or other damages allegedly caused or aggravated by exposure to electromagnetic fields associated with electric transmission and distribution lines. Results of scientific studies conducted to date have not established the existence of a causal connection between electromagnetic fields and any adverse health affects. Wisconsin Electric and Edison SaultWe believe that theirour facilities are constructed and operated in accordance with all applicable legal requirements and standards. Currently, there are no cases pending or threatened against Wisconsin Electric nor
against Edison Sault.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
us with respect to damage caused by electromagnetic fields.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of Wisconsin Energy's nor
Wisconsin Electric'sour security holders during the fourth quarter of the fiscal year covered by this report.
2003.
EXECUTIVE OFFICERS OF THE REGISTRANTS
REGISTRANT
The names, ages at December 31, 19992003 and positions of theour executive officers of Wisconsin Energy and Wisconsin Electric are listed below along with their business experience during the past five years. All officers are appointed until they resign, die or are removed pursuant to the Bylaws. There are no family relationships among these officers, nor is there any agreement or understanding between any officer and any other person pursuant to which the officer was selected.
Richard A. Abdoo, (55):Chairman of the Board and Chief Executive Officer of Wisconsin Energy and Chairman of the Board of Wisconsin Electric and Wisconsin Gas, has indicated his intention to retire from all officer and director positions with Wisconsin Energy and its subsidiaries, and to retire as an employee, effective as of April 30, 2004. Gale E. Klappa, currently President of Wisconsin Energy and President and Chief Executive Officer of Wisconsin Electric and Wisconsin Gas, has been appointed to the officer positions held by Mr. Abdoo. Accordingly, effective as of May 1, 2004, Mr. Klappa will hold the titles of Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy, since
1991; Director of Wisconsin Electric and Wisconsin Gas.
Richard A. Abdoo. Age 59.
Charles R. Cole. Age 57.
Stephen P. Dickson. Age 43.
Gale E. Klappa. Age 53.
Frederick D. Kuester. Age 53.
Allen L. Leverett. Age 37.
Larry Salustro.Age 56.
Certain executive officers also hold offices in Wisconsin Energy's non-utility subsidiaries.
PART II
----------
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1999, based on the number of Wisconsin Energy
Corporation stockholder accounts (including accounts in Wisconsin
Energy's dividend reinvestment and stock purchase plan), there
were 91,062 registered stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New
York Stock Exchange. The ticker symbol is WEC. Daily trading
prices and volume can be found in the "NYSE Composite" section of
most major newspapers, usually abbreviated as WiscEn or WiscEngy.
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER |
DIVIDENDS AND COMMON STOCK PRICES
COMMON STOCK DIVIDENDS OF WISCONSIN ENERGY: Cash dividends
Dividends declared on Wisconsin Energy'sour common stock as declared byduring the board of
directors,two most recent fiscal years are normallyset forth below. Dividends were paid on or about the first day of March,
June, September and December.entirely in cash. Dividends were paid to our sole common stockholder, Wisconsin Energy reviews its
dividend policy on a regular basis. Corporation. There is no established public trading market for our common stock.
Quarter | 2003 | 2002 | ||
(Millions of Dollars) | ||||
First | $44.9 | $44.9 | ||
Second | 44.9 | 44.9 | ||
Third | 44.9 | 44.9 | ||
Fourth | 44.9 | 44.9 | ||
Total | $179.6 | $179.6 | ||
Subject to any regulatory restrictionsrestriction or other limitations on the payment of dividends, future dividends will be at the discretion of the board of directors and will depend upon, among other factors, earnings, financial condition and other requirements.
RANGE OF WISCONSIN ENERGY COMMON STOCK PRICES AND DIVIDENDS:
Various financing arrangements and regulatory requirements impose certain restrictions on Wisconsin Electric Power Company's common stock during
the two most recent fiscal years are set forth below. Dividends
were paidour ability to transfer funds to Wisconsin Electric's sole common stockholder,Energy in the form of cash dividends, loans or advances. Under Wisconsin law, we are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy.
ITEM 6. SELECTED FINANCIAL DATA | ||||||||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||||||||
CONSOLIDATED SELECTED FINANCIAL AND STATISTICAL DATA | ||||||||||||||
Financial | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||
Year Ended December 31 | ||||||||||||||
Earnings available for | ||||||||||||||
common stockholder (Millions) | $255.5 | $258.0 | $245.3 | $163.5 | $211.9 | |||||||||
Operating revenues (Millions) | ||||||||||||||
Electric | $1,986.4 | $1,884.6 | $1,839.8 | $1,763.4 | $1,688.3 | |||||||||
Gas | 513.0 | 389.8 | 457.1 | 399.7 | 306.8 | |||||||||
Steam | 22.5 | 21.5 | 21.8 | 21.9 | 21.3 | |||||||||
Total operating revenues | $2,521.9 | $2,295.9 | $2,318.7 | $2,185.0 | $2,016.4 | |||||||||
At December 31 (Millions) | ||||||||||||||
Total assets | $6,644.6 | $6,285.1 | $6,040.6 | $6,038.7 | $5,907.9 | |||||||||
Long-term debt (includes long-term debt, current | ||||||||||||||
maturities of long-term debt, and short-term debt) | $1,915.4 | $1,814.2 | $1,875.6 | $1,964.7 | $1,973.1 | |||||||||
Utility Energy Statistics | ||||||||||||||
Electric | ||||||||||||||
Megawatt-hours sold (Thousands) | 30,713.8 | 30,378.2 | 30,539.7 | 31,398.8 | 30,619.9 | |||||||||
Customers (End of year) | 1,068,034 | 1,056,370 | 1,044,129 | 1,026,691 | 1,006,013 | |||||||||
Gas | ||||||||||||||
Therms delivered (Millions) | 888.3 | 890.0 | 852.4 | 944.9 | 944.1 | |||||||||
Customers (End of year) | 428,719 | 420,494 | 412,674 | 407,761 | 398,508 | |||||||||
Steam | ||||||||||||||
Pounds sold (Millions) | 3,072.8 | 3,001.1 | 2,929.2 | 3,085.2 | 2,913.9 | |||||||||
Customers (End of year) | 459 | 467 | 449 | 451 | 450 | |||||||||
CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited) | ||||||||||||||
(Millions of Dollars) (a) | ||||||||||||||
March | June | |||||||||||||
Three Months Ended | 2003 | 2002 | 2003 | 2002 | ||||||||||
Total operating revenues | $718.8 | $586.7 | $564.9 | $533.6 | ||||||||||
Operating income | $132.5 | $129.5 | $93.2 | $91.3 | ||||||||||
Earnings available for | ||||||||||||||
common stockholder | $75.1 | $66.1 | $49.5 | $47.0 | ||||||||||
September | December | |||||||||||||
Three Months Ended | 2003 | 2002 | 2003 | 2002 | ||||||||||
Total operating revenues | $599.6 | $566.7 | $638.6 | $608.9 | ||||||||||
Operating income | $124.5 | $127.1 | $121.1 | $137.4 | ||||||||||
Earnings available for | ||||||||||||||
common stockholder | $67.7 | $69.0 | $63.2 | $75.9 | ||||||||||
(a) | Quarterly results of operations are not directly comparable because of seasonal and other factors. See Management's | |||||||||||||
Discussion and Analysis of Financial Condition and Results of Operations. | ||||||||||||||
WISCONSIN ELECTRIC POWER COMPANY | |||||||||||||||
SELECTED OPERATING DATA | |||||||||||||||
Year Ended December 31 | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||
Electric Utility | |||||||||||||||
Operating Revenues (Millions) | |||||||||||||||
Residential | $705.0 | $693.4 | $644.8 | $597.2 | $574.8 | ||||||||||
Small Commercial/Industrial | 626.0 | 591.0 | 577.3 | 534.7 | 510.1 | ||||||||||
Large Commercial/Industrial | 511.4 | 475.6 | 472.0 | 464.9 | 451.2 | ||||||||||
Other - Retail/Municipal | 77.1 | 71.0 | 63.2 | 58.3 | 51.2 | ||||||||||
Resale - Utilities | 39.1 | 31.3 | 69.6 | 84.0 | 79.1 | ||||||||||
Other Operating Revenues | 27.8 | 22.3 | 12.9 | 24.3 | 21.9 | ||||||||||
Total Operating Revenues | $1,986.4 | $1,884.6 | $1,839.8 | $1,763.4 | $1,688.3 | ||||||||||
Megawatt-hour Sales (Thousands) | |||||||||||||||
Residential | 7,928.8 | 8,147.8 | 7,615.7 | 7,477.6 | 7,346.8 | ||||||||||
Small Commercial/Industrial | 8,493.1 | 8,473.2 | 8,354.2 | 8,287.5 | 8,028.2 | ||||||||||
Large Commercial/Industrial | 11,201.8 | 10,933.0 | 10,983.0 | 11,626.2 | 11,333.6 | ||||||||||
Other - Retail/Municipal | 1,980.4 | 1,810.4 | 1,599.4 | 1,527.3 | 1,314.0 | ||||||||||
Resale - Utilities | 1,109.7 | 1,013.8 | 1,987.4 | 2,480.2 | 2,597.3 | ||||||||||
Total Sales | 30,713.8 | 30,378.2 | 30,539.7 | 31,398.8 | 30,619.9 | ||||||||||
Number of Customers (Average) | |||||||||||||||
Residential | 954,757 | 945,298 | 931,714 | 916,028 | 897,333 | ||||||||||
Small Commercial/Industrial | 102,928 | 102,058 | 100,456 | 98,277 | 95,964 | ||||||||||
Large Commercial/Industrial | 703 | 705 | 706 | 712 | 716 | ||||||||||
Other | 2,348 | 2,345 | 2,319 | 2,283 | 1,938 | ||||||||||
Total Customers | 1,060,736 | 1,050,406 | 1,035,195 | 1,017,300 | 995,951 | ||||||||||
Gas Utility | |||||||||||||||
Operating Revenues (Millions) | |||||||||||||||
Residential | $317.5 | $250.9 | $275.8 | $244.3 | $193.8 | ||||||||||
Commercial/Industrial | 166.9 | 125.8 | 150.0 | 132.0 | 95.1 | ||||||||||
Interruptible | 3.8 | 3.2 | 5.1 | 5.3 | 5.3 | ||||||||||
Total Retail Gas Sales | 488.2 | 379.9 | 430.9 | 381.6 | 294.2 | ||||||||||
Transported Gas | 16.2 | 16.0 | 15.4 | 18.9 | 16.4 | ||||||||||
Other Operating Revenues | 8.6 | (6.1) | 10.8 | (0.8) | (3.8) | ||||||||||
Total Operating Revenues | $513.0 | $389.8 | $457.1 | $399.7 | $306.8 | ||||||||||
Therms Delivered (Millions) | |||||||||||||||
Residential | 361.0 | 345.4 | 318.4 | 335.7 | 329.0 | ||||||||||
Commercial/Industrial | 210.8 | 199.2 | 194.5 | 206.2 | 195.3 | ||||||||||
Interruptible | 6.8 | 7.4 | 8.9 | 12.0 | 16.3 | ||||||||||
Total Retail Gas Sales | 578.6 | 552.0 | 521.8 | 553.9 | 540.6 | ||||||||||
Transported Gas | 309.7 | 338.0 | 330.6 | 391.0 | 403.5 | ||||||||||
Total Therms Delivered | 888.3 | 890.0 | 852.4 | 944.9 | 944.1 | ||||||||||
Number of Customers (Average) | |||||||||||||||
Residential | 388,896 | 381,846 | 376,510 | 369,210 | 360,084 | ||||||||||
Commercial/Industrial | 34,646 | 34,180 | 33,839 | 33,275 | 32,594 | ||||||||||
Interruptible | 23 | 24 | 30 | 33 | 89 | ||||||||||
Transported Gas | 362 | 366 | 427 | 389 | 334 | ||||||||||
Total Customers | 423,927 | 416,416 | 410,806 | 402,907 | 393,101 | ||||||||||
Degree Days (a) | |||||||||||||||
Heating (6,721 Normal) | 7,063 | 6,551 | 6,338 | 6,716 | 6,318 | ||||||||||
Cooling (728 Normal) | 606 | 897 | 711 | 566 | 753 | ||||||||||
(a) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. | ||||||||||||||
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL |
CORPORATE DEVELOPMENTS
INTRODUCTION
Wisconsin Electric Power Company ("(Wisconsin Electric), a wholly-owned subsidiary of Wisconsin Electric")Energy Corporation (Wisconsin Energy), an electric,is engaged principally in the business of generating electricity and distributing electricity and natural gas with operations in Wisconsin and steam utility.Michigan. Unless qualified by thetheir context, when used in this document the terms "Wisconsin
Energy"the Company, Our, Us or the "Company"We refer to the holding companyWisconsin Electric and all of its subsidiaries. During 1999, approximately 89%
Wisconsin Energy is also the parent company of Wisconsin Energy's consolidated operating revenuesGas Company (Wisconsin Gas) a natural gas distribution utility, which serves customers throughout Wisconsin, and 94%Edison Sault Electric Company (Edison Sault) an electric utility, which serves customers in the Upper Peninsula of Wisconsin
Energy's consolidated pretax operating income were attributable
to Wisconsin Electric. As of December 31, 1999,Michigan. Wisconsin Electric accounted for approximately 81%and Wisconsin Gas have combined common functions and operate under the trade name of "We Energies".
Cautionary Factors: Certain statements contained herein are "Forward-Looking Statements" within the meaning of the Company's
consolidated total assets. The following discussion and analysisPrivate Securities Litigation Reform Act of financial condition and results1995. Forward-Looking Statements may be identified by reference to a future period or periods or by the use of operations includes both
Wisconsin Energy and Wisconsin Electric unless otherwise stated.
See "Note A - Summary of Significant Accounting Policies" in the
Notes to Financial Statements for information concerning the 1999
reclassification of certain amounts in Wisconsin Energy's and
Wisconsin Electric's prior year financial statements to conform
to current year presentation.
CAUTIONARY FACTORS: A number of forward-looking statements are
included in this document. When used, the terms "anticipate,forward looking terminology such as "may," "believe,"intends," "estimate,"anticipates," "expect,"believes," "objective,"estimates," "plan,"expects," "forecasts," "objectives," "plans," "possible," "potential," "project" andor similar expressions are intended to
identify such forward-looking statements. Forward-looking
statements are subject to certain risks, uncertainties and
assumptions which could cause actualterms or variations of these terms. Actual results tomay differ materially from those that are described, including the factors described
below under "Factors Affecting Results of Operations," "Liquidity
and Capital Resources" and "Cautionary Factors."
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin
Energy acquired ESELCO, Inc.set forth in a tax free reorganization
accounted forForward-Looking Statements as a poolingresult of interests. Duecertain risks and uncertainties, including but not limited to, the immaterial
nature of the transaction, Wisconsin Energy has not restated any
historical financial or statistical information. For additional
information, see "Factors Affecting Results of Operations -
Mergers" below. ESELCO was the parent of Edison Sault Electric
Company, an electric utility serving customerschanges in Michigan's
eastern Upper Peninsula ("Edison Sault"). Where appropriate,
discussionspolitical and economic conditions, equity and bond market fluctuations, varying weather conditions, governmental regulation and supervision, as well as financialother risks and statistical information of
Wisconsin Energy include Edison Sault's operations since June 1,
1998.
RESULTS OF OPERATIONS
The following analysis of Wisconsin Energy'suncertainties detailed from time to time in our filings with the Securities and Wisconsin
Electric's results of operations should be read in conjunction
with each company's 1999 Financial StatementsExchange Commission (SEC), including factors described throughout thi s document and Notes to
Financial Statements.
EARNINGS
During 1999, Wisconsin Energy's consolidated net income and
earnings per share of common stock increased to $209 million and
$1.79 per share, respectively, compared with $188 million and
$1.65 per share, respectively, during 1998 and compared with
$61 million and $0.54 per share, respectively, during 1997. For
the same periods, Wisconsin Electric's earnings increased to
$212 million during 1999 compared with $183 million during 1998
and $69 million during 1997. Excluding the impact of a one-time
charge of $18 million ($10.8 million, or $0.09 per share for
Wisconsin Energy, after tax) related to the settlement of
litigation, Wisconsin Energy's and Wisconsin Electric's earnings
from continuing operations during 1999 were $220 million and
$223 million, respectively. The following table summarizes
contributions to Wisconsin Energy's earnings per share (basic and
diluted) by business segment during the comparative periods.
CORPORATE STRATEGY
Business Opportunities
Wisconsin Energy's comparative
total gas utility operating revenues, gross margins, retail gas
sales and total therm deliveries during 1999, 1998 and 1997.
Power the results of this evaluation and subject to approval by
executive management and by the boards of directors of Wisconsin
Electric andFuture Strategy: In February 2001, Wisconsin Energy in the second half of 2002,
Wisconsin Electric currently anticipates seeking appropriate
regulatory approvals, including submittal of an application to
the Nuclear Regulatory Commission in 2003 for an extension of the
operating licenses for Point Beach Nuclear Plant forfiled a period of
up to 20 years.
NUCLEAR MANAGEMENT COMPANY: In February 1999, WEC Nuclear
Corporation, a subsidiary of Wisconsin Energy, Northern States
Power Company and WPS Nuclear Corporation, a subsidiary of WPS
Resources Corporation, announced the formation of the Nuclear
Management Company, LLC. In November 1999, an affiliate of
Alliant Energy Resources also became a member of the Nuclear
Management Company. The four participants or their affiliates
operate a total of seven nuclear generating units at five sites
in the states of Wisconsin, Minnesota and Iowa with a total
combined generating capacity exceeding 3,600 megawatts. Each
utility will continue to own its respective nuclear units,
maintain exclusive rights to the energy generated, and retain
financial responsibility for safe operation, maintenance and
decommissioning.
The primary goals of the Nuclear Management Company are to
identify and achieve enhanced reliability and continued safe
operation of the seven nuclear generating units as well as to
provide enhanced nuclear plant support and operating services.
The Nuclear Management Company will provide services to Wisconsin
Electric's Point Beach Nuclear Plant and, upon transfer of
operating authority under the operating licenses, will also be
responsible for the day-to-day operation of Point Beach.
During the fourth quarter of 1999, all participants in the
Nuclear Management Company, including Wisconsin Electric, filed
applications with the Nuclear Regulatory Commission to transfer
applicable nuclear generating unit operating authority under
their operating licenses to the Nuclear Management Company.
Wisconsin Electric currently anticipates a decision by the
Nuclear Regulatory Commission on transfer of operating authority
in the Spring of 2000. Also during the fourth quarter of 1999,
Wisconsin Electric submitted an affiliated interest applicationpetition with the Public Service Commission of Wisconsin (PSCW) starting the regulatory review process for approvala proposed 10-year strategy to improve the supply and reliability of its nuclearelectricity in Wisconsin. ThisPower the Future strategy is intended to meet the growing demand for electricity and ensure a diverse fuel mix while keeping electricity prices reasonable.Power the Future will add new coal-based and natural gas-based capacity to the state's power plant operating services agreement withportfolio and will allow us to maintain approximately the Nuclear Management Company. WPS Resources Corporationsame fuel mix as exists today. The new generation will be built by an affiliated company, W.E. Power LLC (We Power), and Northern States Power Company also filed similar applications
with their respective state regulatory commissions. Assuming
approval by all required regulatory authorities, Wisconsin
Electric currently expects the Nuclear Management Companyleased to assume operating responsibility for Point Beach with the transfer
of operating authority under the operating licenses in mid-2000.
SPENT FUEL STORAGE AND DISPOSAL: During 1995, Wisconsin
Electric completed construction of an Independent Spent Fuel
Storage Installation for the temporary dry storage of spent
nuclear fuel at Point Beach. The Public Service Commissionus through long-term leases. As part of Wisconsin has authorizedEnergy'sPower the Future strategy, Wisconsin ElectricEnergy plans to: (1) invest in 2,120 megawatts of new natural gas-based and coal-based generating capacity; (2) upgrade our existing electric genera ting facilities and (3) upgrade our existing energy distribution system.
As of December 31, 2003, Wisconsin Energy has:
Received a Certificate of Public Convenience and Necessity (CPCN) from the PSCW to build two 545-megawatt natural gas-based intermediate load units in Port Washington, Wisconsin, with the first unit expected to be in service July 2005 and the second unit in 2008, subject to resolution of legal challenges; |
Begun construction on the first 545-megawatt generating unit in Port Washington (approximately 14% complete as of January 31, 2004), which is currently on schedule and within budget; and | |
Received a CPCN from the PSCW to build two 615-megawatt coal-based base load units at Elm Road in Oak Creek, Wisconsin, with the first unit expected to be in service in 2009 and the second unit in 2010 subject to resolution of legal challenges and receipt of environmental permits. |
In November 2001, Wisconsin Energy created We Power, to load updesign, construct, own, finance and lease the new generating capacity. UnderPower the Future, we will lease each new facility from We Power as well as operate and maintain the new plants under 25 to twelve
casks containing a total of 288 fuel assemblies with spent fuel
and transfer the casks to the Independent Spent Fuel Storage
Installation. To date, eight VSC-24 casks, designed by Sierra
Nuclear Corporation and containing a total of 192 spent fuel
assemblies, have been loaded and moved. Wisconsin Electric
currently plans to load the four remaining authorized casks in
2000.
To maintain flexibility associated with the continued temporary
dry storage of spent fuel at Point Beach, Wisconsin Electric is
in the process of procuring three alternative model TN-32 casks,
designed by Transnuclear Corp., which should be available by mid-
2000. TN-32 dry storage casks have been previously30-year lease agreements approved by the Nuclear Regulatory Commission for specific use at other
nuclear generating facilities inPSCW. At the United States, and Wisconsin
Electric anticipates that the Nuclear Regulatory Commission will
certify use of TN-32 casks for use at Point Beach in April 2000.
In August 1998, the Public Service Commission of Wisconsin issued
an order approving the substitution of up to six TN-32 casks for
VSC-24 casks at Point Beach in the event that this becomes
necessary.
Wisconsin Electric estimates that, with implementationend of the extended fuel cycles noted above, withleases, we will have the four remaining casks
originally authorized byright to acquire the Public Service Commissionplants outright at market value or renew the lease. Smaller investor-owned or municipal utilities, cooperatives and power marketing associations have the opportunity to own a portion of Wisconsin and with the remaining space in the spent fuel pool, it
has sufficient temporary spent fuel storage capacity to continue
operating Point Beach until the Spring of 2005. Wisconsin
Electric currently plans to apply to the Public Service
Commission of Wisconsin in 2000 for authority to load additional
casks beyond the twelve that are currently authorized.
Temporary spent fuel storage alternatives at Point Beach Nuclear
Plant are necessary until the United States Department of Energy
takes ownership of and permanently removes the spent fuel as
mandated by the Nuclear Waste Policy Act of 1982, as amended in
1987 (the "Waste Act"). Effective January 31, 1998, the
Department of Energy has failed to meet its contractual
obligation to begin removing spent fuelcoal units, including expanding or extending wholesale power purchases from Point Beach, a
responsibility for which Wisconsin Electric has paid a total of
$163 million as of December 31, 1999. The Department of Energy
has indicated that it does not expect a permanent spent fuel
repository to be available any earlier than 2010. At this time,
Wisconsin Electric is unable to predict when the Department of
Energy will actually begin accepting spent nuclear fuel.
On August 24, 1999, Wisconsin Electric filed a petition for
review and for writ of mandamus in the United States Court of
Appeals for the District of Columbia Circuit seeking both
monetary and non-monetary relief under its Standard Contract with
the Department of Energyus as a result of the Department of
Energy's failure to comply with its unconditional obligation
underadditional electric generating capacity included in the Waste Act to disposeproposal. We expect that all lease payments and operating costs of the spent nuclear fuel at Point
Beach Nuclear Plant.plants will be recoverable in rates.
In February 2001, Wisconsin Electric requested a contract
modification requiringEnergy made preliminary filings for itsPower the DepartmentFuture proposal with the PSCW. Subsequently, the state legislature amended several laws, making changes that are critical to the implementation of Energy to provide
storage casks forPower the spent fuel, to take title of the spent fuel
when it is placed in dry storage at Point Beach and to reimburse
Wisconsin Electric for costs incurred as a result of the
Department of Energy's failure to comply with its obligations.Future. On October 12, 1999,16, 2001, the government filedPSCW issued a motiondeclaratory ruling finding, among other things, that it was prudent to dismiss
Wisconsin Electric's petitionproceed withPower the Future and for review on grounds of failureus to exhaust administrative remedies and lack of jurisdiction. On
October 25, 1999, Wisconsin Electric filed a responseincur the associated pre-certification expenses. However, individual expenses are subject to the
government's motion, asking the Appeals Court to deny the motion.
On November 24, 1999, the Court ordered that the motion to
dismiss be referred to a merits panel and directed the parties to
submit briefs on the merits with oral argument scheduled for
May 18, 2000.
During 1997 and again in 1998, the United States Senate and the
United States House of Representatives each passed versions of
the Nuclear Waste Policy Acts of 1997 and 1998, respectively.
The legislation would have required the Department of Energy to
establish a temporary spent fuel repository in the state of
Nevada until a permanent repository is available and to begin
taking ownership from utilities and removing spent fuel as
requiredreview by the Waste Act. Differences between Senate and House
versions of the bill were not reconciled in 1997 nor in 1998.
During 1999, neither house of congress passed similar legislation
that had been introduced. The Senate and House passed a modified
version of temporary nuclear waste disposal legislation in
February and March 2000, respectively. President Clinton has
threatened to veto any legislation which mandates a temporary
spent fuel repository in Nevada.
LEGAL MATTERS
GIDDINGS & LEWIS INC./CITY OF WEST ALLIS LAWSUIT: In July 1999,
a jury decided against Wisconsin Electric and awarded the
plaintiffs $4.5 million as actual damages and $100 million in
punitive damages in a lawsuit alleging that Wisconsin Electric
had placed contaminated wastes at two sites in the City of West
Allis, Wisconsin. Wisconsin Electric is preparing to file an
appeal of the case. In December 1999,PSCW in order to stop the post-
judgment accrual of interest at 12% per annum during the pendencybe recovered.
Several phases of the appeal, Wisconsin Electric tenderedPower the Future strategy remain subject to a contested liability
paymentnumber of $110 million, appearing as part of Deferred Chargesregulatory approvals and Other Assets - Other onlegal challenges by third parties. Additional information regarding the Balance Sheet, to the Milwaukee
County Clerk of Circuit Court representing the amount of the
verdictregulatory process, specific regulatory approvals and accrued interest. In further post-trial proceedings,
the plaintiffs filed a motion for sanctions based upon
representations made by Wisconsin Electric during trial. The
hearing on this matter occurred in February 2000. The matter was
briefed by the partiesassociated legal challenges may be found below under "Rates and oral argument is scheduled in April
2000. In the opinion of management, based in part on the advice
of legal counsel, the jury verdict was not supported by the
evidence or the law and the unprecedented award of punitive
damages of this magnitude was unwarranted and should therefore be
reversed or substantially reduced on appeal. As such, Wisconsin
Electric has not established a reserve for potential damages from
this suit. Regulatory Matters".
For further information concerning thePower the Future strategy, see "Note L" or "Note K -
Commitments"Liquidity and Contingencies" in Wisconsin Energy's or Wisconsin
Electric's Notes to Financial Statements, respectively.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: During the
fourth quarter of 1999, Wisconsin Electric and Wisconsin
International Electric Power, Ltd. reached settlement of
litigation brought by Wisconsin International Electric Power
against Wisconsin Electric claiming that Wisconsin Electric had
breached contractual duties allegedly owed to the plaintiff
relating to development of an electric generating plant at Subic
Bay in the Philippines. While Wisconsin Electric does not
believe that it breached any contractual duties allegedly owed to
the plaintiff, Wisconsin Electric paid Wisconsin International
Electric Power, Ltd. $18 million ($10.8 million, or $0.09 per
share for Wisconsin Energy, after tax) in November 1999 to settle
the case, and the plaintiff's claims were dismissed with
prejudice. For further information, see "Note L" or "Note K -
Commitments and Contingencies" in Wisconsin Energy's or Wisconsin
Electric's Notes to Financial Statements, respectively.
ELECTRIC SYSTEM RELIABILITY MATTERS
In spite of several episodes of hot and humid weather during the
summer of 1999, Wisconsin Electric had adequate capacity to meet
all of its firm electric load obligations. Public appeals for
conservation were not required, and the need to interrupt or
curtail service to non-firm customers who participate in load
management programs in exchange for discounted rates was greatly
reduced from recent years. All of Wisconsin Electric's
generating plants were available and in operation during the
hottest periods in late July 1999, and all power purchase
commitments under firm contract were received.
Wisconsin Electric expects to have adequate capacity to meet all
of its firm load obligations during 2000. However, the Company
anticipates that the regional electric energy supply will remain
tight during 2000. As a result of this, or of extremely hot
weather along with unexpected equipment unavailability, Wisconsin
Electric could be required to call upon load management
procedures during 2000, as it has in past years.
Wisconsin Electric is proceeding with several long-term measures
to enhance the reliability of its own system and that of the
midwestern region as discussed below.
Electric Generation Initiatives
300-MEGAWATT CONTRACT WITH SOUTHERN ENERGY: In August 1998,
Wisconsin Electric signed an agreement with Atlanta-based
Southern Energy, Inc. to purchase for eight years the electric
output from a 300-megawatt natural gas-fired peaking power plant
that Southern Energy is currently constructing in Neenah,
Wisconsin. The facility is scheduled for commercial operation by
June 2000.
As a result of the existing regulatory environment in the state
of Wisconsin, Wisconsin Electric currently expects to utilize
purchase power commitments similar to the agreement with Southern
Energy to meet its electric demand load growth where appropriate.
GERMANTOWN GENERATION PROJECTS: Based upon updated load growth
projections, Wisconsin Electric determined that it needed
additional generating capacity by the summer of 2000. As a
result, Wisconsin Electric is currently installing a new 85-
megawatt combustion turbine at its Germantown Power Plant that is
expected to be in service by June 2000. In addition, Wisconsin
Electric is installing inlet cooling facilities on the four
existing combustion turbine units at the Germantown Power PlantCapital Resources" as well as on the new unit. Installation"Factors Affecting Results, Liquidity and Capital Resources" below.
Divestiture of the inlet cooling
facilities, which counteract the reduction in generating capacity
dueAssets
During 2000, we agreed to hot summer weather, is expected to be completed by mid-
summer of 2000. A net increase in summer capacity of
approximately 59 megawatts will be available as a result of the
inlet cooling facilities that are being installed. Natural gas
burning facilities are also being added at the Germantown Power
Plant to provide dual fuel capability for the new as well as the
existing units. As part of the dual fuel project, dry low-
nitrogen oxide burners are being installed on the existing units
to reduce air emissions. The dual fuel project is expected to be
completed in 2003.
NEW RENEWABLE ELECTRIC ENERGY: In September 1999, Wisconsin
Electric signed an agreement to purchase 25.2 megawatts of
capacity from a 29.7-megawatt wind farm that FPL Energy Wisconsin
Wind LLC plans to construct and operate near Allenton, Wisconsin.
Siting for the wind farm is pending. In October 1999, Wisconsin
Electric signed an agreement to purchase 7.7 megawatts of new
landfill gas-fueled generation capacity installed at several
Waste Management, Inc. landfills. All landfill gas facilities
are expected to be on-line prior to the end of 2000. The total
32.9 megawatts of renewable capacity will be used to meet
Wisconsin Electric's 27 megawatt share of a renewable energy
mandate included in 1997 Wisconsin Act 204 and support Wisconsin
Electric's "energy for tomorrow" renewable energy program.
In June 1999, Wisconsin Electric placed in service two
660 kilowatt Vestas V47 wind turbines. The wind turbines are
located in southern Fond du Lac County in the Town of Byron,
Wisconsin. The electricity generated from this project is being
sold to "energy for tomorrow" customers.
Electric Transmission Initiatives
WISCONSIN ELECTRIC PROJECTS: Wisconsin Electric recently
completed or is currently involved in multiple projects designed
to increase electric import capability into eastern Wisconsin and
to improve electric system reliability for its customers. In
June 1999, Wisconsin Electric completed the Northern Interface
Project which allows for an additional 80 megawatts of generating
capacity in the Upper Peninsula of Michigan to be available to
Wisconsin Electric's transmission system in the state of
Wisconsin. Also in June 1999, Wisconsin Electric completed the
Southern Interface Project which was the first of several
projects being undertaken to improve system reliability in
southeast Wisconsin and the metropolitan Milwaukee area as well
as to eliminate constraints on the Wisconsin Electric system for
future increased electric transfer capability between northern
Illinois and southern Wisconsin. In September 1999, the Public
Service Commission of Wisconsin authorized Wisconsin Electric to
proceed with the Oak Creek-Arcadian Transmission Upgrade Project,
intended to also improve system reliability in southeast
Wisconsin. In December 1999, Wisconsin Electric filed an
application with the Public Service Commission of Wisconsin to
upgrade transmission system facilities in downtown Milwaukee as
well as facilities serving the northern metropolitan Milwaukee
area.
WISCONSIN RELIABILITY ASSESSMENT ORGANIZATION: The Wisconsin
Reliability Assessment Organization was formed in early 1998 to
coordinate activities relating to generation and transmission
reliability issues in the state of Wisconsin. Wisconsin Electric
is an active participant in the Wisconsin Reliability Assessment
Organization, whose members include all of the state's other
investor owned utilities, staff from the Public Service
Commission of Wisconsin, several municipal utilities and
cooperatives, and utilities from surrounding states.
In June 1999, the Wisconsin Reliability Assessment Organization
issued a report to the Public Service Commission of Wisconsin
describing a recently completed comprehensive study of
transmission system reinforcement plans and the abilities of
those plans to achieve numerous technical, environmental and
policy criteria. Based upon the report, the Wisconsin
Reliability Assessment Organization recommended construction of a
new 345 kilovolt transmission line between Duluth, Minnesota and
Wausau, Wisconsin. Wisconsin Public Service Corporation and
Minnesota Power Company, two unaffiliated investor owned
utilities, have applied to regulatory commissions in Wisconsin
and Minnesota for authority to construct this facility. Several
groups are opposing the project and have indicated their intent
to intervene in proceedings before the Public Service Commission
of Wisconsin.
