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, |
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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 | |||
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Securities Registered Pursuant to Section 12(b) of the Act: | |
Name of Each Exchange | |
Title of Each Class | on Which Registered |
Common Stock, $.01 Par Value | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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 the Registrant's knowledge, in the definitive Proxy Statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The aggregate market value of the common stock of Wisconsin Energy Corporation held by non-affiliates iswas approximately $2.8$2.9 billion based upon the reported last sale price of such securities as of FebruaryJune 28, 2002.
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Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date (February 28, 2002)(January 31, 2003):
Common Stock, $.01 Par Value, |
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Documents Incorporated by Reference
Portions of Wisconsin Energy Corporation's definitive Proxy Statement for its Annual Meeting of Stockholders, to be held on May 2, 2002,April 30, 2003, are incorporated by reference into Part III hereof.
WISCONSIN ENERGY CORPORATION |
FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, |
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TABLE OF CONTENTS | |
Item | Page |
PART I |
1. Business | |
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2. Properties | |
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3. Legal Proceedings | |
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4. Submission of Matters to a Vote of Security Holders | 28 |
Executive Officers of the Registrant | 28 |
PART II |
5. Market for Registrant's Common Equity and Related Stockholder Matters | |
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6. Selected Financial Data | |
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7. Management's Discussion & Analysis of Financial Condition & Results of | |
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7A.Quantitative and Qualitative Disclosures About Market Risk | 68 |
8. Financial Statements and Supplementary | |
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9. Changes in & Disagreements with Accountants on Accounting and Financial | |
105 |
PART III |
10. Directors and Executive Officers of the Registrant | 105 |
11. Executive Compensation | 105 |
12. Security Ownership of Certain Beneficial Owners and | 105 |
13. Certain Relationships and Related Transactions | 106 |
14. Controls and Procedures ................................................................................................................... | 106 |
PART IV |
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Schedule 1 - Condensed Parent Company Financial Statements | 108 |
Signatures | 113 |
Certifications ....................................................................................................................................... | 114 |
Exhibit Index | |
E-1 |
PART I
ITEM 1. | BUSINESS |
INTRODUCTION
Wisconsin Energy Corporation was incorporated in the state of Wisconsin in 1981 and became a diversified holding company in 1986. It maintains its principal executive offices in Milwaukee, Wisconsin. Unless qualified by their context when used in this document, the terms "Wisconsin Energy" or the "Company" refer to the holding company and all of its subsidiaries.
Wisconsin Energy conducts its operations primarily in three operating segments: a utility energy segment, a non-utility energy segment and a manufacturing segment. The Company's primary subsidiaries are Wisconsin Electric Power Company ("Wisconsin Electric"), Wisconsin Gas Company ("Wisconsin Gas") and WICOR Industries, Inc ("WICOR Industries").
Utility Energy Segment: The utility energy segment consists of: Wisconsin Electric, which serves over 1,000,000 electric customers in Wisconsin and the Upper Peninsula of Michigan, approximately 413,000420,500 gas customers in Wisconsin and about 450470 steam customers in metro Milwaukee, Wisconsin; Wisconsin Gas, which serves about 554,000562,000 gas customers in Wisconsin and about 2,2002,400 water customers in suburban Milwaukee, Wisconsin; and Edison Sault Electric Company ("Edison Sault"), which serves approximately 22,000 electric customers in the Upper Peninsula of Michigan.
Non-Utility Energy Segment: As of January 1, 2001,2002, the non-utility energy segment consisted primarily of:consists of W.E. Power, LLC ("We Power") and Wisvest Corporation ("Wisvest"), which develops, owns and operates electric generating facilities and invests. We Power was formed in other energy-related entities; WICOR Energy Services Company ("WICOR Energy"), which engaged in natural gas marketing as well as energy and price risk management; and FieldTech, Inc. ("FieldTech"), which provided meter reading and technology services for gas, electric and water utilities. During April 2001 the operations of WICOR Energy were merged into Kaztex Energy Management, Inc., an unconsolidated affiliate of Wisconsin Energy ("Kaztex"). In May 2001, FieldTech was sold to an unaffiliated third party. Wisconsin Energy is currently evaluating proposals to sell Wisvest's two existing non-utility power plants, located in the state of Connecticut. In November of 2001, the Company created W.E. Power, LLC ("W.E. Power"), a new non-utility energy subsid iary that willdesign, construct and own the new generating capacity included in the Company'sPower the Future strategy assuming all required regulatory approvals are obtained. Wisvest owns and operates electric generating facilities and has investments in other energy-related entities and assets. The Company is in the process of reducing the operations of Wisvest. See Item 7 for more information onPower the Future.
Manufacturing Segment: The manufacturing segment consists of WICOR Industries, an intermediary holding company, and its three primary subsidiaries: Sta-Rite Industries, Inc. ("Sta-Rite"), SHURflo Pump Manufacturing Co. ("SHURflo") and Hypro Corporation ("Hypro"), which are manufacturers of pumps, water treatment products and fluid handling equipment with manufacturing, sales and distribution facilities in the United States and several other countries.
Other: Other non-utility operating subsidiaries of Wisconsin Energy include primarily Minergy Corp. ("Minergy"), which develops and markets recycling technologies, and Wispark LLC ("Wispark"), which develops and invests in real estate. In May 2000, Wisconsin Energy announced that it would sell a significant portion of its portfolio of non-utility real estate assets.
Wisconsin Gas, WICOR Energy, FieldTech, WICOR Industries, Sta-Rite, SHURflo and Hypro were acquired by Wisconsin Energy as a result of the Company's acquisition of WICOR, Inc. ("WICOR") on April 26, 2000. WICOR remains a subsidiary of Wisconsin Energy, functioning as an intermediary holding company of the former WICOR companies.
Power the Future Strategy: In late February 2001, Wisconsin Energy announced enhancements to a 10-year, $7 billion strategy, originally proposed in September 2000, to improve the supply and reliability of electricity in Wisconsin. As part of thePower the Future growth strategy, Wisconsin Energy plans to: (1) invest in new natural gas-based and coal-based electric generating facilities and major upgrades on Wisconsin Electric's existing generation facilities, that would be owned within(2) upgrade the non-utility energy segment and leased back to Wisconsin Electric, (2) invest through Wisconsin Electric in upgrades costing less than $10 million in existing electric generating facilities at Wisconsin Electric, and (3) invest through Wisconsin Electric in upgrades of the existing energy distribution system. As part of this strategy, the Company also announced and began implementing plans to divest of non-core assets and operations, primarily in its non-uti litynon-utility energy segment and its non-utility real estate operations. Implementation of thePower the Future strategy is subject to a number of state and federal regulatory approvals. AdditionalA dditional information concerning thePower the Future strategy may be found below under "Non-Utility Energy Segment" and "Environmental Compliance" as well as in Item 7.
For further financial information about Wisconsin Energy's business segments, see "Results of Operations" in Item 7 and "Note N P -- Segment Reporting" in the Notes to Consolidated Financial Statements in Item 8.
The Company has through its Internet website www.wisconsinenergy.com available free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission ("SEC").
Cautionary Factors: A numberCertain statements contained herein are "Forward Looking Statements" within the meaning of forward-looking statements are included in this document. When used, the terms, "anticipate,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," "believe,"intends," "estimate,"anticipates,"
UTILITY ENERGY SEGMENT
ELECTRIC UTILITY OPERATIONS
The Company's electric utility operations consist of the electric operations of Wisconsin Electric as well as Edison Sault. Wisconsin Electric, which is the largest electric utility in the state of Wisconsin, generates, distributes and sells electric energy in a territory of approximately 12,000 square miles with a population estimated at 2,327,000 in southeastern (including the metropolitan Milwaukee area), east central and northern Wisconsin and in the Upper Peninsula of Michigan. Edison Sault generates, distributes and sells electric energy in a territory of approximately 2,000 square miles with a population of approximately 54,000 in the eastern Upper Peninsula of Michigan.
Electric Sales
See "Consolidated Selected Utility Operating Data" in Item 6 for certain electric utility operating information by customer class during the period 19971998 through 2001.2002.
Wisconsin Electric: Wisconsin Electric is authorized to provide retail electric service in designated territories in the state of Wisconsin, as established by indeterminate permits, certificates of public convenience and necessity, or boundary agreements with other utilities, and in certain territories in the state of Michigan pursuant to franchises granted by municipalities. Wisconsin Electric also sells wholesale electric power.
Electric energy sales by Wisconsin Electric to all classes of customers totaled approximately 30.530.4 million megawatt hours ("mwh") during 2001,2002, a 2.7%0.5% decrease from 2000.2001. Approximately 0.30.4 million of megawatt-hour sales during 20012002 were to Edison Sault. There were approximately 1,044,0001,056,000 electric customers at December 31, 2001,2002, an increase of 1.7%1.2% since December 31, 2000.2001.
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 0.8 million megawatt hours during 20012002 and 2000.2001. No significant megawatt-hour sales during 20012002 were to Wisconsin Electric. There were approximately 22,000 electric customers at December 31, 20012002 and December 31, 2000.2001.
Electric Sales Growth: Assuming moderate growth in the economy of its electric utility service territories and normal weather, the Company presently anticipates total retail and municipal electric2.6%2.0% over the six-yearfive-year period ending December 31, 2007.
Sales To Large Electric Retail Customers:Wisconsin Electric provides electric utility service to a diversified base of customers in such industries as mining, paper, foundry, food products, and machinery production, as well as to large retail chains. Edison Sault provides electric service to industrial accounts in the paper, crude oil pipeline and limestone quarry industries as well as to several state and federal government facilities.
The Company's largest retail electric customers are two iron ore mines located in the Upper Peninsula of Michigan. Wisconsin Electric currently has special negotiated power-sales contracts with these mines that expire in 2007. The combined electric energy sales to the two mines accounted for 6.6%6.4%, 7.7%6.6% and 7.0%7.7% of the Company's total electric utility energy sales during 2002, 2001 and 2000, and 1999, respectively. One of the mines is currently idle pending a production decision by its owners.
Sales to Wholesale Customers:During 2001,2002, Wisconsin Electric sold wholesale electric energy to fourthree municipally owned systems, two rural cooperatives and two municipal joint action agencies located in the states of Wisconsin, Michigan and Illinois. Wholesale electric energy sales by Wisconsin Electric were also made to 4234 other public utilities and power marketers throughout the region under rates approved by the Federal Energy Regulatory Commission ("FERC"). Edison Sault sold wholesale electric energy to one rural cooperative during 2001.2002. Wholesale sales accounted for approximately 10.8%8.2% of the Company's total electric energy sales and 4.2% of total electric operating revenues during 2002 compared with 10.8% of total electric energy sales and 6.0% of total electric operating revenues during 2001 compared with 12.1% of total electric energy sales and 7.2% of total electric operating revenues during 2000.2001.