In addition to substantial generation system expansion throughout
the state of Wisconsin, the Wisconsin Reliability Assessment
Organization's recommendations assume that numerous other
transmission system enhancement projects will be completed
including Wisconsin Electric's Oak Creek-Arcadian Transmission
Upgrade Project noted above and construction of a 230 kilovolt
transmission line from Chisago County, Minnesota to Amery,
Wisconsin. Northern States Power Company, an unaffiliated
investor owned utility, and Dairyland Power Cooperative, an
unaffiliated electric cooperative, have applied for necessary
certification for the Chisago / Amery project.
MIDWEST ISO: Wisconsin Electric is currently participating in
the formation of a regional independent electric transmission
system operator to promote reliability in the Midwest (the
"Midwest ISO"). In June 1999, the Public Service Commission of
Wisconsin granted Wisconsin Electric authority to transfer
control of its electric transmission system to the Midwest ISO.
The Midwest ISO installed its independent board of directors and
hired its executive management team during 1999 and plans to
begin operation in 2001. Once established, thejoin American Transmission Company LLC described below under "Industry
Restructuring and Competition" will become a member of the
Midwest ISO.
INDUSTRY RESTRUCTURING AND COMPETITION
Driven(ATC) by a combination of market forces, regulatory and
legislative initiatives and technological changes, thetransferring our electric industry continues a trend towards restructuring and increased
competition. The state of Illinois has passed legislation that
introduced retail electric choice for large customers in 1999 and
introduces choice for all customers by May 2002. For information
concerning restructuring in the state of Michigan, see "Electric
Utility Industry Restructuring In Michigan" below. Congress
continues to evaluate restructuring proposals at the federal
level. The Company cannot predict the ultimate timing or impact
of a restructured electric industry. Among others, the following
electric industry restructuring initiatives are underway in
regulatory jurisdictions where the Company currently does
business.
State of Wisconsin
ELECTRIC UTILITY INDUSTRY INVESTIGATION IN WISCONSIN: The
Public Service Commission of Wisconsin is currently focusing on
electric infrastructure issues for the state of Wisconsin such
as:
* Improvements to existing and addition of new electric
transmission lines in the state,
* Addition of new generating capacity in the state,
* Modifications to the regulatory process to facilitate
development of merchant generating plants,
* Development of a regional independent electricutility transmission system operator, and
* Formation of a statewide transmission company.
The Public Service Commission of Wisconsin continuesassets to maintain
the position that the question of whether to implement electric
retail competition in Wisconsin should ultimately be decided by
the Wisconsin legislature. No such legislation has been
introduced in Wisconsin to date.
TRANSMISSION COMPANY: Wisconsin Electric has agreed to join the
American Transmission Company, LLC by contributing its
transmission assetsATC in exchange for an equityownership interest in thethis new company. Transfer of these electric transmission assets, with a net book value of approximately $224.1 million, became effective on January 1, 2001. During 2001, ATC issued debt and distributed $105.2 million of cash back to us as a partial return of the original equity contribution. As a result, Wisconsin Energy will receive partial
relief from statutory limits on its non-utility assets (the non-
utility asset cap) as authorized by 1999 Wisconsin Act 9. For
additional information, see "Rates and Regulatory Matters" below.of December 31, 2003, we had an ownership interest of approximately 34.6% in ATC. Joining the American Transmission CompanyATC is consistent with the Federal Energy Regulatory Commission's Order No. 2000, designedintended to foster competition, efficiency and reliability in the electric industry.
The American Transmission Company will be owned
RESULTS OF OPERATIONS
EARNINGS
2003 vs 2002: Earnings during 2003 decreased by $2.5 million to $255.5 million compared to 2002 earnings. This decline is primarily due to cooler summer weather, higher fuel and governedpurchased power costs, and increases in accordance with 1999 Wisconsin Act 9 by utilities that contribute
facilities or capital. Governance of the company will also
include outside directors notpension, medical and other benefit costs, nuclear costs and costs associated with Wisconsin Energy'sPower the energy
business. Stock of the American Transmission Company eventually
may be offered for public ownership.Future growth strategy. The American Transmission Company's soledecline was somewhat mitigated by a March 2003 rate increase associated with fuel and purchased power expenses, as well as by higher gas margins, growth in our base electric business, will be to
provide reliable, economic transmission service to all customerslitigation settlements in a fair and equitable manner. Specifically, the American
Transmission Company will plan, construct, operate, maintain and
expand transmission facilities it will own to provide for
adequate and reliable transmission of power. It will provide
comparable service to all customers, including Wisconsin
Electric, and it will support effective competition in energy
markets without favoring any market participant. Formation of
the company will require federal and state regulatory approvals.
The American Transmission Company will be regulated by the
Federal Energy Regulatory Commission for all rate terms and
conditions of service. The company will be a transmission-owning
member of the Midwest ISO as discussed in further detail above
under "Electric System Reliability Matters."
Wisconsin Electric outlined its proposed classification of
transmission assets in a February 2000 filing2002 compared with the Public
Service Commissionreceipt of Wisconsin. A rulinginsurance recoveries in that proceeding is
expected in June 2000. Shortly thereafter, Wisconsin Electric
plans to file with both the Public Service Commission of
Wisconsin and the Federal Energy Regulatory Commission for
permission to transfer assets2003 primarily related to the new company. Wisconsin
Electric estimates that it will transfer approximately $200Giddings & Lewis/City of West Allis litigation, higher other income and deductions and lower interest expense.
2002 vs 2001: Earnings during 2002 increased by $12.7 million to $258.0 million compared to 2001 earnings. The increase is primarily attributable to improved electric and gas margins, a strong focus on managing financial resources and reduced financing costs. Offsetting these items were $17.3 million for litigation settlements related to the Giddings & Lewis/City of West Allis litigation, $10.5 million in transmissionreduced interest income, $5.3 million in costs in 2002 for the early repayment of $103.4 million of long-term debt and additional expenses related to nuclear operations.
The following table summarizes our consolidated earnings during 2003, 2002, and 2001.
2003 | 2002 | 2001 | ||||
(Millions of Dollars) | ||||||
Gross Margin | ||||||
Electric (See below) | $1,430.7 | $1,397.5 | $1,336.3 | |||
Gas (See below) | 157.6 | 149.0 | 138.1 | |||
Steam | 15.8 | 14.7 | 15.6 | |||
Total Gross Margin | 1,604.1 | 1,561.2 | 1,490.0 | |||
Other Operating Expenses | ||||||
Other Operation and Maintenance | 784.0 | 736.3 | 681.9 | |||
Depreciation, Decommissioning | ||||||
and Amortization | 276.2 | 267.9 | 264.3 | |||
Property and Revenue Taxes | 72.6 | 71.7 | 67.8 | |||
Operating Income | 471.3 | 485.3 | 476.0 | |||
Other Income (Deductions) | 31.5 | 24.3 | 36.0 | |||
Financing Costs | 91.2 | 92.7 | 108.9 | |||
Income Before Income Taxes | 411.6 | 416.9 | 403.1 | |||
Income Taxes | 154.9 | 157.7 | 156.6 | |||
Preferred Stock Dividend Requirement | 1.2 | 1.2 | 1.2 | |||
Earnings Available for Common Stockholder | $255.5 | $258.0 | $245.3 | |||
Electric Utility Revenues, Gross Margins and Sales
The following table compares our electric utility assets at net book value when the
American Transmission Company becomes operational in late 2000.
Wisconsin Electric's transmission assets have traditionally
contributed an estimated 3% of Wisconsin Electric'soperating revenues and gross margin during 2003, 2002 and 2001.
Electric Revenues and Gross Margin | Megawatt-Hour Sales | |||||||||||
Electric Utility Operations | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||
(Millions of Dollars) | (Thousands) | |||||||||||
Operating Revenues | ||||||||||||
Residential | $705.0 | $693.4 | $644.8 | 7,928.8 | 8,147.8 | 7,615.7 | ||||||
Small Commercial/Industrial | 626.0 | 591.0 | 577.3 | 8,493.1 | 8,473.2 | 8,354.2 | ||||||
Large Commercial/Industrial | 511.4 | 475.6 | 472.0 | 11,201.8 | 10,933.0 | 10,983.0 | ||||||
Other-Retail/Municipal | 77.1 | 71.0 | 63.2 | 1,980.4 | 1,810.4 | 1,599.4 | ||||||
Resale-Utilities | 39.1 | 31.3 | 69.6 | 1,109.7 | 1,013.8 | 1,987.4 | ||||||
Other Operating Revenues | 27.8 | 22.3 | 12.9 | - | - | - | ||||||
Total Operating Revenues | 1,986.4 | 1,884.6 | 1,839.8 | 30,713.8 | 30,378.2 | 30,539.7 | ||||||
Fuel and Purchased Power | ||||||||||||
Fuel | 298.3 | 278.9 | 308.8 | |||||||||
Purchased Power | 257.4 | 208.2 | 194.7 | |||||||||
Total Fuel and Purchased Power | 555.7 | 487.1 | 503.5 | |||||||||
Gross Margin | $1,430.7 | $1,397.5 | $1,336.3 | |||||||||
Weather -- Degree Days (a) | ||||||||||||
Heating (6,721 Normal) | 7,063 | 6,551 | 6,338 | |||||||||
Cooling (728 Normal) | 606 | 897 | 711 | |||||||||
(a) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
2003 vs 2002: During 2003, total electric utility operating revenues. While it is expected that
Wisconsin Energy will receive earnings distributions fromrevenues increased by $101.8 million or 5.4% when compared with 2002 primarily due to the
American Transmission Company in proportion to its ownership
share, the overall impact of rate increases related to fuel and purchased power costs and to a surcharge related to transmission costs. The total rate impact was approximately $83.3 million in 2003. In March 2003, we received an interim increase in rates of $55.1 million annually to recover increases in fuel and purchased power costs. In October 2003, we received the transaction on Wisconsin Energy
earningsfinal rate order which authorized an additional $6.1 million of annual revenues (see "Factors Affecting Results, Liquidity and Capital Resources" below). In spite of the interim fuel order, we under recovered fuel costs by approximately $7.6 million during 2003, which is not yet known.
AFFILIATE INTEREST POLICIES DOCKET: From late 1998 through
early 2000, the Public Service Commissionapproximately $5.3 million worse than our under recovery during 2002. Much of Wisconsin has
reviewed the policies on standardsour under recovery of conduct governing
diversification of activities thatfuel costs during 2003 can be performed withinattributed to the need to purchase replacement power due to a flood at Presque Isle Power Plant in May and June of 2003 and to high natural gas prices. The impact of unfavorable summer weather in 2003 reduced electric operating revenues by approximately $19.0 million between the comparative periods.
Total electric megawatt-hour sales increased by 1.1% during 2003. Residential sales fell 2.7% due to the impact of unfavorable weather conditions on cooling load during the second and third quarters of 2003. Residential customers contribute higher margins than other customer classes and are particularly sensitive to fluctuations in weather. Sales to our largest customers, two iron ore mines, increased by 238.4 thousand megawatt-hours or 12.1% between the comparative periods despite temporary curtailments of electric sales in the second and fourth quarters of 2003 resulting from a flood-related outage at our Presque Isle Power Plant and a transmission outage, respectively. During the first and third quarters of 2002, the mines had extended outages. Excluding these two mines, our total electric energy sales increased by 0.3% and sales volumes to the remaining large commercial/industrial customers improved by 0.3% between the comparative periods. Sales to municipal utilities, the other retail/muni cipal customer class, increased 9.4% between the periods due to a higher off-peak demand from municipal wholesale power customers.
Total fuel and purchased power expenses increased due in large part to increases in fuel prices, especially for natural gas, the primary fuel source for our purchased power, resulting in a 13% increase in the cost per megawatt hour of purchased power. Average commodity gas market prices were $5.39 for 2003 compared to $3.22 for 2002 on a per dekatherm basis. Fuel and purchased power costs also increased due to higher purchased capacity costs and a higher need for purchased energy in 2003 compared with the same period in 2002. Approximately $9 million of this increase was caused by the flood that temporarily shut down our Presque Isle Power Plant during the second quarter of 2003.
Electric gross margin increased 2.4% to $1,430.7 million between the comparative periods. The increase is primarily related to implementing a PSCW approved surcharge in October 2002 for recovery of increased annual transmission costs associated with ATC, which increased year-to-date 2003 gross margin by approximately $39.4 million. Non-fuel operation and maintenance costs increased by a similar amount, so there was little impact to Operating Income as a result of the transmission surcharge. Excluding the surcharge, electric gross margin fell by $6.2 million primarily due to the impact of cooler summer weather and higher fuel and purchased power costs compared to the prior year.
2002 vs 2001: During 2002, our total electric utility and utility affiliates. On February 17, 2000, the Public
Service Commission votedoperating revenues increased by $44.8 million or 2.4% compared with 2001 due to continue to supportfavorable weather, the full allocation method which allows utilitiesyear impact of price increases related to continuefuel and purchased power and a surcharge related to providetransmission costs. As measured by cooling degree days, 2002 was 26.2% warmer than 2001 and sell products27.6% warmer than normal. In February and services other than core utility products
as long asMay 2001, we received increases in rates to cover increased fuel and purchased power costs. On a year to year basis, the costs are fully allocated and not subsidized by
ratepayers. During these proceedings, Wisconsin Electric has
taken the position that state policy should protect competition,
not individual competitors, and that customers should have the
choice to use either Wisconsin Electric or another vendor for
these products and services. The Public Service Commissionfuel surcharge resulted in $10.0 million of Wisconsin still intends to look at a streamlined process for
reviewing complaints on a case-by-case basis and then is expected
to issue an order on this matter and close the docket.
PUBLIC BENEFITS: On October 27, 1999, the Wisconsin State
legislature passed public benefits legislation as part of the
1999-2001 biennial state budget, 1999 Wisconsin Act 9, which also
included amendments to the non-utility asset cap provisions of
Wisconsin's public utility holding company law. The law creates
new funding of $44 million to be collected by utilities and
remitted to the Wisconsin Department of Administration. The law
also requires utilities to continue to collect the funds at
existing levels for low-income, conservation and environmental
research and development programs and to begin transferring the
funds for these programs to the Department of Administration
within a three-year transition period. The utilities'
traditional role of providing these programs will be shifted to
the Department of Administration, which will administer the funds
for a statewide public benefits program. The new law also
requires utilities to provide a specified proportion of its
retail energy sales in programs such as Wisconsin Electric's
"energy for tomorrow" renewable energy program.additional revenue. For additional information concerning the non-utility asset cap,rate increases, see "Rates"Factors Affecting Results, Liquidity and Regulatory Matters"Capital Resources" below. StateEven with the increased fuel revenues, we estimate that we under-recovered fuel and purchased power costs by $2.3 million and $0.1 million for 2002 and 2001, respectively.
During 2002, total electric energy sales decreased by 0.5% compared with 2001, primarily reflecting a decline in sales for resale to other utilities due to a reduced demand for wholesale power. Most of Michigan
ELECTRIC UTILITY INDUSTRY RESTRUCTURING IN MICHIGAN: In June
1999,the remaining customer classes had increased sales in response to earlier actions by2002 reflecting favorable weather and the Michigan Public
Service Commission to implement retail access for all retail
customers of regulated utilities and co-opsgrowth in the stateaverage number of Michigan beginning January 1, 2002,customers. Sales to our largest commercial/industrial customers, two iron ore mines, declined by 2.8% between the Michigan Supreme Court
ruledcomparative periods due to the shutdown of a mine in the first quarter of 2002. Excluding these mines, total electric sales decreased by 0.4% and sales to the remaining large commercial/industrial customers increased by 0.1% between the comparative periods.
Between the comparative periods, fuel and purchased power expenses decreased by $16.4 million or 3.3% primarily due to lower natural gas prices, lower wholesale power prices, and lower megawatt sales. These reductions were partially offset by higher costs due to a larger number of planned outages including a second refueling outage at the Point Beach Nuclear Plant during 2002. The lower fuel and purchased power expenses and increased sales to higher margin customers offset the impact on electric revenues of the decline in electric megawatt-hours such that the Michigan Public Service Commission did not have
authoritytotal gross margin on electric operating revenues increased by $61.2 million or 4.6% during 2002 compared with the same period in 2001.
Our electric gross margin was $1,397.5 million or 4.6% higher than 2001. The increase is primarily related to mandate direct access plans.
On September 1, 1999, Michigan's two largest utilities, Detroit
Edisonthe favorable impact of weather and Consumers Energy Company, filed an agreementhigher fuel cost recovery compared to voluntarily implementthe prior year. In addition, we implemented a phase-inPSCW-approved surcharge in October 2002 for recovery of direct access beginning in
late 1999 followedincreased annual transmission costs associated with ATC, which increased year-to-date 2002 gross margin by full access on January 1 , 2002. In
October 1999,approximately $8.7 million. Non-fuel operation and maintenance costs increased by a similar amount, so there was little impact to Operating Income as a result of the Michigan Public Service Commission's authority
to implement access ontransmission surcharge.
Gas Utility Revenues and Gross Margins
Gross margin is a voluntary basis was challengedbetter performance indicator than revenues because changes in the courts.cost of gas sold flow through to revenue under a gas cost recovery mechanism. The Michigan Public Service Commission is expected to
continue to support its authority to implement voluntary open
access programs. Meanwhile, the phase-in programs have begun for
Detroit Edison and Consumers Energy Company.
In January 2000, a bill was introduced in the Michigan Senate
providing for a phase-in of direct access with full access on
January 1, 2002. The bill addresses market power concerns and
remedies and contains modifications for smaller utilities and co-
ops. Wisconsin Electric believes that passage of the bill as
introduced is unlikely. However, a modified bill could be
enacted by late 2000.
During 1999, 6.8% of Wisconsin Energy's and 5.3% of Wisconsin
Electric's totalfollowing table compares our gas utility operating revenues wereand gross margins (total gas utility operating revenues less cost of gas sold) during 2003, 2002 and 2001.
Gas Utility Operations | 2003 | 2002 | 2001 | |||
(Millions of Dollars) | ||||||
Gas Operating Revenues | $513.0 | $389.8 | $457.1 | |||
Cost of Gas Sold | 355.4 | 240.8 | 319.0 | |||
Gross Margin | $157.6 | $149.0 | $138.1 | |||
2003 vs 2002: During 2003 gas operating revenues increased by $123.2 million or 31.6%. This increase in revenues is due primarily to a $114.6 million increase in the delivered cost of natural gas, recognition of $4.5 million of increased gas cost incentive revenues under our gas cost recovery mechanism and increased deliveries resulting from colder weather during 2003 compared with 2002. The increase in purchased gas costs is passed on to customers because changes in the cost of gas sold flow through to revenue under the jurisdiction of the Michigan Public Service Commission.
Wholesale Competition
Wholesale sales of electric energy accounted for 7%, 6% and 5% of
Wisconsin Electric'sgas cost recovery mechanism.
2002 vs 2001: During 2002, total electricgas utility operating revenues decreased by $67.3 million or 14.7% compared to 2001 due to lower gas costs offset in 1999,
1998part by increased deliveries resulting from colder winter weather. This decline primarily reflects a decrease in natural gas costs in 2002, which are passed on to customers under the gas cost recovery mechanism.
Gas Utility Gross Margins and 1997, respectively. Wisconsin Electric attributesTherm Deliveries
The following table compares gas utility gross margin and therm deliveries during 2003, 2002 and 2001.
Gross Margin | Therm Deliveries | |||||||||||
Gas Utility Operations | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||
(Millions of Dollars) | (Millions) | |||||||||||
Customer Class | ||||||||||||
Residential | $98.8 | $95.3 | $87.4 | 361.0 | 345.4 | 318.4 | ||||||
Commercial/Industrial | 34.2 | 32.7 | 31.2 | 210.8 | 199.2 | 194.5 | ||||||
Interruptible | 0.5 | 0.5 | 0.7 | 6.8 | 7.4 | 8.9 | ||||||
Total Gas Sold | 133.5 | 128.5 | 119.3 | 578.6 | 552.0 | 521.8 | ||||||
Transported Gas | 16.2 | 16.7 | 15.7 | 309.7 | 338.0 | 330.6 | ||||||
Other Operating | 7.9 | 3.8 | 3.1 | - | - | - | ||||||
Total | $157.6 | $149.0 | $138.1 | 888.3 | 890.0 | 852.4 | ||||||
Weather -- Degree Days (a) | ||||||||||||
Heating (6,721 Normal) | 7,063 | 6,551 | 6,338 | |||||||||
(a) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
2003 vs 2002: Gas gross margin totaled $157.6 million in 2003, an $8.6 million improvement from 2002. This was directly related to a favorable weather-related increase in therm deliveries, especially to residential customers who are more weather sensitive and contribute higher margins per therm than other customer classes. As measured by heating degree days, 2003 was 7.8% colder than 2002 and 5.1% colder than normal. A $4.5 million increase in gas cost incentive revenues during 2003 under our gas cost recovery mechanism also contributed to the increased gross margin between the comparative periods. Total therm deliveries of natural gas decreased by 0.2% during 2003, but varied within customer classes. Volume deliveries for the residential and commercial/industrial customer classes increased by 4.5% and 5.8%, respectively, reflecting colder weather.
2002 vs 2001: Gas gross margin for 2002 totaled $149.0 million, an increase of $10.9 million from 2001. This increase was primarily due to a return to colder winter weather in 2002, which increased the heating degree days compared to 2001. In addition, we had a rate increase which became effective December 20, 2001, which contributed $3.2 million in 2002. The average number of customers also increased in 2002, which favorably impacted the fixed component of operating revenues that is not affected by volume fluctuations.
Other Operation and Maintenance Expenses
2003 vs 2002: Other operation and maintenance expenses increased by $47.7 million or 6.5% during 2003 when compared with 2002. The increase was primarily attributable to approximately $39.4 million of higher electric transmission expenses. A surcharge for transmission costs that was approved by the PSCW in October 2002 offset
2002 vs 2001: Other operation and maintenance expenses increased by $54.4 million or 8.0% during 2002 compared with 2001. The most significant change in other operation and maintenance expenses between 2002 and 2001 resulted from $17.3 million for the settlements of litigation with the City of West Allis in the second quarter of 2002 and Giddings & Lewis Inc. and Kearney & Trecker Corporation (now part of Giddings & Lewis) in the third quarter of 2002. Increased other operation and maintenance expenses during 2002 were also attributable to additional sales$9.8 million of higher electric transmission expenses associated with ATC which were offset by increased revenues recorded due to the surcharge that became effective in October of 2002, $9.2 million of increased scheduled maintenance at several steam generation plants and $15.4 million associated with the second scheduled outage and incremental costs associated with reactor vessel head inspections at Point Beach Nuclear Plant in 2002. In 2002, both Point Beach nuclear units had scheduled outages. In 2001, only one nuclear unit had a scheduled outage. We also experienced an increase of $13.7 million for resale.
RATES AND REGULATORY MATTERS
The table below summarizesemployee benefit and pension costs and $4.8 million in property insurance costs which were partially offset by cost reduction efforts during 2002. These increased expenses were offset in part by lower intercompany costs related to information systems. Prior to August 2001, Wisconsin Gas utilized its own customer service system. Following the anticipated annualized revenueApril 2000 merger of Wisconsin Energy with WICOR, Inc., in August of 2001, we combined our customer service function with Wisconsin Gas' customer service function which resulted in decreased operating and maintenance costs of $7.8 million for us for 2002 compared to 2001.
Depreciation, Decommissioning and Amortization Expenses
2003 vs 2002: Depreciation, decommissioning and amortization expenses increased by $8.3 million or 3.1% during 2003 primarily due to a higher base of depreciable assets between the comparative periods.
2002 vs 2001: Depreciation, decommissioning and amortization expenses increased by $3.6 million during 2002 compared with 2001. This increase was primarily due to capital asset additions of longer-lived assets offset by the impact of recentthe retirement of several shorter-lived intangible assets.
Other Income and Deductions
2003 vs 2002: Other income and deductions increased by $7.2 million in 2003 compared to 2002. This increase is primarily due to increased equity in earnings of ATC, our unconsolidated affiliate offset in part by $5.3 million of costs associated with bond redemptions we recorded in 2002 and a $3.2 million civil penalty we agreed to pay in 2003 pursuant to the terms of a consent decree with the U.S. Environmental Protection Agency (EPA).
2002 vs 2001: Other income and deductions decreased by $11.7 million in 2002 compared to 2001. This decrease is primarily due to $10.5 million in interest income accrued in 2001 related to litigation.
Financing Costs
Total financing costs decreased by $1.5 million in 2003 compared to 2002. This decline was primarily due to lower interest rates. Total financing costs decreased by $16.2 million in 2002 compared to 2001. This decline was primarily due to lower interest rates and the early repayment of $103.4 million of long-term debt.
Income Taxes
Our effective income tax rate changes authorizedwas 37.6%, 37.8%, and 38.8% for each of the three years ending December 31, 2003, 2002, and 2001, respectively. The 2003 and 2002 effective income tax rates reflect tax credits associated with rehabilitation projects.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table summarizes our cash flows during 2003, 2002 and 2001:
Wisconsin Electric | 2003 | 2002 | 2001 | |||
(Millions of Dollars) | ||||||
Cash Provided by (Used in) | ||||||
Operating Activities | $514.2 | $656.3 | $537.1 | |||
Investing Activities | ($402.8) | ($416.1) | ($301.8) | |||
Financing Activities | ($104.7) | ($248.2) | ($224.6) | |||
Operating Activities
Cash provided by regulatory
commissions for Wisconsin Electric's electric,operating activities decreased to $514.2 million during 2003 compared with $656.3 million during the same period in 2002. This decrease was primarily due to a $116 million refund received in the first quarter of 2002 from a favorable court ruling in the Giddings & Lewis/City of West Allis litigation, increased use of working capital in 2003 due to higher natural gas prices and steam utilitieshigher volumes of natural gas in storage and increased tax payments.
During 2002, cash flow from operations increased to $656.3 million, a $119.2 million improvement over 2001. This increase was primarily attributable to the return of a $100 million deposit plus accrued interest as a result of the favorable court ruling discussed above.
Investing Activities
During 2003, we made net investments totaling $402.8 million, a decrease of $13.3 million over the prior year. For 2003 and 2002, capital expenditures totaled $343.7 million and $365.7 million, respectively. In addition, due to the timing of refueling outage schedules at Point Beach Nuclear Plant, we spent $17.6 million more on the acquisition of nuclear fuel in 2003 than in 2002.
During 2002, we had net cash outflows for investing activities of $416.1 million as compared to $301.8 million in 2001. For 2002 and 2001, capital expenditures totaled $365.7 million and $377.0 million, respectively. The primary reason for the decline is the receipt during 2001 of $105.2 million from ATC as a partial return of our investment. In addition, due to the timing of refueling outage schedules at Point Beach Nuclear Plant, we spent $10.8 million more on the acquisition of nuclear fuel in 2002 than in 2001.
Financing Activities
During 2003, we used $104.7 million of net cash in our financing activities consisting primarily of the payment of $179.6 million of dividends to Wisconsin Energy. In May 2003, we sold $635 million of unsecured Debentures ($300 million of ten-year 4.50% Debentures due 2013 and $335 million of thirty-year 5.625% Debentures due 2033) under an existing $800 million shelf registration statement filed with the SEC. We used a portion of the proceeds from the Debentures to repay short-term debt, which was originally incurred to retire debt that matured in December 2002. The balance of the proceeds were used to redeem $425 million of our debt securities in June 2003 and to fund the early redemption in August 2003 of another $60 million debt issue.
The debt refinancings in June and August 2003 are being accounted for using the PSCW-authorized revenue neutral method of accounting, under which net debt extinguishment costs in the amount of approximately $18.3 million were deferred and are being amortized over an approximately two year period based upon the sales projections utilized bylevel of interest savings achieved.
In October 2003, we redeemed $9 million of 6.85% First Mortgage Bonds.
During 2002, we used $248.2 million of net cash in our financing activities consisting primarily of the payment of $179.6 million of dividends to Wisconsin Energy. In January 2002, we redeemed $103.4 million of debt with a weighted average interest rate of 8.4%. In December 2002, we retired $150 million of 6 5/8% debentures at maturity. These redemptions and retirements were originally financed with short-term commercial paper bearing rates of approximately 2%.
CAPITAL RESOURCES AND REQUIREMENTS
Capital Resources
We anticipate meeting our capital requirements during 2004 primarily through internally generated funds, short-term borrowings and existing lines of credit, supplemented through the issuance of debt securities depending on market conditions and other factors. Beyond 2004, we anticipate meeting our capital requirements through internally generated funds supplemented, when required, through the issuance of debt securities.
We have access to the capital markets and have been able to generate funds internally and externally to meet our capital requirements. Our ability to attract the necessary financial capital at reasonable terms is critical to our overall strategic plan. We believe that we have adequate capacity to fund our operations for the foreseeable future through our borrowing arrangements and internally generated cash.
We have $165 million of unsecured notes outstanding at December 31, 2003 that were issued as support for a similar amount of variable rate tax-exempt bonds issued on our behalf. The terms of the variable rate tax-exempt bonds require resetting of the interest rate on a weekly basis and allow holders to put the bonds at par value to the issuer with seven days notice. Our credit agreements, as well as those commissions in setting rates. Edison Sault implemented a
temporary price cap in 1995. The Public Service Commission of Wisconsin regulates retailEnergy, provide liquidity support of our obligations with respect to variable rate tax-exempt bonds and commercial paper.
As of December 31, 2003, we had approximately $350.0 million of available unused lines of bank back-up credit facilities on a consolidated basis. We had approximately $315.9 million of total consolidated short-term debt outstanding on such date.
We review our bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support our operations. The following table summarizes such facilities at December 31, 2003:
|
|
| Facility | Facility | ||||
(Millions of Dollars) | ||||||||
$250.0 | $ - | $250.0 | Jun-2004 | 364 day | ||||
$100.0 | $ - | $100.0 | Aug-2004 | 9 month | ||||
On June 25, 2003, we entered into an unsecured 364 day $250 million bank back-up credit facility to replace a $230 million credit facility that was expiring. The credit facility may be extended for an additional 364 days, subject to lender agreement.
On December 12, 2003, we entered into an unsecured nine month $100 million bank back-up credit facility.
The following table shows our consolidated capitalization structure at December 31:
Capitalization Structure | 2003 | 2002 | ||||||
(Millions of Dollars) | ||||||||
Common Equity | $2,131.9 | 52.3% | $2,049.9 | 52.6% | ||||
Preferred Stock | 30.4 | 0.7% | 30.4 | 0.8% | ||||
Long-Term Debt (including | ||||||||
current maturities) | 1,599.5 | 39.2% | 1,459.4 | 37.5% | ||||
Short-Term Debt | 315.9 | 7.8% | 354.8 | 9.1% | ||||
Total | $4,077.7 | 100.0% | $3,894.5 | 100.0% | ||||
Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the ratings of our securities by Standard & Poors Corporation (S&P), Moody's Investors Service (Moody's) and Fitch as of December 31, 2003.
S&P | Moody's | Fitch | ||||
Commercial Paper | A-2 | P-1 | F1 | |||
Secured Senior Debt | A- | Aa3 | AA- | |||
Senior Unsecured Debt | A- | A1 | A+ | |||
Preferred Stock | BBB | A3 | A |
In March 2003, S&P lowered its corporate credit rating on us from A to A-. S&P lowered its rating on our senior secured debt from A to A-. S&P affirmed our A- senior unsecured debt rating. S&P lowered the rating on our preferred stock from BBB+ to BBB. S&P lowered our short-term rating from A-1 to A-2. S&P's ratings outlook for us is stable.
In October 2003, Moody's downgraded certain of our security ratings. Moody's lowered our senior secured debt rating from Aa2 to Aa3, our senior unsecured debt rating from Aa3 to A1 and our preferred stock debt rating from A2 to A3. Moody's confirmed our P-1 commercial paper rating. Moody's ratings outlook for us is stable.
In October 2003, Fitch downgraded certain of our security ratings. Fitch lowered our senior secured debt rating from AA to AA-, our senior unsecured debt rating from AA- to A+ and our preferred stock rating from AA- to A. Fitch lowered our commercial paper rating from F1+ to F1. Fitch's ratings outlook for us is stable.
We believe these security ratings should provide a significant degree of flexibility in obtaining funds on competitive terms. However, these security ratings reflect the views of the rating agencies only. An explanation of the significance of these ratings may be obtained from each rating agency. Such ratings are not a recommendation to buy, sell or hold securities, but rather an indication of creditworthiness. Any rating can be revised upward or downward or withdrawn at any time by a rating agency if it decides that the circumstances warrant the change. Each rating should be evaluated independently of any other rating.
Capital Requirements
Total capital expenditures, excluding the purchase of nuclear fuel, are currently estimated to be $406 million during 2004. Due to changing environmental and other regulations such as air quality standards and electric steamreliability initiatives that impact us, future long-term capital requirements may vary from recent capital requirements. We currently expect capital expenditures, excluding the purchase of nuclear fuel and natural gas ratesexpenditures for new generating capacity contained in Wisconsin Energy'sPower the Future strategy, to be between $350 million and $425 million per year during the next five years.
Investments in Outside Trusts: We fund our pension obligations, certain other post-retirement obligations and future nuclear obligations in outside trusts. Collectively, these trusts had investments that exceeded $1.4 billion as
Off-Balance Sheet Arrangements: We are a party to various financial instruments with off-balance sheet risk as a part of our normal course of business, including financial guarantees and letters of credit which support commodity contracts and other payment obligations. Our estimated maximum exposure under these agreements is approximately $2.1 million as of December 31, 2003. We believe that such agreements do not have, and are not reasonable likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.. See "Note L -- Guarantees" in the stateNotes to Consolidated Financial Statements in this report for more information.