Electric System Reliability Matters: Electric energy sales are impacted by seasonal factors and varying weather conditions from year-to-year. Wisconsin Energy, a summer peaking utility as a result of cooling load, reached its all-time electric peak demand obligation of 6,298 megawatts on August 7, 2001. The summer period is the most relevant period for capacity planning purposes at the Company. Wisconsin Electric is a member of the MAIN reliability council. MAIN guidelines direct members to have a minimum 15% planning reserve margin in place prior to the upcoming peak season. The Public Service Commission of Wisconsin ("PSCW") guidelines to electric utilities in Wisconsin advise a minimum 18% planning reserve margin. The Michigan Public Service Commission has not provided guidelines in this area. During the years 20022003 through 2007, Wisconsin Energy currently estimates that electric peak demand obligation will grow at an annualized rate of 2.6%1.7% to approximately 6,7 00 megawatts by the year 2007.6,700 megawatts.
Effective January 1, 2001, Wisconsin Energy combined the service territories of Wisconsin Electric and Edison Sault, a winter peaking utility as a result of heating load, into a single control area.
In spite of continued tight regional electric supply, especially during episodes of hot and humid weather, theThe Company had adequate capacity to meet all of its firm electric load obligations during 20012002 and expects to have adequate capacity to meet all of its firm obligations during 2002.2003. For additional information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7. For additional information regarding the Company's generation facilities, see "Utility Energy Segment" in Item 2.
Competition
Driven by a combination of market forces, regulatory and legislative initiatives and technological changes, theThe nation's electric utility industry hashad previously been following a trend towards restructuring and increased competition. However, given electric reliability problems in the state of California, which had previously deregulated,restructured its electric industry framework, and the current status of restructuring initiatives in regulatory jurisdictions where the Company primarily does business, Wisconsin Energy cannot predictdoes not expect significant electric deregulation in Wisconsin in the ultimate timing or impact of a restructured electric industry on its financial position or results of operations.next three years. For additional information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Electric Supply
The table below indicates the Company's sources of electric energy supply, including net generation by fuel type, for the following years ended December 31.31:
Estimate | Actual | Estimate | Actual | |||||
2002 (a) | 2001 | 2000 | 1999 | 2003 (a) | 2002 | 2001 | 2000 | |
Coal | 59.1% | 61.1% | 62.9% | 62.3% | 57.9% | 58.2% | 61.1% | 62.9% |
Nuclear | 22.1% | 24.6% | 22.8% | 21.5% | 24.5% | 24.6% | 22.8% | |
Hydroelectric | 2.0% | 1.6% | 1.8% | 1.8% | 2.0% | 1.6% | ||
Natural gas | 1.1% | 0.7% | 1.0% | 1.3% | 0.4% | 0.8% | 0.7% | 1.0% |
Oil and Other (b) | 0.1% | 0.1% | 0.2% | 0.1% | 0.1% | 0.2% | ||
Net Generation | 84.4% | 88.1% | 88.5% | 87.1% | 84.7% | 85.7% | 88.1% | 88.5% |
Power Purchases (c) | 15.6% | 11.9% | 11.5% | 12.9% | ||||
Purchased Power (c) | 15.3% | 14.3% | 11.9% | 11.5% | ||||
Total | 100.0% | 100.0% | 100.0% | 100.0% | ||||
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(a) | Estimated assuming that there are no unforeseen contingencies such as unscheduled maintenance or repairs of Wisconsin Energy's generating facilities or of regional electric transmission facilities. See "Factors Affecting Results, Liquidity and Capital Resources -- Cautionary Factors" in Item 7. |
(b) | Includes generation by alternative renewable sources. |
(c) | Excludes total intercompany sales between Edison Sault and Wisconsin Electric of 364.6 thousand mwh during 2002, 305.5 thousand mwh during 2001 and 175.6 thousand mwh during |
Wisconsin Energy's net generation totaled 27.8 million megawatt hours during 2002 compared with 28.9 million megawatt hours during 2001 compared withand 29.8 million megawatt hours during 2000 and 28.6 million megawatt hours2000. The decline in 2002 generation was primarily due to an increase in scheduled outages at Wisconsin Electric's generating facilities. The Company made up for the decrease in generation through additional power purchases during 1999.2002. When compared with the past three years, net generation as a percent of the Company's total electric energy supply is expected to decrease during 20022003 in large part due to the Port Washington unit retirements and planned outages at various Wisconsin Electric generating facilities andfacilities. Purchased power is expected to be the useprimary source of purchased poweradditional electric energy supply required to meet load growth.growth in the next two years.
Wisconsin Electric'sEnergy's average total fuel and purchased power costs per million British thermal unitsmegawatt by fuel type for the years ended December 31 are shown below.
2002 | 2001 | 2000 | |
Coal | $12.09 | $12.44 | $12.07 |
Nuclear | $5.04 | $5.78 | $5.44 |
Natural Gas | $60.56 | $72.31 | $75.49 |
Purchased Power | $32.78 | $37.71 | $38.06 |
The price offuel costs for coal and nuclear generation are relatively stable as the fuel costs are under long-term contracts. The costs for natural gas decreased in 2001 after increasing significantly during 2000.
2001 | 2000 | 1999 | |
Coal | $1.04 | $1.11 | $1.10 |
Nuclear | $0.57 | $0.53 | $0.55 |
Natural Gas | $4.57 | $5.08 | $2.82 |
Oil | $7.11 | $5.27 | $3.57 |
Coal-Based Generation
Coal Supply: Wisconsin Electric diversifies the coal supply for its 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 2002,2003, 99% of Wisconsin Electric's projected coal requirements of 13.012.0 million tons will be under contracts which are not tied to 2003 market pricing fluctuations. Wisconsin Electric does not anticipate any problem in procuring its remaining 20022003 coal requirements through short-term or spot purchases and inventory adjustments.
Following is a summary of the annual tonnage amounts for Wisconsin Electric's principal long-term coal contracts by the month and year in which the contracts expire.
Contract | |
Expiration Date | Annual Tonnage |
Dec. | 500,000 |
Dec. |
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Dec. |
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Dec. 2005 | 3,200,000 |
Dec. 2005 | 1,600,000 |
Dec. 2006 | 2,000,000 |
As of the beginning of 2002,2003, Wisconsin Electric had approximately a 108-day109-day supply of coal in inventory at its coal-firedcoal-based facilities.
Coal Deliveries: Approximately 80%75% of Wisconsin Electric's 20022003 coal requirements are expected to be delivered by Wisconsin Electric-owned unit trains. The unit trains will transport coal for the Oak Creek and Pleasant Prairie Power Plants from Wyoming mines. Coal from Pennsylvania and Colorado mines is also transported via rail to Lake Erie or Lake Michigan transfer docks and delivered to the Valley and Port Washington Power Plants by lake vessels. Coal from central Appalachia is shipped via rail to Lake Erie transfer docks and delivered to the Milwaukee County Power Plant by truck once it arrives by lake vessel in Milwaukee. Montana and Wyoming coal for Presque Isle Power Plant is transported via rail to Superior, Wisconsin, placed in dock storage and reloaded into lake vessels for plant delivery. Central Appalachian and Colorado coal bound for Presque Isle Power Plant is shipped via rail to Lake Erie and Lake Michigan (Chicago) coal transfer docks, respectively,respectivel y, for lake vessel delivery to the plant.
Environmental Matters: For information regarding emission restrictions, especially as they relate to coal-firedcoal-based generating facilities, see "Environmental Compliance".
Nuclear Generation
Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin. The United States Nuclear Regulatory Commission operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2. For additional information concerning Point Beach, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 and "Note FG -- Nuclear Operations" in the Notes to the Consolidated Financial Statements in Item 8.
Nuclear Management Company: Nuclear Management Company, LLC ("NMC"), owned by the Company and the affiliates of four other unaffiliated investor-owned utilities in the region, operates Point Beach. NMC provides services to nine nuclear generating units at seven sites in the states of Wisconsin, Minnesota, Michigan, Iowa, and Nebraska with a total combined generating capacity of about 5,300 megawatts as of December 31, 2001.2002. Wisconsin Electric continues to own Point Beach and retains 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, Liquidity and Capital Resources" in Item 7.
In August 2001, the United States Nuclear Regulatory Commission issued Bulletin 2001-01, Circumferential Cracking of Reactor Pressure Vessel Head Penetration Nozzles, requesting that pressurized water reactor licensees provide information on the structural integrity of the subject nozzles. NMC responded that tests and inspections conducted at Point Beach over the last several years had not identified any evidence of such cracking. NMC intends to conduct more thorough inspections of the reactor pressure vessel heads and nozzles during the Spring 2002 Unit 2 refueling outage and the Fall 2002 Unit 1 refueling outage.
Nuclear Fuel Supply: Wisconsin Electric purchases uranium concentrates ("Yellowcake") and contracts for its conversion, enrichment and fabrication. Wisconsin Electric maintains title to the nuclear fuel until fabricated fuel assemblies are delivered to Point Beach, whereupon it is sold to and leased back from the Wisconsin Electric Fuel Trust. For further information concerning this nuclear fuel lease, see "Note IJ -- Long-Term Debt" in the Notes to the Consolidated Financial Statements in Item 8.
Uranium Requirements: Wisconsin Electric requires approximately 400,000 pounds of Yellowcake to refuel a generating unit at Point Beach. Wisconsin Electric 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, amended in 2000, which supplies 100% of the annual requirements through 2007 under these staggered, extended fuel cycles.
Conversion: Wisconsin Electric has a long-term contract with a provider of uranium conversion services to supply 75% of the conversion requirements for the Point Beach reactors through 2004. Wisconsin Electric has an additional long-term conversion contract with a second conversion supplier to supply the remaining 25% of Wisconsin Electric's annual conversion requirements through 2004.
Enrichment: Wisconsin Electric effectively has one long-term contract that provides for 100% of the required enrichment services for the Point Beach reactors through the year 2006.
Fabrication: Fabrication of fuel assemblies from enriched uranium for Point Beach is covered under a contract with Westinghouse Electric Company, LLC for the balance of the plant's current operating licenses. During its fall 2000 refueling outage, the first reload region of a new fuel design from Westinghouse was loaded into Point Beach Unit 2. The first reload region of the new fuel design in Unit 1 was loaded during its spring of 2001 refueling outage. 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.
Used Fuel Storage & Disposal: For information concerning used fuel storage and disposal issues, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Nuclear Decommissioning: Wisconsin Electric provides for costs associated with the eventual decommissioning of Point Beach through the use of an external trust fund. Payments to this fund, together with investment earnings,results, brought the balance in the trust fund at December 31, 20012002 to approximately $590 million compared with an estimated cost to decommission Point Beach of $621 million in current dollars.$550.0 million. For additional information regarding decommissioning, see "Note FG -- Nuclear Operations" in the Notes to the Consolidated Financial Statements in Item 8.