Contractual Obligations/Commercial Commitments: We have the following contractual obligations and other commercial commitments as of Wisconsin, whileDecember 31, 2003:
Payments Due by Period | ||||||||||
|
| Less than 1 year. |
|
| More than 5 years | |||||
(Millions of Dollars) | ||||||||||
Long-Term Debt Obligations (b) | $1,399.4 | $141.9 | $204.9 | $0.4 | $1,052.2 | |||||
Capital Lease Obligations (c) | 619.3 | 52.6 | 89.8 | 73.1 | 403.8 | |||||
Operating Lease Obligations (d) | 272.2 | 42.5 | 82.6 | 67.2 | 79.9 | |||||
Purchase Obligations (e) | 176.6 | 42.1 | 63.9 | 60.9 | 9.7 | |||||
Other Long-Term Liabilities (f) | 494.2 | 174.3 | 246.6 | 61.3 | 12.0 | |||||
Total Contractual Obligations | $2,961.7 | $453.4 | $687.8 | $262.9 | $1,557.6 | |||||
(a) | The amounts included in the table are calculated using current market prices, forward curves and other estimates. Contracts with multiple unknown variables have been omitted from the analysis. |
(b) | Principal payments on our Long-Term Debt and the Long-Term Debt of our affiliates (excluding capital lease obligations). |
(c) | Capital Lease Obligations of Wisconsin Electric for nuclear fuel lease and purchase power commitments. |
(d) | Operating Lease Obligations for purchased power and rail car leases for Wisconsin Electric. |
(e) | Purchase Obligations for information technology and other services for utility operations. |
(f) | Other Long-Term Liabilities under various contracts of Wisconsin Electric for the procurement of fuel, power, gas supply and associated transportation, and post-retirement contributions. |
Our obligations for utility operations have historically been included as part of the Federal Energy Regulatory
Commission regulates wholesale power, electric transmissionrate making process and gas transportation service rates.therefore are generally recoverable from customers.
Guarantees: We provide various guarantees supporting certain of our operations. We guarantee payment or performance under specified agreements or transactions. As a result, our exposure under the guarantees is based upon the net liability under the specified agreements or transactions. The Michigan Public Service
Commission regulates retail electric ratesmajority of the guarantees issued by us limit our exposure to a maximum amount stated in the stateguarantees. See "Note L -- Guarantees" in the Notes to Consolidated Financial Statements in this report for more information.
FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
MARKET RISKS AND OTHER SIGNIFICANT RISKS
We are exposed to market and other significant risks as a result of Michigan.
Commodity Price Risk: In the normal course of business, our utility operations utilize contracts of various duration for the forward sale and purchase of electricity. This is done to Financial Statements,effectively manage utilization of available generating capacity and energy during periods when available power resources are expected to exceed the Public Service
Commissionrequirements of Wisconsin ordered, as a conditionour obligations. This practice may also include forward contracts for the purchase of its approvalpower during periods when the anticipated market price of Wisconsin Energy's pending merger with WICOR, a qualified five-
year rate freeze following completion of Wisconsin Electric's
current pricing request for 2000/2001.
A review of recent rate and regulatory actions follows.
2000/2001 TEST YEARS: On September 17, 1999, Wisconsin Electric
submitted an application with the Public Service Commission of
Wisconsin requestingelectric energy is below expected incremental price relief for specific
capital investments for electricpower production costs. We manage our fuel and gas system reliabilitysupply costs through a portfolio of short and safety and for a one-time accounting adjustment. The application
further recommended the adoption of performance-based measures
and incentives. In its application, Wisconsin Electric proposed
a two-step price increase. The first requested increase, to be
effective January 1, 2000, totaled $46 million (3.1%) for
electric operations and $8 million (2.3%) for gas operations.
The second requested price increase, to be effective January 1,
2001, totaled $29 million (2.0%) for electric operations.
On December 23, 1999, Wisconsin Electric requested that interim
price relief be granted by the Public Service Commission of
Wisconsin, subject to refund, as soon as possible because it
anticipated that a final order on its price request would not be
issued until June 2000. On an interim basis, Wisconsin Electric
requested a 3.1% increase on electric prices and a 2.3% increase
on gas prices. Wisconsin Electric withdrew its request to be
allowed to implement performance-based prices because some
elements of the proposed performance-based price plan are not
compatiblelong-term procurement contracts with the Public Service Commission of Wisconsin's
approval of the WICOR merger. Hearings on Wisconsin Electric's
request for interim price relief were held on February 9, 2000.
On March 23, 2000, the Public Service Commission of Wisconsin
approved Wisconsin Electric's request for interim price
increases, authorizing a $25.2 million (1.7%) increase for
electric operations and an $11.6 million (3.3%) increase for gas
operations. The interim increase will become effective upon the
issuance of a written interim order subject to any conditions
imposed in the order.
1998/1999 TEST YEARS: On December 23, 1997, the Public Service
Commission of Wisconsin issued an order authorizing Wisconsin
Electric to implement interim Wisconsin retail rate increases
effective January 1, 1998 in the amount of $154 million on an
annualized basis, including $135 million for electric operations,
$19 million for gas operations and $1 million for steam
operations. The Public Service Commission of Wisconsin
authorized permanent annualized retail base rate increases in the
state of Wisconsin effective May 1, 1998 of $160 million for
electric operations, $19 million for gas operations and
$1 million for steam operations. The permanent rate increases,
which replaced the interim rate increases, were based upon an
authorized regulatory return on common equity of 12.2%.
In November 1998, Wisconsin Electric filed testimony and exhibits
with the Michigan Public Service Commission showing a
$3.8 million annual revenue deficiency for its electric utility
operations in the state of Michigan. On April 12, 1999, the
Michigan Public Service Commission issued an order authorizing
Wisconsin Electric to implement retail electric rate increases
effective April 13, 1999 in the amount of $2.1 million on an
annualized basis. The increase was based upon an authorized
regulatory return on common equity of 11.0%.
1997 TEST YEAR: In an order dated February 13, 1997, the Public
Service Commission of Wisconsin directed Wisconsin Electric to
implement rate decreases for retail electric and gas customers in
the state of Wisconsin of $7 million and $6 million,
respectively, on an annualized basis, and a steam rate increase
of $0.1 million on an annualized basis. The order was effective
February 18, 1997 and was based upon a regulatory return on
common equity of 11.8%. The Public Service Commission of
Wisconsin had determined that it required a special full review
of Wisconsin Electric's ratesvarious suppliers for the 1997 test year in
connection with considerationpurchase of the application for approval of
the proposed merger of Wisconsin Energycoal, uranium, natural gas and Northern States Power
Company discussed above under "Mergers."
EDISON SAULT PRICE CAP: On August 22, 1995, Edison Sault filed
an application with the Michigan Public Service Commission for
authority to implement price cap regulation for its electric
customers in the state of Michigan. In the application, Edison
Sault proposed that its base rates be capped at existing levels,
that its existing Power Supply Cost Recovery factor be rolled
into base rates and that its existing Power Supply Cost Recovery
Clause be suspended. On September 21, 1995, the Michigan Public
Service Commission approved Edison Sault's application subject to
the modification that Edison Sault give thirty days notice rather
than two weeks notice for rate decreases. Edison Sault will file
an application with the Michigan Public Service Commission by
October 1, 2000 to address the experience under the price cap
mechanism. The order authorizing Edison Sault's price cap
represents a temporary experimental regulatory mechanism and
allows Edison Sault to file an application seeking an increase in
rates under extraordinary circumstances.
FUEL COST ADJUSTMENT PROCEDURE: Effective in 1998 under the
Public Service Commission of fuel oil.
Wisconsin's retail electric fuel cost adjustment procedure in the statemitigates some of Wisconsin, retailour risk of electric rates may be adjusted, on a prospective basis, iffuel cost fluctuation. If cumulative fuel and purchased power costs for electric utility operations deviate from a prescribed range when compared to the costs projected in the most recent retail rate proceeding, retail electric rates may be adjusted, subject to risks associated with the regulatory approval process including regulatory lag. Regulatory lag risk occurs between the time we submit rate proceeding, deviate
fromproceedings and we receive final approval or denial. Regulatory risk can increase or decrease due to many factors which may also change during this approval period including commodity price fluctuations, unscheduled operating outages or unscheduled maintenance. In 2002, the PSCW authorized the inclusion of price risk management financial instruments for the management of our electric utility gas costs. During 2003, a prescribed rangegas hedging program was approved by the PSCW and are expected to continue to be above
or belowimplemented by us. For 2003, our electric fuel cost exceeded fuel recovery by approximately $7.6 million. The PSCW has authorized dollar for dollar recovery for the authorized annual rangemajority of 2%.
As partnatural gas costs for our gas utility operations through a gas cost recovery mechanism, which mitigates most of the Public Service Commissionrisk of Wisconsin's 1998 Rate
Order, Wisconsin Electric was requiredgas cost variations. For additional information concerning the electric utility fuel cost adjustment procedure and our gas cost recovery mechanism, see "Rates and Regulatory Matters" below. For information concerning commodity price risk as it applies to file by October 1, 1998
its forecastgas operations see "Commodity Price Risk Programs" below.
Regulatory Recovery Risk: Our electric operations burn natural gas in several of electricour peaking power plants or as a supplemental fuel costsat several coal-based plants and the cost of purchased power is tied to the cost of natural gas in many instances. We bear regulatory risk for the 1999 calendar year.
Wisconsin Electric filed the forecast indicating no change in
fuel costs compared to 1998. Following subsequent discussions,
the Public Service Commissionrecovery of Wisconsin issued an order
effective May 1, 1999 authorizing Wisconsin Electric to implement
a retail revenue fuel credit of $.00033 per kilowatt-hour or
approximately $7.8 million on an annualized basis.
During 1997, extended outages at Point Beach, an extended
maintenance outage at Oak Creek Power Plant that was concluded in
June 1997, delayed commercial operation of a cogeneration
facility owned by an independent power producer with whom
Wisconsin Electric had entered into a long-term power purchase
contract, and higher than projected purchased power costs per
megawatt-hour due to regional electric energy supply constraints
resulted in increasedthese fuel and purchased power costs at Wisconsin
Electric. Wisconsin Electric estimates that such costs were
approximately $116 millionwhen they are higher than those includedthe base rate established in 1997
baseour rate structure.
As noted above, our electric ratesoperations operate under a fuel cost adjustment clause in all jurisdictions.
Effective May 24, 1997, the Public Service Commission of
Wisconsin approved a $0.00109 per kilowatt-hour fuel surchargeretail jurisdiction for the 1997-1998 biennial period based upon an estimated
$50 million increase in fuel and purchased power costs allocated
toassociated with the Wisconsin jurisdiction during this biennial period.
However, this interim surcharge was superceded bygeneration and delivery of electricity. This clause establishes a final
December 23, 1997 Public Service Commission of Wisconsin order.
During 1997, Wisconsin Electric collected $15.3 million through
the interim surcharge.
On December 23, 1997, the Public Service Commission of Wisconsin
issued a combined final order on two 1997 Wisconsin Electric
filings under Wisconsin's fuel cost adjustment procedure,
authorizing Wisconsin Electric to recover $11.9 million of
additional 1997base rate for fuel and purchased power and we assume the risks and benefits of fuel cost variances that are within 3% of the base rate. We are subject to risks associated with the regulatory approval process including regulatory lag once the costs fromfall outside the 3% variances of the base rate. During the second quarter of 2002, the PSCW issued an order authorizing new fuel cost adjustment rules to be implemented in the Wisconsin retail electric customers duringjurisdiction. The new rules will not be effective for us until January 2006, the 1997-1998 biennial period.
This temporaryend of a five year rate freeze associated with the WICOR Merger Order. Until that time, we will operate under an approved transaction mechanism similar to the old fuel surcharge ended as of May 1, 1998. Wisconsin
Electric estimates that of $116 million of total excesscost adjustment procedure. For 2003, 2002 and 2001, our actual fuel and purchasedpurch ased power costs incurred during 1997, it recoveredexceeded base fuel rates by $7.6 million, $2.3 million and $0.1 million, respectively. In all three years, the electric rates included a totalfuel surcharge.
Gas Costs: Significant increases in the cost of $27.2 millionnatural gas affect our electric and gas utility operations. Gas costs have increased significantly because the supply of gas in recent years has not kept pace with the demand for natural gas, which has grown throughout the United States as a result of the interim May 1997 and final
December 1997 orders, leaving $89 million unrecovered.
In December 1995, the Michigan Public Service Commission approved
the suspension of the Power Supply Cost Recovery Clause (fuel
adjustment procedure)increased reliance on natural gas-based electric generating facilities. We expect that demand for a five-year period for Michigan retail
electric customers.
NUCLEAR OPERATION AND MAINTENANCE COST DEFERRAL: See "Note E -
Nuclear Operations" in the Notes to Financial Statements for
information regarding authority granted to Wisconsin Electric by
the Public Service Commission of Wisconsin to defer certain non-
fuel nuclear operation and maintenance costs incurred during
1997.
PURCHASED GAS ADJUSTMENT MECHANISM: Purchasednatural gas adjustment
mechanisms have been evaluated as part of an ongoing generic
investigation by the Public Service Commission of Wisconsinwill remain high into the foreseeable future and that significant price relief will not occur until additional natural gas industryis added to the nation's energy supply mix.
Higher gas costs increase our working capital requirements resulting in higher gross receipts taxes in the state of Wisconsin. On July 1,
1997, Wisconsin Electric filedHigher gas costs combined with poor economic conditions also expose us to greater risks of accounts
As a modified dollar for dollarresult of a gas cost recovery mechanism, in accordance with a November 1996 order
from the Public Service Commission of Wisconsin. This filing,
which was updated on June 30, 1998, was approved on March 23,
1999 and implemented July 1, 1999. The newour gas cost recovery
mechanism includes after the fact prudence reviews by the Public
Service Commission of Wisconsin. Wisconsin Electric does not
expect that the major portion of gas costs that are currently
passed through to customers will be subject to price risk under
the new gas cost recovery mechanism.
Prior to July 1, 1999, differences between the test year estimate
and the actual cost of purchased gas were accounted for and
passed through to customers on adistribution operations receive dollar for dollar basispass through a purchased gas adjustment clause.
NON-UTILITY ASSET CAP: On October 27, 1999, the Governoron most of the statecost of Wisconsin signed Wisconsin's 1999-2001 biennial state
budget, 1999 Wisconsin Act 9,natural gas. However, increased natural gas costs increase the risk that customers will switch to alternative fuel sources, which included amendments to
Wisconsin's public utility holding company law. As a result,
Wisconsin Energy remains subject to certain restrictionscould reduce future gas margins.
Weather: Our rates are set by the PSCW based upon estimated temperatures which have the potential of limiting diversification into non-utility
activities. Under the amended public utility holding company
law, the sum of certain assets of all non-utility affiliates in a
holding company system may not exceed 25% of the assets of all
public utility affiliates. However, among other exemptions, the
amended law exempts energy-related assets and assets used for
providing environmental engineering services and for processing
waste materials from being counted against the asset cap provided
that theyapproximate 20-year averages. Our electric revenues are employed in qualifying businesses. In addition,
the amended law exempts the provision of metering services and
manufacturing, distributing or selling products for filtration,
pumping water or other fluids, processing or heating water,
handling fluids or other related activities.
As described in further detail above under "Industry
Restructuring and Competition," a voluntary state electric
transmission company, the American Transmission Company, LLC is
being created as part of the amendment to Wisconsin's public
utility holding company law. For a public utility holding
company system to qualify for the amended non-utility asset cap
rules, all of its public utility affiliates are required to
irrevocably transfer their electric transmission facilities and
rights of way in the state of Wisconsinsensitive to the American
Transmission Company in exchange for an ownership interest in the
American Transmission Company. Wisconsin Electric is currently
working with other electric transmission system owners in the
state of Wisconsin to transfer its electric transmission assets
when the American Transmission Company becomes operational in
late 2000.
Other amendments to the non-utility asset cap provisions of the
public utility holding company law require public utility
affiliates of a public utility holding company, such as Wisconsin
Electric, to commit to certain spending levels for low-income
residents and for conservation programs and to meet certain
renewable energy source targets as a percent of total retail
energy sales between 2000 and 2010. For further information, see
"Industry Restructuring and Competition" above. In addition, non-
supervisory employees must be retained for a 30 month period at
the same wage and with similar benefits in the event of any
energy business acquisition.
ENVIRONMENTAL MATTERS
NATIONAL AMBIENT AIR QUALITY STANDARDS: In July 1997, the
United States Environmental Protection Agency revised the
National Ambient Air Quality Standards for ozone and particulate
matter. Although specific emission control requirements are not
yet defined and despite legal challenges to these standards that
will impact compliance requirements and timing, Wisconsin
Electric believes that the revised standards will likely require
significant reductions in sulfur dioxide ("SO2") and nitrogen
oxide ("NOx") emissions from coal-fired generating facilities.
Wisconsin Electric expects that reductions needed to achieve
compliance with the ozone attainment standards will be
implemented in stages from 2003 through 2012, beginning with the
ozone transport reductions described below. Reductions
associated with the new particulate matter standards will likely
be implemented in stages after the year 2010 and extending to the
year 2017. Beyond the cost estimates identified below, Wisconsin
Electric is currently unable to estimate the impact of the
revised air quality standards on its future liquidity, financial
condition or results of operation.
OZONE NON-ATTAINMENT RULEMAKING: In October 1998, the
Environmental Protection Agency promulgated ozone transport rules
to address transport of NOx and ozone into ozone non-attainment
areas in the eastern half of the United States. The rules would
have required electric utilities in 22 eastern states and the
District of Columbia, including the state of Wisconsin, to
significantly reduce NOx emissions by May 1, 2003. Affected
states were required to submit their respective state
implementation plans to the Environmental Protection Agency by
September 1999. This submittal date was stayed pending the
outcome of legal challenges against the rule. A court decision
on these challenges was issued on March 3, 2000 excluding the
state of Wisconsin but continuing to include Michigan as one of
19 states in a region east of the Mississippi River that would
remain subject to the October 1998 rules. Further appeals are
likely.
Independent of any court decisions, Wisconsin and the other
states in the Lake Michigan region are proceeding with
rulemakings by December 2000 that will require utilities,
including Wisconsin Electric, to reduce NOx emissions as part of
separate existing 1-hour ozone attainment demonstration rules
required by the Environmental Protection Agency for the Lake
Michigan region's severe non-attainment areas.
Wisconsin Electric is working with a variety of state and
regional stakeholders to provide input to the plan under
development by the states of Wisconsin and Michigan. Wisconsin
Electric is evaluating various NOx control techniques under
various regulatory scenarios to develop a least cost compliance
plan and currently expects to incur total capital costs of
$150 million to $200 million and annual operation and maintenance
costs of $2 million to $10 million during the period 2000 through
2004 to comply with such a plan. Wisconsin Electric believes
that compliance with the NOx emission reductions as a result of
the Environmental Protection Agency's non-attainment rules will
likely mitigate costs to comply with the Environmental Protection
Agency's July 1997 revisions to the ozone National Ambient Air
Quality Standards discussed above.
In January 2000, the Public Service Commission of Wisconsin
approved Wisconsin Electric's comprehensive plan to meet the
Environmental Protection Agency regulations, permitting recovery
in rates of NOx emission reduction costs over an accelerated 10-
year recovery period and requiring that these costs be separately
itemized on customer bills.
NON-UTILITY AIR QUALITY MATTERS: As a result of the
Environmental Protection Agency's October 1998 ozone transport
rules and the regulations adopted by the state of Connecticut to
implement such rules, the Company's non-utility energy operations
expect to incur capital costs of $7.5 million to $15 million
prior to May 2003 at its two fossil-fueled power plants in the
state of Connecticut.
In February 2000, legislation was introduced in the state of
Connecticut's legislature that would require additional NOx and
SO2 emission reductions from the two power plants by 2003.
Wisvest-Connecticut, LLC is reviewing several methods to achieve
compliance with the proposed legislation in its present form.
The Company expects to have the studies completed by the end of
2000. If enacted in its present form, the pending legislation
would require Wisvest-Connecticut, LLC to make additional
investments and may result in an impairment of the assets. The
details of that final legislation, including required
expenditures and the nature of any impairment, cannot be known at
this time. For additional information concerning the acquisition
of the two Connecticut power plants, see "Liquidity and Capital
Resources - Investing Activities" below as well as "Note B -
Mergers & Acquisitions" in Wisconsin Energy's Notes to Financial
Statements.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric is voluntarily
reviewing and addressing environmental conditions at a number of
former manufactured gas plant sites. For further information,
see "Note L" or "Note K - Commitments and Contingencies" in
Wisconsin Energy's or Wisconsin Electric's Notes to Financial
Statements, respectively.
ASH LANDFILL SITES: Wisconsin Electric aggressively seeks
environmentally acceptable, beneficial uses for its combustion
byproducts. However, combustion byproducts have been,summer cooling season, and to some degree, continueextent, to be disposed in company-owned, licensed
landfills. Some early designed and constructed landfills may
allow the release of low levels of constituents resulting in the
need for various levels of remediation. Where Wisconsin Electric
has become aware of these conditions, efforts have been expended
to define the nature and extent of any release, and work has been
performed to address these conditions. The costs of these
efforts are included in the environmental operating and
maintenance costs of Wisconsin Electric.
OUTLOOK
The following forecasts are forward-looking statements subject to
certain risks, uncertainties and assumptions. Actual results may
vary materially. Factors that could cause actual results to
differ materially include, but are not limited to: business,
competitive and regulatory conditions in the energy industry, in
general, and in the Company's service territory; availability of
the Company's generating facilities; changes in purchased power
costs; and the economy, weather, the restructuring of the
electric andwinter heating season. Our gas utility industries and other factors referred to
under "Cautionary Factors" below.
ELECTRIC SALES: Assuming moderate growth in the economy of its
service territory and normal weather, the Company presently
anticipates total retail and municipal electric kilowatt-hour
sales to grow at a compound annual rate of 2.4% over the five-
year period ending December 31, 2004.
GAS DELIVERIES: Assuming moderate growth in the economy of its
service territory and normal weather, and excluding the effect of
the WICOR merger, the Company currently forecasts total therm
deliveries of natural gas to grow at a compound annual rate of
approximately 1.9% over the five-year period ending December 31,
2004.
EMPLOYEES: Excluding the WICOR merger, the Company expects to
add approximately 260 full-time equivalent employees during 2000.
Of these 260 full-time equivalent employees, approximately 220
are attributable to Wisconsin Electric, primarily in such key
areas as distribution operations, customer service and
information resources. Approximately half of the new employees
at Wisconsin Electric are expected to replace contract labor that
has been used during the past couple of years. Approximately 35
full-time equivalent non-utility employees are expected to be
added by the Company's non-utility energy operations during 2000.
The Company anticipates adding approximately 3,970 full-time
equivalent employees when it acquires WICOR.
EFFECTS OF WEATHER
By the nature of its utility business segment, Wisconsin Energy's
and Wisconsin Electric's earningsrevenues are sensitive to the winter heating season. A summary of actual weather variations from period to period. Variationsinformation in winter weather
affect heating load for both the gasour service territory during 2003, 2002 and electric utilities.
Variations in summer weather affect cooling load for the electric
utilities as well as therm deliveries to gas-fired electric
generating customers. The table below summarizes weather2001, as measured by degree days at Mitchell International Airportdegree-days, may be found above in Milwaukee, Wisconsin for each"Results of the three years ended
December 31. Normal degree days are based upon a twenty year
average.
Interest Rate Risk: We have various short-term borrowing arrangements to provide working capital and general corporate funds. The level of borrowingsWe also have variable rate long-term debt outstanding at December 31, 2003. Borrowing levels under suchthese arrangements vary from period to period depending upon amongcapital investments and other factors, capital investments.factors. Future short-
termshort-term interest expense and payments will reflect both the level of
future short-term interest rates and borrowing levels.
The table below provides information about the long-term
financial instruments that were held by the Company
We performed an interest rate sensitivity analysis at December 31, 1999 and that are sensitive to changes in interest
rates. For long-term2003 of our outstanding portfolio of $315.9 million of short-term debt the table presents anticipated
principal cash flows by maturity date and the related annualized
average interest rate of the maturing long-term debt. The
annualized average interest rate on the variable rate long-term
debt was estimated based uponwith a weighted average interest rate at
December 31, 1999.
For the interest rate swap, the table presents notional amountsof 1.7% and $165.4 million of variable-rate long-term debt with a weighted average interest rate of 1.4%. A one-percentage point change in interest rates would cause our annual interest expense to increase or decrease by expected (contractual)
maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under contract. Weighted
averageapproximately $3.2 million before taxes from short-term borrowings and by $1.7 million before taxes from variable rates are based upon implied forward rates in
the yield curve at the reporting date. Fair value of the
interest rate swap is the amount that Wisvest-Connecticut, LLC
would receive if the outstanding contract were terminated at the
reporting date.
Marketable Securities Return Risk: We fund our pension, other postretirementpost-retirement benefit and nuclear decommissioning obligations through various trust funds, which in turn invest in debt and equity securities. Changes in the market price of the assets in these trust funds can affect future pension, other postretirementpost-retirement benefit and nuclear decommissioning expenses in
future periods.expenses. Future annuity paymentscontributions to these trust funds can also be affected by changes in the market price of the trust fund assets. Wisconsin Energy expectsWe expect that the risk of expense and annuity paymentcontribution variations as a result of changes in the market price of trust fund assets would be mitigated in part through future rate actions by the Company'sour various utility regulators. However, we are currently operating under a PSCW-ordered, qualified five-year rate restriction period through 2005. For further information about the rate restriction, see "Rates and Regulatory Matters" below.
At December 31, 1999, the Company had2003, we held the following total trust fund assets at fair value, primarily consisting of publicly traded debt and equity security investments.
Wisconsin Electric | Millions of | |
Pension trust funds | $695.2 | |
Nuclear decommissioning trust fund | $674.4 | |
Other | $95.7 |
We manage our fiduciary oversight of the pension and other post-retirement plan trust fund investments through a Board-appointed Investment Trust Policy Committee. Qualified external investment managers are engaged to manage the investments. We conduct asset/liability studies periodically through an outside investment advisor. The current study projects long-term, annualized returns of approximately 9%.
Fiduciary oversight for the nuclear decommissioning trust fund investments is also the responsibility of the Board-appointed Investment Trust Policy Committee. Qualified external investment managers are also engaged to manage these investments. An asset/liability study is periodically conducted by an outside investment advisor, subject to additional constraints established by the PSCW. The current study projects long-term, annualized returns of approximately 9%. Current PSCW constraints allow a maximum allocation of 65% in equities. The allocation to equities is expected to be reduced as the date for decommissioning Point Beach Nuclear Plant approaches in order to increase the probability of sufficient liquidity at the time the funds will be needed.
We insure various property and outage risks through Nuclear Electric Insurance Limited (NEIL). Annually, NEIL reviews its underwriting and investment results and determines the feasibility of granting a distribution to policyholders. Adverse loss experience, rising reinsurance costs, or impaired investment results at NEIL could result in increased costs or decreased distributions to us.
Credit Rating Risk: We do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. We do have certain agreements in the form of commodity and energy services contracts and employee benefit plans that could require collateral or termination payments in the event of a credit ratings change to below investment grade. At December 31, 2003, we estimate that the potential payments under these agreements that could result from credit rating downgrades totaled approximately $90 million.
Economic Risk. We are exposed to market risks in the regional midwest economy for our utility operations.
Inflationary Risk: We continue to monitor the impact of inflation, especially with respect to the rising costs of medical plans, in order to minimize its effects in future years through pricing strategies, productivity improvements and cost reductions. Except for continuance of an increasing trend in the inflation of medical costs and the impacts on our medical and post-retirement benefit plans, we have expectations of low-to-moderate inflation. We do not believe the impact of general inflation will have a material effect on our future results of operations.
For additional information concerning risk factors, including market risks, see "Cautionary Factors" below.
RATES AND REGULATORY MATTERS
The PSCW regulates retail electric, natural gas, and steam rates in the state of Wisconsin, Energy's pensionwhile the Federal Energy Regulatory Commission (FERC) regulates wholesale power, electric transmission and other postretirement benefitsinterstate gas transportation service rates. The Michigan Public Service Commission (MPSC) regulates retail electric rates in the state of Michigan. Orders from the PSCW can be viewed at http://psc.wi.gov/ and orders from the MPSC can be viewed at www.michigan.gov/mpsc/.
Wisconsin Jurisdiction
WICOR Merger Order: As a condition of its March 2000 approval of the WICOR acquisition, the PSCW ordered a five-year rate restriction period in effect freezing electric and natural gas rates for us and Wisconsin Gas effective January 1, 2001. We may seek biennial rate reviews during the five-year rate restriction period limited to changes in revenue requirements as a result of:
To the extent that natural gas rates and rules need to be modified during the integration of our gas operations and those of Wisconsin Gas, our total gas revenue requirements are to remain revenue neutral under the merger order. In its order, the PSCW found that electric fuel cost adjustment procedures as well as nuclear
decommissioning, see "Note J - Benefits" and "Note E - Nuclear
Operations," respectively, in Wisconsin Energy's Notes to
Financial Statements. For additional information concerning
Wisconsin Electric's pension and other postretirement benefits as
well as nuclear decommissioning, see "Note I - Benefits" and
"Note E - Nuclear Operations," respectively, in Wisconsin
Electric's Notes to Financial Statements.
COMMODITY PRICE RISK: In the normal course of business, the
Company's utility and non-utility power generation subsidiaries
utilize contracts of various duration for the forward sale and
purchase of electricity to effectively manage utilization of
their available generating capacity and energy during periods
when available power resources are expected to exceed the
requirements of their obligations. This practice may also
include forward contracts for the purchase of power during
periods when the anticipated market price of electric energy is
below expected incremental power production costs. The Company
manages its fuel and gas supply costs through a portfolio of
short and long-term procurement contracts with various suppliers.
To a certain extent, Wisconsin Electric's retail fuel cost
adjustment procedure in Wisconsin may mitigate some of the risk
of fuel cost price fluctuation. Currently, the gas cost recovery mechanismmechanisms would not be subject to the five-year rate restriction period and that it was reasonable to allow us to retain efficiency gains associated with the merger. A full rate review will be required by the PSCW for rates beginning in January 1, 2006.
Limited Rate Adjustment Request: On July 2, 2003, we filed an application with the PSCW for an increase in electric, gas and steam rates for anticipated 2004 revenue deficiencies associated with (1) costs for the new Port Washington Generating Station being constructed as part of Wisconsin mitigates mostEnergy'sPower the Future strategy, (2) increased costs linked to changes in Wisconsin's public benefits legislation and (3) costs related to steam utility operations. The filing identified anticipated revenue deficiencies in 2004 attributable to Wisconsin in the amount of $63.5 million (3.5%) for our electric operations and $0.6 million (3.9%) for our steam operations. The filing also included an additional anticipated 2005 Wisconsin revenue deficiency in the riskamount of $0.4 million (2.6%) for our
Recent Rate Changes: The table below summarizes the anticipated annualized revenue impact of recent rate changes, primarily in the Wisconsin jurisdiction, authorized by regulatory commissions for our electric, natural gas cost
variations. For additional information concerning the fuel cost
adjustment procedure and the purchased gas adjustment mechanism,
seesteam utilities. Our current Wisconsin rates are based on an authorized return on common equity of 12.2%. See "Rates and Regulatory Matters" above for the web site addresses where the related rate orders can be found.
| Incremental |
|
| |||
(Millions) | (%) | |||||
Fuel electric, MI | $3.3 | 7.6% | January 1, 2004 | |||
Fuel electric, WI (a) | $6.1 | 0.3% | October 2, 2003 | |||
Fuel electric, WI (a) | $55.1 | 3.3% | March 14, 2003 | |||
Fuel electric, MI | $0.9 | 2.0% | January 1, 2003 | |||
Retail electric, WI (b) | $48.1 | 3.2% | October 22, 2002 | |||
Retail electric, MI (c) | $3.2 | 7.8% | September 16, 2002 | |||
Fuel electric, MI | $1.6 | 3.8% | January 1. 2002 | |||
Retail gas (d) | $3.6 | 0.9% | December 20, 2001 | |||
Fuel electric, WI (e) | $20.9 | 1.4% | May 3, 2001 | |||
Fuel electric, WI (e) | $37.8 | 2.5% | February 9, 2001 | |||
Fuel electric, MI | $1.0 | 2.4% | January 1, 2001 | |||
Retail electric, WI | $27.5 | 1.8% | January 1, 2001 |
(a) | In October 2003, the PSCW issued a final order authorizing a fuel surcharge for $6.1 million of additional fuel costs. In March 2003, the PSCW issued an interim order authorizing a surcharge for $55.1 million of additional fuel costs on an annualized basis subject to true up. |
(b) | In October 2002, the PSCW issued its order authorizing a surcharge for recovery of $48.1 million of annual estimated incremental costs associated with the formation and operation of ATC. The additional revenues will be offset by additional transmission costs. |
(c) | In September 2002, the MPSC issued an order authorizing an annual electric retail rate increase of $3.2 million for Wisconsin Electric. In addition, the September 2002 order issued by the MPSC authorized us to include the transmission costs from ATC prospectively in its Power Supply Cost Recovery clause. |
(d) | In November 2001, the Milwaukee County Circuit Court overturned the PSCW's August 2000 final order for natural gas rates and the PSCW reinstated a higher April 2000 interim gas rate order, effective December 2001. |
(e) | The February 2001 order was an interim order that was effective until the May 2001 final order was issued by the PSCW. The final May 2001 order superceded the February 2001 interim order. |
In its final order related to the 2000/2001 biennial period, the PSCW authorized recovery of revenue requirements for, among other things, electric reliability and safety construction expenditures as well as for nitrogen oxide (NOx) remediation expenditures. Revenue requirements for electric reliability and safety construction expenditures were subject to refund at the end of 2001 to the extent that actual expenditures were less than forecasted expenditures included in "Factors Affecting
Results of Operations."