Nuclear Plant Insurance: For information regarding nuclear plant insurance, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 and "Note FG - Nuclear Operations" in the Notes to the Consolidated Financial Statements in Item 8.
Hydroelectric Generation
Wisconsin Electric: Wisconsin Electric's hydroelectric generating system consists of fourteen operating plants with a total installed capacity of approximately 89 megawatts and a dependable capability of approximately 57 megawatts in December 2001.megawatts. Of these fourteen plants, thirteen are licensed by the FERC. The fourteenth plant, with an installed generating capacity of approximately 2 megawatts, does not require a license. Of the thirteen licensed plants, twelve plants, representing a total of 85 megawatts of installed capacity, have long-term licenses from the FERC, and one plant, the Sturgeon project, will not be relicensed and is intended to be removed.
Edison Sault: Edison Sault's primary source of generation is its 30-megawatt hydroelectric generating plant located on the St. Mary'sMarys 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. Mary'sMarys River at predetermined rates with a minimum annual payment of $0.1 million. The total flow of water taken out of Lake Superior, which in effect is the flow of water in the St. Mary'sMarys 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.
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. Mary'sMarys 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.
Natural Gas-Based Generation
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
Wisconsin Electric also has power purchase agreements with Mirant Corporation and LSP-Whitewater, LP, both of which utilize natural gas as primary fuel and fuel oil as back-up fuel. LSP-Whitewater, LP is responsible for its own natural gas and fuel oil procurement. Wisconsin Electric procures and delivers fuel to Mirant's Neenah Power Plant and receives the electric power produced, as discussed in "Purchase Power Commitments" below. This plant uses natural gas as its primary fuel, with fuel oil as backup. Fuel supplies to Mirant's Neenah Power Plant utilize the same procedures and agreements that are used for Wisconsin Electric's facilities.
An interruptible balancing and storage agreement with ANR Pipeline is intended to facilitate the variable gas usage pattern of the combustion turbine plants.
Wisconsin Electric has another power purchase agreement with Calpine Corporation for peaking capacity from a Zion, Illinois facility which is scheduled to begin commercial operation during the summer of 2002. Wisconsin Electric will procure and deliver fuel to the plant and receive the electric power produced, similar to the Mirant agreement. Fuel supplies to the Zion facility will utilize the same procedures as other Wisconsin Electric facilities; however, the Zion facility will be connected to Natural Gas Pipeline of American rather than ANR Pipeline, in turn procedures and agreements for transportation and balancing will be slightly different than those of the other Wisconsin Electric facilities.
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 utilityWisconsin Gas then transports Wisconsin Electric's gas to each plant under interruptible tariffs.
Wisconsin Electric also has power purchase agreements with Alliant Energy Neenah, LLC, a subsidiary of Alliant Energy Corporation, ("Alliant") and LSP-Whitewater, LP,a subsidiary of Cogentrix, Inc., both of which utilize natural gas as primary fuel and fuel oil as back-up fuel. LSP-Whitewater, LP is responsible for its own natural gas and fuel oil procurement. Wisconsin Electric procures and delivers fuel to Alliant's Neenah Energy Facility and receives the electric power produced, as discussed in "Purchase Power Commitments" below. Wisconsin Electric has another power purchase agreement with Calpine Corporation for peaking capacity from a Zion, Illinois facility which began commercial operation during the summer of 2002. Wisconsin Electric procures and delivers natural gas to the plant and receives the electric power produced, similar to the Alliant agreement.
Wisconsin Electric is the gas distribution utility for Concord, Paris, Pleasant Prairie, Whitewater Cogeneration Facility and Oak Creek Power Plants. Wisconsin Gas is the gas distribution utility for the Valley and Milwaukee County Power Plants. Both the Germantown Power Plant and Mirant'sAlliant's Neenah Power PlantEnergy Facility are directly connected to 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 Wisconsin Electric's power plant interconnects. A portion of Wisconsin Electric's gas requirements will be purchased at the Joliet hub.
Oil-Based Generation
Fuel oil is used for the combustion turbines at the Point Beach Germantown and Port WashingtonGermantown Power Plants. It is also used for boiler ignition and flame stabilization at the Presque Isle Power Plant, as backup for ignition at the Pleasant Prairie Power Plant and as a backup fuel for the natural gas-firedgas-based gas turbines discussed above. Fuel oil requirements are purchased under partnering agreements with suppliers that assist Wisconsin Electric with inventory tracking and oil market price trends.
SubjectDue to various regulatory approvals,issues, Wisconsin Electric has put the conversion of the four original generating units at the Germantown Power Plant will be converted, from 2002 to 2004, to dual fuel (natural gas and oil). on hold. A fifth dual fuel combustion turbine began commercial operation at Germantown Power Plant in 2000. 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 company that delivers gas to the plants.
Purchase Power Commitments
Wisconsin Electric: To meet a portion of its anticipated increase in future electric energy supply needs, Wisconsin Electric has entered into separate long-term power purchase contracts with subsidiaries of Cogentrix, Inc., MirantLSP-Whitewater, LP, Alliant and Calpine Corporation.
The contract with LSP-Whitewater, LP, a subsidiary of Cogentrix, Inc., for 236 megawatts of firm capacity from a gas-firedgas-based cogeneration facility located in Whitewater, Wisconsin, does not include any minimum energy requirements. For additional information, see "Note I -- Long-Term Debt" in Item 8.
Mirant'sAlliant's Neenah Power PlantEnergy Facility began commercial operations in May 2000. The Neenah plant2000 and is a 300-megawatt gas turbine peaking facility in the town of Neenah, Wisconsin. The purchase power agreement with Alliant is similar in structure to arrangements commonly referred to in the electric industry as a "tolling arrangement." That is, Wisconsin Electric delivers fuel to the facility and receives electric power. Wisconsin Electric pays MirantAlliant a "toll" to convert Wisconsin Electric's fuel into the electric energy. The output of the facility will beis available for Wisconsin Electric to dispatch during the eight-year term of the agreement which ends in May 2008.
Wisconsin Electric's agreement with the Calpine Corporation calls for new generating capacity to be constructed in northern Illinois by a Calpine subsidiary with electric generating units in both northern Illinois and in central Wisconsin, to supply power to Wisconsin Electric. TwoUnder the agreement, three 150-megawatt natural gas-firedgas-based turbine peaking units willare to be constructed, one eachtwo in 2002 and 2003, and one approximately 500-megawatt natural gas-fired combined cycle facility is to bein 2003. Although two units were constructed in 2004, of which 225 megawatts is contracted to Wisconsin Electric. The agreement remains contingent for both parties upon certain site related issues that2002, Wisconsin Electric expectsreceived power from only one of the two available units. The power from the second unit was under contract to be resolved as Calpine continues to meet contractual milestones.a third party for 2002 only. Wisconsin Electric will have the full 450 megawatts available for its use in 2003. This power purchase agreement also is a tolling agreement. The output of each unit will be committed to
Wisconsin Electric cancelled a long-term contract for ten years from its start225 megawatts of commercial operation.output due to certain contractual obligations not being met.
Wisconsin Electric currently expects to utilize a combination of new generating capacity identified in itsPower the Future proposal and purchase power commitments with independent power producers to meet its electric demand load growth.
In the normal course of business, Wisconsin Electric utilizes contracts of various duration for the forward purchase of electricity to meet load requirements in an economic manner and when the anticipated market price for electric energy is below Wisconsin Electric's expected incremental cost of generation. Contracts of this nature are one of the power supply resources Wisconsin Electric uses to meet its reliability requirements.
Edison Sault: Edison Sault purchased 700.0676.9 thousand megawatt hours or 80%76% of its energy supply during 20012002 to meet its energy requirements, including 296.5364.6 thousand megawatt hours from Wisconsin Electric.
Effective January 1, 2001, Edison Sault began purchasing additional capacity and energy from Wisconsin Electric under the terms of a joint operating agreement. Under the agreement, Edison Sault and Wisconsin Electric each retain the rights to any generation and purchased power contracts that were in place on July 1, 2000. Any additional capacity and energy needs of the two companies would be obtained on a joint basis and the costs shared.
Electric Transmission
American Transmission Company: Effective January 1, 2001, the Company transferred all of the electric utility transmission assets of Wisconsin Electric and Edison Sault to American Transmission Company LLC ("ATC") in exchange for equity interests in this new company. Joining ATC is consistent with the FERC's Order No. 2000, designed to foster competition, efficiency and reliability in the electric industry.
ATC is owned and governed by the utilities that contributed facilities or capital in accordance with 1999 Wisconsin Act 9. Governance of ATC also includes outside directors not associated with the energy business. At December 31, 2001,2002, the Company owned 42%approximately 42.5% of ATC.
ATC's sole business is to provide reliable, economic electric transmission service to all customers in a fair and equitable manner. Specifically, ATC plans, constructs, operates, maintains and expands transmission facilities it owns to provide for adequate and reliable transmission of electric power. It is expected to provide comparable service to all customers, including Wisconsin Electric and Edison Sault, and to support effective competition in energy markets without favoring any market participant. ATC is regulated by the FERC for all rate terms and conditions of service and is a transmission-owning member of the Midwest ISO.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, and Wisconsin Electric became a non-transmission owning member and customer of the Midwest ISO.
Wisconsin Electric has 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. The annual cost of the services provided by Wisconsin Electric is estimated to have been aboutwas approximately $52 million and $53 million during 2002 and 2001, respectively, and is expected to decline in future years as ATC provides more of these services directly.
For further information, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Renewable Electric Energy
Beginning in 2001, the state of Wisconsin mandated that retail energy providers supply 0.5% of their Wisconsin retail electric sales from renewable energy, which the Company did, with the percentage increasing to 2.2% by the year 2011. The Company'sPower the Future proposal includes a commitment to significantly increase the amount of renewable generation utilized by the Company beyond that required by Wisconsin law. In addition, Wisconsin Electric has an "energy for tomorrow®" renewable energy program. For more information about Public Benefits see "Regulation" below.
GAS UTILITY OPERATIONS
The Company's gas utility operations consist of Wisconsin Gas, which was acquired as part of the WICOR merger in April 2000, as well as the gas operations of Wisconsin Electric. Both companies 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. The two companies also transport customer-owned gas. Wisconsin Gas, the largest natural gas distribution utility in Wisconsin, operates throughout the state including the City of Milwaukee.Wisconsin Electric's gas utility operates in three distinct service areas: west and south of the cityCity of Milwaukee, the Appleton area, and areas within Iron and Vilas Counties, Wisconsin.