YEARthe final order. During 2002, we accrued a $1.1 million refund liability associated with the electric safety and reliability spending requirements subject to PSCW review and future resolution. In March 2000, TECHNOLOGY ISSUESthe PSCW had previously authorized all Wisconsin utilities to depreciate NOx emission reduction costs over an accelerated 10-year recovery period. Due to the successful effortsuncertainty regarding the level and timing of these expenditures, the PSCW, in its final order, required us to establish escrow accounting for the revenue requirement components associated with NOx expenditures. Our actual NOx remediation expenditures resulted in an under-spent balance of
We have the ability to request biennial rate reviews for certain changes in revenue requirement items. We are currently updating a request for regulatory relief for the year beginning January 1, 2005. See "Limited Rate Adjustment Request" above for more information.
Electric Transmission Cost Recovery: In September 2001, we requested that the PSCW approve $58.8 million of annual rate relief to recover the estimated incremental costs associated with the formation and operation of ATC, which was designed to enhance transmission access and increase electric system reliability and market efficiency in the state of Wisconsin. We were also seeking to recover associated incremental transmission costs of the Company's Year 2000 program
teamsMidwest Independent Transmission System Operator Inc. (Midwest ISO), the multi-state organization that monitors and consistent with industry experiencecontrols electric transmission throughout the United States, Wisconsin EnergyMidwest. These increased costs are primarily due to the implementation of capital improvement projects for the period 2001-2005 and Wisconsin Electric had no
significant problemsassociated operation costs that are expected to increase transmission capacity and reliability. In October 2002, the PSCW issued its order authorizing a surcharge for recovery of $48.1 million of annual costs reflecting lower projecte d transmission costs through 2005 than we estimated. Recognizing the uncertainty of these transmission related costs, the PSCW order authorized a four year escrow accounting treatment such that rate recovery will ultimately be trued-up to actual costs plus a return on the unrecovered costs. The October 2002 order increased annual revenues and operating costs by approximately $48.1 million, with their businessan insignificant impact to net earnings. We estimate that we are recovering approximately 96% of our incremental transmission related costs from our customers.
Fuel Cost Adjustment Procedure: We operate under a fuel cost adjustment clause for fuel and purchased power costs associated with the generation and delivery of electricity and purchase power contracts. In December 2000, we submitted an application software nor
with their infrastructureto the PSCW seeking a $51.4 million increase in rates on an expedited basis to recover increased costs of fuel and process control systems duringpurchased power in 2001. We revised our projected power supply cost shortfall in January 2001 to reflect updated natural gas cost projections for 2001. This update resulted in a request for an additional $11.1 million in 2001, bringing the transition intototal requested increase to $62.5 million. In February 2001, the Year 2000. PSCW issued an interim order authorizing a $37.8 million increase in rates for 2001 power supply costs. The PSCW issued a final order in May 2001, effective immediately, authorizing a total increase in rates of $58.7 million (or an additional $20.9 million over the interim order). Under the final order, we would have to refund to customers any over recoveries of fuel costs as a result of the surcharges authorized in 2001. During 2003, 2002 and 2001, we did not over recover fuel costs.
During the firstsecond quarter of 2000,
these teams are completing miscellaneous related clean-up work2002, the PSCW issued an order authorizing new fuel cost adjustment rules to be implemented in the Wisconsin retail jurisdiction. The order redefined fuel for fuel cost recovery. The new rules will not be effective for us until January 2006, the end of a five-year rate freeze associated with the WICOR Merger Order. Until such time, we will operate under an approved transaction mechanism similar to the old fuel cost adjustment procedure.
In February 2003, we completed a power supply cost analysis, which included updated natural gas cost projections for 2003. Based on this analysis, in February 2003 we determined that projected costs had deviated outside of a range prescribed by the PSCW when compared to fuel and disbanding. There are no known significant residual
Year 2000 matters outstanding atpurchased power costs authorized in current rates. As a result, we filed a request with the PSCW to increase Wisconsin Energy nor at
Wisconsin Electric.
During 1998retail electric rates by $55.1 million annually to recover the forecasted increases in fuel and 1999, Wisconsin Energy incurred a total of
$32.1 million of expenses for its Year 2000 program of which
$32.0 million is attributable to Wisconsin Electric. In
addition, Wisconsin Energy incurred capital expenditures of
$17.1 million during 1998 and 1999 for its Year 2000 program of
which $16.7 million is attributable to Wisconsin Electric. In
its May 1998 ratepurchased power costs. We received an interim order from the Public Service CommissionPSCW authorizing an increase of $55.1 million in electric rates in March 2003. In October 2003, the PSCW approved the fuel surcharge adjustment request authorizing an increase of $61.2 million for 2003, $6.1 million more than the interim order on an annualized basis. The final order reflects seven months of actual costs incurred plus changes in natural gas prices. The final order imposes an obligation on us to refu nd any fuel surcharge amounts that result in excess revenues as defined. We do not anticipate a refund will occur.
Gas Cost Recovery Mechanism: As a result of Wisconsin Energy's acquisition of WICOR, the PSCW required similar gas cost recovery mechanisms (GCRM) for our gas operations and for those of Wisconsin ElectricGas. Prior to the acquisition, we had receivedoperated under a modified dollar-for-dollar GCRM, which included after the fact prudence reviews by the PSCW. The majority of gas costs are passed through to customers under our existing gas cost recovery mechanism.
In February 2001, the PSCW issued an order to us authorizing a new GCRM. Under the new GCRM, gas costs are passed directly to customers through a purchased gas adjustment clause. However, we may increase or decrease earnings by up to approximately 2.5% of our total annual gas costs based upon how closely actual gas commodity and capacity costs compare to benchmarks established by the PSCW.
Commodity Price Risk Programs: Our gas operations have commodity risk management programs that have been approved by the PSCW. These programs hedge the cost of natural gas. As gas costs are recovered from customers, changes in the value of the financial instruments do not impact net income. These programs allow our gas operations to utilize option contracts to reduce market risk associated with fluctuations in the price of natural gas purchases and gas in storage. Under these programs, we have the ability to hedge up to 50% of our planned flowing gas and storage inventory volumes. The cost of applicable call and put option contracts, as well as gains or losses realized under the contracts, do not affect net income as they are fully recovered under the purchase gas adjustment clauses of our gas cost recovery mechanism. In addition, under these programs, we use derivative financial instruments to manage the cost of gas. The cost of these financial instruments, as well a s any gains or losses on the contracts, are subject to sharing under the incentive mechanisms. For information concerning commodity price risk as it applies to electric operations see "Commodity Price Risk" above.
Bad Debt Expense: In 2003, due to a combination of unusually high natural gas prices, the soft economy within our utility service territories and limited governmental assistance available to low-income customers, we have seen a significant increase in uncollectible accounts receivable. Because of this, we sent a letter to the PSCW in July 2003 requesting authority to defer for future rate recovery all residential bad debt write-offs during 2003 in excess of amounts included in current annual utility rates. The PSCW approved our request for deferral of 2003 uncollectible accounts receivable effective October 2003. We have deferred approximately $10.9 million in uncollectible accounts receivable as of December 31, 2003. Our annual residential bad debt expense in base rates is approximately $11.6 million.
Power the Future - Port Washington: The PSCW issued a written order on December 20, 2002 (the Port Order) granting Wisconsin Energy, We Power and us a CPCN to commence construction of the Port Washington Generating Station consisting of two 545-megawatt natural gas-based combined cycle generating units (Port Units 1 and 2) on the site of our existing Port Washington Power Plant. The Port Order also authorized Wisconsin Gas to proceed with the construction of a connecting natural gas lateral and ATC to construct required transmission system upgrades to serve the Port Washington Generating Station. As part of the proceedings, the PSCW approved the lease agreements and related documents under which we will staff, operate and maintain Port Units 1 and 2. Key financial terms of the leased generation contracts include:
After receiving approval for the Port Washington project, We Power entered into binding contracts with third parties to secure necessary engineering, design and construction services and major equipment components for Port Unit 1. In January 2003, we commenced demolition of two of our existing coal-based generating units on the Port Washington plant site to make room for the new facility. We Power began construction of the new facility in July 2003 and expects to complete construction by the end of the second quarter of 2005. We Power began collecting certain costs from us in the third quarter of 2003 as provided for in lease generation contracts that were signed in May 2003. In January 2003, we filed a request with the PSCW to defer costs for recovery in future rates. Wisconsin state law allows us to recover fully in our retail rates any portion of approximately $13a lease generation contract that the PSCW has approved and allocated to retail electric service. The PSCW approved the req uest in an open meeting in April 2003. (See "Limited Rate Adjustment Request" above for further information.) Before beginning construction of Port Unit 2, the order requires that an updated demand and energy forecast be filed with the PSCW to document market demand for additional generating capacity. In October 2003, we received approval from the FERC to transfer by long-term lease certain associated FERC jurisdictional assets from We Power to us.
In March 2003, an individual who participated in the Port Washington CPCN proceedings before the PSCW filed a petition for review with the Dane County Circuit Court requesting the Court to reverse and remand in its entirety the PSCW's December 2002 Port Order granting the CPCN. In January 2004, the Dane County Circuit Court issued a decision vacating the Port Order and remanding the matter to the PSCW to develop additional environmental analysis to justify its decision to perform only an Environmental Assessment, rather than a more comprehensive Environmental Impact Statement. The PSCW has begun a process to revise the Environmental Assessment consistent with the Court's decision. The PSCW has not made a decision on whether to appeal the Dane County Circuit Court decision.
Associated with construction of the Port Washington Generating Station, Wisconsin Gas received a Certificate of Authority from the PSCW in January 2003 authorizing construction of a 16.8 mile gas lateral that will connect the plant to the ANR Pipeline. It will also improve reliability for the natural gas distribution system in the area. Wisconsin Gas received a Chapter 30 wetland permit from the Wisconsin Department of Natural Resources (WDNR) in July 2003 approving construction of this lateral. The WDNR permitted construction of substantially the entire lateral consistent with the planned route previously approved by the PSCW, with certain exceptions. Wisconsin Gas has modified the planned route pursuant to the WDNR's request and received the necessary approvals for the modified route. Including the requested changes, the PSCW approved an updated cost estimate for the project of $41.5 million perin November 2003. Construction of the lateral is scheduled to begin in spring 2004 and to be completed by late 2004.
In July and August 2003, two landowners filed separate Petitions for Review in Ozaukee County Circuit Court challenging the Chapter 30 permit issued in July 2003 by the WDNR to Wisconsin Gas for the Port Washington Lateral natural gas pipeline. Further, in September 2003, one of the same landowners filed an additional Petition for Review in Ozaukee County Circuit Court challenging the WDNR's denial of a request for a contested case hearing on the issuance of the Chapter 30 permit. Wisconsin Energy has reached a settlement with the landowners and the Petitions for Review have been dismissed.
Power the Future - Elm Road: In November 2003, the PSCW issued an order (the Elm Road Order) granting Wisconsin Energy, We Power and us a CPCN to commence construction of two 615-megawatt coal-based units (the Elm Road units) to be located on the site of our existing Oak Creek Power Plant. The Elm Road Order concluded:
We expect that we will have co-owners for approximately 17% of the project. In December 2003, Wisconsin Energy submitted lease generation contracts for the Elm Road units to the PSCW for approval. We anticipate these lease generation contracts, when approved by the PSCW, will, under state law, be recovered fully in our retail rates for that portion which the PSCW allocates to retail electric service.
In March 2003, the City of Oak Creek reached a tentative environmental and economic agreement with us covering our expansion plans for new generation at the Oak Creek site. We have also agreed to follow the City of Oak Creek's conditional use permit for construction on the Oak Creek site.
Four appeals challenging the PSCW's Elm Road Order have been filed, which appeals have been consolidated in Dane County Circuit Court. We have filed a Notice of Appearance and Statement of Position in three of these proceedings requesting that the PSCW's decision be upheld and the petitions be dismissed. Also, two cases were filed in January 2004 in Dane County Circuit Court against the WDNR contending that the WDNR did not comply with state laws when it participated with the PSCW in preparing the Environmental Impact Statement for the Elm Road units. We have filed a Notice of Appearance and Statement of Position in these two proceedings requesting that the WDNR's decision be upheld and the petitions be dismissed.
In September 2003, several parties filed a request with the WDNR for a contested case hearing in connection with our application to the WDNR for a water discharge permit for the Elm Road units. That request was granted. In January 2004, the WDNR issued the air pollution control construction permit to us for the Elm Road units. In February 2004, parties submitted to the WDNR and to the Dane County Circuit Court requests for a contested case hearing and for judicial review, respectively, on the Elm Road units air pollution control construction permit. No proceedings on these permit hearings have been scheduled. We continue to work with the PSCW and the WDNR, and other agencies, to obtain all required permits and project approvals.
Michigan Jurisdiction
In mid-November 2000, we submitted an application to the MPSC requesting an electric retail rate increase of $3.7 million or 9.4% on an annualized basis. Hearings on this rate relief request were completed in June of 2001. In December of 2001, the MPSC issued an order reopening the case on a limited basis to incorporate the rate effects of the transfer of our transmission assets to ATC. Hearings were completed in April 2002. In September 2002, the MPSC issued its order authorizing an annual electric retail rate increase of $3.2 million effective immediately. On February 20, 2003, International Paper Corporation filed a claim of appeal from the MPSC's final order in Case No. U-12725, which awarded us a $3.2 million rate increase and changed the procedures by which we recover the cost of obtaining transmission services. We believe the MPSC will prevail in defense of its order.
Used Nuclear Fuel Rates: In March 2003, a group of consumer advocacy groups led by the Michigan Environmental Council (collectively, MEC) filed a Formal Complaint and Request to Open a Formal Proceeding (the Complaint) with the MPSC naming us and four other utilities operating in Michigan as defendants. MEC claims that we improperly collect revenues for used nuclear fuel storage and disposal. The amounts of these revenues claimed by MEC to be collected from Michigan customers is between $2.3 million and $11.4 million. MEC requested that the MPSC open a contested case and review the rate making mechanisms for these used nuclear fuel revenues, as well as prospective remedies including ratepayer reductions, long-term mechanisms to ensure that used nuclear fuel revenues do not become stranded and performance or surety bonds to protect Michigan ratepayers. In April 2003, the MPSC certified the Complaint. We filed a notice of intent to file claim with the Michigan Court of Claims and a motion to dismiss the Complaint with the MPSC in May 2003. MEC filed its answer to our motion to dismiss in July 2003. We believe that the revenues are properly collected as the collection of these revenues is authorized by the MPSC. The resolution of this matter is not expected to have a material impact on our financial condition or results of operations.
Electric Transmission Cost Recovery: Consistent with the requests in Wisconsin noted above, we filed a request with the MPSC in September 2001 for rate recovery of estimated 2002 transmission costs over 2001 levels in the amount of $0.3 million through the Michigan Power Supply Cost Recovery mechanism. In September 2002, the MPSC issued an order that authorized us to recover transmission costs in our Power Supply Cost Recovery clause prospectively. In April 2003, we received MPSC approval to defer costs associated with the start-up, formation of, and obtaining transmission service from ATC. As of December 31, 2003, we have deferred $1.2 million of start-up and network charges for the period January 2001 through September 2002 plus carrying costs.
ELECTRIC SYSTEM RELIABILITY
In response to customer demand for higher quality power required by modern digital equipment, we are evaluating and updating our electric distribution system as part of Wisconsin Energy'sPower the Future strategy. We are taking some immediate steps to reduce the likelihood of outages by upgrading substations and rebuilding lines to upgrade voltages and reliability. These improvements, along with better technology for analysis of our existing system, better resource management to speed restoration and improved customer communication, are near-term efforts to enhance our current electric distribution infrastructure. In the long-term, we are initiating a new distribution system design that is expected to consistently provide the level of reliability needed for a digital economy, using new technology, advanced communications and a two-way electricity flow. Implementation of Wisconsin Energy'sPower the Future strategy is subject to a number of state and federal regulatory approvals. For ad ditional information, see "Corporate Developments" above.
We had adequate capacity to meet all of our firm electric load obligations during 2003. All of our generating plants performed well during the 1998-1999 biennial
period.hottest periods of the summer and all power purchase commitments under firm contract were received. During this period, public appeals for conservation were not required, nor was there the need to interrupt or curtail service to non-firm customers who participate in load management programs in exchange for discounted rates. In addition,mid-May a flood at a hydroelectric dam owned by another utility forced a complete shutdown of our 618-megawatt Presque Isle Power Plant in Marquette, Michigan, which resulted in the rate order included associated capital
expenditurescurtailment of non-firm service to some customers, as well as brief interruptions to firm service. Deliveries were also curtailed on several occasions to certain special contract customers in the Upper Peninsula of Michigan because of transmission constraints in the area including an incident in December 2003. During the December incident, flow was inter rupted on the three main electric transmission lines owned by ATC and connecting Wisconsin to the Upper Peninsula of Michigan. This incident also resulted in short outages to some firm customers.
We expect to have adequate capacity to meet all of our firm load obligations during 2004. However, extremely hot weather, unexpected equipment failure or unavailability could require us to call upon load management procedures during 2004 as we have in past years.
ENVIRONMENTAL MATTERS
Consistent with other companies in the energy industry, we face potentially significant ongoing environmental compliance and remediation challenges related to current and past operations. Specific environmental issues affecting our utility operations include but are not limited to (1) air emissions such as carbon dioxide (CO2), sulfur dioxide (SO2), nitrogen oxide (NOx), small particulates and mercury, (2) disposal of combustion by-products such as fly ash, (3) remediation of former manufactured gas plant sites, (4) disposal of used nuclear fuel and (5) the eventual decommissioning of nuclear power plants.
We are currently pursuing a proactive strategy to manage our environmental issues including (1) substituting new and cleaner generating facilities for older facilities as part of Wisconsin Electric's Year 2000 program.
ACCOUNTING MATTERS
NEW PRONOUNCEMENTS: SeeEnergy'sPower the Future strategy, (2) developing additional sources of renewable electric energy supply, (3) participating in regional initiatives to reduce the emissions of NOx from our fossil fuel-based generating facilities, (4) entering into agreements with the WDNR and EPA to reduce emissions of SO2 and NOx from our coal-based power plants in Wisconsin and Michigan by more than 65% and mercury by 50% within 10 years, (5) recycling of ash from coal-based generating units and (6) the clean-up of former manufactured gas plant sites. The capital cost of implementing the EPA agreement is estimated to be approximately $600 million over 10 years. For further information concerning the associated consent decree, see "Note A - Summary of Significant
Accounting Policies"O -- Commitmen ts and Contingencies" in the Notes to Consolidated Financial Statements forin this report. For further information concerning new pronouncements issued bydisposal of used nuclear fuel and nuclear power plant decommissioning, see "Nuclear Operations" below and "Note E -- Nuclear Operations" in the Notes to Consolidated Financial AccountingStatements in this report, respectively.
National Ambient Air Quality Standards: In July 1997, the EPA revised the National Ambient Air Quality Standards Board during 1999 that are significantfor ozone and fine particulate matter. Legal challenges to the Company.
In February 2000,new standards are complete and the Financial Accounting Standards Board
released for comment an exposure draft of a Proposed Statement of
Financial Accounting Standards entitled "Accounting for
Obligations AssociatedEPA and the states are currently developing rules to implement them. Although specific emission control requirements are not yet defined, we believe that the revised standards will likely require significant reductions in SO2 and NOx emissions from coal-based generating facilities. We expect that reductions needed to achieve compliance with the
Ozone Non-Attainment Standards: The 1-hour ozone nonattainment rules currently being implemented by the state of Wisconsin and ozone transport rules implemented by the state of Michigan limit NOx emissions in phases over the next five years.
We currently expect to incur total annual operation and maintenance costs of $1-2 million during the period 2004 through 2005 to comply with the Michigan and Wisconsin rules. We believe that compliance with the NOx emission reductions requirements will substantially mitigate costs to comply with the EPA's 8-hour ozone National Ambient Air Quality Standards discussed above.
In January 2000, the PSCW approved our comprehensive plan to meet the Wisconsin regulations, permitting recovery in rates of NOx emission reduction costs over an accelerated 10-year recovery period.
Mercury Emission Control Rulemaking: As required by the 1990 amendments to the Federal Clean Air Act, the EPA issued a regulatory determination in December 2000 that utility mercury emissions should be regulated. The EPA issued draft rules in December 2003 and will issue final rules by December 2004. In June 2001, the WDNR independently developed draft mercury emission control rules that would affect electric utilities in Wisconsin. In May 2003, the WDNR released a final draft of the proposed rules, which include mercury emission reductions of 40% by 2010 and 80% by 2015. The rules provide for a multi-emission alternative approach for compliance, but it is not clear if this would apply to the second phase of reductions. In June 2003, the Natural Resources Board approved the rules and sent them to the Wisconsin Legislature. The Wisconsin Legislature rejected the rules during the third quarter of 2003. We are currently unable to predict the ultimate rules, if any, that will be developed and adopted by the EPA or the WDNR, nor are we able to predict the impacts, if any, that the EPA's and WDNR's mercury emission control rulemakings might have on the operations of our existing or Wisconsin Energy's anticipated coal-based generating facilities.
Manufactured Gas Plant Sites: We are voluntarily reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. For further information, see "Note O -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.
Ash Landfill Sites: We aggressively seek environmentally acceptable, beneficial uses for our combustion byproducts. For further information, see "Note O -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.
EPA Information Requests: We received requests for information from the EPA regional offices pursuant to Section 114(a) of the Clean Air Act. For further information, see "Note O -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.
LEGAL MATTERS
Giddings & Lewis Inc./City of West Allis Lawsuit: In July 1999, a jury issued a verdict against us awarding the plaintiffs $4.5 million in compensatory damages and $100 million in punitive damages in an action alleging that we had deposited contaminated wastes at two sites in West Allis, Wisconsin owned by the plaintiffs. In September 2001, the Wisconsin Court of Appeals overturned the $100 million punitive damage award and remanded the punitive damage claim to the lower court for retrial. In January 2002, the Wisconsin Supreme Court denied the plaintiffs' petition for review. Plaintiffs' claims were settled during 2002 for a total cost of $17.3 million. During 2003, we recovered settlements with various insurance carriers for approximately $11.2 million. We are continuing to pursue litigation against the remaining insurance carriers and other third parties. For further information, see "Note O -- Commitments and Contingencies" in the Not es to Consolidated Financial Statements in this report.
Presque Isle Flood: During the second quarter of 2003, our Presque Isle Power Plant was temporarily shut down due to the failure of a tangible long-
lived assethydroelectric reservoir dike which flooded Marquette, Michigan. We estimate that our fuel and purchased power costs increased by approximately $9 million due to the need for replacement power during the plant outage. These increased costs were included as a liability when incurred and to correspondingly
capitalize those costs as an increase in the carrying amountpart of the related long-lived asset. The capitalizedfuel surcharge request discussed above. In addition, we incurred approximately $13.5 million in damage to equipment and property. We are pursuing recovery from insurance carriers and other parties for the above costs. We are continuing to analyze and refine the costs would then
be depreciated to expense over the useful life of the asset. The
Proposed FAS would require that, subsequent to initial
measurement, an entity recognize changes in the amount of the
liability resulting from the passage of time and revisions to
either the timing or amount of estimated cash flows. The
Proposed FAS would be effective for financial statements issued
for fiscal years beginning after June 15, 2001.
The scope of the Proposed FAS would include decommissioning costs
for associated with this matter.
NUCLEAR OPERATIONS
Point Beach Nuclear Plant and may also apply to other
facilities of the Company. The Company has not yet assessed the
specific applicability and implications of the Proposed FAS.
With respect to decommissioning costs for Point Beach Nuclear
Plant, the Proposed FAS would result in Wisconsin Electric
recording a decommissioning liability and a corresponding asset
as required by the pronouncement. Currently, nuclear
decommissioning costs are accrued as depreciation expense over
the expected service lives of thePlant: We own two 518-megawatt electric generating units at Point Beach Nuclear Plant basedin Two Rivers, Wisconsin which are operated by Nuclear Management Company, LLC (NMC), a company owned by one of our affiliates and affiliates of other unaffiliated utilities. During 2003, 2002 and 2001, Point Beach provided 25% of our net electric energy supply. The United States Nuclear Regulatory Commission (NRC) operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2.
In July 2000, our senior management authorized the commencement of initial design work for the power uprate of both units at Point Beach. Subject to approval by the PSCW, the project could add approximately 90 megawatts of electrical output to Point Beach. We are currently evaluating the timing for implementation of the power uprate project. In February 2003, Point Beach completed an equipment upgrade, which resulted in a capacity increase of 7 megawatts per generating unit.
In 2003, NMC formed an operating license renewal team which completed a technical and economic evaluation of license renewal. Based upon the results of this evaluation and following approval by executive management and our Board of Directors in December 2003, NMC filed an external sinking fund method. Any
changesapplication in depreciation expense dueFebruary 2004 with the NRC to differing assumptions
betweenrenew the Proposed FASoperating licenses for both of Point Beach's nuclear reactors for an additional 20 years.
In February 2003, NRC issued an order establishing interim inspection requirements for reactor vessel heads at pressurized water reactors. The order formally establishes requirements for licensees to implement the provisions of NRC Bulletin 2002-02, "Reactor Pressure Vessel Head and thoseVessel Head Penetration Nozzle Inspection Programs," issued in August 2002. We plan to replace both reactor vessel heads during the 2005 refueling outages as an alternative to incurring the additional time and costs of these examinations and filed such an application with the PSCW in June 2003. In October 2003, the PSCW approved reactor vessel head replacement for Units 1 and 2 at Point Beach. Total capital expenditure to replace the two reactor vessel heads are estimated at approximately $54 million.
During 2002 and 2003, the NRC issued Final Significance Determination letters for two red (high safety significance) inspection findings regarding problems identified by Point Beach with the performance of the auxiliary feedwater system recirculation lines. During 2003 the NRC conducted a three-phase supplemental inspection of Point Beach in accordance with NRC Inspection Procedure 95003 to review corrective actions for the findings as well as the effectiveness of the corrective action, emergency preparedness and engineering programs.
The inspection results were presented at a public meeting in December 2003 and documented in a February 2004 NRC letter to NMC. The NRC determined that the plant is being operated in a manner that ensures public safety but also identified several performance issues in the areas of problem identification and resolution, emergency preparedness, electrical design basis calculation control and engineering-operations communication.
NMC responded to the supplemental inspection in February 2004 with specific commitments to address the NRC concerns, including revision of the Point Beach Excellence Plan. NRC will review the adequacy of the revised Excellence Plan and its implementation and will continue to provide increased oversight at Point Beach.
As a result of the September 11, 2001 terrorist attacks, NRC and the industry have been strengthening security at nuclear power plants. Security at Point Beach remains at a high level, with limited access to the site continuing. NMC has responded to NRC's February 2002 Order for interim safeguards and security compensatory measures. NMC has also responded to NRC orders regarding security of independent spent fuel storage installations, design
Used Nuclear Fuel Storage and Disposal: We are authorized to load and store sufficient dry fuel storage containers to allow Point Beach Units 1 and 2 to operate to the end of their current operating licenses but not to exceed the original 48-canister capacity of the dry fuel storage facility.
Temporary storage alternatives at Point Beach are necessary until the United States Department of Energy takes ownership of and permanently removes the used fuel as mandated by the Nuclear Waste Policy Act of 1982, as amended in 1987 (the Waste Act). Effective January 31, 1998, the Department of Energy failed to meet its contractual obligation to begin removing used fuel from Point Beach, a responsibility for which we have paid a total of $193.2 million over the life of the plant. The Department of Energy has indicated that it does not expect a permanent used fuel repository to be available any earlier than 2010. It is not possible, at this time, to predict with certainty when the Department of Energy will actually begin accepting used nuclear fuel.
On August 13, 2000, the United States Court of Appeals for the Federal Circuit ruled in a lawsuit brought by Maine Yankee and Northern States Power Company that the Department of Energy's failure to begin performance by January 31, 1998 constituted a breach of the Standard Contract, providing clear grounds for filing complaints in the Court of Federal Claims. Consequently, we filed a complaint on November 16, 2000 against the Department of Energy in the Court of Federal Claims. The matter is pending. As of December 2003, we have incurred damages in excess of $70 million, which we seek to recover from the Department of Energy. Damages continue to accrue, and, accordingly, we expect to seek recovery of our damages in this lawsuit.
In January 2002, as required by the Public Service CommissionWaste Act, the Secretary of Energy notified the Governor of Nevada and the Nevada Legislature that he intended to recommend to the President that the Yucca Mountain site is scientifically sound and suitable for development as the nation's long-term geological repository for used nuclear fuel. In February 2002, the Secretary provided the formal recommendation to the President. In a February 2002 letter to Congress, the President expressed his support for the development of the Yucca Mountain site. The letter also affirmed the need for a permanent repository by supporting the need for nuclear power and its cost competitiveness, as well as acknowledging that successful completion of the repository program will redeem the clear Federal legal obligation set forth in the Waste Act. In April 2002, the Nevada Governor announced the state's official disapproval of the President's recommendation. In May 2002, the U.S. House of Representatives endorsed the Pres ident's recommendation to develop the Yucca Mountain site as the nation's long-term geological repository for used nuclear fuel overriding the state of Nevada's objections. In July 2002, the U.S. Senate approved Yucca Mountain as such a repository. The President signed the resolution in July 2002 which cleared the way for the Department of Energy to begin preparation of the application to the NRC for a license to design and build the repository.
INDUSTRY RESTRUCTURING AND COMPETITION
Electric Utility Industry
Across the United States, electric industry restructuring progress has generally stalled subsequent to the California price and supply problems in early 2001. The wide-spread outage in the eastern United States in August of 2003 further slowed the pace of electric industry restructuring. FERC continues to strongly support large Regional Transmission Organizations (RTOs), which will affect the structure of the wholesale market. The timeline for restructuring and retail access continues to be stretched out and it is uncertain when retail access will happen in Wisconsin. Late in 2003 a federal energy bill containing changes that would impact the electric utility industry passed the U. S. House of Representatives, however it was not passed by the Senate. Major issues in industry restructuring like deregulating existing generation, unbundling transmission and generation from distribution costs, implementing RTOs, and market power mitigation received little attention in 2003. We continue to focus on infra structure issues through Wisconsin Energy'sPower the Future growth strategy.
Restructuring in Wisconsin: Electric utility revenues in Wisconsin are regulated by the PSCW. Due to many factors, including relatively competitive electric rates charged by the state's electric utilities, Wisconsin is proceeding with restructuring of the electric utility industry at a much slower pace than many other states in the
The PSCW continues to maintain the position that the question of whether to implement electric retail competition in Wisconsin should ultimately be decided by the Wisconsin Legislature. No such legislation has been introduced in Wisconsin to date.
Restructuring in Michigan: Electric utility revenues in Michigan are regulated by the MPSC. In June 2000, the Governor of Michigan signed the "Customer Choice and Electric Reliability Act" into law empowering the MPSC to implement electric retail access in Michigan. The new law provides that as of January 1, 2002 all Michigan retail customers of investor-owned utilities have the ability to choose their electric power producer. The Michigan Retail Access law was characterized by the Michigan Governor as "Choice for those who want it and protection for those who need it."
As of January 1, 2002, our Michigan retail customers were allowed to remain with their regulated utility at regulated rates or choose an alternative electric supplier to provide power supply service. We have maintained our generation capacity and distribution assets and provide regulated service as we have in the past. We continue providing distribution and customer service functions regardless of the customer's power supplier.
Competition and customer switching to alternative suppliers in our service territory in Michigan has been limited. With the exception of one general inquiry, no alternate supplier activity has occurred in our service territory in Michigan, reflecting the small market area, our competitive regulated power supply prices and a lack of interest in general in the Upper Peninsula of Michigan as a market for alternative electric suppliers.
Restructuring in Illinois: In 1999, the state of Illinois passed legislation that introduced retail electric choice for large customers and introduced choice for all retail customers in May 2002. This legislation is not expected to have a material impact on our business. We have one wholesale customer in Illinois, the City of Geneva, whose contract is scheduled to expire on December 31, 2005.
Electric Transmission
American Transmission Company: Effective January 1, 2001, we transferred all of our electric utility transmission assets to ATC in exchange for an ownership interest in this new company. Joining ATC is consistent with the FERC's Order No. 2000, intended to foster competition, efficiency and reliability in the electric industry.
ATC is regulated by the FERC for all rate terms and conditions of service and is a transmission-owning member of the Midwest ISO. As of February 1, 2002, operational control of ATC's transmission system was transferred to the Midwest ISO and we became a non-transmission owning member and customer of the Midwest ISO.
Midwest ISO: In connection with its role as a FERC-approved RTO, the Midwest ISO is in the process of developing a bid-based energy market, which is currently proposed to be materialimplemented on December 1, 2004. In connection with the development of the energy market, the Midwest ISO is developing a market-based platform for valuing transmission congestion premised upon the locational marginal pricing (LMP) system that has been implemented in certain northeastern and would most likelymid-atlantic states. It is expected that the LMP system will include the ability to mitigate or eliminate congestion costs through the use of Financial Transmission Rights (FTR) which will be deferrableinitially allocated by the Midwest ISO and, recoverableit is anticipated, will be available through an auction-based system run by the Midwest ISO. It is unknown at this time how and in rates. For additional informationwhat quantity FTRs will be initially allocated by the Midwest ISO and, what, if any, financial impact the LMP congestion pricing system might have on us.
In the Midwest ISO, base transmission costs are currently being paid by load serving entities (LSEs) located in the service territories of decommissioning Point Beach, seeeach Midwest ISO transmission owner in proportion to the load served by the LSE versus the total load of the service territory. This "license plate" rate design is scheduled to be replaced after a six-year phase-in of rates in Midwest ISO. It is unknown at this point what rate design will replace the license plate rate design or the impact that any new rate design will have on our results of operations or financial position.
Lost Revenue Charges: The FERC permits transmission owning utilities that have not joined an RTO to propose a charge to recover revenues that would be lost as a result of RTO membership. These lost revenues result from FERC's requirement that, within an RTO and for transmission between the systems operated by the Midwest ISO and PJM Interconnection, LLC, entities that currently pay a transmission charge to move energy through or out of a neighboring transmission system will no longer pay this charge to the neighboring transmission system owner or operator upon the neighboring transmission system owner or operator joining an RTO.
In December 2003, we, along with other entities, reached an agreement with the Midwest ISO and a consortium of companies referred to as the Grid America Companies on a lost revenue payment resulting from the Grid America Companies' decision to place their transmission facilities under the operational control of the Midwest ISO. Discussions as to appropriate lost revenue charges are currently ongoing with regard to several entities' decisions, including that of Commonwealth Edison Company, a transmission provider to us, to place their transmission facilities under the control of PJM.
Natural Gas Utility Industry
Restructuring in Wisconsin: The PSCW has instituted generic proceedings to consider how its regulation of gas distribution utilities should change to reflect the changing competitive environment in the natural gas industry. To date, the PSCW has made a policy decision to deregulate the sale of natural gas in customer segments with workably competitive market choices and has adopted standards for transactions between a utility and its gas marketing affiliates. However, work on deregulation of the gas distribution industry by the PSCW is presently on hold. Currently, we are unable to predict the impact of potential future deregulation on our results of operations or financial position.
ACCOUNTING DEVELOPMENTS
New Pronouncements: In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation 46, Consolidation of Variable Interest Entities (FIN 46). This standard requires an enterprise that is the primary beneficiary of a variable interest entity to consolidate that entity. The Interpretation was applied to any existing interests in variable interest entities beginning in the third quarter of 2003. In October 2003, the FASB deferred the adoption of FIN 46 for entities commonly referred to as special-purpose entities to the first reporting period ending after December 15, 2003. See "Note E - Nuclear Operations"B -- Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements.
REGULATORY ACCOUNTING: Wisconsin Energy's applicable utility
subsidiaries, Wisconsin ElectricStatements for additional information. In December 2003, the FASB revised the effective date for all other types of entities to financial statements for periods after March 15, 2004. While we are continuing to evaluate the impact of the application o f these new rules, we do not expect adoption of the final phase of Interpretation 46 to have a significant impact on our balance sheets or on our results of operations.
The FASB issued FASB Staff Position No. SFAS 106-1, "Accounting and Edison Sault Electric
Company, operate under electric utility rates which are subjectDisclosure Requirements Related to the approvalMedicare Prescription Drug, Improvement and Modernization Act of 2003", (FSP 106-1) that allows sponsors to elect to defer recognition of the Public Service Commissioneffects of Wisconsin,
the Michigan Public Service CommissionAct. In accordance with FSP 106-1, we elected to defer recognition of the effects of the Act. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information. See "Note K -- Benefits" in the Federal Energy
Notes to Consolidated Financial Statements in this report for more information.
CRITICAL ACCOUNTING ESTIMATES
Preparation of financial statements and related disclosures in compliance with generally accepted accounting principles (GAAP) requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies necessarily involves judgments regarding future events, including the likelihood of success of particular projects, legal and regulatory challenges and anticipated recovery of costs. These judgments, in and of themselves, could materially impact the financial statements and disclosures based on varying assumptions. In addition, the financial and operating environment also may have a significant effect, not only on the operation of our business, but on our results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies applied have not changed.
The following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments.
Regulatory Commission, and naturalAccounting: Our electric, gas and steam utilityoperations operate under rates that are subject to the approval of the Public Service Commission
of Wisconsin (see "Ratesestablished by state and Regulatory Matters" above). Such
ratesfederal regulatory commissions, which are designed to recover the cost of service and provide a reasonable return to investors. Developing competitive pressures in the utility industry may result in future utility prices which are based upon factors other than the traditional original cost of investment. In such athis situation, continued deferral of certain regulatory asset and liability amounts on the utility's'our books, may no longer be appropriate as allowed under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation ("FAS 71")(SFAS 71), may no longer be appropriate and the unamortized regulatory assets net of the regulatory liabilities would be recorded as an extraordinary after-tax non-cash charge to earnings. As discussed above under "Ratesof December 31, 2003, we had $443.4 million in regulatory assets and Regulatory Matters," the
Michigan Public Service Commission issued a five-year
experimental price cap order for Edison Sault's electric rates
that expires$561.7 million in the year 2000. This order allows Edison Sault to
seek rate relief for costs incurred under extraordinary
circumstances.
Because of Edison Sault's price cap order and other potential
changes in the industry, the Companyregulatory liabilities. We continually reviewsreview the applicability of FASSFAS 71 and hashave determined that it is currently appropriate to continue following FASSFAS 71. At this time, the
Company is unable to predict whether any adjustments to
regulatory assets and liabilities will occur in the future at
either Wisconsin Electric or at Edison Sault. See "Note A --- Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During
Pension and Other Post-retirement Benefits: Our reported costs of providing non-contributory defined pension benefits (described in "Note K -- Benefits" in the threeNotes to Consolidated Financial Statements) are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience. Pension costs are impacted by actual employee demographics (including age, compensation levels, and employment periods), the level of contributions made to plans and earnings on plan assets. Changes made to the provisions of the plans may also impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.
In accordance with SFAS 87, Employers' Accounting for Pensions (SFAS 87), changes in pension obligations associated with these factors may not be immediately recognized as pension costs on the income statement but generally are recognized in future years endedover the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants.
As of December 31, 1999, total cash
provided by operating activities was $1.2 billion at Wisconsin
Energy2002, approximately 72% of our pension plan assets were invested in equity securities. Remaining plan assets were invested primarily in corporate and at Wisconsin Electric. Aftergovernment bonds. During 2002, the paymentfunded status of dividends, internal sources fundedour plans fell significantly due to the following percentdecline in the value of Wisconsin Energy'splan investments and Wisconsin Electric's total construction
expenditures and power plant acquisitions duringdue to the three years
endedincrease in the benefit obligation resulting from a lower discount rate. Our pension plans went from a $50 million underfunded status as of December 31, 1999.
As of December 31, 2003, approximately 76% of our pension plan assets were invested in equity securities. Remaining plan assets were invested primarily in corporate and government bonds. During 2003, the funded status of our plans recovered from the 2002 levels but they still remain $237 million underfunded. As a result, we recorded a minimum pension liability of $113.8 million in December 2003. We recorded a corresponding $70.4 million regulatory asset under SFAS 71 during 2003 (see "Note A -- Summary of Significant Accounting
The following chart reflects pension plan sensitivities associated with changes in certain actuarial assumptions by the indicated percentage. Each sensitivity reflects a change to the given assumption, holding all other assumptions constant for a discussionour pension plans.
| Impact on |
(Millions of Dollars) | |
0.5% decrease in discount rate | $2.8 |
0.5% decrease in rate of return on plan assets | $3.6 |
(a) | The inverse of the change in the actuarial assumption may be expected to have an approximately similar impact in the opposite direction. |
In addition to pension plans, we maintain other post-retirement benefit plans, which provide health and life insurance benefits for retired employees (described in "Note K -- Benefits" in the Notes to Consolidated Financial Statements). We account for these plans in accordance with Statement of various limitationsFinancial Accounting Standards No. 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions (SFAS 106). Our reported costs of providing these post-retirement benefits are dependent upon numerous factors resulting from actual plan experience including employee demographics (age and compensation levels), our contributions to the plans, earnings on plan assets and health care cost trends. Changes made to the abilityprovisions of Wisconsin Electric to
transfer funds to Wisconsin Energy.
CAPITAL REQUIREMENTS
CONSTRUCTION EXPENDITURES: Excluding the WICOR acquisition,plans may also impact current and future post-retirement benefit costs. Other post-retirement benefit costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the Company's total construction budget for 2000 is approximately
$660 million, including $412 million for Wisconsin Electricdiscount rates used in determining the post-retirement benefit obligation and $248 million for Wisconsin Energy's non-utility subsidiariespost-retirement costs. Our other post-retirement benefit plan assets are primarily made up of equity and fixed income investments. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased other post-retirement costs in future periods. Similar to accounting for Edison Sault.
Wisconsin Electric's $412 millionpension plans, the regulators of construction expenditures
during 2000 include additionsour utility operations have adopted SFAS 106 for rate making purposes.
The following chart reflects other post-retirement benefit plan sensitivities associated with changes in certain actuarial assumptions by the indicated percentage. Each sensitivity reflects a change to and/or improvementsthe given assumption, holding all other assumptions constant for our other post-retirement plans.
| Impact on | |
(Millions of Dollars) | ||
0.5% decrease in discount rate | $2.2 | |
0.5% decrease in health care cost trend rate | ($1.4) | |
0.5% decrease in rate of return on plan assets | $0.3 |
(a) | The inverse of the change in the actuarial assumption may be expected to have an approximately similar impact in the opposite direction. |
Unbilled Revenues: We record utility operating revenues when energy is delivered to our customers. However, the determination of energy sales to individual customers is based upon the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of their last meter reading are estimated and corresponding unbilled revenues are calculated. This unbilled
Asset Retirement Obligations: Effective January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, Accounting for Edison Sault,Asset Retirement Obligations (SFAS 143), which requires entities to recognize the estimated fair value of legal liabilities for asset retirements in the period in which they are incurred. SFAS 143 applies primarily to decommissioning costs for Point Beach Nuclear Plant. Using a discounted future cash flow methodology, we estimated that our nuclear asset retirement obligation was approximately $177$673 million at January 1, 2003. Calculation of this asset retirement obligation is for non-utility energy operations. The remaining
capital budget is primarily for non-utility real estate
development and investmentbased upon projected decommissioning costs calculated by an independent decommissioning consulting firm as well as recycling technology
activities.
In September 1999,several significant assumptions including the City Counciltiming of Detroit, Michigan, awarded
a 15 year contractfuture cash flows, future inflation rates, the discount rate applied to Minergy Detroit, LLC, a wholly owned
subsidiary of Minergy Corp. which is in turn a wholly owned
subsidiary of Wisconsin Energy, to recycle 500 to 600 dry tons
per day of the city's wastewater solids into a glass aggregate
construction product used in the manufacture of floor tiles,
roofing shingle granules, sand blast gritfuture cash flows and other construction
materials. Minergy Detroit, LLC expects to begin construction of
a proposed $115 million recycling facility project in the Delray
area of Detroit in the fourth quarter of 2000 with startup
anticipated in 2002. The proposed facility would replace
existing wastewater solids incinerators operated by Detroit's
Water and Sewer Department. The 15 year contract will be
contingent upon obtaining proper performance bonding and
financing as well as upon reaching agreement with the City of
Detroit on the results of a series of post-startup tests of the
proposed recycling facility. Minergy Detroit, LLC has not yet
identified specific financing plans for the facility.
In November 1999, Calumet Energy Team, LLC signed two agreements
with the City of Chicago, Illinois. The first provides for the
lease, purchase and redevelopment of land for the purpose of
constructing a 308-megawatt natural gas-fired peaking power
plant. The second is a ten year capacity reservation agreement
for 50 megawattsan 85% probability of plant capacity. Wisvest Corporation,relicensing. Assuming the following changes in key assumptions and holding all other assumptions constant, we estimate that our nuclear asset retirement obligation at January 1, 2003 would have changed by the following amounts:
Change in Assumption | Change in Liability | |
(Millions of Dollars) | ||
1% increase in inflation rate | $226 | |
1% decrease in inflation rate | ($167) | |
0% probability of license extension | $138 | |
100% probability of license extension | ($24) |
At January 1, 2003, we were unable to identify a wholly owned subsidiaryviable market for or third party who would be willing to assume this liability. Accordingly, we used a market-risk premium of Wisconsin Energy, has an 82% ownership
interest in Calumet Energy Team, LLC. Permit approvalszero when measuring our nuclear asset retirement obligation. We estimate that for this
project are expected toeach 1% increment that would be received in the spring of 2000 with
construction to begin thereafter. The facility is anticipated to
haveincluded as a total project cost ofmarket-risk premium, our nuclear asset retirement obligation would increase by approximately $140 million with
startup anticipated in the summer of 2001. While no specific
plans have been developed, Calumet Energy Team, LLC expects to
obtain project financing for the facility with remaining amounts
to be funded by equity participants in the project.
Wisconsin Energy intends to obtain the cash needed for the
$1.2 billion acquisition of WICOR, Inc. through the issuance of
commercial paper. Wisconsin Energy is arranging a $1.0 billion
364-day bank back-up credit facility and a $0.5 billion 3-year
bank back-up credit facility to provide credit support for the
issuance of Wisconsin Energy's commercial paper. In addition,
Wisconsin Energy will assume approximately $300 million of WICOR
debt. $7.1 million.
For additional information concerning adoption of SFAS 143 and our estimated nuclear asset retirement obligation, see "Note B - Mergers &
Acquisitions"-- Recent Accounting Pronouncements" and "Note E -- Nuclear Operations" in Wisconsin Energy'sthe Notes to Consolidated Financial Statements.
Due to changing environmental and other regulations that
especially impact the Company's utility and non-utility energy
segments, future long-term capital requirements may vary from
recent capital requirements. For example, see "Environmental
Matters" and "Industry Restructuring and Competition" above in
"Factors Affecting Results of Operations" for a discussion of the
United States Environmental Protection Agency's and the state of
Connecticut's evolving air quality standards and for a discussion
of the evolving utility industry, respectively. Wisconsin
Electric currently expects to spend approximately $300 million to
$400 million for new construction in each of the next five years.
Wisconsin Energy is reviewing non-utility growth opportunities
and strategic dispositions on an ongoing basis. The Company may
make further investments and/or acquisitions from time to time in
projects or entities that are expected to provide a satisfactory
return on the investment. Currently, the Company is conducting a
strategic assessment of its portfolio of non-utility assets. The
Company may sell all or a portion of Wispark and Witech and a
portion of its ownership interest in certain Wisvest investments.
As a result, the Company expects that its future long-term
capital requirements as well as its capital resources may
continue to vary from historical levels.
CAPITAL RESOURCES
Wisconsin Energy's and Wisconsin Electric's capitalization
structures at December 31 were:
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain forward-looking statements made by us or on behalf of
Wisconsin Energy or Wisconsin Electric. Suchour behalf. These statements are based upon management's current expectations and are subject to risks and uncertainties that could cause Wisconsin Energy's or
Wisconsin Electric'sour actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "forecast," "objective," "plan," "possible," "potential," "project" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with suchthese statements, factors that could cause Wisconsin Energy's or Wisconsin Electric'sour actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect our future results of operations and financial condition include, among others, the following:
OPERATING, FINANCIAL AND INDUSTRY FACTORS
*
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See "Factors Affecting Results, of Operations -Liquidity and Capital Resources -- Market Risks and Other Significant Risks" in Item 7,7. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report for information concerning potential market risks to which Wisconsin
Energy and Wisconsin Electricwe are exposed due to changes in
interest rates, the return on marketable equity securities and
the market price of electricity, fuel to generate electricity and
gas to supply Wisconsin Electric's gas operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |||||||||
WISCONSIN ELECTRIC POWER COMPANY | |||||||||
CONSOLIDATED INCOME STATEMENTS | |||||||||
Year Ended December 31 | |||||||||
2003 | 2002 | 2001 | |||||||
(Millions of Dollars) | |||||||||
Operating Revenues | |||||||||
Electric | $1,986.4 | $1,884.6 | $1,839.8 | ||||||
Gas | 513.0 | 389.8 | 457.1 | ||||||
Steam | 22.5 | 21.5 | 21.8 | ||||||
Total Operating Revenues | 2,521.9 | 2,295.9 | 2,318.7 | ||||||
Operating Expenses | |||||||||
Fuel and purchased power | 562.4 | 493.9 | 509.7 | ||||||
Cost of gas sold | 355.4 | 240.8 | 319.0 | ||||||
Other operation and maintenance | 784.0 | 736.3 | 681.9 | ||||||
Depreciation, decommissioning and amortization | 276.2 | 267.9 | 264.3 | ||||||
Property and revenue taxes | 72.6 | 71.7 | 67.8 | ||||||
Total Operating Expenses | 2,050.6 | 1,810.6 | 1,842.7 | ||||||
Operating Income | 471.3 | 485.3 | 476.0 | ||||||
Other Income and Deductions | |||||||||
Interest income | 0.6 | 2.1 | 13.2 | ||||||
Equity in earnings of unconsolidated affiliates | 22.8 | 20.4 | 20.6 | ||||||
AFUDC-equity | 2.4 | 3.5 | 1.7 | ||||||
Other, net | 5.7 | (1.7) | 0.5 | ||||||
Total Other Income and Deductions | 31.5 | 24.3 | 36.0 | ||||||
Financing Costs | |||||||||
Interest expense | 92.6 | 94.9 | 109.7 | ||||||
AFUDC-debt | (1.4) | (2.2) | (0.8) | ||||||
Total Financing Costs | 91.2 | 92.7 | 108.9 | ||||||
Income Before Income Taxes | 411.6 | 416.9 | 403.1 | ||||||
Income Taxes | 154.9 | 157.7 | 156.6 | ||||||
Net Income | 256.7 | 259.2 | 246.5 | ||||||
Preferred Stock Dividend Requirement | 1.2 | 1.2 | 1.2 | ||||||
Earnings Available for Common | |||||||||
Stockholder | $255.5 | $258.0 | $245.3 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | |||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||
Year Ended December 31 | ||||||||||
2003 | 2002 | 2001 | ||||||||
(Millions of Dollars) | ||||||||||
Operating Activities | ||||||||||
Net income | $256.7 | $259.2 | $246.5 | |||||||
Reconciliation to cash | ||||||||||
Depreciation, decommissioning and amortization | 301.9 | 282.3 | 277.6 | |||||||
Nuclear fuel expense amortization | 25.3 | 27.3 | 32.3 | |||||||
Equity in earnings of unconsolidated affiliates | (22.8) | (20.4) | (20.6) | |||||||
Deferred income taxes and investment tax credits, net | (1.7) | (31.9) | (32.9) | |||||||
Accrued income taxes, net | (6.0) | 37.2 | 46.5 | |||||||
Change in - Accounts receivable and accrued revenues | 5.3 | (26.1) | 17.0 | |||||||
Other accounts receivable | - | 116.4 | - | |||||||
Inventories | (31.7) | (17.4) | (29.7) | |||||||
Other current assets | (23.2) | 2.0 | 27.0 | |||||||
Accounts payable | (8.7) | (20.0) | - | |||||||
Other current liabilities | 7.5 | 22.3 | (48.2) | |||||||
Other | 11.6 | 25.4 | 21.6 | |||||||
Cash Provided by Operating Activities | 514.2 | 656.3 | 537.1 | |||||||
Investing Activities | ||||||||||
Capital expenditures | (343.7) | (365.7) | (377.0) | |||||||
Return of investment from ATC | - | - | 105.2 | |||||||
Nuclear fuel | (38.3) | (20.7) | (9.9) | |||||||
Nuclear decommissioning funding | (17.6) | (17.6) | (17.6) | |||||||
Other | (3.2) | (12.1) | (2.5) | |||||||
Cash Used in Investing Activities | (402.8) | (416.1) | (301.8) | |||||||
Financing Activities | ||||||||||
Dividends paid on common stock | (179.6) | (179.6) | (130.0) | |||||||
Dividends paid on preferred stock | (1.2) | (1.2) | (1.2) | |||||||
Issuance of long-term debt | 655.2 | 36.0 | 22.0 | |||||||
Retirement of long-term debt | (522.2) | (285.8) | (30.8) | |||||||
Change in short-term debt | (38.9) | 182.4 | (84.6) | |||||||
Other, net | (18.0) | - | - | |||||||
Cash Used in Financing Activities | (104.7) | (248.2) | (224.6) | |||||||
Change in Cash and Cash Equivalents | 6.7 | (8.0) | 10.7 | |||||||
Cash and Cash Equivalents at Beginning of Year | 13.3 | 21.3 | 10.6 | |||||||
Cash and Cash Equivalents at End of Year | $20.0 | $13.3 | $21.3 | |||||||
Supplemental Information - Cash Paid For | ||||||||||
Interest (net of amount capitalized) | $112.1 | $114.8 | $131.7 | |||||||
Income taxes (net of refunds) | $148.7 | $124.1 | $142.1 | |||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | ||||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||
December 31 | ||||||||
ASSETS | ||||||||
2003 | 2002 | |||||||
(Millions of Dollars) | ||||||||
Property, Plant and Equipment | ||||||||
Electric | $5,726.6 | $5,297.2 | ||||||
Gas | 671.0 | 623.5 | ||||||
Steam | 69.7 | 68.5 | ||||||
Common | 299.0 | 346.5 | ||||||
Other | 52.8 | 31.0 | ||||||
6,819.1 | 6,366.7 | |||||||
Accumulated depreciation | (2,571.4) | (2,389.8) | ||||||
4,247.7 | 3,976.9 | |||||||
Construction work in progress | 68.3 | 188.8 | ||||||
Leased facilities, net | 104.6 | 110.3 | ||||||
Nuclear fuel, net | 78.4 | 63.2 | ||||||
Net Property, Plant and Equipment | 4,499.0 | 4,339.2 | ||||||
Investments | ||||||||
Nuclear decommissioning trust fund | 674.4 | 550.0 | ||||||
Investment in ATC | 136.2 | 130.9 | ||||||
Other | 0.7 | 6.3 | ||||||
Total Investments | 811.3 | 687.2 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | 20.0 | 13.3 | ||||||
Accounts receivable, net of allowance for | ||||||||
doubtful accounts of $26.6 and $30.2 | 239.3 | 246.6 | ||||||
Accrued revenues | 149.8 | 147.8 | ||||||
Materials, supplies and inventories | 276.2 | 244.5 | ||||||
Prepayments | 95.6 | 72.4 | ||||||
Deferred income taxes - current | 42.4 | 38.3 | ||||||
Other | 3.6 | 3.6 | ||||||
Total Current Assets | 826.9 | 766.5 | ||||||
Deferred Charges and Other Assets | ||||||||
Regulatory assets | 443.4 | 457.9 | ||||||
Other | 64.0 | 34.3 | ||||||
Total Deferred Charges and Other Assets | 507.4 | 492.2 | ||||||
Total Assets | $6,644.6 | $6,285.1 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | ||||||||
WISCONSIN ELECTRIC POWER COMPANY | |||||||||
CONSOLIDATED BALANCE SHEETS | |||||||||
December 31 | |||||||||
CAPITALIZATION AND LIABILITIES | |||||||||
2003 | 2002 | ||||||||
(Millions of Dollars) | |||||||||
Capitalization (See Statements of Capitalization) | |||||||||
Common equity | $2,131.9 | $2,049.9 | |||||||
Preferred stock | 30.4 | 30.4 | |||||||
Long-term debt | 1,435.3 | 1,432.4 | |||||||
Total Capitalization | 3,597.6 | 3,512.7 | |||||||
Current Liabilities | |||||||||
Long-term debt due currently | 164.2 | 27.0 | |||||||
Short-term debt | 315.9 | 354.8 | |||||||
Accounts payable | 184.9 | 193.6 | |||||||
Payroll and vacation accrued | 58.1 | 62.1 | |||||||
Taxes accrued - income and other | 103.7 | 110.1 | |||||||
Interest accrued | 12.2 | 16.5 | |||||||
Other | 91.1 | 74.9 | |||||||
Total Current Liabilities | 930.1 | 839.0 | |||||||
Deferred Credits and Other Liabilities | |||||||||
Asset retirement obligations | 732.0 | - | |||||||
Regulatory liabilities | 561.7 | 156.9 | |||||||
Cost of removal obligations | - | 954.2 | |||||||
Deferred income taxes - long-term | 456.4 | 430.5 | |||||||
Minimum pension liability | 113.8 | 163.6 | |||||||
Accumulated deferred investment tax credits | 61.4 | 65.8 | |||||||
Other | 191.6 | 162.4 | |||||||
Total Deferred Credits and Other Liabilities | 2,116.9 | 1,933.4 | |||||||
Commitments and Contingencies (Note O) | - | - | |||||||
Total Capitalization and Liabilities | $6,644.6 | $6,285.1 | |||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | |||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||||
CONSOLIDATED STATEMENTS OF CAPITALIZATION | ||||||||||
December 31 | ||||||||||
2003 | 2002 | |||||||||
(Millions of Dollars) | ||||||||||
Common Equity (See Consolidated Statements of Common Equity) | ||||||||||
Common stock - $10 par value; authorized | ||||||||||
65,000,000 shares; outstanding - 33,289,327 shares | $332.9 | $332.9 | ||||||||
Other paid in capital | 532.4 | 530.7 | ||||||||
Retained earnings | 1,270.8 | 1,194.9 | ||||||||
Accumulated other comprehensive income (loss) | (4.2) | (8.6) | ||||||||
Total Common Equity | 2,131.9 | 2,049.9 | ||||||||
Preferred Stock | ||||||||||
Six Per Cent. Preferred Stock - $100 par value; | ||||||||||
authorized 45,000 shares; outstanding - 44,498 shares | 4.4 | 4.4 | ||||||||
Serial preferred stock - | ||||||||||
$100 par value; authorized 2,286,500 shares; 3.60% Series | ||||||||||
redeemable at $101 per share; outstanding - 260,000 shares | 26.0 | 26.0 | ||||||||
$25 par value; authorized 5,000,000 shares; none outstanding | - | - | ||||||||
Total Preferred Stock | 30.4 | 30.4 | ||||||||
Long-Term Debt | ||||||||||
First mortgage bonds | 7-1/4% due 2004 | 140.0 | 140.0 | |||||||
7-1/8% due 2016 | - | 100.0 | ||||||||
6.85% due 2021 | - | 9.0 | ||||||||
7-3/4% due 2023 | - | 100.0 | ||||||||
7.05% due 2024 | - | 60.0 | ||||||||
7.70% due 2027 | - | 200.0 | ||||||||
Debentures (unsecured) | 6-5/8% due 2006 | 200.0 | 200.0 | |||||||
9.47% due 2006 | 2.1 | 2.8 | ||||||||
8-1/4% due 2022 | - | 25.0 | ||||||||
6-1/2% due 2028 | 150.0 | 150.0 | ||||||||
6-7/8% due 2095 | 100.0 | 100.0 | ||||||||
4.50% due 2013 | 300.0 | - | ||||||||
5.625% due 2033 | 335.0 | - | ||||||||
Notes (secured, nonrecourse) | 2% stated rate due 2011 | 1.3 | 1.3 | |||||||
4.81% effective rate due 2030 | 2.0 | - | ||||||||
Notes (unsecured) | 6.36% effective rate due 2006 | 3.6 | 4.8 | |||||||
1.52% variable rate due 2006 (a) | 1.0 | 1.0 | ||||||||
1.52% variable rate due 2015 (a) | 17.4 | 17.4 | ||||||||
1.25% variable rate due 2016 (a) | 67.0 | 67.0 | ||||||||
1.52% variable rate due 2030 (a) | 80.0 | 80.0 | ||||||||
Obligations under capital leases | 213.2 | 218.2 | ||||||||
Unamortized discount | (13.1) | (17.1) | ||||||||
Long-term debt currently due | (164.2) | (27.0) | ||||||||
Total Long-Term Debt | 1,435.3 | 1,432.4 | ||||||||
Total Capitalization | $3,597.6 | $3,512.7 | ||||||||
(a) Variable interest rate as of December 31, 2003. | ||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | ||||||||||
WISCONSIN ELECTRIC POWER COMPANY | ||||||||||||||
CONSOLIDATED STATEMENTS OF COMMON EQUITY | ||||||||||||||
Accumulated | ||||||||||||||
Other | ||||||||||||||
Common | Other Paid | Retained | Comprehensive | |||||||||||
Stock | In Capital | Earnings | Income | Total | ||||||||||
(Millions of Dollars) | ||||||||||||||
Balance - December 31, 2000 | $332.9 | $530.7 | $1,001.2 | $ - | $1,864.8 | |||||||||
Net income | 246.5 | 246.5 | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||
Unrealized gain (loss) on derivatives | ||||||||||||||
qualified as hedges: | ||||||||||||||
Unrealized losses due to cumulative | ||||||||||||||
effect of a change in accounting | ||||||||||||||
principle, net of tax | (5.1) | (5.1) | ||||||||||||
Reclassification adjustment for gains | ||||||||||||||
included in net income, net of tax | 5.1 | 5.1 | ||||||||||||
Comprehensive Income | - | - | 246.5 | - | 246.5 | |||||||||
Cash dividends | ||||||||||||||
Common stock | (130.0) | (130.0) | ||||||||||||
Preferred stock | (1.2) | (1.2) | ||||||||||||
Balance - December 31, 2001 | $332.9 | $530.7 | $1,116.5 | $ - | $1,980.1 | |||||||||
Net income | 259.2 | 259.2 | ||||||||||||
Other comprehensive income (loss) | ||||||||||||||
Minimum pension liability | (8.1) | (8.1) | ||||||||||||
Unrealized hedging losses | (0.5) | (0.5) | ||||||||||||
Comprehensive Income (loss) | - | - | 259.2 | (8.6) | 250.6 | |||||||||
Cash dividends | ||||||||||||||
Common stock | (179.6) | (179.6) | ||||||||||||
Preferred stock | (1.2) | (1.2) | ||||||||||||
Balance - December 31, 2002 | $332.9 | $530.7 | $1,194.9 | ($8.6) | $2,049.9 | |||||||||
Net income | 256.7 | 256.7 | ||||||||||||
Other comprehensive income | ||||||||||||||
Minimum pension liability | 3.9 | 3.9 | ||||||||||||
Unrealized hedging gains | 0.5 | 0.5 | ||||||||||||
Comprehensive Income | - | - | 256.7 | 4.4 | 261.1 | |||||||||
Cash dividends | ||||||||||||||
Common stock | (179.6) | (179.6) | ||||||||||||
Preferred stock | (1.2) | (1.2) | ||||||||||||
Tax Benefit of exercised stock | ||||||||||||||
options allocated from parent | 1.7 | 1.7 | ||||||||||||
Balance - December 31, 2003 | $332.9 | $532.4 | $1,270.8 | ($4.2) | $2,131.9 | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. | ||||||||||||||
WISCONSIN ENERGY CORPORATION
ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The consolidated financial statements include
General: Wisconsin Electric Power Company (Wisconsin Electric, the accountsCompany, Our, We or Us), a wholly-owned subsidiary of Wisconsin Energy Corporation ("(Wisconsin Energy), is an electric, gas and steam utility which services electric customers in Wisconsin Energy" orand the "Company"); its utility subsidiaries,Upper Peninsula of Michigan, gas customers in Wisconsin Electric
Power Company ("Wisconsin Electric") and Edison Sault Electric
Company; and its non-utility subsidiaries, Wisvest Corporation,
Minergy Corp., Wispark Corporation, Wisconsin Energy Capital
Corporation, WEC Nuclear Corporation, WEC International, Inc.,
Witech Corporation, Northern Tree Service, Inc., Badger Service
Company and other non-utility companies. steam customers in metro Milwaukee, Wisconsin. We consolidate our wholly owned subsidiary Bostco LLC (Bostco). Bostco owns real estate properties, with total assets of $45.1 million as of December 31, 2003 that are eligible for historical rehabilitation tax credits.
All significant intercompany transactions and balances have been eliminated from the consolidated financial statements.
The accounting records of the Company's utility subsidiaries are
maintained as prescribed by the Federal Energy Regulatory
Commission. Wisconsin Electric's accounting records are modified
for requirements of the Public Service Commission of Wisconsin.
The preparation of financial statements in conformity with accounting principles generally accepted accounting principlesin the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain
Reclassifications: We have reclassifiedcertain prior year financial statement amounts have been reclassified to conform to their current year presentation. Due to recent acquisitions by Wisconsin Energy that have
increased the size of Wisconsin Energy's non-utility operations
and assets, Wisconsin Energy and Wisconsin Electric have modified
theirThese reclassifications had no effect on net income statement and balance sheet presentations. or earnings per share.
The primary income statement modifications include reclassifying the
results of non-utility operations from Other Income and
Deductionsmost significant reclassifications relate to the various lines within operating incomereporting of accumulated costs of removal, which are non-legal retirement obligations and disclosing operating income before income taxes. This
modification does not change net income. The primaryaccumulated decommissioning costs accrued prior to January 1, 2003. Previously, these costs were included as components of accumulated depreciation on our balance sheet modification includes reclassification of utility and non-
utility property and plant and the related accumulated provision
for depreciation into a new category called Property, Plant and
Equipment. This modification does not change total assets.
REVENUES: Revenues are recognizedsheets.
Revenues: We recognize energy revenues on the accrual basis and include estimated amounts for service rendered but not billed.
FUEL: The cost
Our rates include base amounts for estimated fuel and purchased power costs. We can request recovery of fuel is expensedand purchased power costs prospectively from retail electric customers in the period consumed.
PROPERTY AND DEPRECIATION: Wisconsin jurisdiction through the rate review process with the Public Service Commission of Wisconsin (PSCW) and in interim fuel cost hearings when such annualized costs are more than 3% higher than the forecasted costs used to establish rates.
Our retail gas rates include monthly adjustments, which permit the recovery or refund of actual purchased gas costs. We defer any difference between actual gas costs incurred (adjusted for a sharing mechanism) and costs recovered through rates as a current asset or liability. The deferred balance is returned to or recovered from customers at intervals throughout the year and any residual balance at the annual October 31 reconciliation date is subsequently refunded to or recovered from customers.
Property is recordedand Depreciation: We record utilityproperty, plant and equipment at cost. Cost includes material, labor, overheads and allowance for funds used during construction. Additions to and significant replacements of property are charged to property, plant and equipment at cost; minor items are charged to maintenance expense. Cost includes material, labor and
capitalized interest or allowance for funds used during
construction (see Note D).
The cost of depreciable utility property together with removal
cost less salvage value is charged to accumulated provision for
depreciation when property is retired. In 1998, Wisconsin
Electric began classifying certain utility plant as common.
Common plant is allocated to electric, gas and steam utility
plant
We collect future removal costs in rate proceedings.