Termination of Proposed Combination of Gas Utility Operations: On November 1, 2000, Wisconsin Electric and Wisconsin Gas filed a joint application with the PSCW for authority to transfer the physical gas utility assets of Wisconsin Electric together with certain liabilities associated with such assets, to Wisconsin Gas in return for stock in Wisconsin Gas. On December 4, 2001, Wisconsin Electric and Wisconsin Gas entered into a stipulation with the PSCW in which a Consent Order was issued by the PSCW whereby Wisconsin Electric and Wisconsin Gas withdrew the joint application to combine the gas operation of Wisconsin Electric under Wisconsin Gas in the manner described above. Under the stipulation agreement, Wisconsin Gas and WICOR agreed to reverse the 2000 dividend transactions and reverse interest expense on the intercompany notes. The Company operates the gas business of Wisconsin Electric and Wisconsin Gas as one operation to achieve operating efficiencies and i mproved reliability.
Gas Deliveries
The Company's 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 "Consolidated Selected Utility Operating Data" in Item 6 for selected gas utility operating information by customer class during the period 19971998 through 2001.2002. See "Results of Operations" in Item 7 for selected pro forma gas utility operating information by customer class prepared as if Wisconsin Gas had been a part of Wisconsin Energy since January 1, 1999.2000.
Wisconsin Gas: During the twelve months of 2001,2002, Wisconsin Gas delivered a total of approximately 1,144.81,231.2 million therms, including customer-owned transported gas, a 8.7% decrease7.5% increase compared with 2000.2001. At December 31, 2001,2002, Wisconsin Gas was transporting gas for approximately 1,200 customers who purchased gas directly from other suppliers. Transported gas accounted for approximately 40% of total therms delivered by Wisconsin Gas during all of 2001 and 2000 and 41% during 1999. Wisconsin Gas had approximately 554,000 customers at December 31, 2001, an increase of approximately 1.4% since December 31, 2000.
The maximum daily send-out of Wisconsin Gas during 2001 was 714,413 dekatherms on February 2, 2001. A dekatherm is equivalent to ten therms or one million British thermal units.
Wisconsin Electric: Total gas therms delivered by Wisconsin Electric, including customer-owned transported gas, were approximately 852.4 million therms during 2001, a 9.8% decrease compared with 2000. At December 31, 2001, Wisconsin Electric was transporting gas for approximately 3701,080 customers who purchased gas directly from other suppliers. Transported gas accounted for approximately 39% of total therms delivered by Wisconsin Gas during 2002, 40% during 2001 and 41% during 2000. Wisconsin Gas had approximately 562,000 customers at December 31, 2002, an increase of approximately 1.4% since December 31, 2001.
The maximum daily send-out of Wisconsin Gas during 2002 was 759,066 dekatherms on March 4, 2002. A dekatherm is equivalent to ten therms or one million British thermal units.
Wisconsin Electric: Total gas therms delivered by Wisconsin Electric, including customer-owned transported gas, were approximately 890.0 million therms during 2002, a 4.4% increase compared with 2001. At December 31, 2002, Wisconsin Electric was transporting gas for approximately 365��customers who purchased gas directly from other suppliers. Transported gas accounted for approximately 38% of total therms delivered by Wisconsin Electric during 2002, 39% during 2001 and 41% during 2000 and 43% during 1999.2000. Wisconsin Electric had approximately 412,700420,500 gas customers at December 31, 2001,2002, an increase of approximately 1.2%1.9% since December 31, 2000.2001.
Wisconsin Electric's maximum daily send-out during 20012002 was 517,632628,272 dekatherms on February 2, 2001.March 4, 2002.
Sales to Large Gas Customers: The Company provides gas utility service to a diversified base of industrial customers who are largely within its electric service territory. Major industries served include the paper, food products and fabricated metal products industries. TheFuel used for Wisconsin Electric's electric utility operations of Wisconsin Electric areenergy supply represents the Company's largest single gastransportation customer.
Gas Deliveries Growth: Assuming moderate growth in the economy of its gas utility service territories and normal weather, the The Company currently forecasts total therm deliveries of natural gas to grow at a compoundan annual rate of approximately 1.5%1.1% for the combined gas operations of Wisconsin Electric and Wisconsin Gas over the five-year period ending December 31, 2006.2007. This forecast reflects a current year normalized sales level and assumes moderate growth in the economy of the Company's gas utility service territories and normal weather. Abnormal
Competition
Competition in varying degrees exists between natural gas and other forms of energy available to consumers. Many of the Company's large commercial and industrial customers are dual-fuel customers that are equipped to switch between natural gas and alternate fuels. The Company offers 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 the Company to have the gas transported to the facilities where it is used. The Company earns substantially the same margin (difference between revenue and cost of gas) whether it sells and transports gas to customers or only transports their gas.
The Company's future ability to maintain its present share of the industrial dual-fuel market (the market that is equipped to use gas or other fuels) depends on the success of the Company and third-party gas marketers in obtaining long-term and short-term supplies of natural gas at marketable prices compared to other sources and their success 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 distribution utilities should change to reflect the changing competitive environment in the gas industry, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7. While the gas utility distribution function is expected to remain a heavily regulated, monopoly function, the sales of 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 the Company begins to face competition for the sale of gas to its smaller firm customers.
Gas Supply, Pipeline Capacity and Storage
Both Wisconsin Gas and the gas operations of Wisconsin Electric have been able to meet their contractual obligations with both their suppliers and their customers despite periods of severe cold and unseasonably warm weather.
Pipeline Capacity and Storage: 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. The Company has 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, the companies have also contracted for substantial underground storage capacity, primarily in Michigan. Storage enables the companies to manage significant changes in daily demand and to optimize their overall gas supply and capacity costs. In summer, gas in excess of market demand is transported into the storage fields, and in winter, gas is withdrawn from storage and combined with gas purchased in or near the production areas ("flowing gas") to meet the increased winter market demand. As a result, the companies 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 the companies to reduce their overall costs.
The companies also maintain high deliverability storage in the mid-continent and Southeast production areas, as well as in itstheir 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.
The companies hold firm daily transportation and storage capacity entitlements from pipelines and other service providers under long-term contracts.
Term Gas Supply: Wisconsin Gas and the gas operations of Wisconsin Electric have contracts for firm supplies with terms in excess of 30 days with more than 20 gas suppliers for gas produced in each of the three producing areas
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, such as Wisconsin Gas and the gas operations of Wisconsin Electric, 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 the WisconsinWisco nsin Electric and Wisconsin Gas gas cost incentive mechanisms pursuant to which the companies 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 2001,2002, the companies continued their active participation in the capacity release market.
Spot Market Gas Supply: Wisconsin Gas and the gas operations of Wisconsin Electric expect to continue to make gas purchases in the 30-day spot market as price and other circumstances dictate. The Company has supply relationships with a number of sellers from whom it purchases spot gas.
Guardian Pipeline: In March 1999, WICOR announced the formation of a joint venture, Guardian Pipeline, L.L.C., to construct the Guardian interstate natural gas pipeline from the Joliet, Illinois market hub to southeastern Wisconsin ("Guardian Pipeline"). The Guardian Pipeline is designed to serve the growing demand for natural gas in Wisconsin and Northern Illinois. CMS Energy Corporation, a Dearborn, Michigan-based international energy company, and a subsidiary of Xcel Energy, Inc., a Minneapolis-based diversified energy company, arewere cosponsors of the project with WICOR. The three partners will have equal ownership interests in the project. On March 14, 2001, the FERC issued a certificate of public convenience and necessity authorizing construction and operation of the Guardian Pipeline. TheOn January 17, 2003 Xcel Energy announced the completion of the sale of its ownership interest in Guardian Pipeline is expected to serve growing demand for natural gas in Wisconsin andan affiliate of Northern Illinois.Border Partners, LLP.
The Guardian Pipeline willwas proposed to consist of 141143 miles of 36-inch pipe and related compression equipment as well as an additional 8.5 mile, 16-inch lateral, and will bewas designed to carrytransport about 750,000 dekatherms per day of natural gas. In September of 2001, the FERC approved Wisconsin Gas' purchase of nine miles of existing Northern Natural Pipeline pipe to substitute for building a lateral to connect with the utility system at Eagle, Wisconsin. This purchase negatesnegated the need for the 8.5 mile 16 inch segment originally proposed for Guardian. The total cost
Construction commenced on the Guardian Pipeline in the spring of 2002. Guardian Pipeline began operation in early December with the exception of the project is estimated toIxonia meter station which will be approximately $238 million. The joint venture intends to financecompleted during the second quarter of 2003. Guardian Pipeline has financed this project using $70$79 million of total capital contributions fromsplit equally among the three co-owners and using the proceeds of a $170 million fixed rate, amortizing project term loan and a $10 million 3-year revolving credit agreement arranged in November 2001.
Currently, Guardian Pipeline has firm precedent agreements to transport 88% of its design capacity. The pipeline entered service and began deliveries to customers during early December 2002. Each joint venture partner has provided a $60 million guarantee for the Guardian Pipeline project, with Wisconsin Energy guaranteeing WICOR's portion. The guarantee is scheduledeffective during construction of the project and approximately the first six months of commercial operation. Wisconsin Energy expects to be in servicereleased from this guarantee during the firstsecond quarter of 2003.
Wisconsin Gas has no ownership interest in the Guardian Pipeline and has made no guarantees regarding construction of the project. Wisconsin Gas has committed to purchase 650,000 dekatherms per day of capacity on the pipeline and will construct a 35-mile lateral at a cost of approximately $68$97.5 million to connect its distribution system to the Guardian Pipeline. In November 1999, Wisconsin Gas filed an application with the PSCW to construct and operate the lateral. In October 2000, the PSCW affirmed the need for the Wisconsin Gas lateral in a preliminary determination. Wisconsin Gas received final approval by the PSCW in an Order dated July 24,25, 2001. Wisconsin Gas began taking delivery of gas supply from the Guardian Pipeline in December 2002 through an interconnection point to its
OTHER UTILITY OPERATIONS
Steam Utility Operations: Wisconsin Electric's steam utility generates, distributes and sells steam supplied by its Valley and Milwaukee County Power Plants. Wisconsin Electric operates a district steam system in downtown Milwaukee and the near south side of Milwaukee. Steam is supplied to this system from Wisconsin Electric's Valley Power Plant, a coal-firedcoal-based cogeneration facility. Wisconsin Electric also operates 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 2001,2002, the steam utility had $21.7$21.5 million of operating revenues from the sale of 3,001 million pounds of steam compared with $21.8 million of operating revenues from the sale of 2,929 million pounds of steam compared with $21.9 million of operating revenues from the sale of 3,085 million pounds of steam during 2000.2001. As of December 31, 20012002 and 2000,2001, steam was used by 452467 and 451449 customers, respectively, for processing, space heating, domestic hot water and humidification.
Water Utility Operations: To leverage off of operational similarities with its natural gas business, Wisconsin Gas entered the water utility business in November 1998. As of December 31, 2001,2002, the water utility served about 2,2002,380 water customers in the suburban Milwaukee area compared with approximately 1,8402,200 customers at December 31, 2000.2001. The Company also provides contract services to local municipalities and businesses within its service territory for water system repair and maintenance. During 2001,2002, the water utility had $1.1$1.6 million of operating revenues compared with $0.9$1.1 million of operating revenues during 2000.2001.