Depreciation expense is accrued at straight lineour rates overfuture removal costs for many assets that do not have an associated legal asset retirement obligation. We record a liability on our balance sheet for the estimated useful livesamounts we have collected in rates for future removal costs less amounts we have spent in removal activities. This liability was $400.6 million as of December 31, 2003 and is classified as a regulatory liability. The December 31, 2002 liability was $404.2 million and was classified in Cost of Removal Obligations.
We include capitalized software costs associated with our regulated operations under the assets.
Utilitycaption "Property, Plant and Equipment" on the Consolidated Balance Sheets. We had capitalized software costs of $47.6 million and $50.5 million as of December 31, 2003 and 2002, respectively.
Our utility depreciation rates are certified by the state regulatory commissions and include estimates for salvage value and removal costs. Depreciation as a percent of average depreciable utility plant was 4.4%4.2% in 1999 and 1998 and2003, 4.5% in 1997.2002, and 4.6% in 2001. Nuclear plant decommissioning iscosts are accrued asand included in depreciation expense (see Note E).
In its 1998 Rate Order,
We record other property, plant and equipment at cost. Cost includes material, labor, overhead and capitalized interest. We charge additions to and significant replacements of property to property, plant and equipment at cost and we charge minor items to maintenance expense. Upon retirement or sale of other property and equipment we remove the Public Service Commission of
Wisconsin authorized Wisconsin Electriccost and related accumulated depreciation from the accounts and include any gain or loss in "Other Income and Deductions" in the Consolidated Income Statements.
Estimated useful lives for non-regulated assets are 2 to amortize the remaining
$45.7 million balance of pre-1991 contributions in aid of
construction at December 31, 1997 on a straight line basis over
the 1998-1999 biennial period. As a result, credits to5 years for software.
For assets other than our regulated assets we accrue depreciation expense for pre-1991 contributions were
$22.8 million in 1999 and $22.9 million in 1998 compared to
$3.5 million in 1997. General plant and software are amortizedat straight-line rates over periods approved by the state regulatory commissions.
The estimated useful lives for non-utility equipment is 3 to 15
years and for non-utility buildings it is 30 to 40 years.
GOODWILL: Goodwill represents the excess of acquisition costs
over the fair market value of the net assets of acquired
businesses and is amortized on a straight line basis over its
estimated life. The Company reviews the carrying value of
goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment would be determined based on a
comparison of the undiscounted future operating cash flows
anticipated to be generated during the remaining life of the
goodwill to the carrying value. Measurement of any impairment
loss would be based on discounted operating cash flows.
REGULATORY MATTERS: Pursuant to Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of
Certain Types of Regulation, the utility subsidiaries capitalize,
as regulatory assets, incurred costs which are expected to be
recovered in future utility rates. The utility subsidiaries also
record, as regulatory liabilities, the current recovery in
utility rates of costs which are expected to be paid in the
future.
The following deferred regulatory assets and liabilities are
reflected in the Consolidated Balance Sheet at December 31.
Allowance For Funds Used During 1997, Wisconsin Electric recorded a
$140 million non-cash capital lease transaction for a long-term
power purchase contract (see Note H). During 1998, Wisconsin
Energy recorded a $19.3 million non-cash acquisition of ESELCO,
Inc. accounted for as a pooling of interests (see Note B). In
1999, Wisconsin Electric recorded a $110 million cash payment,
included in Operating Activities - Other, related to a contested
July 1999 jury verdict (see Note L).
RESTRICTIONS: Various financing arrangements and regulatory
requirements impose certain restrictions on the ability of
Wisconsin Energy's utility subsidiaries to transfer funds to
Wisconsin Energy in the form of cash dividends, loans or
advances. Under Wisconsin law, Wisconsin Electric is prohibited
from loaning funds, either directly or indirectly, to Wisconsin
Energy. The Company does not believe that such restrictions will
affect its operations.
NEW PRONOUNCEMENTS: On June 15, 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("FAS 133"). Pursuant to Statement of
Financial Accounting Standards No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective
Date of FAS 133, which was issued by the FASB on June 30, 1999,
FAS 133 will be adopted by Wisconsin Energy on January 1, 2001.
FAS 133 requires that all derivative investments be recorded on
the balance sheet at fair value. Changes in the fair value of
derivatives are then recorded each period in current earnings or
in other comprehensive income, depending upon how the derivative
is designated. Wisconsin Energy is currently evaluating FAS 133
and has not yet identified the implications of adoption.
B - MERGERS & ACQUISITIONS
WICOR, INC.: On June 27, 1999, Wisconsin Energy and WICOR,
Inc., a Wisconsin corporation, entered into an Agreement and Plan
of Merger providing for a strategic business combination of
Wisconsin Energy and WICOR. WICOR is a diversified holding
company with total assets of approximately $1.1 billion at
December 31, 1999 in utility and non-utility energy subsidiaries
as well as in pump manufacturing subsidiaries. Following the
merger, WICOR and its subsidiaries will become subsidiaries of
Wisconsin Energy. The merger agreement has been approved by the
boards of directors and the shareholders of Wisconsin Energy and
WICOR.
The transaction is intended to qualify as a tax-free
reorganization to the extent that shares of Wisconsin Energy
common stock are issued in the merger and will be accounted for
as a purchase transaction. Under the terms of the agreement,
Wisconsin Energy will acquire all of the outstanding shares of
WICOR common stock for a fixed price of $31.50 for each WICOR
share representing a total purchase price of approximately
$1.2 billion at December 31, 1999. In addition, WICOR had
approximately $300 million of assumable debt outstanding at
December 31, 1999.
The agreement calls for at least 40% of the purchase price to be
paid in Wisconsin Energy common stock with the balance paid in
cash. Wisconsin Energy has the option to increase the percentage
of stock to 60%. The actual stock exchange ratio will depend
upon the average closing prices of Wisconsin Energy common stock
on the New York Stock Exchange during a valuation period
consisting of ten trading days ending with the fifth trading day
prior to closing. Under the terms of the merger agreement, if
the average closing price of Wisconsin Energy common stock is
less than $22.00 per share, Wisconsin Energy may and most likely
will elect to pay all cash. Wisconsin Energy common stock closed
at $19-1/4 per share on December 31, 1999.
The Public Service Commission of Wisconsin approved the merger in
January 2000 with a written order in March 2000. As part of its
approval, the Public Service Commission of Wisconsin ordered a
qualified five-year rate freeze to begin following completion of
Wisconsin Electric's current pricing request for 2000-2001.
While the Company's retail electric, gas and steam rates in the
state of Wisconsin will be frozen for five years, the Company can
request review and approval of price changes every two years to
address increased costs for such reasons as government mandates
and reliability upgrades. During this qualified five-year rate
freeze period, Wisconsin Electric will continue to reflect
changes in fuel and gas costs in its rates. In March 2000, the
Federal Trade Commission closed its review of the proposed
acquisition. Consummation of the merger is subject to the
satisfaction of certain remaining closing conditions including
approval by the Securities and Exchange Commission under the
Public Utility Holding Company Act of 1935, as amended. The
regulatory approval process is expected to be completed in time
for the transaction to be consummated on or about April 26, 2000.
UNITED ILLUMINATING GENERATING PLANTS: In April 1999, Wisvest-
Connecticut, LLC, a wholly owned subsidiary of Wisvest
Corporation, acquired two fossil-fueled power plants in the state
of Connecticut for $277 million from The United Illuminating
Company, an unaffiliated investor-owned utility in New Haven,
Connecticut. Pursuant to the agreement, Wisvest-Connecticut, LLC
purchased the Bridgeport Harbor Station, which has an active
generating capacity of 590 megawatts, as well as the New Haven
Harbor Station, which has an active generating capacity of 466
megawatts. Wisconsin Energy accounted for the transaction under
the purchase method of accounting. Included in Deferred Charges
and Other Assets - Other on the Consolidated Balance Sheet at
December 31, 1999 is $57 million of related goodwill which is
being amortized over a 30-year estimated life. Due to the
immaterial nature of the transaction, Wisconsin Energy has not
presented pro forma financial information.
ESELCO, INC.: On May 31, 1998, Wisconsin Energy acquired
ESELCO, Inc. in a tax-free reorganization accounted for as a
pooling of interests. ESELCO was the parent company of Edison
Sault, an electric utility serving approximately 21,800
residential, commercial and industrial customers in Michigan's
eastern Upper Peninsula. In connection with the acquisition,
Wisconsin Energy issued 2,407,275 shares of Wisconsin Energy
common stock for the outstanding shares of ESELCO common stock.
Due to the immaterial nature of the transaction, Wisconsin Energy
has not restated any historical financial or statistical
information. Instead, Wisconsin Energy combined ESELCO's May 31,
1998 balance sheet with Wisconsin Energy's, including a
$1.2 million credit to retained earnings of which $0.9 million
represented ESELCO's consolidated net income during the first
five months of 1998. Wisconsin Energy is operating Edison Sault
as a separate utility subsidiary.
NORTHERN STATES POWER COMPANY: On May 16, 1997, the boards of
directors of Wisconsin Energy and Northern States Power Company,
a Minnesota corporation, agreed to terminate by mutual written
consent an Agreement and Plan of Merger which provided for a
business combination of Wisconsin Energy and Northern States
Power Company to form Primergy Corporation. As a result,
Wisconsin Energy recorded a $30.7 million charge in the second
quarter of 1997 ($18.8 million net of tax or approximately
17 cents per share) to write off deferred transaction costs and
costs to achieve the merger.
C - INCOME TAXES
The Company follows the liability method in accounting for income
taxes as prescribed by Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("FAS 109").
FAS 109 requires the recording of deferred assets and liabilities
to recognize the expected future tax consequences of events that
have been reflected in the Company's financial statements or tax
returns and the adjustment of deferred tax balances to reflect
tax rate changes.
The following table is a summary of income tax expense and a
reconciliation of total income tax expense with the tax expected
at the federal statutory rate.
As approved by the Public Service Commission of Wisconsin,
Wisconsin Electric's allowance for funds used during construction
wasPSCW, we capitalized AFUDC-debt and equity at 10.18% during the following periods reported.
In a rate order dated August 30, 2000, the PSCW authorized us to accrue AFUDC on 50% ofall electric utility nitrogen oxide (NOx) remediation construction work in progress at a rate of 10.18%, and provided a full current return on electric safety and reliability construction work in progress so that no AFUDC accrual is required on such projects. In addition, the August 2000 PSCW order provided a current return on half of other utility construction work in progress and authorized AFUDC accruals on the remaining 50% of these projects.
Materials, Supplies and Inventories: Our inventory at December 31 consists of:
Materials, |
|
| ||
(Millions of Dollars) | ||||
Fossil Fuel | $107.0 | $124.3 | ||
Natural Gas in Storage | 83.8 | 37.4 | ||
Materials and Supplies | 85.4 | 82.8 | ||
Total | $276.2 | $244.5 | ||
We price substantially all fossil fuel, materials and supplies and natural gas in storage inventories using the weighted-average method of accounting.
Regulatory Accounting: We account for our regulated operations in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS 71). This statement sets forth the application of generally accepted accounting principles to those companies whose rates are determined by an independent third-party regulator. The economic effects of regulation can result in regulated companies recording costs that have been or are expected to be allowed in the rate making process in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected in rates. We defer all of our regulatory assets pursuant to specific rate orders or by a generic order issued by our primary regulator. We expect to recover our outstanding regulatory assets in rates over a period of no longer than 20 years. As of December 31, 2003, we had approximately $25.2 million of regulatory assets that were not earning a return. Additionally, regulators can impose liabilities upon a regulated
Our regulatory assets and liabilities at December 31 consist of:
Regulatory Assets | 2003 | 2002 | ||
(Millions of Dollars) | ||||
Deferred income tax related (See Note D) | $132.3 | $138.4 | ||
Deferred electric transmission costs | 73.3 | 62.5 | ||
Unrecognized pension costs (See Note K) | 70.4 | 135.8 | ||
Plant related -- capital lease (See Note G) | 54.5 | 47.2 | ||
Environmental costs | 48.7 | 44.0 | ||
Debt redemption costs | 18.3 | - | ||
Bad debt costs | 10.9 | - | ||
Department of Energy assessments (See Note E) | 10.7 | 13.3 | ||
Lightweight aggregate plant | 8.9 | 12.2 | ||
Other, net | 15.4 | 4.5 | ||
Total Regulatory Assets | $443.4 | $457.9 | ||
Regulatory Liabilities | 2003 | 2002 | ||
(Millions of Dollars) | ||||
Cost of removal obligations | $400.6 | $ - | ||
Deferred income tax related (See Note D) | 91.0 | 97.5 | ||
Tax and interest refunds | 21.2 | 20.7 | ||
Derivatives | 11.5 | 4.5 | ||
NOx escrow | 2.7 | 11.9 | ||
Other, net | 34.7 | 22.3 | ||
Total Regulatory Liabilities | $561.7 | $156.9 | ||
We recorded a minimum pension liability in 2003 and in 2002 to reflect the funded status of our pension plans (See Note K). We concluded that substantially all of the unrecognized pension costs resulting from the recognition of our minimum pension liability that relate to our utility operations qualify as a regulatory asset. As a result, we recognized a pre-tax regulatory asset in the amount of $70.4 million and $135.8 million associated with our minimum pension liability as of December 31, 2003 and 2002, respectively.
In October 2002, the PSCW issued an order authorizing us to implement a surcharge for recovery of annual electric transmission costs projected through 2005. Recognizing the uncertainty of these transmission-related costs, the PSCW order authorized a four year escrow accounting treatment such that rate recovery will ultimately be trued-up to actual costs plus a return on the unrecovered costs. We are currently recovering incremental transmission costs from our customers. The difference between actual incremental transmission costs incurred and the amount being recovered goes to the escrow account We have deferred a total of $73.3 million of electric transmission costs as a regulatory asset through December 31, 2003.
Consistent with a generic order from and past rate-making practices of the PSCW, we defer as a regulatory asset costs associated with the remediation of former manufactured gas plant sites. As of December 31, 2003, we have recorded $48.7 million of environmental costs associated with manufactured gas plant sites as a regulatory asset, including $25.7 million of deferrals for actual remediation costs incurred and a $23.5 million accrual for estimated future site remediation (See Note O). We expect to include total actual remediation costs incurred in our next rate case at which time we would begin amortizing these costs over the following rates:
* June 1, 1998 -five years.
As permitted by our regulators, we account for certain debt redemption costs under the revenue neutral method of accounting. Under the revenue neutral method of accounting, we defer the costs associated with the redemption of utility debt to the extent that the redeemed debt is refinanced with other utility debt. The redemption costs are amortized based upon the difference between the interest expense of the new and redeemed debt.
As of December 31, 1998 10.29%
*2003, we have deferred a regulatory asset of approximately $10.9 million in total uncollectible accounts receivable representing incremental bad debt costs in excess of amounts in existing rates. In 2003, due to a combination of unusually high natural gas prices, the soft economy within our utility service territories and limited governmental assistance available to low-income customers, we experienced a significant increase in uncollectible accounts receivable. As a result, in October 2003 the PSCW approved our request for deferral of 2003 uncollectible accounts receivable in excess of amounts included in existing annual utility rates.
Income Taxes: We are included in Wisconsin Energy's consolidated Federal income tax return. As such, Wisconsin Energy allocates Federal current tax expense or credits to us based on our separate tax computation.
Investment tax credits related to regulated utility assets are recorded as a deferred credit on the balance sheet and amortized to income over the applicable service lives of related properties in accordance with regulatory treatment. Historical rehabilitation credits are reported in income in the year claimed.
Wisconsin Energy allocates the tax benefit of stock options exercised to us to the extent the option holders payroll cost was incurred by us. We record the allocated tax benefit as an addition to paid in capital.
Derivative Financial Instruments: We have derivative physical and financial instruments as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). However, we limit the use of financial instruments. For further information, see Notes I and J.
Statement of Cash Flows: Cash and cash equivalents include marketable debt securities acquired three months or less from maturity.
Restrictions: Various financing arrangements and regulatory requirements impose certain restrictions on our ability to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. Under Wisconsin law, we are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. We do not believe that these restrictions will materially affect our operations.
Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No 143, Accounting for Asset Retirement Obligations. We adopted SFAS 143 effective January 1, 1997 - February 17, 1997 10.17%
2003. Consistent with SFAS 143, we record a liability at fair value for a legal asset retirement obligation in the period in which it is incurred. When a new legal obligation is recorded, we capitalize the costs of the liability by increasing the carrying amount of the related long-lived asset. We accrete the liability to its present value each period and depreciate the capitalized cost over the useful life of the related asset. At the end of the asset's useful life, we settle the obligation for its recorded amount or incur a gain or loss. As it relates to our regulated operations, we apply SFAS 71 and recognize regulatory assets or liabilities for the timing differences between when we recover legal asset retirement obligations in rates and when we would recognize these costs under SFAS 143.
Investments: Investments in affiliated companies in which we have a controlling financial interest are consolidated. Investments in other affiliated companies in which we do not maintain control are accounted for using the equity method.
Nuclear Fuel Amortization: We lease our nuclear fuel and amortize the fuel inventory to fuel expense as the power is generated, generally over a period of 60 months.
B -- RECENT ACCOUNTING PRONOUNCEMENTS
Variable Interest Entities: In January 2003, the FASB issued Interpretation 46, Consolidation of Variable Interest Entities (FIN 46). This standard requires an enterprise that is the primary beneficiary of a variable interest entity to consolidate that entity. We applied the Interpretation to any existing interests in variable interest entities beginning in the third quarter of 2003. In October 2003, the FASB deferred the adoption of FIN 46 for all entities commonly referred to as special-purpose entities to the first reporting period ending after December 15, 2003. In
Derivative Instruments: We adopted SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, effective July 1, 2003. SFAS 149, which was issued by FASB in April 2003, amends Statement 133 for certain decisions made by the FASB as part of the Derivatives Implementation Group process and other FASB projects dealing with financial instruments. SFAS 149 also amends Statement 133 to incorporate clarifications of and to expand the definition of a derivative.
Pension and Other Post-retirement Benefit Plans: We adopted SFAS 132R, Employers' Disclosures about Pensions and Other Post-retirement Benefits, in December 2003. SFAS 132R, which was issued by FASB in December 2003, replaces existing FASB disclosure requirements for defined benefit plans. In addition to expanded annual disclosures, the FASB is requiring companies to report the various elements of pension and other post-retirement benefit costs on a quarterly basis (See Note K).
C -- AMERICAN TRANSMISSION COMPANY
Effective January 1, 2001, we transferred electric utility transmission system assets with a net book value of approximately $224.1 million to American Transmission Company LLC (ATC) in exchange for an ownership interest in this new company. No gain or loss was recorded in this transaction. During 2001, ATC issued debt and distributed $105.2 million of cash back to us as a partial return of the original equity contribution. As of December 31, 2003 and 2002, we had a total ownership interest of approximately 34.6% and 37%, respectively, in ATC. We are represented by one out of fourteen ATC board members, each of whom has one vote. Due to the voting requirements, no individual member has more than 8% of the voting control. We account for our investment in ATC under the equity method.
D -- INCOME TAXES
We follow the liability method in accounting for income taxes as prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires the recording of deferred assets and liabilities to recognize the expected future tax consequences of events that have been reflected in our financial statements or tax returns and the adjustment of deferred tax balances to reflect tax rate changes. Tax credits associated with regulated operations are deferred and amortized over the life of the assets.
The following table is a summary of income tax expense for each of the years ended December 31:
Income Tax Expense | 2003 | 2002 | 2001 | |||
(Millions of Dollars) | ||||||
Current tax expense | $156.6 | $189.7 | $189.5 | |||
Deferred income taxes, net | 2.8 | (27.5) | (28.4) | |||
Investment tax credit, net | (4.5) | (4.5) | (4.5) | |||
Total Income Tax Expense | $154.9 | $157.7 | $156.6 | |||
The provision for income taxes for each of the years ended December 31 differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income before income taxes and preferred dividend as a result of the following:
2003 | 2002 | 2001 | ||||||||||
|
| Effective |
| Effective |
| Effective | ||||||
(Millions of Dollars) | ||||||||||||
Expected tax at | ||||||||||||
statutory federal tax rates | $144.1 | 35.0% | $145.9 | 35.0% | $141.0 | 35.0% | ||||||
State income taxes | ||||||||||||
net of federal tax benefit | 19.3 | 4.7% | 20.2 | 4.8% | 20.7 | 5.1% | ||||||
Investment tax credit restored | (4.5) | (1.1%) | (4.5) | (1.0%) | (4.5) | (1.1%) | ||||||
Historical rehabilitation credits | (3.3) | (1.0%) | (2.5) | (0.6%) | - | - | ||||||
Other, net | (0.7) | (0.0%) | (1.4) | (0.4%) | (0.6) | (0.2%) | ||||||
Total Income Tax Expense | $154.9 | 37.6% | $157.7 | 37.8% | $156.6 | 38.8% | ||||||
The components of SFAS 109 deferred income taxes classified as net current assets and net long-term liabilities at December 31 are as follows:
Current Assets (Liabilities) | Long-Term Liabilities (Assets) | |||||||
Deferred Income Taxes | 2003 | 2002 | 2003 | 2002 | ||||
(Millions of Dollars) | ||||||||
Property-related | $ - | $ - | $643.2 | $607.8 | ||||
Construction advances | - | - | (82.9) | (75.7) | ||||
Decommissioning trust | - | - | (65.5) | (59.0) | ||||
Contested liability payment | - | (2.4) | - | - | ||||
Recoverable gas costs | (0.5) | 2.3 | - | - | ||||
Uncollectible account expense | 9.8 | 9.1 | - | - | ||||
Employee benefits | ||||||||
and compensation | 10.6 | 10.7 | (44.3) | (37.5) | ||||
Asset impairment charge | 10.7 | 10.8 | - | - | ||||
Other | 11.8 | 7.8 | 5.9 | (5.1) | ||||
Total Deferred Income Taxes | $42.4 | $38.3 | $456.4 | $430.5 | ||||
We have also recorded deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues (See Note A).
E --- NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: Wisconsin Electric owns and operates
Point Beach Nuclear Plant: We own two approximately 510-megawatt518-megawatt electric generating units at Point Beach Nuclear Plant (Point Beach) in Two Rivers, Wisconsin. During 1999, 1998
and 1997, Point Beach provided 22%is operated by Nuclear Management Company, LLC (NMC), 18%a company that, as of December 31, 2003, provides services to eight nuclear generating units in the Midwest. NMC is owned by Wisconsin Energy and 6%, respectively,the affiliates of Wisconsin Electric's net electric energy supply. The United
States Nuclear Regulatory Commissionfour other unaffiliated investor-owned utilities in the region. We currently expect the two units at Point Beach to operate to the end of their operating licenses, for Point
Beachwhich expire in October 2010 for Unit 1 and in March 2013 for Unit 2. In 1997,NMC filed an application in February 2004 with the Public Service CommissionNRC to renew the operating licenses for both of Wisconsin authorized
Wisconsin Electric to defer certainour plant's nuclear non-fuel operation
and maintenance costs in excess of those included in 1997 rates.
As a result, Wisconsin Electric deferred $18 million during 1997.
During 1998, the Public Service Commission of Wisconsin
authorized a five-year recovery in the electric retail
jurisdiction in the state of Wisconsin of the excess 1997 nuclear
non-fuel operation and maintenance costs, and Wisconsin Electric
began amortizing the $18 million of deferred costs on a straight
line basis over the five year recovery period. As of
December 31, 1999, $12 million of deferred costs remain on the
Consolidated Balance Sheet in Deferred Charges and Other Assets -
Deferred Regulatory Assets (see Note A).
NUCLEAR INSURANCE:reactors for an additional 20 years.
Nuclear Insurance: The Price-Anderson Act, as amended and
extendedit applies to August 1, 2002,Point Beach, currently limits the total public liability for damages arising from a nuclear incident at a nuclear power plant to approximately $9.8$10.7 billion, of which $200$300 million is covered by liability insurance purchased from private sources, and $9.6sources. The remaining $10.4 billion is covered by an industry retrospective loss sharing plan whereby in the event of a nuclear incident resulting in damages exceeding the private insurance coverage, each owner of a nuclear plant would be assessed a deferred premium of up to $88.1$99.2 million per reactor (Wisconsin
Electric owns(we own two) with a limit of $10 million per reactor within one calendar year. As the owner of Point Beach, Wisconsin
Electricwe would be obligated to pay itsour proportionate share of any such assessment.
Wisconsin Electric participated in an industry-wide insurance
program, with an aggregate limit of $200 million which covered
radiation injury claims of nuclear workers first employed after
1987. This program was replaced with a new program (which has no
retrospective assessment provisions) at the end of 1997.
However, the discovery period for claims covered under the former
program remains open until the end of 2007 for those few former
insureds who no longer need to participate in the new,
replacement program. If claims in excess of the funds available
under the old program develop, Wisconsin Electric would be
assessed up to a maximum of approximately $6.3 million.
Wisconsin Electric,
We, through itsour membership in Nuclear Electric Insurance Limited ("NEIL")(NEIL), carriescarry decontamination, property damage and decommissioning shortfall insurance covering losses of up to $1.5$2.0 billion at Point Beach. Under policies issued by NEIL, the insured member is liable for a retrospective premium adjustment in the event of catastrophic losses exceeding the full financial resources of NEIL. Wisconsin Electric'sOur maximum retrospective liability under itsthese policies is $8.9$14.9 million.
Wisconsin Electric
We also maintainsmaintain insurance with NEIL covering business interruption and extra expenses during any prolonged accidental outage at Point Beach, where such outage is caused by accidental property damage from radioactive contamination or other risks of direct physical loss. Wisconsin Electric'sOur maximum retrospective liability under this policy is $3.7$10.0 million.
It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of liability would protect Wisconsin Electricus from material adverse impact.
NUCLEAR DECOMMISSIONING: Wisconsin Electric currently expects
to operate the two units at Point Beach
Nuclear Decommissioning: We record decommissioning expense in amounts equal to the expiration of
their current operating licenses. The estimated costamounts collected in rates and funded to decommission the plant in 1999 dollars is $518 million based upon
a site specific decommissioning cost study completed in 1998.
Assuming plant shutdown at the expiration of the current
operating licenses, prompt dismantlement and annual escalation of
costs at specific inflation factors established by the Public
Service Commission of Wisconsin, it is projected that
approximately $1.8 billion will be spent over a thirty-three year
period, beginning in 2010, to decommission the plant.external trusts. Nuclear decommissioning costs are accrued as depreciation expense over the expected service lives of the twonuclear generating units and are included in electric rates. Decommissioning expense was $17.6 million for each of the years ended 2003, 2002 and 2001. As of December 31, 2003, and 2002, we had the following an
external sinking fund method. It is expected that the annual
payments to theinvestments in Nuclear Decommissioning Trust Fund ("Fund") alongTrusts, stated at fair value.
2003 | 2002 | |||
(Millions of Dollars) | ||||
Funding and Realized Earnings | $485.2 | $458.6 | ||
Unrealized Gains | 189.2 | 91.4 | ||
Total | $674.4 | $550.0 | ||
In accordance with the earnings on the Fund will provide sufficient funds at
the time of decommissioning. Wisconsin Electric believes it is
probable that any shortfall in funding would be recoverable in
utility rates.
As required by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, Wisconsin Electric'sour debt and equity security investments in the Nuclear Decommissioning Trust Fund are classified as available for sale. Gains and losses on the Fund werefund are determined on the basis of specific identification; net unrealized holding gains on the Fund
werefund are recorded as part of the accumulated provision for
depreciation.
Following isfund. We record realized and unrealized fund earnings as a summaryregulatory liability.
As of December 31, 2002, we had accrued decommissioning costs of $550.0 million. These amounts were included on the 2002 consolidated balance sheets as a long-term liability under Cost of Removal Obligations. Beginning January 1, 2003, we adopted SFAS 143 Accounting for Asset Retirement Obligations. Under SFAS 143, we recorded a liability on our balance sheet for the net present value of the expected cash flows associated with our legal obligation to decommission our nuclear plant and earnings
chargedreclassified non-legal removal obligations from cost of
The asset retirement liability as calculated under SFAS 143 is based on several significant assumptions including the timing of future cash flows, future inflation rates, the extent of work that is performed and the Fund balance includeddiscount rate applied to future cash flows. These assumptions differ significantly from the assumptions used by the PSCW to calculate the nuclear decommissioning liability for funding purposes. For the SFAS 143 calculation, we assumed an 85% probability of plant license renewal based strictly on industry averages. Our SFAS 143 liability is approximately $732 million as of December 31, 2003.
In 2002, we engaged a consultant to perform a site specific study for regulatory funding purposes. This study assumed that the plants would not run past their current operating licenses of 2010 and 2013, respectively, and the study made several assumptions as to the scope of work. The study also estimated the liability for fuel management costs and non-nuclear demolition costs. These costs are excluded from the calculation of the SFAS 143 liability. The 2002 site specific study estimated that the cost to decommission the plant in accumulated provision for depreciation at December 31.2003 year dollars was approximately $1.1 billion. The Fund
balancedifferences between the regulatory funding liability and the SFAS 143 liability are primarily related to fuel management costs, non-nuclear demolition costs and the timing of future cash flows.
The ultimate timing and amount of future cash flows associated with nuclear decommissioning is stated at fair value.
Decontamination and Decommissioning Fund: The Energy Policy Act of 1992 established a Uranium Enrichment Decontamination and Decommissioning Fund ("D(D&D Fund")Fund) for the United States Department of Energy's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments on utilities using enrichment services. As of December 31, 1999, Wisconsin Electric has2003, we recorded itsour remaining estimated liability equal to projected special assessments of
$18.8$8.0 million. A correspondingAn associated deferred regulatory asset is detailed in Note A. The deferred regulatory asset will be amortized to nuclear fuel expense and included in utility rates over the next eight years. In Wisconsin Electric's 1998 Rate
Order,four years ending in 2007.
F -- ASSET RETIREMENT OBLIGATIONS
SFAS 143, Accounting for Asset Retirement Obligations, primarily applies to the Public Service Commissionfuture decommissioning costs for Point Beach. Prior to January 2003, we recorded a long-term liability for accrued nuclear decommissioning costs. (See Note E).
SFAS 143 also applies to a smaller extent to several other utility assets including the dismantlement of certain hydro facilities and the removal of certain coal handling equipment and water intake facilities located on lakebeds. We have not recorded any asset retirement obligations for the removal of the coal handling equipment or for the water intake facilities located on lakebeds because the associated liability cannot be reasonably estimated.
During the second quarter of 2003, we signed an agreement to lease the site of our existing coal-based Port Washington Power Plant to our affiliate, W.E. Power LLC, which is constructing and will own a new gas-fired generating station at the site as part of Wisconsin approved
recovery overEnergy'sPower the 1998-1999 biennial periodFuture program. The terms of D&D Fund costs
disallowed in 1997.
F - PREFERRED STOCK
Preferred stock authorized but unissued is: Wisconsin Energy,
$.01 par value, 15,000,000 shares and Wisconsin Electric,
cumulative, $25 par value, 5,000,000 shares.
The 3.60% series preferred stock is redeemable in whole or in
partthe lease call for us to raze the existing facilities at the optionsite by the spring of Wisconsin Electric2006. Accordingly, we recorded an asset retirement obligation and corresponding plant asset in the amount of $14.9 million.
If we had adopted SFAS 143 at $101 per share plus
any accrued dividends.
the beginning of fiscal 2002, we would have reported the following asset retirement obligations on our Consolidated Balance Sheets in "Deferred Credits and Other Liabilities" as of December 31:
2003 | 2002 | |
(Millions of Dollars) | ||
Asset Retirement Obligations | ||
Reported | $732.0 | $ - |
Pro forma | $732.0 | $675.4 |
The fair value of Wisconsin Electric's preferred stock was
$18.0 millionfollowing table presents the change in our asset retirement obligations during 2003.
Balance at | Initial | Liabilities | Liabilities |
| Cash Flow | Balance at |
(Millions of Dollars) | ||||||
$ - | $675.4 | $14.9 | $0.8 | $35.2 | $7.3 | $732.0 |
G -- LONG-TERM DEBT
First Mortgage Bonds, Debentures and $20.2 million atNotes: At December 31, 1999 and 1998,
respectively.
G - TRUST PREFERRED SECURITIES
In March 1999, WEC Capital Trust I, a Delaware business trust of
which Wisconsin Energy owns all of2003, the outstanding common
securities, issued $200 million of 6.85% trust preferred
securities to the public. The sole asset of WEC Capital Trust I
is $206 million of 6.85% junior subordinated debentures issued by
Wisconsin Energy and due March 31, 2039. The terms and interest
payments on these debentures correspond to the terms and
distributions on the trust preferred securities. Wisconsin
Energy used the proceeds from the sale of its junior subordinated
debentures to fund a capital contribution of approximately
$105 million to Wisvest-Connecticut, LLC for acquisition in mid-
April 1999 of two fossil-fueled power plants (see Note B) and for
repayment of short-term borrowings. WEC Capital Trust I has been
consolidated into Wisconsin Energy's financial statements.
For tax purposes, Wisconsin Energy is allowed to deduct an amount
equal to the distributions on the trust preferred securities.
Wisconsin Energy may elect to defer interest payments on the
debentures for up to 20 consecutive quarters, causing
corresponding distributions on the trust preferred securities to
also be deferred. In case of a deferral, interest and
distributions will continue to accrue, along with quarterly
compounding interest on the deferred amounts.
Wisconsin Energy may redeem all or a portion of the debentures
after March 25, 2004, requiring an equal amount of trust
preferred securities to be redeemed at face value plus accrued
and unpaid distributions. Wisconsin Energy has entered into a
limited guarantee of payment of distributions, redemption
payments and payments in liquidation with respect to the trust
preferred securities. This guarantee, when considered together
with Wisconsin Energy's obligations under the related debentures
and indenture and the applicable declaration of trust, provide a
full and unconditional guarantee by Wisconsin Energy of amounts
due on the outstanding trust preferred securities.