UTILITY RATE MATTERS
See "Factors Affecting Results, Liquidity and Capital Resources -- Rates and Regulatory Matters" in Item 7.
NON-UTILITY ENERGY SEGMENT
The non-utility energy segment is involved in a variety of businesses including: development, ownership and operation of independent electric generating facilities; natural gas purchasing and marketing; energy and price risk management; and investment in other energy-related entities.entities and assets.
During 2000, the Company performed a comprehensive review of its existing portfolio of businesses and began implementing a strategy of divesting many of its non-utility energy segment businesses, especially those outside of the Midwest region. The Company expects to continue to reduce the size of its current non-utility energy segment operations in the near-term. As the Company implements itsPower the Future strategy, the Company expects to grow the non-utility energy segment within the Midwest region through its newly formed subsidiary W.E.We Power.
Demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 7,220 megawatts by 2016, according to the state of Wisconsin 2001 Energy Policy Report. Wisconsin Electric's customer load is currently growing at a rate of approximately 100 to 150 megawatts per year. W.E.We Power will provide a part of the new generation to meet Wisconsin's future demand for electricity.Power the Future, which will allow the Company to manage its fuel mix, includes new coal-based plants as well as natural gas-based plants. Without thePower the Future strategy, the Company anticipates that new generation in Wisconsin would most likely come from independent power producers who use natural gas-based facilities. The Company continues to have concerns about long-term natural gas supply at reasonable prices. Coal prices historically have been more stable, and the fuel is much more plentiful. The creation of W.E.We Power provides a long-term means for the Company to keep a diverse fu eldive rse fuel mix to maintain a stable, reliable and affordable energy supply in the region. For further information about Wisconsin Energy'sPower the Future strategy, see "Environmental Compliance" below as well as "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
W.E. Power, LLC:LLC
In November 2001, Wisconsin Energy created this subsidiary to design, permit, construct, own, finance, and ownlease the 2,800 MW of new, in-state Wisconsin generating capacity proposed as part of Wisconsin Energy'sPower the Future plan.
Wisvest Corporation
The mission of Wisvest has beenwas originally formed to develop, own and operate electric generating facilities and to invest in other energy-related entities. As a result of a change in corporate strategy, Wisvest has discontinued its development activity. During the twelve months ended December 31, 2001,2002, Wisvest had $255.9$166.6 million of operating revenues compared with $253.3$255.9 million of operating revenues during 2000.2001. The Company has divested, or is in the process of divesting the majority of Wisvest's assets. On December 6, 2002 Wisvest completed the sale of its ownership interest in Wisvest-Connecticut, LLC, which included 1,056 megawatts of capacity in the state of Connecticut. These plants had originally been acquired in April 1999. During 2002 Wisvest-Connecticut had operating revenues of $155.7 million compared with $237.2 million during 2001. As of December 31, 2001,2002, Wisvest operations and investments included:
Wisvest-Connecticut, LLC: Wisvest-Connecticut, LLC, a wholly-owned subsidiary of Wisvest, 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. These plants were originally acquired in April 1999. During 2001, Wisvest-Connecticut had $237.2 million of operating revenues compared with $208.5 million of operating revenues during 2000. The Company is currently evaluating proposals to sell these assets.
Calumet Energy Team, LLC: In November 1999, Calumet Energy Team, LLC signed two agreements with the City of Chicago, Illinois to support the construction ofowns and operates a 308-megawatt308 megawatt natural gas-firedgas-based peaking power plant in Chicago, Illinois. The total plant investment is $159 million and to enter intoit began commercial operation in June 2002. Calumet has a ten-year capacity reservation agreement for 50 megawatts of plant capacity. Wisvest owns 100%capacity with the City of Calumet Energy Team, LLC, the developer and intended operatorChicago. The remaining plant capacity is marketed as merchant power. The plant experienced very limited demand for production during its period of the project. Construction is complete and startup is currently in progress. The facility is anticipated to have a total project cost of approximately $155 million with commercial operation in early 2002. The project is being financed through utilization of Wisconsin Energy corporate credit facilities.2002 due to excess capacity in the region and soft electricity market prices.
Other: The Company has economic interests in other energy-related entities such asincluding a cogeneration facility in the state of Maine, the Androscoggin Cogeneration Center; andEnergy LLC; Kaztex, Inc. and Blackhawk Energy Services, which are strategic energy management services companies with a focus on natural gas and electricity management in the Upper Midwest.Midwest; and Wisvest Thermal Energy Services, which provides chilled water services to Milwaukee County. The Company also has commitments to purchaseowns a 500 megawatt (nominal) Siemens Westinghouse advanced technology natural gas power island configured for two-on-one combined cycle operation with delivery due in mid-2002.
Other Non-Utility Energy Operations
WICOR Energy Services Company: In connection with the April 2000 WICOR acquisition, the Company acquired WICOR Energy, an unregulated energy services company. In April 2001, the operations of WICOR Energy were merged into Kaztex in exchange for an additional ownership interest in Kaztex.
MANUFACTURING SEGMENT
The manufacturing segment consists of WICOR Industries, an intermediary holding company. Its three primary subsidiaries: Sta-Rite, SHURflo and Hypro were acquired as part of the April 2000 WICOR merger. During the twelve months ended December 31, 2001,2002, WICOR Industries had $585.1$685.2 million of operating revenues compared with $575.2$585.1 million of operating revenues during 2000.2001.
Sta-Rite Industries, Inc.: Sta-Rite is incorporated under the laws of the state of Wisconsin and maintains its principal office and place of business in Delavan, Wisconsin. Sta-Rite is a manufacturer and marketer of pumps, tanks, water treatment products and fluid handling equipment for the water systems, agricultural, pool/spa and water treatment markets world wide. Sta-Rite's products are manufactured at 1817 locations with facilities in the United States, Australia, Canada, China, Germany, India, Italy, Mexico and New Zealand and are sold through a world wide network of distributors, retailers and original equipment manufacturers.
SHURflo Pump Manufacturing Co.: SHURflo is incorporated under the laws of the state of California and maintains its principal office and place of business in Santa Ana,Cypress, California. SHURflo manufactures high performance pumps and fluid handling equipment for the beverage/food service, recreational vehicle, marine, industrial, and water treatment markets. Its products are manufactured in California and England. They are sold and distributed globally through original equipment manufacturers and a network of distributors.
Hypro Corporation: Hypro is incorporated under the laws of the state of Delaware and maintains its principal office and place of business in New Brighton, Minnesota. Hypro manufactures pumps, accessories and pumping systems for agricultural, marine, industrial and firefightingfire fighting markets. Hypro's products are manufactured in Minnesota, Oregon and England and are sold to original equipment manufacturers, distributors and agricultural retailers.
U.S. Operations
Water products include jet, centrifugal, sump, submersible and submersible turbine water pumps, water storage and pressure tanks, water filters, pool and spa filters, pool heaters and pump and tank systems. These products pump, filter and store water used for drinking, cooking, washing and livestock watering, and are used in private and public swimming pools, spas, hot tubs, jetted bathtubs, and fountains. The manufacturing businesses also produce large higher capacity water pumps used in agricultural and turf irrigation systems and in a wide variety of commercial, industrial and municipal fluids-handling applications.
High performance pumps, related fluids-handling products, accessories and pumping systems have applications in a variety of markets, including: (1) the food service industry, where gas-operated pumps are used for pumping soft drinks made from syrups, and electric motor driven pumps are used for water boost and drink dispensing; (2) the recreational vehicle and marine markets, where electric motor driven pumps are used for multiple applications including pumping potable water in travel trailers, motor homes, camping trailers and boats, and for other purposes including marine engine cooling, marine washdown, bilge and livewell pumping; (3) agricultural markets, for spraying fertilizers and pesticides on crops; (4) industrial markets, where applications include carpet cleaning machines for soil extraction, firefightingfire fighting and pressure cleaning applications and general industrial uses requiring fluid handling; and (5) the water purification industry, where electric motor driven pumps are useduse d to pressure reverse osmosis systems for water transfer.
Sales of pumps and water processing equipment are somewhat related to the season of the year as well as the level of activity in the housing construction industry and are sensitive to weather, interest rates, discretionary income, and leisure and recreation spending. The markets for most water and industrial products are highly competitive, with price, service and product performance all being important competitive factors. The Company believes it is a leading producer of pumps for private water systems and swimming pools, spas, food service, recreational vehicle, agricultural spraying, marine engine cooling, and foam proportioning systems for the firefightingfire fighting markets. Management believes the Company also ranks among the larger producers of pool and spa filters and submersible turbine pumps. Brand names include "AquaTools," "Berkeley," "Edwards," "Fibredyne," "Flotec," "FoamPro," "Hydro-Flow," "Hypro," "Lurmark," "Nocchi," "Omnifilter," "Onga," "Park," "Rivaflo," "Sherwood," "SHURflo," "Simer," "Sta-R ite,"Sta- Rite," "Tate-Western," "Aermotor," "Diamond," "Ultra-Jet," and "VICO."
Domestic pumps and water products are sold and serviced primarily through a network of independent distributors, dealers, retailers and manufacturers' representatives serving the well drilling, hardware, plumbing, water treatment, pump installing, irrigation, pool and spa, food service, recreational vehicle, marine, industrial, commercial and do-it-yourself markets. Sales are also made on a private label basis to large customers in various water products markets and to original equipment manufacturers.
Backlog of orders for pumps and water products is not a significant indicator of future sales.
International Operations
International operations are conducted primarily by international subsidiaries and export operations from the United States. Products are sold to markets in approximately 100 countries on six continents. Foreign manufacturing is carried out by Australian, Canadian, Chinese, English, German, Indian, Italian, Mexican and New Zealand operations. The products sold in international markets in some cases are similar to those sold in the United States, but in many instances have distinct features required for those markets. Product distribution channels are similar to those for domestic markets. Non-domestic operating revenues, including exports, were 24%26% of manufacturing segment sales during 20012002 and 2000.24% during 2001.
Raw Materials and Patents
Raw materials essential to the manufacturing operations are available from various established sources in the United States and overseas. The principal raw materials needed for production of the Company's primary lines of products include: cast iron, aluminum and bronze castings for pumps; copper wire, steel and aluminum for motors; stainless and carbon sheet steel, bar steel and tubing; plastic resins for injection molded components; and powdered metal components. The manufacturing units also purchase from third-party suppliers completely assembled electric motors, plastic molded parts, elastomers for valves and diaphragms, components for electric motors, stamped and die-cast metal parts, and hardware and electrical components. Although the manufacturing subsidiaries own a number of patents and hold licenses for manufacturing rights under other patents, no one patent or group of patents is material to the success of the manufacturing businesses as a whole.
OTHER NON-UTILITY OPERATIONS
Minergy Corp.