The fair value of Wisconsin Energy's trust preferred securities
was $156.0 million at December 31, 1999.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking fund requirements through 20042008 and thereafter for the aggregate amount of our long-term debt outstanding (excluding obligations under capital lease) at December 31, 1999 follow.
(Millions of Dollars) | ||
2004 | $141.9 | |
2005 | 1.9 | |
2006 | 203.0 | |
2007 | 0.2 | |
2008 | 0.2 | |
Thereafter | 1,052.2 | |
Total | $1,399.4 | |
Sinking fund requirements for the years 20002004 through 2004,2008, included in the preceding table, are $78.0$9.0 million. Substantially all of our utility plant is subject to thea first mortgage of the
respective subsidiary.
lien.
Long-term debt premium or discount and expense of issuance are amortized by the straight line method over the lives of the debt issues and included as interest expense. Unamortized amounts
pertaining to reacquired debt are written off currently, when
acquired for sinking fund purposes, or amortized in accordance
with state regulatory commission orders, when acquired for early
retirement.
In April 1998, Wisconsin Energy Capital Corporation issued
$25May 2003, we sold $635 million of 6.48% medium-term notes due 2008. Proceeds from
the issue were added to Wisconsin Energy Capital Corporation's
general funds and were used to finance non-utility projects and
for other general corporate purposes.
In June 1998, Wisconsin Electric issued $150unsecured Debentures ($300 million of 6-1/2%
debentures due 2028. Proceeds from the issue were added to
Wisconsin Electric's general funds and were used to reduce short-
term borrowings and for other general corporate purposes.
In December 1998, Wisconsin Energy Capital Corporation issued
$20 million of 6.21% medium-term notes due 2008, $30 million of
6.51% medium-term notesten-year 4.50% Debentures due 2013 and $50$335 million of 6.94% medium-
term notesthirty-year 5.625% Debentures due 2028. Proceeds of2033) under an $800 million shelf registration statement filed with the issues were added to
Wisconsin Energy Capital Corporation's general funds and wereSEC. We used to finance non-utility projects and for other general
corporate purposes.
During 1998, Wispark Corporation secured $18 million of bank
financing in the form of adjustable rate mortgage notes due 2000-
2008 to finance the construction or purchase of various
facilities.
In April 1999, Wisvest-Connecticut, LLC issued $210 million of
nonrecourse variable rate notes due December 31, 2005, the
proceeds of which were used to help finance the acquisition of
two fossil-fueled power plants (see Note B) and for related
working capital. Associated with issuance of this debt, Wisvest-
Connecticut, LLC has entered into an interest rate swap agreement
to exchange fixed rate payment obligations for variable rate
receipt rights without exchanging the underlying notional
amounts. This agreement, which expires on December 31, 2005,
serves to convert variable rate debt under Wisvest-Connecticut,
LLC's long-term nonrecourse notes to fixed rate debt to reduce
the impact of interest rate fluctuations. The variable rate is
based upon a three-month LIBOR rate and the fixed rated is 5.99%.
At year-end 1999, three-month LIBOR was 6.18375%. The notional
amounts parallel a portion of the underlyingproceeds from the Debentures to repay short-term debt, levels and are
usedwhich was originally incurred to measure interest to be paid or received and do not
represent an exposure to credit loss.retire debt that matured in December 2002. The notional amount of
Wisvest-Connecticut, LLC's interest rate swaps was $76.1 million
at December 31, 1999. This notional amount decreases on a
quarterly basis over the remaining termbalance of the agreement. The
difference between the amounts paid and received under the
interest rate swap is accrued as interest rates change and is
recorded as an adjustment to interest expense over the life of
the hedged agreement. Wisvest-Connecticut, LLC is exposed to
credit loss in the event of nonperformance by the other party to
the interest rate swap. However, it does not anticipate any
losses from this agreement, which is with a major financial
institution.
In December 1999, Wisconsin Electric issued $150 million of 6-
5/8% debentures due 2002. Proceeds from the issue were added to
Wisconsin Electric's general funds andproceeds were used to reduce short-
term borrowings and for other general corporate purposes.
During 1999, Wispark Corporation secured $53redeem $425 million of bank
financingour debt securities in June 2003, and to fund the formearly redemption in August 2003 of adjustableanother $60 million debt issue.
In October 2003, redeemed $9 million of 6.85% First Mortgage Bonds.
In January 2002, we redeemed $100 million of 8-3/8% first mortgage bonds due 2026 and fixed rate mortgage notes$3.4 million of 9-1/8% First Mortgage Bonds due 2001-2012 to finance the construction or purchase2024. Early redemption of various
facilities.
Following is Wisconsin Energy'sthis long-term debt outstanding at
December 31.
Obligations Under Capital Leases: In the event
Wisconsin Electric or the Trust terminates the lease, the Trust
would recover its unamortized cost of nuclear fuel from Wisconsin
Electric. Under the lease terms, Wisconsin Electric is in effect
the ultimate guarantor of the Trust's commercial paper and line
of credit borrowings financing the investment in nuclear fuel.
Interest expense on the nuclear fuel lease, included in fuel
expense, was $3.5 million, $3.1 million and $0.9 million during
1999, 1998 and 1997, respectively.
To meet a portion of its electric energy supply needs, Wisconsin
Electricwe entered into a long-term25 year power purchase contract with an unaffiliated independent power producer. The contract, for 236 megawatts of firm capacity from a gas-fired cogeneration facility, includes no minimum energy requirements. When the contract expires in 2022, Wisconsin Electricwe may, at itsour option and with proper notice, renew for another ten years or purchase the generating facility at fair value or allow the contract to expire. Wisconsin Electric treatsWe account for this contract as a capital lease. Thelease and recorded the leased facility and corresponding obligation under the capital lease were recorded at the estimated fair value of the plant's electric generating facilities. TheWe are amortizing the leased facility is
being amortized on a straight linestraight-line basis over the original 25-
year25-year term of the contract.
Beginning with commercial operation of
We treat the facility in September
1997, imputed interest costs on the capitalized purchase power
obligation were $23.4 million, $22.9 million and $6.5 million
during 1999, 1998 and 1997, respectively, and total amortization
costs of the leased facilities were $5.7 million during 1999 and
1998 and $1.6 million during 1997. The long-term power purchase contract is treated as an operating lease for rate-making purposes. Aspurposes and we record our minimum lease payments as purchased power expense on the Consolidated Income Statements. We paid a result,total of $23.4 million, $22.3 million and $21.5 million in minimum lease payments during 2003, 2002, and 2001, respectively. We record the difference between the minimum lease payments and the sum of the imputed interest and amortization costs are recordedcalculated under capital lease accounting as a deferred regulatory asset on our Consolidated Balance Sheets (see deferred regulatory asset - plant related - capital lease in Note A). Due to the timing of the minimum lease payments, Wisconsin
Electric expectswe expect the regulatory asset to increase to approximately $78$78.5 million by the year 2009 and the total obligation under the capital lease to increase to $160$160.2 million by the year 2005 before each is reduced to zero over the remaining life of the contract. The minimum
We also have a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust (Trust), which is treated as a capital lease. We lease and amortize the nuclear fuel to fuel expense as power is generated, generally over a period of 60 months. Lease payments include charges for the cost of fuel burned, financing costs and management fees. In the event that we or the Trust terminates the lease, the Trust would recover its unamortized cost of nuclear fuel from us. Under the lease terms, we are classified as purchased
powerin effect the ultimate guarantor of the Trust's commercial paper and line of credit borrowings that finance the investment in nuclear fuel. We included $1.4 million of interest expense on the Consolidated Income Statement. Interestnuclear fuel lease in fuel expense on the purchase power obligation, included in purchased
power expense, was $20.4 million, $20.3 million and $5.6during 2003, as well as $1.9 million during 1999, 19982002 and 1997, respectively.
$3.3 million during 2001.
Following is a summary of Wisconsin Electric'sour capitalized leased facilities and nuclear fuel and
leased facilities at December 31.
Capital Lease Assets | 2003 | 2002 | ||
(Millions of Dollars) | ||||
Leased Facilities | ||||
Long-term purchase power commitment | $140.3 | $140.3 | ||
Accumulated amortization | (35.7) | (30.0) | ||
Total Leased Facilities | $104.6 | $110.3 | ||
Nuclear Fuel | ||||
Under capital lease | $115.9 | $118.4 | ||
Accumulated amortization | (67.0) | (63.7) | ||
In process/stock | 29.5 | 8.5 | ||
Total Nuclear Fuel | $ 78.4 | $ 63.2 | ||
Future minimum lease payments under theour capital leases and the present value of theour net minimum lease payments as of December 31, 19992003 are as follows:
| Purchase |
|
| |||
(Millions of Dollars) | ||||||
2004 | $ 29.0 | $ 23.6 | $ 52.6 | |||
2005 | 30.1 | 18.3 | 48.4 | |||
2006 | 31.2 | 10.2 | 41.4 | |||
2007 | 32.4 | 4.2 | 36.6 | |||
2008 | 33.6 | 2.9 | 36.5 | |||
Thereafter | 403.8 | - | 403.8 | |||
Total Minimum Lease Payments | 560.1 | 59.2 | 619.3 | |||
Less: Estimated Executory Costs | (118.5) | - | (118.5) | |||
Net Minimum Lease Payments | 441.6 | 59.2 | 500.8 | |||
Less: Interest | (282.5) | (5.1) | (287.6) | |||
Present Value of Net | ||||||
Minimum Lease Payments | 159.1 | 54.1 | 213.2 | |||
Less: Due Currently | - | (22.3) | (22.3) | |||
$159.1 | $31.8 | $190.9 | ||||
H -- SHORT-TERM DEBT
Short-term notes payable balances and their corresponding weighted averageweighted-average interest rates at December 31 consist of:
2003 | 2002 | |||||||
|
| Interest |
| Interest | ||||
(Millions of Dollars) | ||||||||
Banks and other | $ 35.2 | 6.13% | $ 73.1 | 2.59% | ||||
Commercial paper | 280.7 | 1.15% | 281.7 | 1.38% | ||||
Total Short-Term Debt | $315.9 | 1.70% | $354.8 | 1.63% | ||||
As of December 31, 2003, we had approximately $350.0 million aggregate principalof available unused lines of bank back-up credit facilities on a consolidated basis. We had approximately $315.9 million of total consolidated short-term debt outstanding on such date. Our bank back-up credit facilities mature beginning June 2004 through August 2004.
We have entered into various bank back-up credit agreements to maintain short-term credit liquidity which, among other terms, require us to maintain a minimum total funded debt to capitalization ratio of less than 65%.
I -- DERIVATIVE INSTRUMENTS
We follow SFAS 133 as amended by SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, effective July 1, 2003, which requires that derivative instruments be recorded on the balance sheet as an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Upon adoption of SFAS 149, prospectively any forward commodity contracts other than electric power contracts that meet the qualification of a capacity
We have a limited number of other financial and physical commodity contracts that are defined as derivatives under SFAS 133 and that qualify for cash flow hedge accounting. These cash flow hedging instruments are comprised of gas futures and basis swap contracts utilized to manage the cost of gas.
Changes in the fair market values of these cash flow hedging instruments, to the extent that the hedges are effective at mitigating the underlying commodity risk, are recorded in Accumulated Other Comprehensive Income. At the date that the underlying transaction occurs, we report the amounts in Accumulated Other Comprehensive Income as earnings. The ineffective portion of the derivative's change in fair value is recorded as a regulatory asset or liability immediately as these transactions are part of the purchased gas adjustment.
For the years ended December 31, 2003 and 2002, the amount of nine-month adjustable
medium-term noteshedge ineffectiveness was immaterial. We did not exclude any components of derivative gains or losses from the assessment of hedge effectiveness. The maximum length of time over which we are hedging our exposure to the variability in future cash flows of forecasted transactions was two months as of December 31, 2003 and 2002.
J -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of certain of our recorded financial instruments at December 31 are as follows:
2003 | 2002 | |||||||
| Carrying | Fair | Carrying | Fair | ||||
(Millions of Dollars) | ||||||||
Nuclear decommissioning trust fund | $674.4 | $674.4 | $550.0 | $550.0 | ||||
Preferred stock, no redemption required | $30.4 | $20.9 | $30.4 | $17.5 | ||||
Long-term debt including | ||||||||
current portion | $1,399.4 | $1,417.9 | $1,258.3 | $1,302.1 | ||||
The carrying value of cash and cash equivalents, net accounts receivable, accounts payable and short-term borrowings approximates fair value due August 16, 2000.to the short term nature of these instruments. The initial interest ratenuclear decommissioning trust fund is carried at fair value as reported by the trustee (see Note E). The fair value of our preferred stock is estimated based upon the quoted market value for the Wisconsin Energy Capital Corporation medium-term notessame or similar issues. The fair value of our long-term debt, including the current portion of long-term debt but excluding capitalized leases, is estimated based upon quoted market value for the same or similar issues or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows. The fair values of gas commodity instruments are equal to their carrying values as of December 31, 2003.
K -- BENEFITS
Pensions and Other Post-retirement Benefits: We have funded and unfunded noncontributory defined benefit pension plans that together cover substantially all of our employees. The plans provide defined benefits based upon years of service and final average salary.
We also have other post-retirement benefit plans covering substantially all of our employees. The health care plans are contributory with participants' contributions adjusted annually; the life insurance plans are noncontributory. The accounting for the health care plans anticipates future cost-sharing changes to the written plans that are consistent
| Other Post-retirement | ||||||||||||||||
Status of Benefit Plans | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||
(Millions of Dollars) | |||||||||||||||||
Change in Benefit Obligation | |||||||||||||||||
Benefit Obligation at January 1 | $851.2 | $806.2 | $773.5 | $257.6 | $205.3 | $173.4 | |||||||||||
Service cost | 27.2 | 18.3 | 18.5 | 10.3 | 7.5 | 6.2 | |||||||||||
Interest cost | 56.9 | 56.7 | 57.0 | 17.6 | 15.3 | 13.6 | |||||||||||
Plan participants' contributions | - | - | - | 0.7 | 6.9 | 5.8 | |||||||||||
Plan amendments | 18.5 | 0.1 | - | - | - | - | |||||||||||
Actuarial loss | 32.5 | 28.6 | 14.9 | 14.0 | 39.8 | 21.9 | |||||||||||
Benefits paid | (53.8) | (58.7) | (57.7) | (10.9) | (17.2) | (15.6) | |||||||||||
Benefit Obligation at December 31 | $932.5 | $851.2 | $806.2 | $289.3 | $257.6 | $205.3 | |||||||||||
Change in Plan Assets | |||||||||||||||||
Fair Value at January 1 | $609.6 | $756.4 | $873.2 | $78.6 | $81.0 | $79.4 | |||||||||||
Actual earnings (loss) on plan assets | 138.2 | (91.2) | (60.3) | 11.9 | (5.1) | (0.1) | |||||||||||
Employer contributions | 1.2 | 3.1 | 1.2 | 15.4 | 13.0 | 11.5 | |||||||||||
Plan participants' contributions | - | - | - | 0.7 | 6.9 | 5.8 | |||||||||||
Benefits paid | (53.8) | (58.7) | (57.7) | (10.9) | (17.2) | (15.6) | |||||||||||
Fair Value at December 31 | $695.2 | $609.6 | $756.4 | $95.7 | $78.6 | $81.0 | |||||||||||
Funded Status of Plans | |||||||||||||||||
Funded status at December 31 | ($237.3) | ($241.6) | ($49.8) | ($193.6) | ($179.0) | ($124.3) | |||||||||||
Unrecognized | |||||||||||||||||
Net actuarial loss | 153.6 | 203.2 | 18.4 | 94.1 | 92.1 | 44.1 | |||||||||||
Prior service cost | 36.6 | 22.9 | 26.2 | 0.2 | 0.2 | 0.3 | |||||||||||
Net transition (asset) obligation | (2.3) | (4.5) | (6.8) | 13.8 | 15.4 | 16.8 | |||||||||||
Net Asset (Accrued Benefit Cost) | ($49.4) | ($20.0) | ($12.0) | ($85.5) | ($71.3) | ($63.1) | |||||||||||
Amounts recognized in the Balance Sheet consist of: | |||||||||||||||||
Prepaid benefit cost | $6.9 | $13.5 | $12.3 | $0.1 | $0.1 | $0.1 | |||||||||||
Accrued benefit cost | (49.4) | (28.5) | (24.3) | (85.6) | (71.4) | (63.2) | |||||||||||
Minimum liability | (113.8) | (163.6) | - | - | - | - | |||||||||||
Intangible asset | 36.5 | 22.8 | - | - | - | - | |||||||||||
Regulatory asset (See Note A) | 70.4 | 135.8 | - | - | - | - | |||||||||||
Net amount recognized at end of year | ($49.4) | ($20.0) | ($12.0) | ($85.5) | ($71.3) | ($63.1) | |||||||||||
The accumulated benefit obligation for all of our defined benefit plans was 6.16375%. The interest rate is reset quarterly based on 3-
month LIBOR plus 10 basis points. Proceeds from the notes were
used to fund a $150$858.5 million capital contribution by Wisconsin
Energy to Wisconsin Electric and to reduce short-term borrowings
and for other general corporate purposes.
Unused lines of credit for short-term borrowing amounted to
$398$785.7 million at December 31, 1999 of which $378 million supports
commercial paper. In support of various informal lines of credit
from banks, Wisconsin Energy's subsidiaries have agreed to
maintain unrestricted compensating balances or to pay commitment
fees; neither the compensating balances nor the commitment fees
are significant.
J - BENEFITS
The Company provides defined benefit2003 and 2002, respectively.
Information for pension and other
postretirement benefit plans to employees. The status of these
plans, including a reconciliation of benefit obligations, a
reconciliation of plan assets and the funded status of the plans
follows. Also disclosed below is the aggregate funded status of
those pension and other postretirement benefit plans with an accumulated net benefit obligationsobligation in excess of plan assets.
2003 | 2002 | ||||
(Millions of Dollars) | |||||
Projected benefit obligation | $913.1 | $834.6 | |||
Accumulated benefit obligation | $839.9 | $785.7 | |||
Fair value of plan assets | $695.2 | $609.6 | |||
Additional Information | 2003 | 2002 | |
(Millions of Dollars) | |||
Increase (decrease) in minimum liability included in a combination of other | |||
comprehensive income and regulatory assets | ($49.8) | $163.6 | |
The components of net periodic pension and other postretirementpost-retirement benefit costs are:
| Other Post-retirement | |||||||||||
Benefit Plan Cost Components | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||
Net Periodic Benefit Cost (Income) | ||||||||||||
Service cost | $27.2 | $18.3 | $18.5 | $10.3 | $ 7.5 | $ 6.2 | ||||||
Interest cost | 56.9 | 56.7 | 57.0 | 17.6 | 15.3 | 13.6 | ||||||
Expected return on plan assets | (64.0) | (68.2) | (71.3) | (6.5) | (6.8) | (6.8) | ||||||
Amortization of: | ||||||||||||
Transition (asset) obligation | (2.2) | (2.2) | (2.2) | 1.5 | 1.5 | 1.5 | ||||||
Prior service cost | 4.8 | 3.4 | 3.3 | - | - | 0.1 | ||||||
Actuarial loss (gain) | 3.0 | 3.1 | 0.9 | 6.6 | 3.7 | 1.5 | ||||||
Net Periodic Benefit Cost (Income) | $25.7 | $11.1 | $ 6.2 | $29.5 | $21.2 | $16.1 | ||||||
Weighted-Average assumptions used to | ||||||||||||
determine benefit obligations at Dec 31 | ||||||||||||
Discount rate | 6.25% | 6.75% | 7.25% | 6.25% | 6.75% | 7.25% | ||||||
Rate of compensation increase | 4.5 to | 4.0 to | 4.5 to | 4.5 to | 4.0 to | 4.5 to | ||||||
5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | |||||||
Weighted-Average assumptions used to | ||||||||||||
determine net cost for year ended Dec 31 | ||||||||||||
Discount rate | 6.75% | 7.25% | 7.50% | 6.75% | 7.25% | 7.50% | ||||||
Expected return on plan assets | 9.0 | 9.0 | 9.0 | 9.0 | 9.0 | 9.0 | ||||||
Rate of compensation increase | 4.0 to | 4.5 to | 4.5 to | 4.0 to | 4.5 to | 4.5 to | ||||||
5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | |||||||
Assumed health care cost trend rates at Dec 31 | ||||||||||||
Health care cost trend rate assumed for | ||||||||||||
next year | N/A | N/A | N/A | 10 | 10 | 9 | ||||||
Rate that the cost trend rate gradually | ||||||||||||
declines to | N/A | N/A | N/A | 5 | 5 | 5 | ||||||
Year that the rate reaches the rate it is | ||||||||||||
assumed to remain at | N/A | N/A | N/A | 2009 | 2008 | 2007 | ||||||
The expected long-term rate of return on plan assets was 9% in 2003 and 2002. This return expectation on plan assets was determined by reviewing actual pension historical returns as well as calculating expected total trust returns using the weighted-average assumptions usedweighted average of long term market returns for each of the asset categories utilized in the pension fund.
Other Post-retirement Benefits Plans: We use various Employees' Benefit Trusts to fund a major portion of other post-retirement benefits. The majority of the trusts' assets are mutual funds or commingled indexed funds.
Since January 1, 1992, we have calculated our post-retirement benefit costs in accordance with SFAS 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions. These costs are recoverable from our utility customers.
The assumed health care cost trend rate for 2004 is at 10% for all plan participants decreasing gradually to 5% in 2008 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans.
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase | 1% Decrease | ||
(Millions of Dollars) | |||
Effect on | |||
Post-retirement benefit obligation | $25.5 | ($22.7) | |
Total of service and interest cost components | $3.3 | ($2.9) | |
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit program under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.
In general, accounting rules require that changes in relevant laws and government benefit programs be considered in measuring post-retirement benefit costs and the Accumulated Post-retirement Benefit Obligation (APBO). However, certain accounting issues raised by the Act -- in particular, how to account for the federal subsidy -- are not explicitly addressed by FASB Statement 106. In addition, significant uncertainties exist for a plan sponsor both as to the direct effects of the Act and its ancillary effects on plan participant's behavior and health care costs.
The FASB issued FASB Staff Position No. SFAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," (FSP 106-1) that allows sponsors to elect to defer recognition of the effects of the Act.
In accordance with FSP 106-1, we elected to defer recognition of the effects of the Act. Accordingly, any measures of the APBO or net periodic post-retirement benefit cost in the financial statements or the accompanying footnotes do not reflect the effects of the Act on the plan. Specific authoritative guidance on the accounting for the plans include the following:
Plan Assets: In theour opinion, of the Company, current pension trust assets and amounts which are expected to be paidcontributed to the trusts in the future will be adequate to meet pension payment obligations to current and future retirees. OTHER POSTRETIREMENT BENEFITS PLANS: The Company uses
Employees' Benefit Trusts to fund a major portion of other
postretirement benefits for employees of Wisconsin Electric and
the non-utility affiliates. The majority of the trusts' assets
are mutual funds.
The assumed health care cost trend rateOur pension plans asset allocation at December 31, 19992003 and 2002, and our target allocation for 2004, by asset category, are as follows:
Target | Percentage of Pension Plans | |||||
Asset Category | 2004 | 2003 | 2002 | |||
Equity Securities | 72% | 76% | 72% | |||
Debt Securities | 28% | 24% | 28% | |||
Total | 100% | 100% | 100% | |||
Wisconsin Energy Corporation's common stock is not included in equity securities. Investment managers are specifically prohibited from investing in our securities or any affiliate of ours except if part of a commingled fund.
The target asset allocation was 10.0%established by our Board of Directors appointed Investment Trust Policy Committee, which oversees investment matters related to all of our funded benefit plans. Asset allocation is monitored by the Investment Trust Policy Committee and support staff on a monthly basis.
Our other post-retirement benefit plans asset allocation at December 31, 2003 and 2002, and our target allocation for 2004, by asset category, are as follows:
Target | Percentage of Pension Plans | |||||
Asset Category | 2004 | 2003 | 2002 | |||
Equity Securities | 35% | 35% | 36% | |||
Debt Securities | 64% | 64% | 63% | |||
Other | 1% | 1% | 1% | |||
Total | 100% | 100% | 100% | |||
Wisconsin Energy Corporation's common stock is not included in equity securities. Investment managers are specifically prohibited from investing in our securities or any affiliate of ours except if part of a commingled fund.
The target asset allocation was established by our Board of Directors appointed Investment Trust Policy Committee, which oversees investment matters related to all plan participants decreasing graduallyof our funded benefit plans. Asset allocation is monitored by the Investment Trust Policy Committee and support staff on a monthly basis.
Cashflows:
|
| Other Post-retirement Benefits | ||
(Millions of Dollars) | ||||
2002 | $ - | $12.9 | ||
2003 | - | 15.3 | ||
2004 (Expected) | 15.0 | 15.5 | ||
Of the $15.0 million expected to 5.0%be contributed in 2005 and thereafter. Assumed health care cost trend rates have a
significant effect on2004 for pension benefits, $3.5 million is the amounts reportedminimum required by law for health careour qualified plans.
A one-percentage-point change
All contributions to the other post-retirement benefit plans during 2004 are discretionary, as the plans are not subject to any minimum regulatory funding requirements. These contribution would be expected to be in assumed health care cost trend
rates would have the following effects:
Savings Plans: We sponsor savings planplans which allowsallow employees to contribute a portion of their pretax and/and or after tax income in accordance with plan
specifiedplan-specified guidelines. The Company matches 50%Under these plans, we expensed $8.8 million of employeematching contributions up to 6% of the employee's annual compensation.
Matching contributions charged to expense amounted to
$9.1during 2003 and $8.3 million $7.4 millioneach during 2002 and $6.8 million during 1999, 1998 and
1997, respectively.
OMNIBUS STOCK INCENTIVE PLAN: The Omnibus Stock Incentive Plan
("OSIP"), as approved by stockholders in 1993 and amended by the
board of directors in 1998, enables the Company2001.
L -- GUARANTEES
We enter into various guarantees to provide a long-
term incentive, through equity interests in Wisconsin Energy, to
outside directors, selected officers and key employees. The OSIP
provides for the granting of stock options, stock appreciation
rights, stock awardsfinancial and performance units during the ten year
term of the plan. Awards may be paid in common stock, cash or a
combination thereof. No stock appreciation rights have been
grantedassurance to date. Four million shares of common stock have been
reserved under the OSIP.
The exercise price of a stock option under the OSIP is to be no
less than 100% of the common stock's fair market value on the
grant date and options may not be exercised within six months of
the grant date. The following is a summary of stock options
issued through December 31, 1999 under the Omnibus Stock
Incentive Plan.
Maximum |
|
| ||||
(Millions of Dollars) | ||||||
Guarantees | $223.3 | - | - | |||
Letters of Credit | 2.1 | 2.1 | - | |||
We guarantee the OSIP are exercisable at per share prices of between $26.813
and $30.875 with a weighted average remaining contractual life of
7.7 years. Under "cliff vesting" terms, 527,200 of these options
are exercisable four years after the grant date, while 632,500 of
these options vest on a straight-line "graded" basis over a four-
year period from the grant date and 45,000 of these options vest
on a straight-line "graded" basis over a three-year period from
the grant date. All outstanding options have an exercise period
of ten years from the grant date.
The earliest year in which any of the optionspotential retrospective premiums that could be exercised
was 1997.assessed under our nuclear insurance program (See Note E).
Postemployment benefits: Postemployment benefits provided to former or inactive employees are recognized when an event occurs. As of December 31, 1999, the 287,7002003, we have recorded an estimated liability, based on an accrual analysis, of exercisable
options outstanding under the OSIP$4 million.
M -- SEGMENT REPORTING
We are exercisable at per share
pricesa wholly-owned subsidiary of between $26.813 and $30.188 with a weighted average
remaining contractual life of 5.4 years.
Each stock option granted prior to 1999 under the Omnibus Stock
Incentive Plan includes performance units based upon contingent
dividends for four years from the date of grant. Payment of
these dividends depends on the achievement of certain performance
goals. No performance units have been earned to date. Wisconsin Energy has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("FAS 123"), and continueshave organized our operating segments according to apply
the intrinsic value method of accounting for awards under the
OSIP as required by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"). If
Wisconsin Energy had adopted the optional FAS 123 accounting
method, the effect on net income and earnings per share for 1999,
1998 and 1997 would have been immaterial.
During 1999, 1998 and 1997, the Company granted to certain key
employees restricted shares of common stock under the OSIP at
their weighted-average fair market values on the grant date.
Our electric utility and
a non-utility energy segment.
The reportable utility energy segment includes Wisconsin Energy's
two utility subsidiaries, Wisconsin Electric Power Company and
Edison Sault Electric Company. This segment derives its revenues
from electric, gas and steam operations. Electric operations
engageengages in the generation, transmission, distribution and sale of electric energy in southeastern (including Metropolitanmetropolitan Milwaukee), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Gas operations engageOur natural gas utility is engaged in the purchase, distribution and sale of natural gas to retail customers and the transportation of customer-owned natural gas in fourthree service areas in southeastern, east central western and northern Wisconsin. Steam operations engage in the production, distributionOur steam utility produces, distributes and sale
ofsells steam to space heating and processing customers in the Milwaukee, Wisconsin area.
The reportable non-utility energy segment derives its revenues
from activities including independent power production and energy
marketing, services and trading.
The following table summarizes the
Summarized financial information concerning our reportable operating segments for each of Wisconsin Energy for the years ended December 31.
31, 2003, 2002 and 2001, is shown in the following table.
Reportable Operating Segments | |||||
Year Ended | Electric | Gas | Steam | Other (a) | Total |
(Millions of Dollars) | |||||
December 31, 2003 | |||||
Operating Revenues (b) | $1,986.4 | $513.0 | $22.5 | $ - | $2,521.9 |
Depreciation, Decommissioning | |||||
and Amortization | $234.1 | $38.9 | $3.2 | $ - | $276.2 |
Operating Income (c) | $422.3 | $49.0 | $ - | $ - | $471.3 |
Equity in Earnings | |||||
of Unconsolidated Affiliates | $22.8 | $ - | $ - | $ - | $22.8 |
Capital Expenditures | $271.6 | $56.8 | $2.6 | $12.7 | $343.7 |
Total Assets (d) | $5,784.9 | $628.7 | $54.5 | $176.5 | $6,644.6 |
December 31, 2002 | |||||
Operating Revenues (b) | $1,884.6 | $389.8 | $21.5 | $ - | $2,295.9 |
Depreciation, Decommissioning | |||||
and Amortization | $230.0 | $34.6 | $3.3 | $ - | $267.9 |
Operating Income (Loss) (c) | $453.3 | $33.5 | ($1.5) | $ - | $485.3 |
Equity in Earnings | |||||
of Unconsolidated Affiliates | $20.4 | $ - | $ - | $ - | $20.4 |
Capital Expenditures | $312.3 | $34.7 | $1.6 | $17.1 | $365.7 |
Total Assets (d) | $5,513.3 | $566.2 | $55.3 | $150.3 | $6,285.1 |
December 31, 2001 | |||||
Operating Revenues (b) | $1,839.8 | $457.1 | $21.8 | $ - | $2,318.7 |
Depreciation, Decommissioning | |||||
and Amortization | $231.7 | $29.3 | $3.3 | $ - | $264.3 |
Operating Income (c) | $446.2 | $28.6 | $1.2 | $ - | $476.0 |
Equity in Earnings | |||||
of Unconsolidated Affiliates | $20.6 | $ - | $ - | $ - | $20.6 |
Capital Expenditures | $324.4 | $34.5 | $3.1 | $15.0 | $377.0 |
(a) | Other includes primarily other non-utility |
(b) | We account for intersegment revenues at a tariff rate established by the PSCW. Intersegment revenues are not material. |
(c) | Interest income and interest expense are not included in segment |
(d) | Common utility plant is allocated to electric, gas and steam to determine segment assets (see Note A). |
N -- RELATED PARTIES
American Transmission Company: We have approximately a 34.6% interest in non-utility energy segment assets, Wisvest
CorporationATC, a regional transmission company established in 2000 under Wisconsin legislation. During 2003, 2002 and 2001, we paid ATC $94.4 million, $85.1 million and $71.0 million, respectively, for transmission services. We also provide a variety of operational, maintenance and project management work for ATC, which are reimbursed to us by ATC.
Other: Managerial, financial, accounting, legal, data processing and other services may be rendered between associated companies and are billed in accordance with service agreements approved by the PSCW. We had $141.4a net receivable from associated companies of approximately $10.7 million of loans receivable outstanding as of December 31, 1999 under two loan facilities2003.
O -- COMMITMENTS AND CONTINGENCIES
Capital Expenditures: We have made certain commitments in connection with SkyGen Energy
Holdings LLC (with its affiliate defined2004 capital expenditures. During 2004, we estimate that total capital expenditures will be approximately $406 million.
Operating Leases: We enter into long-term purchase power contracts to meet a portion of our anticipated increase in future electric energy supply needs. These contracts expire at various times through 2013. Certain of these contracts were deemed to qualify as "SkyGen"). SkyGen
develops, owns and operates independent power plants and
cogeneration facilities. SkyGen has approximately 350 megawatts
of generation plants in operation, 1,500 megawatts under
construction and 2,500 megawatts in advanced development. The
loan facilities follow Wisvest Corporation's 1997 collaboration
with SkyGen to develop and jointly own the Androscoggin Energy
Center, a 160-megawatt cogeneration facility located in Jay,
Maine.
The first loan, in the amount of $30 million, provides secured
short-term financingoperating leases.
Future minimum payments for the purchase of combustion turbines
associated with various SkyGen power projects. Under certain
circumstances, the second loan may be converted in stages to a
minority equity ownership of 25% to up to 49.9% in SkyGen Energy
Holdings LLC. Following any such conversion, management control
remains with SkyGen. As of December 31, 1998next five years and 1997, Wisvest
Corporation had $66.4 million and $15.0 million of loans
receivable from SkyGen. The fair value ofthereafter for these loans in all
periods equals their face value.