Minergy is engaged in the development and marketing of proprietary technologies designed to convert high volume industrial and municipal wastes into value-added products, including renewable energy. Minergy's future strategic focus is to license that technology to domestic and foreign operators or industrial/municipal users through its patented GlassPack process as a component of larger scale waste processing solutions. Management believes this licensing strategy will allow Minergy to recognize the economic benefits of its technology with limited capital requirements. During the twelve months ended December 31, 2001,2002, Minergy had $19.8$16.6 million of consolidated operating revenues compared with $17.3$19.8 million of consolidated operating revenues during 2000. Current Minergy2001. Minergy's primary operations and investments include:
Minergy Neenah, LLC: In 1998, Minergy Neenah, LLC opened a facility in Neenah, Wisconsin that recycles paper sludge from area paper mills using the Company's patented Glass Aggregate technology into three usable and salable products: Glass Aggregate; steam; and electricity. The Glass Aggregate technology is a vitrification process that melts the inorganic fraction of a waste material into an inert glassy stone and converts the organic fraction of a waste material into heat. The plant also provides substantial environmental and economic benefits to the area by providing an alternative to landfilling paper sludge. Minergy intends to maintain ownership and operation of this facility.
GlassPack, LLC: Minergy has designed, permitted and constructed thea GlassPack demonstration facility in Winneconne, Wisconsin which hasutilizes the Company's patented GlassPack technology. This facility is a scaled-down modular version of the Glass Aggregate technology and is ideally suited for smaller wastewater treatment plants. Minergy has successfully tested numerous municipal and paper wastewater sludges at this plant. In 2002, Minergy has entered intocompleted fabrication and delivery of GlassPack equipment to the sanitary district located in Waukegan, Illinois. The sanitary district will own the facility upon its construction and Minergy will operate the facility pursuant to an agreement for construction and operation of a GlassPack unit in Waukegan, Illinois andwith the district. Minergy is currently pursuing development of other domestic and foreign GlassPack installations with several other municipalities in the United States.through a technology licensing process.
Minergy Detroit, LLC: In September 1999, the City Council of Detroit, Michigan, awarded a 15-year contract to Minergy Detroit, LLC, a wholly owned subsidiary of Minergy, to recycle 500 to 600 dry tons per day of the city's wastewater solids into a glass aggregate product. The 15-year contract is contingent upon Minergy Detroit, LLC obtaining satisfactory financing, required construction and operating permits and the necessary construction agreements, as well as reaching agreementagreements. To date, Minergy has been unable to negotiate satisfactory agreements. However, Minergy is continuing to pursue these items, including contract amendments with the City of Detroit onand a joint venture or contract assignment to third parties, to determine if the results of a series of post-startup tests. Subject to the satisfactory resolution of these contingent items, Minergy Detroit, LLC expects to begin construction of a proposed $150 million recycling facility project in the Delray area of Detroit in mid-2002 with startup anticipated in 2004.will be developed.
Wispark LLC
Wispark develops and invests in real estate. In MayFrom September 2000 the Company announced that it would sell a large portion of the assets of Wispark. The assets held for sale atthrough December 31, 2001 are $20.62002, Wispark has reduced its overall holdings from $373.1 million to $160.1 million. It is theWispark's objective to continue its divestiture strategy throughstrategy. Wispark will maintain its remaining portfolio for investment and potential sale. Any new investments are expected to center on development of urban redevelopment sites in the end of 2003. During the twelve months ended December 31, 2001, Wispark had $25.5 million of consolidated operating revenues compared with $35.5 million of consolidated operating revenues during 2000.We Energies service area.
Wispark has developed several business parks primarily in southeastern Wisconsin, and to a lesser extent in the metropolitan Chicago and Minneapolis/St. Paul markets. Wispark's flagship development, the 1600-acre1,600-acre LakeView Corporate Park located near Kenosha, Wisconsin is home to more than 68 companies located in more than 7.68.0 million square feet of buildings that have been developed on property in excess of 839900 acres. Many out-of-state firms have located in this park, creating a significant number of new jobs and growth in electricity and natural gas revenues.
Other Non-Utility Subsidiaries
Other non-utility subsidiaries primarily include:
Wisconsin Energy Capital Corporation:Wisconsin Energy Capital 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.
WEC Nuclear Corporation:WEC Nuclear Corporation has a 20% ownership interest in Nuclear Management Company, LLC. Formed during the first quarter of 1999, Nuclear Management Company, LLC provides 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 about Nuclear Management Company, see "Utility Energy Segment" above and "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Witech Corporation: Witech Corporation is a venture capital company operating in the state of Wisconsin. At December 31, 2001,2002, Witech had investments in seven companies and one fund totaling $14.1 million. Among others, the companies include: a provider of partner relationship management and business to business e-Commerce solutions for manufacturers in selected industries with shared service networks and distribution channels, and a manufacturer of electronic components.four companies. Wisconsin Energy continues to evaluate the Witech portfolio in connection with its announced strategy to focus on core investments.
WEC International, Inc.Inc.: WEC International, Inc. previously had two investments in joint ventures in the Netherlands involving waste treatment and by-product utilization activities which are currently in bankruptcy proceedings. The investments were insignificant to Wisconsin Energy.
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.
REGULATION
Wisconsin Energy Corporation
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, accordingly, is exempt from that law's provisions other than with respect to certain acquisitions of securities of a public utility.
Non-Utility Asset Cap: In October 1999, the Wisconsin State Legislature passed amendments to the non-utility asset cap provisions of Wisconsin's public utility holding company law as part of the 1999-2001 biennial state budget, 1999 Wisconsin Act 9. As a result, Wisconsin Energy remains subject to certain restrictions that 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 items, the amended law exempts energy-related assets and assets such as Minergy's used for providing environmental engineering services and for processing waste materials from being counted against the asset cap provided that they are employed in qualifying businesses. In addition, the amended law also exempts the manufacturing, distributing or sellin gselling of certain products of WICOR Industries used for filtration, pumping water or other fluids, processing or heating water, handling fluids or other
Under thePower the Future plan, the $3 billion estimated cost of constructing 2,800 megawatts of new generating facilities to be owned by We Power, LLC, a non-utility energy subsidiary of Wisconsin Energy, is expected to qualify as energy projects under the amended non-utility asset cap and therefore would be entirely exempt from the definition of "non-utility" property for this purpose. The remaining $4 billion estimated cost of thePower the Future plan represents investments in new and existing energy distribution system assets and upgrades to existing generation assets and has no impact on the amount of non-utility assets under the non-utility asset cap test.
For Wisconsin Energy to qualify for the amended non-utility asset cap rules, all of its public utility affiliates were required to irrevocably transfer their electric transmission facilities and rights of way in the state of Wisconsin to ATC. As described in further detail under "Utility Energy Segment" above and in "Factors Affecting Results, Liquidity and Capital Resources" in Item 7, Wisconsin Electric and Edison Sault transferred their electric transmission system assets to ATCeffectiveATC effective January 1, 2001.
Utility Energy Segment
Wisconsin Electric is an exempt holding company under Section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended, and Rule 2 thereunder and, accordingly, is exempt from that law's provisions other than with respect to certain acquisitions of securities of a public utility.
Wisconsin Electric and Wisconsin Gas are subject to the regulation of the PSCW as to retail electric, gas, steam and water rates in the state of Wisconsin, standards of service, issuance of securities, construction of certain new facilities, transactions with affiliates, billing practices and various other various matters. Wisconsin Electric is subject to regulation of the PSCW as to certain levels of short-term debt obligations. Wisconsin Electric and Edison Sault are both subject to the regulation of the Michigan Public Service Commission as to the various matters associated with retail electric service in the state of Michigan as noted above except as to issuance of securities, construction of certain new facilities, levels of short-term debt obligations and advance approval of transactions with affiliates. Wisconsin Electric's hydroelectric facilities are regulated by the FERC. Wisconsin Electric and Edison Sault are subject to regulation of the FERC with respect to wholesale power service and accounting. Ediso nEdison Sault is subject to regulation of the FERC with respect to the issuance of certain securities.
The following table compares the source of the Company's utility energy segment operating revenues by regulatory jurisdiction for each of the three years in the period ended December 31, 2001.2002.
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |
(Millions of Dollars) | (Millions of Dollars) | |||||||||||
Wisconsin | ||||||||||||
Electric Utility -- Retail | $1,611.8 | 54.4% | $1,517.7 | 59.3% | $1,465.7 | 71.5% | $1,687.5 | 59.2% | $1,611.8 | 54.4% | $1,517.7 | 59.3% |
Gas Utility -- Retail | 1,074.5 | 36.2% | 736.3 | 28.8% | 306.8 | 15.0% | 918.1 | 32.2% | 1,074.5 | 36.2% | 736.3 | 28.8% |
Other Utility -- Retail | 22.9 | 0.8% | 22.6 | 0.9% | 21.3 | 1.0% | 23.2 | 0.8% | 22.9 | 0.8% | 22.6 | 0.9% |
Total | 2,709.2 | 91.4% | 2,276.6 | 89.0% | 1,793.8 | 87.5% | 2,628.8 | 92.2% | 2,709.2 | 91.4% | 2,276.6 | 89.0% |
Michigan | ||||||||||||
Electric Utility -- Retail | 144.2 | 4.9% | 151.2 | 5.9% | 139.7 | 6.8% | 143.7 | 5.0% | 144.2 | 4.9% | 151.2 | 5.9% |
FERC | ||||||||||||
Electric Utility -- Wholesale | 111.4 | 3.7% | 128.9 | 5.1% | 116.7 | 5.7% | 79.6 | 2.8% | 111.4 | 3.7% | 128.9 | 5.1% |
Total Utility Operating Revenues | $2,964.8 | 100.0% | $2,556.7 | 100.0% | $2,050.2 | 100.0% | $2,852.1 | 100.0% | $2,964.8 | 100.0% | $2,556.7 | 100.0% |
===== | ===== | ===== | ===== | ===== | ===== | ===== | ==== | ===== | ==== | ===== | ==== |
For information concerning the implementation of 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's 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
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. 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 law created new funding of $44 millionwhich is adjusted annually to be collected by all electric utilities and remitted to the Wisconsin Department of Administration. The law also required 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. The Company implemented this change in October 2000. The utilities' traditional role of providing these programs is beinghas shifted to the Department of Administration, which will administeradministers the funds for a statewide public benefits program. The new
This law also requires utilities to provide a specified proportion of itsthat retail energy providers supply 0.5% of their Wisconsin retail electric sales in programs such as Wisconsin Electric's "energy for tomorrow™"from renewable energy, program.which the Company did in 2002, with the required minimum percentage increasing to 2.2% by the year 2011.
Affiliated Interest Policies Docket: From late 1998 through early 2000, the PSCW reviewed the policies on standards of conduct governing diversification of activities that can be performed within a utility and utility affiliates. During these proceedings, Wisconsin Electric took 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. In April 2000, the PSCW issued an order that allows utilities to continue to provide and sell products and services other than core utility products as long as the related costs are fully allocated and not subsidized by ratepayers.
Non-Utility Energy Segment
Wisvest-Connecticut, LLC and Calumet Energy Team, LLC areis an exempt wholesale generatorsgenerator pursuant to Section 32 of the Public Utility Holding Company Act of 1935. Wisvest-Connecticut, LLC's operations are subject to regulation of the FERC with respect to wholesale power service and to regulations, where applicable, of the EPA and the Connecticut Department of Environmental Protection. Calumet1935, as amended. Calumet's operations are subject to regulation of the FERC with respect to wholesale power service and to regulations, where applicable, of the United States Environmental Protection Agency and the Illinois Department of Environmental Protection.
Wisvest-Connecticut, LLC, formerly a wholly-owned subsidiary of Wisvest, was an exempt wholesale generator pursuant to Section 32 of the Public Utility Holding Company Act of 1935, as amended. Wisvest-Connecticut, LLC's operations were subject to regulation of the FERC with respect to wholesale power service and to regulations, where applicable, of the United States Environmental Protection Agency and the Connecticut Department of Environmental Protection.
ENVIRONMENTAL COMPLIANCE
Environmental Expenditures
Expenditures for environmental compliance and remediation issues are included in anticipated capital expenditures described in "Liquidity and Capital Resources" in Item 7. For discussion of additional environmental issues, see "Environmental Matters" in Item 3. For further information concerning air quality standards and rulemaking initiated by the EPA, including estimated costs of compliance, see "Factors Affecting Results, Liquidity and Capital Resources" in Item 7.
Utility Energy Segment: Compliance with federal, state and local environmental protection requirements resulted in capital expenditures by Wisconsin Electric of approximately $77 million in 2002 compared with $49 million in 2001 compared with $37 million in 2000.
Operation, maintenance and depreciation expenses for Wisconsin Electric's fly ash removal equipment and other environmental protection systems are estimated to have been approximately $46 million during 2002 and $45 million during 2001 and $41 million during 2000.
Non-Utility Energy Segment: Wisvest-Connecticut, LLC and its two power plants are subject to various rules and regulations promulgated by the EPA, including ozone non-attainment rules applicable to a 19-state region east of the Mississippi River. The state of Connecticut has adopted the EPA's requirements, which will require affected plants, including those owned by Wisvest-Connecticut, LLC, to reduce emissions of NOx. The state of Connecticut adopted additional regulations in December 2000 to further reduce the emissions of NOx and sulfur dioxide ("SO2"). The new regulations took effect on January 1, 2002. Wisvest-Connecticut, LLC is currently implementing its plan for compliance.
Sub-surface, non-aqueous petroleum liquids have been identified at both of Wisvest-Connecticut's power plant sites. The Company is currently completing studies and plans to bring the two sites into compliance with applicable standards in the state of Connecticut.2001.
Solid Waste Landfills
The Company provides 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.Currently there are no active cases.
Giddings and Lewis, Inc./City of West Allis Lawsuit: For information about this matter, see "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 8.
Muskego Landfill: On January 2, 2001, three individuals filed an action in the circuit court of Milwaukee County against Waste Management of Wisconsin, Inc., Wisconsin Electric and others alleging environmental contamination emanating from the Muskego landfill in Muskego, Wisconsin. The Muskego landfill was operated by Waste Management and was classified as an EPA Superfund Site. The plaintiffs, who are adjacent landowners to the site, are alleging that the defendants are liable on various theories for groundwater contamination. Plaintiffs are requesting, inter alia, further remediation, damages for personal injury, loss of property value and punitive damages. In 1996, Wisconsin Electric had entered into a buyout agreement as a de minimis party with Waste Management and nine other potentially responsible parties ("PRP's") concerning groundwater contamination on this site. Pursuant to the agreement, the PRP's have agreed to indemnify and defend Wisconsin Electric in this action.
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 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. For additional information, see "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 8. Sites currently undergoing remediation include:
Highway 59 Landfill: In 1989, a sulfate plume was detected in the groundwater beneath a Wisconsin Electric-owned former ash landfill located in the Town of Waukesha, Wisconsin. After notifying the 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 affected residents, Wisconsin Electric has completed excavation of saturated ash and placement of a cap on the landfill, and completed final landscaping of the site in 2001. City water supply piping to residen ts is currently being installed. The cost for complete remediation of this site is estimated to be $3.5 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 is working with the Wisconsin Department of Natural Resources to obtain closure for this site. Expenses associated with athe site closure are estimated to be $0.8$0.9 million. No groundwater treatment is planned at this time.
Lakeside Landfill: During 2001, Wisconsin Electric begancompleted an investigation of property that was used primarily for coal storage, fuel oil transport and coal ash disposal in support of the former Lakeside Power Plant in St. Francis, Wisconsin. UntilThe Company has initiated excavation and utilization of residual coal at the investigation worksite and has been completedimplemented slope stabilization and a remedial plan developed, Wisconsin Electric cannot estimate any relatedcover construction. The cost for remediation costs.of this site is estimated to be approximately $3.2 million.
Oak Creek North Landfill: Groundwater impairments at this landfill, located in the City of Oak Creek, Wisconsin, prompted Wisconsin Electric to investigate, during 1998, the condition of the existing cover and other conditions at the site. Surface water drainage improvements were implemented at this site during 1999 and 2000, which are expected to eliminate ash contact with water and remove unwanted ponding of water near monitoring systems. Future financial impacts to Wisconsin Electriccosts for remediation, involving reconfiguration of the site and construction of a new cap, are projectedestimated to be minimal.approximately $3.5 million.
Manufactured Gas Plant Sites
The Company is reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. See "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 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 nonattainment provisions. The acid rain provisions limit SO2 and NOx emissions in phases. Phase I became effective in 1995 and Phase II became effective during the year 2000. The Company has met the requirements of Phase I. The Phase II requirements of the 1990 amendments to the Federal Clean Air Act are expected to have minimal future impacts on the Company's utilities because of existing cost effective compliance strategies and previous actions taken. 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 over the next seven years.
See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 for information concerning National Ambient Air Quality Standards established during 1997 by the EPA and ozone non-attainment rulemaking promulgated by the EPA during 1998.
Wisconsin Energy'sPower the Futurestrategyprovides a plan to meet the Company's growing demand for electricity while using more environmentally friendly equipment. The plan proposes to build five new generating units, a total of 2,800 megawatts, at a total cost of about $3.0 billion. Three of the units would be built at the site of the Company's Oak Creek Power Plant. Two of these units would use a supercritical pulverized coal design and the other would use coal gasification technology. All of these units will use state-of-the-art emission controls. The other two units would be located at the Company's Port Washington Power Plant site, where older, less efficient coal-based units installed in the mid-1930sbefore 1950 would be retired and new natural gas-based units would be built. These latest technologies are expected to provide a significant reduction in air emissions compared with existing, older power plants. Implementation of thePower the Futureplan also pro videsprovides for upgradesupgrad es to existing power plants and modernization to increase efficiency and reduce emissions. In addition to the positive environmental attributes of the generation technology, the plan involves an increased commitment to conservation and renewable fuels, as well as a commitment to address greenhouse gas issues. For further information about Wisconsin Energy'sPower the Future strategy, see "Non-Utility Segment" above as well as "Corporate Developments" in Item 7.
OTHER
Research and Development: Wisconsin Electric had immaterial research and development expenditures in the last three years, primarily for improvement of service and abatement of air and water pollution by the electric utility operations. During the last three years, the manufacturing segment incurred immaterial research and development expenditures for the development of new or improved products. Research and development activities include work done by employees, consultants and contractors, plus sponsorship of research by industry associations.
Employees:
Employees: At December 31, 2001,2002, the following number of individuals were employed by Wisconsin Energy and its subsidiaries:
Total | Represented | Total | Represented | |||
Employees | Employees (a) | Employees | Employees (a) | |||
Utility Energy Segment | Utility Energy Segment | Utility Energy Segment | ||||
Wisconsin Electric | Wisconsin Electric | 5,235 | 3,652 | Wisconsin Electric | 5,172 | 3,560 |
Wisconsin Gas | Wisconsin Gas | 783 | 626 | Wisconsin Gas | 746 | 597 |
Edison Sault | Edison Sault | 70 | 48 | Edison Sault | 69 | 48 |
Total | Total | 6,088 | 4,326 | Total | 5,987 | 4,205 |
Non-Utility Energy Segment | Non-Utility Energy Segment | 214 | 114 | Non-Utility Energy Segment | 29 | - |
Manufacturing Segment | Manufacturing Segment | 3,086 | - | Manufacturing Segment | 3,156 | - |
Other | Other | 71 | - | Other | 86 | - |
Total Employees | Total Employees | 9,459 | 4,440 | Total Employees | 9,258 | 4,205 |
==== | ||||||
(a) | Individuals represented under labor agreements | Individuals represented under labor agreements |
During 2001, approximately 410
The employees went to NMC and ATC.represented under labor agreements were with the following bargaining units as of December 31, 2002.
Number of Employees | Expiration Date of Current Labor Agreement | |
Wisconsin Electric | ||
Local 2150 of International Brotherhood of Electrical Workers | 2,651 | August 15, 2004 |
Local 317 of International Union of Operating Engineers | 486 | September 30, 2003* |
Local 12005 of United Steel Workers of America | 196 | November 6, 2004 |
Local 7-0111 of Paper, Allied- Industrial Chemical & Energy Workers International Union | 66 | November 3, 2004 |
Local 510 of International Brotherhood of Electrical Workers | 161 | April 30, 2004 |
Total Wisconsin Electric | 3,560 | |
Wisconsin Gas | ||
Local 2150 of International Brotherhood of Electrical Workers | 128 | August 15, 2005 |
Local 7-0018 of Paper, Allied- Industrial Chemical & Energy Workers International Union | 212 | May 31, 2005 |
Local 7-0018-1 of Paper, Allied- Industrial Chemical & Energy Workers International Union | 247 | November 30, 2006 |
Local 7-0018-2 of Paper, Allied- Industrial Chemical & Energy Workers International Union | 10 | May 31, 2007 |
Total Wisconsin Gas | 597 | |
Edison Sault | ||
Local 13457 of United Steel Workers of America | 48 | October 21, 2004 |
Total Employees | 4,205 | |
==== | ||
* Currently under negotiations. |
ITEM 2. |
|
The principal properties of Wisconsin Energy and its subsidiaries are owned in fee except that the major portion of electric utility distribution lines, 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 of Wisconsin Electric's utility plant is subject to a first mortgage lien.
UTILITY ENERGY SEGMENT
Effective January 1, 2001, Wisconsin Electric and Edison Sault exited the electric transmission business by contributing all of their transmission assets to ATC in exchange for equity interests in this new company. For further information, see "Electric Utility Operations" above as well as "Corporate Developments" in Item 7.1.