A reconciliation of the totals reported for the operating
segments to the applicable line items in the financial statements
iscontracts are as follows:
(Millions of | ||
2004 | $42.5 | |
2005 | 41.4 | |
2006 | 41.2 | |
2007 | 40.8 | |
2008 | 26.4 | |
Thereafter | 79.9 | |
Total | $272.2 | |
Giddings & Lewis, Inc.,/City of West Allis Lawsuit: During 2002, we entered into Settlement Agreements and Releases with Giddings & Lewis Inc. and Kearney & Trecker Corporation now(now a part of Giddings & Lewis, Inc.,Lewis) and the City of West Allis, brought an actionthereby ending all remaining litigation in this lawsuit. Under the Settlement Agreements and Releases, we paid $17.3 million as full and final settlement of all damage claims against us. These settlements resulted in a 2002 charge of approximately $10.6 million after tax for us. The Settlement Agreements were determined to be in the Milwaukee County Circuit Court alleging
that Wisconsin Electric had deposited cyanide contaminated wood
chips in 1959 at two sites in West Allis, Wisconsin owned by the
plaintiffs. Environmental remediation at both sites was
completed several years ago, with the current owners paying for
disposal of materials found on their respective portionsmutual best interests of the sites. Internal investigations led Wisconsin Electric to believe
that it was not the source of this waste.
In July 1999, a jury issued a verdict against Wisconsin Electric
awarding the plaintiffs $4.5 million in compensatory damages for
clean-up costs and loss of property value and $100 million in
punitive damages. In October 1999, the Circuit Court denied
Wisconsin Electric's post trial motions and directed that
judgment on the verdict be entered. Wisconsin Electric has filed
notice of appeal of the judgment to the Wisconsin Court of
Appeals.
In December 1999,settling parties in order to stopavoid the post-judgment accrualburden, inconvenience and expense of interest at 12% duringcontinued litigation between the pendencyparties and do not constitute an admission of liability or wrongdoing by us with respect to any released claims.
In September 2002, we filed a lawsuit against our insurance carriers to recover those costs and expenses associated with this matter. As of December 31, 2003, we have recovered amounts totaling approximately $11.2 million from several insurance carriers, with $11.1 million recorded as a reduction of other operation and maintenance expenses. We are continuing to pursue litigation against the remaining insurance carriers and other third parties.
Environmental Matters: We periodically review our exposure for environmental remediation costs as evidence becomes available indicating that our liability has changed. Given current information, including the following, management believes that future costs in excess of the appeal, Wisconsin
Electric tendered a contested liability paymentamounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to our financial position or results of $110 million,
which is part of Deferred Charges and Other Assets - Other on the
Consolidated Balance Sheet, to the Milwaukee County Clerk of
Circuit Court representing the amount of the verdict and accrued
interest. Under Wisconsin law, the plaintiffs are liable to
Wisconsin Electric upon reversal or reduction of the judgment for
the applicable amount of the funds tendered with interest.
In further post-trial proceedings, the plaintiffs filed with the
Circuit Court a motion for sanctions based upon representations
made by Wisconsin Electric during trial that Wisconsin Electric
had no insurance coverage for the punitive damage award. The
Circuit Court held hearings on the sanctions issue in February
2000. Wisconsin Electric vigorously defended against the
plaintiffs' allegations and does not believe that a basis for
sanctions based upon intentional misrepresentation exists. The
Circuit Court is requiring further briefing on the matter and
will hear oral argument in April 2000.
In the opinion of management, based in part on the advice of
legal counsel, the jury verdict was not supported by the evidence
or the law and the unprecedented award of punitive damages of
this magnitude was unwarranted and should therefore be reversed
or substantially reduced on appeal. As such, Wisconsin Electric
has not established a reserve for potential damages from this
suit.
MANUFACTURED GAS PLANT SITES: Wisconsin Electric continuesoperations.
We have a voluntary program to investigateof comprehensive environmental remediation planning for former manufactured gas plant sites and coal-ash disposal sites. We perform ongoing assessments of manufactured gas plant sites and related disposal sites and coal ash disposal/landfill sites used by us, as discussed below. We are working with the Wisconsin Department of Natural Resources in our investigation and remediation of elevenplanning. At this time, we cannot estimate future remediation costs associated with these sites beyond those described below.
Manufactured Gas Plant Sites: We have completed planned remediation activities at three former manufactured gas plant sites. Wisconsin ElectricRemediation at additional sites is currently estimatesbeing performed, and other sites are being investigated or monitored. We have identified additional sites that may have been impacted by historical manufactured gas plant activities. Based upon ongoing analysis, we estimate that the future costs for detailed site investigation and future
The PSCW has allowed Wisconsin utilities, including us, to defer the costs are uncertain pendingspent on the resultsremediation of further
site specific investigations and the selection of site specific
remediation.
Of the eleven sites, Wisconsin Electric has begun remediation
activities at former manufactured gas plant sites, and has allowed for these costs to be recovered in rates over five years. Accordingly, we have recorded a regulatory asset for remediation costs.
Ash Landfill Sites: We aggressively seek environmentally acceptable, beneficial uses for our coal combustion by-products. However, these coal-ash by-products have been, and to a small degree, continue to be disposed in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the Citiesneed for various levels of Burlington and Kenosha, Wisconsin. Wisconsin Electric also
expects to begin remediation at sites in Fort Atkinson and
Waukesha, Wisconsin in 2001. Wisconsin Electric's expected
remediationmonitoring or adjusting. Where we have become aware of these sitesconditions, efforts have been expended to define the nature and extent of any release and work has been performed to address these conditions. The costs of these efforts are included in our fuel costs. During 2003, 2002 and 2001, we incurred $2.1 million, $2.1 million and $1.2 million, respectively, in coal-ash remediation expenses. As of December 31, 2003 we have no reserves established related to ash landfill sites.
EPA Information Requests: We received a request for information in December 2000 from the United States Environmental Protection Agency (EPA) regional offices pursuant to Section 114(a) of the Clean Air Act and a supplemental request in December 2002. In April 2003, we announced that a consent decree had been reached with the EPA that resolved all issues related to this matter. Under the consent decree, we will significantly reduce our air emissions from our coal-fired generating facilities. The reductions will be achieved between now and 2013 through a combination of installing new pollution control equipment, upgrading existing equipment, and retiring certain older units. The capital cost of implementing this agreement is anticipatedestimated to be accomplished at
an aggregate cost ofapproximately $600 million over 10 years. Under the agreement with EPA, we will spend between $8$20 million and $13 million.
In Wisconsin Electric's February 13, 1997 Rate Order, the Public
Service Commission of Wisconsin amplified its position on the
recovery of manufactured gas plant site remediation costs. It
reiterated its position that such costs should be deferred and
amortized and recovered, without carrying costs, in future rate
cases. Since the timing and recovery of remediation costs will
be affected by the biennial rate case cycle, the timing and
magnitude of remediation expenditures, and their recovery may be
affected.
KIMBERLY COGENERATION EQUIPMENT: In conjunction with the
proposed construction of an electric cogeneration$25 million to conduct a research project at our Presque Isle facility, in Kimberly,cooperation with th e U.S. Department of Energy, to test new mercury reduction technologies. These steps and the associated costs are consistent with our cost projections for implementing our Wisconsin Multi-Emission Cooperative Agreement and Wisconsin Electric purchased three
combustion turbines, three heat recovery boilers and a steam
turbine (the "Equipment"). Following a change inEnergy'sPower the status of
the original project and an extensive review of other potential
uses, Wisvest CorporationFuture plan. We also agreed to use the Equipment inpay a joint
independent power project. Under the provisionscivil penalty of Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, Wisconsin Electric refined its cash flow projection
for the Equipment based upon this proposal. As measured by
expected gross cash flows to be earned under this project,
Wisconsin Electric determined that an impairment existed. As a
result, Wisconsin Electric recorded a $30.0$3.2 million, impairment
charge in the fourth quarter of 1997 which was includedcharged to earnings in the
Other Income and Deductions - Other line of the Consolidated
Income Statement. During the second quarter of 1998, Wisvest
Corporation purchased2003. On July 21, 2003, the Equipment from Wisconsin Electriccourt granted the state of Michigan's and contributed itthe EPA's joint motion to amend the consent decree to allow Michigan to become a joint independent power project,party. Under the Androscoggin Energy Center.
In a related matter, Wisconsin Electric and Wisconsin
International Electric Power, Ltd reached agreement during 1999
on settlementterms of litigation brought by Wisconsin International
Electric Power against Wisconsin Electric claiming that Wisconsin
Electric had breached contractual duties allegedly owedthe amended consent decree, $0.1 million of the original $3.2 million civil penalty will be paid to the plaintiff relatingstate of Michigan. The agreement has gone through the public comment period. In October 2003, three citizen groups filed a motion with the court to the development of an electric generating
plant at Subic Bayintervene in the Philippines involvingproceeding to contest the Equipment.
While Wisconsin Electric does not believeconsent decree; the court granted their motion. Also, in October 2003, the government filed its response to public comments and a mo tion asking the court to approve the amended consent decree The intervenor groups subsequently filed a motion requesting that it breached any
contractual duties allegedly owedthe court stay the government's motion for approval of the decree to allow the plaintiff, Wisconsin
Electric paidintervenors to conduct discovery. Briefing has been completed. Both the plaintiff $18 million ($10.8 million, or
$0.09 per share for Wisconsin Energy, after tax) in November 1999
to settle the case,intervenors' motion and the plaintiff's claims were dismissed
with prejudice.government's motion for court approval of the decree are before the court for consideration.
INDEPENDENT AUDITORS' REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholders of Wisconsin Energy Corporation
Electric Power Company:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Wisconsin Electric Power Company and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, common equity, and cash flows for the years then ended. 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. The financial statements of Wisconsin Electric Power Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated February 5, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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, thesuch consolidated financial statements listed in
the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Wisconsin Energy
CorporationElectric Power Company and its subsidiariessubsidiary at December 31, 19992003 and 1998,2002, and the results of their operations and their cash flows for each
of the three years in the periodthen ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition,States of America.
As described in Note F, on January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations".
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 20, 2004
The following report is a copy of a report previously issued by Arthur Andersen LLP in connection with our Annual Report on Form 10-K for the year ended December 31, 2001. This opinion has not been reissued by Arthur Andersen LLP. See Exhibit 23.2 for further discussion.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the financialBoard of Directors and Stockholders of Wisconsin Electric Power Company:
We have audited the accompanying balance sheet and statement schedule listed in the index appearing under Item
14(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction withof capitalization of Wisconsin Electric Power Company as of December 31, 2001, and the related consolidated financial statements.statements of income, common equity and cash flows for the year then ended. These financial statements and financial statement schedule are the responsibility of the Company's management; ourmanagement. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. audit.
We conducted our audits
of these statementsaudit in accordance with auditing standards generally accepted in the United States, whichStates. 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,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
________________________________
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 25, 2000
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In our opinion, the financial statements listed in the index appearing
under Item 14(a)(1)referred to above present fairly, in all material respects, the financial position of Wisconsin Electric Power Company atas of December 31, 1999 and 1998,2001, and the results of its operations and its cash flows for each of the three years in the periodyear then ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers
/s/ARTHUR ANDERSEN LLP
________________________________
PRICEWATERHOUSECOOPERS
Arthur Andersen LLP
Milwaukee, Wisconsin
January 25, 2000
February 5, 2002
ITEM 9.9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None for
In July 2002, the Board of Directors of Wisconsin Energy, norupon recommendation of its Audit and Oversight Committee, ended the engagement of Arthur Andersen LLP as our independent public accountants and engaged Deloitte & Touche LLP to serve as our independent auditors for the fiscal year ended December 31, 2002.
The members of the Board of Directors of Wisconsin Electric.
Energy are also the members of our Board of Directors and, as such, approved the changes with respect to us. For more information, see our current report on Form 8-K filed with the Securities and Exchange Commission on July 8, 2002.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.
Internal Control Over Financial Reporting: There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
---------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WISCONSIN ENERGY:
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information under "Proposal 1: Election"Election of Directors - Terms Expiring in 2003" andDirectors", "Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate Governance -- Frequently Asked Questions: Are the Audit and Oversight and Compensation Committees comprised solely of independent directors?", "Corporate Governance -- Frequently Asked Questions: Are all the members of the audit committee financially literate and does the committee have an "audit committee financial expert"?" and "Committees of the Board of Directors -- Audit and Oversight" in Wisconsin Energy'sour definitive ProxyInformation Statement to be filed with the Securities and Exchange Commission for itsour Annual Meeting of Stockholders to be held June 27, 2000April 30, 2004 (the "2000 Annual Meeting Proxy
Statement") is incorporated herein by reference. Also see
"Executive Officers of the Registrant" in Part I of this report.
WISCONSIN ELECTRIC: The information under "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in Wisconsin Electric's definitive Information
Statement for its Annual Meeting of Stockholders to be held
June 22, 2000 (the "2000"2004 Annual Meeting Information Statement") is incorporated herein by reference. Also see "Executive Officers of the Registrant" in Part II.
Wisconsin Energy has adopted a written code of this report.
ITEM 11. EXECUTIVE COMPENSATION
WISCONSIN ENERGY: ethics, referred to as its Code of Business Conduct. We are a wholly owned subsidiary of Wisconsin Energy, and as such, all of our directors and employees, including the principal executive officer, principal financial officer and principal accounting officer, must comply with Wisconsin Energy's Code of Business Conduct. Wisconsin Energy has posted its Code of Business Conduct on its Internet website, www.WisconsinEnergy.com. Any amendments to, or waivers from, the Code of Business Conduct will be disclosed on Wisconsin Energy's website or in a current report on Form 8-K.
ITEM 11. | EXECUTIVE COMPENSATION |
The information under "Corporate Governance -
Compensation"Compensation of the Board of Directors",Directors," "Executive Officers' Compensation," "Employment and Severance Arrangements" and "Retirement Plans" in the 2000 Annual Meeting Proxy Statement is
incorporated herein by reference.
WISCONSIN ELECTRIC: The information under "Compensation,"
"Employment and Severance Arrangements" and "Retirement Plans" in
the 20002004 Annual Meeting Information Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
WISCONSIN ENERGY: The security ownership information under "WEC
Common Stock Ownership" in the 2000 Annual Meeting Proxy
Statement is incorporated herein by reference.
WISCONSIN ELECTRIC:
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
All of Wisconsin Electric'sour Common Stock (100% of such class) is owned by theour parent company, Wisconsin Energy Corporation, 231 West Michigan Street, P.O. Box 2949, Milwaukee, Wisconsin 53201. TheOur directors, director nominees and executive officers of Wisconsin Electric do not own any of theour voting securities of Wisconsin Electric.securities. The information concerning their beneficial ownership of Wisconsin Energy Corporation stock set forth under "Stock Ownership of Directors, Nominees and Executive Officers" in the 20002004 Annual Meeting Information Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WISCONSIN ENERGY:
We do not have any equity compensation plans under which our equity securities may be issued. Our directors, officers and certain employees participate in the compensation plans of Wisconsin Energy Corporation.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information under "Certain Related Transactions" in the 2000 Annual Meeting Proxy Statement is
incorporated herein by reference.
WISCONSIN ELECTRIC: The information under "Certain Related
Transactions" in the 20002004 Annual Meeting Information Statement is incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information regarding the fees paid to, and services performed by, our independent auditors and the pre-approval policy of our audit and oversight committee under "Independent Auditors" in the 2004 Annual Meeting Information Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT ACCOUNTANTS
INCLUDED IN PART II OF THIS REPORT
Wisconsin Energy Corporation:
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS |
ON FORM 8-K |
(a) 1. | FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS INCLUDED IN PART II OF THIS REPORT |
Consolidated Income StatementStatements for the three years ended December 31, 1999.
2003.
Consolidated StatementBalance Sheets at December 31, 2003 and 2002.
Consolidated Statements of Cash Flows for the three years ended December 31, 1999.
2003.
Consolidated Balance Sheet at December 31, 1999 and 1998.
Consolidated Capitalization Statement at December 31, 1999 and 1998.
ConsolidatedStatements of Common Stock Equity statement for the three years ended December 31, 1999.
Notes to Financial Statements.
Report2003.
Consolidated Statements of Independent Accountants.
Wisconsin Electric Power Company:
Income Statement for the three years ended December 31, 1999.
Statement of Cash Flows for the three years ended December 31, 1999.
Balance SheetCapitalization at December 31, 19992003 and 1998.
Capitalization Statement at December 31, 1999 and 1998.
Common Stock Equity Statement for the three years ended
December 31, 1999.
2002.
Notes to Consolidated Financial Statements.
Report of
Independent Accountants.
2. FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF
THIS REPORT
Wisconsin Energy Corporation:
Schedule I Condensed Parent Company Financial Statements
for the periods ended December 31, 1999. Other schedules
are omitted because of the absence of conditions under
which they are required or because the required information
is given in the financial statements or notes thereto.
Wisconsin Electric Power Company:
Auditors' Reports.
2. | FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF THIS REPORT |
Financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
3. EXHIBITS AND EXHIBIT INDEX
3. | EXHIBITS AND EXHIBIT INDEX |
See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each Management Contractmanagement contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by two asterisks (**) following the description of the exhibit.
(b)
(b) | REPORTS ON FORM 8-K |
A Current Reports on Form 8-K dated as of October 6, 1999 were
filed by Wisconsin Energy and Wisconsin Electric to report
that the Wisconsin trial court had denied Wisconsin
Electric's post trial motions and directed that judgement on
the verdict be entered against Wisconsin Electric in a
lawsuit involving contaminated wastes on two properties in
the City of West Allis, Wisconsin (the "West Allis lawsuit").
Current Reports on Form 8-K dated as of November 30, 1999
were filed by Wisconsin Energy and Wisconsin Electric to
report further developments in the West Allis lawsuit.
Current ReportsReport on Form 8-K dated as of December 22, 19992003 was filed by Wisconsin Electric on December 22, 2003 to report that Nuclear Management Company, which operates our Point Beach Nuclear Plant,submitted a letter notifying the U.S. Nuclear Regulatory Commission that it intends to file an application in February 2004 to renew the operating licenses for the plant's two nuclear reactors for an additional 20 years.
No other reports on Form 8-K were filed by Wisconsin Energy and Wisconsin Electric to
report additional developments induring the West Allis lawsuit and
that, in order to cease any further accrual of interest at
the rate of 12% per annum on the judgment, Wisconsin Electric
had tendered to the Milwaukee County Clerk of Circuit Court
the judgment amount including interest to the date of tender
aggregating $110.2 million.
A Current Report on Form 8-K dated as of cash dividends, loans, or advances. Under Wisconsin
law,February 11, 2004 was filed by Wisconsin Electric is prohibited from loaning funds, either
directly or indirectly,on February 11, 2004 to Wisconsin Energy. Wisconsin Energy
Corporation does not believereport that such restrictions will affect
its operations.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements and Prospectuses constituting part of the
Registration Statements listed below of Wisconsin Energy
Corporation of our report dated January 25, 2000 relating to the
financial statements and financial statement schedule, which
appears in this Form 10-K.
1. Registration Statement on Form S-3 (Registration No.
333-24277) - Stock Plus Investment Plan.
2. Registration Statement on Form S-8 (Registration No.
333-86467) - Employee Retirement Savings Plan.
3. Registration Statement on Form S-8 (Registration No.
33-65225) - 1993 Omnibus Stock Incentive Plan.
4. Registration Statement on Form S-3 (Registration No.
333-73137) - Trust Preferred Securities.
/s/PricewaterhouseCoopers LLP
_________________________________
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 29, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statement on
Form S-3 (No. 333-40319) of Wisconsin Electric Power Company of
our report dated January 25, 2000 relating to the financial
statements, which appears in this Form 10-K.
/s/PricewaterhouseCoopers LLP
_________________________________
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 29, 2000
WISCONSIN ELECTRIC POWER COMPANY | |
By | /s/GALE E. KLAPPA |
Date: March 8, 2004 | Gale E. Klappa, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/GALE E. KLAPPA | March 8, 2004 | |
Gale E. Klappa, President, Chief Executive Officer | ||
and | ||
/s/ALLEN L. LEVERETT | March | |
Allen L. Leverett, Chief Financial Officer | ||
Principal Financial Officer | ||
/s/STEPHEN P. DICKSON | March | |
Stephen P. Dickson, Controller | ||
/s/RICHARD A. ABDOO | March 8, 2004 | |
Richard A. Abdoo, Director | ||
/s/JOHN F. AHEARNE | March 8, 2004 | |
John F. Ahearne, Director | ||
/s/JOHN F. BERGSTROM | March | |
John F. Bergstrom, Director | ||
/s/BARBARA L. BOWLES | March | |
Barbara L. Bowles, Director | ||
/s/ROBERT A. CORNOG | March | |
Robert A. Cornog, Director | ||
/s/WILLIE D. DAVIS | March | |
Willie D. Davis, Director | ||
/s/ULICE PAYNE, JR. | March | |
Ulice Payne, Jr., Director | ||
/s/FREDERICK P. STRATTON, JR. | March | |
Frederick P. Stratton, Jr., Director |
/s/GEORGE E. WARDEBERG | March | |
George E. Wardeberg, Director |
WISCONSIN ELECTRIC POWER COMPANY
(Commission File No. 001-01245)
EXHIBIT INDEX
to
Annual Report on Form 10-K
For the year ended December 31, 2003
The following exhibits are filed or furnished with or incorporated by reference in the report with respect to Wisconsin Electric Power Company. (An asterisk (*) indicates incorporation by reference pursuant to Exchange Act Rule 12b-32.)
Number | Exhibit | ||
3 | Articles of Incorporation and By-laws | ||
3.1* | Restated Articles of Incorporation of Wisconsin | ||
3.2* | Bylaws of Wisconsin Electric Power Company, as amended to | ||
4 | Instruments defining the rights of security holders, including indentures | ||
4.1* | Reference is made to Article III of the Restated | ||
Mortgage, Indenture, Supplemental Indenture or Securities | |||
4.2* | Mortgage and Deed of Trust of Wisconsin Electric Power Company ("Wisconsin Electric"), dated | ||
4.3* | Second Supplemental Indenture of Wisconsin Electric, | ||
4.4* | Third Supplemental Indenture of Wisconsin Electric, | ||
4.5* | Fourth Supplemental Indenture of Wisconsin Electric, | ||
4.6* | Fifth Supplemental Indenture of Wisconsin Electric, | ||
4.7* | Sixth Supplemental Indenture of Wisconsin Electric, | ||
4.8* | Seventh Supplemental Indenture of Wisconsin Electric, | ||
Number | Exhibit | ||
4.9* | Eighth Supplemental Indenture of Wisconsin Electric, | ||
4.10* | Ninth Supplemental Indenture of Wisconsin Electric, | ||
4.11* | Tenth Supplemental Indenture of Wisconsin Electric, | ||
4.12* | Eleventh Supplemental Indenture of Wisconsin Electric, | ||
4.13* | Twelfth Supplemental Indenture of Wisconsin Electric, | ||
4.14* | Thirteenth Supplemental Indenture of Wisconsin | ||
4.15* | Fourteenth Supplemental Indenture of Wisconsin | ||
4.16* | Fifteenth Supplemental Indenture of Wisconsin Electric, | ||
4.17* | Sixteenth Supplemental Indenture of Wisconsin Electric, | ||
4.18* | Seventeenth Supplemental Indenture of Wisconsin | ||
4.19* | Eighteenth Supplemental Indenture of Wisconsin | ||
4.20* | Nineteenth Supplemental Indenture of Wisconsin | ||
4.21* | Twentieth Supplemental Indenture of Wisconsin Electric, | ||
4.22* | Twenty-First Supplemental Indenture of Wisconsin | ||
4.23* | Twenty-Second Supplemental Indenture of Wisconsin | ||
4.24* | Twenty-Third Supplemental Indenture of Wisconsin | ||
4.25* | Twenty-Fourth Supplemental Indenture of Wisconsin | ||
4.26* | Twenty-Fifth Supplemental Indenture of Wisconsin | ||
4.27* | Twenty-Sixth Supplemental Indenture of Wisconsin | ||
Number | Exhibit | ||
4.28* | Twenty-Seventh Supplemental Indenture of Wisconsin | ||
4.29* | Twenty-Eighth Supplemental Indenture of Wisconsin | ||
4.30* | Twenty-Ninth Supplemental Indenture of Wisconsin | ||
4.31* | Thirtieth Supplemental Indenture of Wisconsin Electric, | ||
4.32* | Thirty-First Supplemental Indenture of Wisconsin | ||
4.33* | Thirty-Second Supplemental Indenture of Wisconsin | ||
4.34* | Thirty-Third Supplemental Indenture of Wisconsin | ||
4.35* | Thirty-Fourth Supplemental Indenture of Wisconsin | ||
4.36* | Thirty-Fifth Supplemental Indenture of Wisconsin | ||
4.37* | Thirty-Sixth Supplemental Indenture of Wisconsin | ||
4.38* | Thirty-Seventh Supplemental Indenture of Wisconsin | ||
4.39* | Thirty-Eighth Supplemental Indenture of Wisconsin | ||
4.40* | Thirty-Ninth Supplemental Indenture of Wisconsin | ||
4.41* | Fortieth Supplemental Indenture of Wisconsin Electric, | ||
4.42* | Indenture for Debt Securities of Wisconsin Electric | ||
4.43* | Securities Resolution No. 1 of Wisconsin Electric | ||
4.44* | Securities Resolution No. 2 of Wisconsin Electric | ||
4.45* | Securities Resolution No. 3 of Wisconsin Electric | ||
Number | Exhibit | ||
4.46* | Securities Resolution No. 4 of Wisconsin Electric | ||
4.47* | Securities Resolution No. | ||
Certain agreements and instruments with respect to long-term debt not exceeding 10 percent of the total assets of the Registrant and its subsidiaries on a consolidated basis have been omitted as permitted by related instructions. The Registrant agrees pursuant to Item | |||
10 | Material Contracts | ||
10.1* | Supplemental Executive Retirement Plan of Wisconsin Energy Corporation, as amended and restated as of December 9, 2002. (Exhibit 10.1 to Wisconsin Energy Corporation's 12/31/02 Form 10-K (File No. 001-09057).)** See Note. | ||
10.2* | Service Agreement, dated April 25, 2000, between Wisconsin Electric Power Company and Wisconsin Gas Company. Exhibit 10.32 to Wisconsin Energy Corporation's 12/31/00 Form 10-K (File No. 001-09057).) | ||
10.3* | Executive Deferred Compensation Plan of Wisconsin Energy Corporation, as amended and restated as of February 1, 2004. (Exhibit 10.3 to Wisconsin Energy Corporation's 12/31/03 Form 10-K (File No. 001-09057).)** See Note. | ||
10.4* | Directors' Deferred Compensation Plan of Wisconsin Energy Corporation, as amended and restated as of January 1, 2004. (Exhibit 10.4 to Wisconsin Energy Corporation's 12/31/03 Form 10-K (File No. 001-09057).)** See Note. | ||
10.5* | Amended and Restated Wisconsin Energy Corporation Special Executive Severance Policy, effective | ||
10.6* | Short-Term Performance Plan of Wisconsin Energy Corporation effective January 1, 1992, as amended and restated as of August | ||
10.7* | Amended and Restated Wisconsin Energy Corporation Executive Severance Policy, effective as of April 26, 2000. (Exhibit 10.4 to Wisconsin Energy Corporation's 3/31/00 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.8* | Service Agreement, December 29, 2000, between Wisconsin Electric Power Company and American Transmission Company LLC. (Exhibit 10.33 to Wisconsin Energy Corporation's 12/31/00 Form 10-K (File No. 001-09057).) |
Number | Exhibit | ||
10.9* | Non-Qualified Trust Agreement by and between | ||
10.10* | Employment arrangement with Charles R. Cole, effective | ||
10.11* | Employment arrangement with Larry Salustro, effective December | ||
10.12* | Supplemental Benefits Agreement between Wisconsin | ||
10.13* | Amended and Restated Senior Officer Change in Control, Severance and Non-Compete Agreement between Wisconsin Energy Corporation and Richard A. Abdoo, effective May 1, 2002. (Exhibit 10.13 to Wisconsin Energy Corporation's 12/31/02 Form 10-K (File No. 001-09057).)** See Note. | ||
10.14* | Affiliated Interest Agreement (Service Agreement), dated December 12, 2002, by and among Wisconsin Energy Corporation and its affiliates. (Exhibit 10.14 to Wisconsin Energy Corporation's 12/31/02 Form 10-K (File No. 001-09057).) | ||
10.15* | Amended and Restated Senior | ||
10.16* | Letter Agreement by and between Paul Donovan and Wisconsin Energy Corporation dated April 27, 2003 (Exhibit 10.2 to Wisconsin Energy Corporation's 3/31/03 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.17* | Employment Agreement with George E. Wardeberg as | ||
10.18* | Non-Qualified Stock Option Agreement with George E. Wardeberg, dated April 26, 2000, granted pursuant to the Employment Agreement. (Exhibit 10.2(b) to Wisconsin Energy Corporation's 3/31/00 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.19* | Amended and |
Number | Exhibit | ||
10.20* | Letter Agreement by and between Richard R. Grigg and Wisconsin Energy Corporation dated July | ||
10.21* | Amended and | ||
10.22* | Senior Officer Employment and Non-Compete Agreement between Wisconsin Energy Corporation and Allen L. Leverett, effective July 1, 2003. (Exhibit 10.3 to Wisconsin Energy Corporation's 6/30/03 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.23* | Senior Officer Employment and Non-Compete Agreement between Wisconsin Energy Corporation and Rick Kuester, effective October 13, 2003. (Exhibit 10.3 to Wisconsin Energy Corporation's 9/30/03 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.24* | Benefit exchange documents between Paul Donovan and Wisconsin Energy Corporation, effective April 23, 2001. (Exhibit 10.1 to Wisconsin Energy Corporation's 3/31/01 Form 10-Q (File No. 001-09057).)** See Note. | ||
(a) Exchange Agreement | |||
(b) Letter Agreement | |||
(c) Split Dollar Agreement | |||
(d) Collateral Assignment | |||
10.25* | Benefit exchange documents between George E. Wardeberg and Wisconsin Energy Corporation, effective April 19, 2001. (Exhibit 10.2 to Wisconsin Energy Corporation's 3/31/01 Form 10-Q (File No. 001-09057).)** See Note. | ||
(a) Exchange Agreement | |||
(b) Letter Agreement | |||
(c) Split Dollar Agreement | |||
(d) Collateral Assignment | |||
10.26* | Supplemental Pension Benefit agreement between Wisconsin Energy Corporation and Stephen Dickson, effective May 23, 2001. (Exhibit 10.1 to Wisconsin Energy Corporation's 6/30/01 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.27* | Forms of Stock Option Agreements under 1993 Omnibus Stock Incentive Plan. (Exhibit 10.5 to Wisconsin Energy Corporation's 12/31/95 Form 10-K.) Updated as Exhibit 10.1(a) and 10.1(b) to Wisconsin Energy Corporation's 3/31/00 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.28* | 1998 Revised forms of award agreements under 1993 | ||
10.29* | Form of Nonstatutory Stock Option Agreement under the WICOR, Inc. 1994 Long-Term Performance |
Number | Exhibit | ||
10.30* | Form of Nonstatutory Stock Option Agreement for February 2000 Grants of Options under the WICOR, Inc. 1994 Long-Term Performance Plan. (Exhibit 4.5 to Wisconsin Energy | ||
10.31* | WICOR, Inc. 1992 Director Stock Option Plan, as amended. (Exhibit 10.3 to WICOR, Inc.'s 12/31/98 Form 10-K (File No. 001-07951).)** See Note. | ||
10.32* | Form of Director Nonstatutory Stock Option Agreement under the WICOR, Inc. 1992 Director Stock Option Plan. (Exhibit 4.2 to WICOR, Inc.'s Registration Statement on Form S-8 (Reg. No. 33-67132).)** See Note. | ||
10.33* | Form of Director Nonstatutory Stock Option Agreement for February 2000 Option Grants under the WICOR, Inc. 1992 Director Stock Option Plan. (Exhibit 4.8 to Wisconsin Energy Corporation's Registration Statement on Form S-8 (Reg. No. 333-35798).)** See Note. | ||
10.34* | WICOR, Inc. 1987 Stock Option Plan, as amended. (Exhibit 4.1 to WICOR, Inc.'s Registration Statement on Form S-8 (Reg. No. 33-67134).)** See Note. | ||
10.35* | Form of Nonstatutory Stock Option Agreement under the WICOR, Inc. 1987 Stock Option Plan. (Exhibit 10.20 to WICOR, Inc.'s 12/31/91 Form 10-K (File No. 001-07951).)** See Note. | ||
10.36* | 2001 Revised forms of award agreements under 1993 Omnibus Stock Incentive Plan, as amended, for restricted stock awards, incentive stock option awards and non-qualified stock option awards. (Exhibit 10.3 to Wisconsin Energy Corporation's 3/31/01 Form 10-Q (File No. 001-09057).)** See Note. | ||
10.37* | 1993 Omnibus Stock Incentive Plan, as amended and restated, as | ||
10.38* | Form of Performance Share Agreement | ||
10.39* | Port Washington I Facility Lease Agreement between Port Washington Generating Station LLC as | ||
10.40* | Port Washington II Facility Lease Agreement between Port Washington Generating Station LLC as Lessor and Wisconsin | ||
Note: Two asterisks (**) identify management contracts and executive compensation plans or arrangements required to be filed as exhibits pursuant to Item | |||
12 | Statements re Computation of | ||
12.1 | Statement of Computation of Ratio of Earnings to | ||
Number | Exhibit | ||
21 | Subsidiaries of the registrant | ||
21.1 | Subsidiaries of Wisconsin | ||
23 | Consents of experts and counsel | ||
23.1 | Deloitte & Touche LLP | ||
23.2 | Notice regarding Consent of | ||
31 | Rule 13a-14(a) / 15d-14(a) Certifications | ||
31.1 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the | ||
31.2 | Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the | ||
32 | Section 1350 Certifications | ||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||