Wisconsin Electric: Wisconsin Electric owns the following generating stations with dependable capabilities as indicated.
Dependable Capability | |||||||
No. of | In Megawatts (a) | ||||||
Generating | August | December | |||||
Name | Fuel | Units | 2001 | 2001 | |||
Steam Plants | |||||||
Point Beach | Nuclear | 2 | 1,012 | 1,022 | |||
Oak Creek | Coal | 4 | 1,135 | 1,139 | |||
Presque Isle | Coal | 9 | 618 | 618 | |||
Pleasant Prairie | Coal | 2 | 1212 | 1222 | |||
Port Washington | Coal | 4 | 320 | 320 | |||
Valley | Coal | 2 | 267 | 227 | |||
Edgewater 5 (b) | Coal | 1 | 102 | 102 | |||
Milwaukee County | Coal | 3 | 11 | 11 | |||
Total Steam Plants | 27 | 4,677 | 4,661 | ||||
Hydro Plants (14 in number) | 37 | 54 | 57 | ||||
Germantown Combustion Turbines | Gas/Oil | 5 | 345 | 345 | |||
Concord Combustion Turbines | Gas/Oil | 4 | 376 | 376 | |||
Paris Combustion Turbines | Gas/Oil | 4 | 388 | 388 | |||
Other Combustion Turbines & Diesel | Gas/Oil | 6 | 55 | 62 | |||
Total System | 83 | 5,895 | 5,889 | ||||
== | ==== | ==== |
Dependable Capability | |||||||
No. of | In Megawatts (a) | ||||||
Generating | August | December | |||||
Name | Fuel | Units | 2002 | 2002 | |||
Steam Plants | |||||||
Point Beach | Nuclear | 2 | 1,012 | 1,022 | |||
Oak Creek | Coal | 4 | 1,135 | 1,139 | |||
Presque Isle | Coal | 9 | 617 | 618 | |||
Pleasant Prairie | Coal | 2 | 1,224 | 1,234 | |||
Port Washington (b) | Coal | 4 | 305 | 305 | |||
Valley | Coal | 2 | 267 | 227 | |||
Edgewater 5 (c) | Coal | 1 | 102 | 102 | |||
Milwaukee County | Coal | 3 | 11 | 11 | |||
Total Steam Plants | 27 | 4,673 | 4,658 | ||||
Hydro Plants (14 in number) | 37 | 54 | 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 | 400 | |||
Other Combustion Turbines & Diesel (b) (d) | Gas/Oil | 6 | 55 | 62 | |||
Total System | 83 | 5,903 | 5,898 | ||||
== | ==== | ==== |
(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) | The Company retired Units 4 & 6 effective January 1, 2003 which resulted in a decrease of 97 megawatts. |
(c) | Wisconsin Electric has a 25% interest in Edgewater 5 Generating Unit, which is operated by Wisconsin Power and Light Company, an unaffiliated utility. |
(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 the local gas distribution company that delivers gas to the plants. |
AtAs of December 31, 2001,2002, Wisconsin Electric was operatingoperated approximately 22,00021,900 pole-miles of overhead distribution lines and 17,90019,300 miles of underground distribution cable as well as approximately 350347 distribution substations and 251,300253,000 line transformers.
As of December 31, 2001,2002, Wisconsin Electric's gas distribution system included approximately 8,2008,400 miles of mains connected at 2221 gate stations to the pipeline transmission systems of ANR Pipeline Company, Guardian Pipeline, Natural Gas Pipeline Company of America, Northern Natural Pipeline Company and Great Lakes Transmission
AtAs of December 31, 2001,2002, the combined steam systems supplied by the Valley and Milwaukee County Power Plants consisted of approximately 43 miles of both high pressure and low pressure steam piping, 8.8 miles of walkable tunnels and other pressure regulating equipment.
Wisconsin Electric owns various office buildings and service centers throughout its service area.
Wisconsin Gas: Wisconsin Gas owns a distribution system which, on December 31, 2001,2002, included approximately 9,90010,100 miles of distribution and transmission mains. Wisconsin Gas' distribution system consists almost entirely of plastic and coated steel pipe. Wisconsin Gas owns office buildings in certain communities in which it serves, gas regulating and metering stations, peaking facilities and its major service centers, including garage and warehouse facilities. In 2001, the Company announced that it expects to sell the former main office building of
Where distribution mains and services occupy private property, Wisconsin Gas in Milwaukee.some, but not all, instances has obtained consents, permits or easements for such installations from the apparent owners or those in possession, generally without an examination of title.
Edison Sault: Edison Sault's majorprimary source of electric energy is its 29.830 megawatt hydroelectric generating plant on the St. Mary'sMarys River in Sault Ste. Marie, Michigan. In addition, Edison Sault owns and operates a 4.8 megawatt diesel-fireddiesel-based peaking power plant.
Edison Sault maintains approximately 810816 miles of primary distribution lines and renders service to its customers through approximately 9,400 line transformers.
NON-UTILITY ENERGY SEGMENT
Wisvest Corporation: Wisvest owns a chilled water production and distribution facility located in Milwaukee County, Wisconsin. Calumet Energy Team LLC owns a 308-megawatt peaking power plant in Chicago, Illinois. Wisvest-Connecticut, LLC, ownsowned 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. The Company is evaluating proposals to sell these plants. Calumet Energy Team LLC is completing start-up of a 308-megawatt peaking power plantWisvest-Connecticut units were sold in Chicago, Illinois.December 2002.
MANUFACTURING SEGMENT
The manufacturing segment has manufacturing or assembly facilities located in California (5), Indiana, Minnesota, (2), Nebraska, New Hampshire, Oregon, Wisconsin, Australia, Canada, China, England, Germany, India, Italy (3), Mexico (2) and New Zealand. These plants contain more than 1,500,0001,600,000 square feet of floor space. In addition, through its manufacturing business, the Company owns or leases sales/distribution facilities in the United States (10)(11), in Australia (6)(5), in Mexico (3), (2) each in Canada, Mexico, Italy, New Zealand, and the United KingdomEngland and (1) each in China, France, Germany, India, Kazakhstan, and Russia.
OTHER
Wispark LLC: As of December 31, 2001, remaining2002, Wispark properties included the following commercial and industrial parks in the state of Wisconsin: LakeView Corporate Park located near Kenosha; Business Park of Kenosha and PrairieWood Corporate Park in Kenosha County; GrandView in Racine County; 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, plusas well as other properties located in Wisconsin Electric's service territories that are held for future development.
Minergy Corp.: Minergy owns a Glass Aggregate facility located in Neenah, Wisconsin and a GlassPack facility in Winneconne, Wisconsin.
Other: Badger Service Company holds rights to coal in an area of 8,5688,594 acres in Knox County, Indiana.
ITEM 3. |
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ENVIRONMENTAL MATTERS
Wisconsin Energy is subject to federal, state and certain local laws and regulations governing the environmental aspects of its operations. The Company believes that, perhaps with immaterial exceptions, its existing facilities are in compliance with applicable environmental requirements.
See "Environmental Compliance" in Item 1, which is incorporated by reference herein, for a discussion of matters related to certain solid waste and coal-ash landfills, manufactured gas plant sites and air quality.
Giddings & Lewis, Inc./City of West Allis Lawsuit: See "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements in Item 8 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.
Columbia Propane Lawsuit:Lawsuit: In 1999, Wisconsin Gas was sued by Columbia Propane LP in the Circuit Court of Wood County, Wisconsin for an estimated $5 million in clean up costs related to a manufactured gas plant site in Marshfield, Wisconsin. The gas plant was owned and operated by People's Gas until 1960 when Wisconsin Gas acquired the assets of People's Gas subject to the terms of an Asset Purchase Agreement. In 1962, Wisconsin Gas sold the site to Columbia Propane. Columbia Propane asserts in the lawsuit that Wisconsin Gas stands in the shoes of People's Gas and is liable for environmental liabilities. Wisconsin Gas contested the liability and filed a motion for summary judgment contending that as a matter of law it was not liable for the clean up costs. The judge granted Wisconsin Gas' motion for summary judgment and dismissed the complaint, but on December 28, 2001, the Wisconsin Court of Appeals reversed the trial court and remanded the matter back for trial o non the issue as to whether the parties intended tort liability to be assumed by Wisconsin Gas under the terms of the Asset Purchase Agreement. On January 29, 2002, Wisconsin Gas filed with the Wisconsin Supreme Court a Petition for Review, which is pending.Review. On April 22, 2002, the Wisconsin Supreme Court granted Wisconsin Gas' Petition for Review. Oral arguments were held on January 15, 2003 and to date, no opinion has been rendered by the Wisconsin Supreme Court.
California PRP Notification:In June 2001, WICOR Industries received a letter from the California Department of Toxic Substance Control notifying Sta-Rite that its Park facility in Long Beach had arranged for transport and treatment of waste at Davis Chemical Company in Los Angeles, California which operated between 1949 and 1990. The Department determined that there had been a release of hazardous substances at this site. Other PRPs are listed in the notification. The sellers of the Park facility in Long Beach to Sta-Rite have indemnified Sta-Rite with respect to any liability arising from the release of hazardous substances at the Davis Chemical Company in Los Angeles prior to August 10, 2000. The indemnity is contained in the Asset Purchase Agreement dated August 10, 2000 which governed the purchase by Sta-Rite of the Park facility.
UTILITY RATE MATTERS
See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 for information concerning rate matters in the jurisdictions where Wisconsin Electric, Wisconsin Gas and Edison Sault do business.
OTHER MATTERS
Used Nuclear Fuel Storage & Removal:See "Factors Affecting Results, Liquidity and Capital Resources" in Item 7 for information concerning the United States Department of Energy's breach of a contract with Wisconsin
Electric that required the United States Department of Energy to begin permanently removing used nuclear fuel from Point Beach Nuclear Plant by January 31, 1998.
Mackinac Island Lawsuit: On September 1, 2000, two plaintiffs individually and on behalf of an uncertified class of plaintiffs, filed a lawsuit against Edison Sault in the state court in St. Ignace, Mackinac County, Michigan for an unknown amount of damages which allegedly arose from an outage which occurred on Mackinac Island in July 2000. Plaintiffs' motion for class certification was heard by the Court on May 31, 2001 and was denied. The two plaintiffs intend to submit their individual claims to the Company's claim adjudicator for the complete resolution of this case.
Stray Voltage:On July 11, 1996, the PSCW issued its final order regarding the stray voltage policies of Wisconsin's investor-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 beneficial in Wisconsin Electric's efforts to manage this controversial issue, it has not had a significant impact on Wisconsin Electric's financial position or results of operations.
In recent years, several actions by dairy farmers have been commenced or claims made against Wisconsin Electric for loss of milk production and other damages to livestock allegedly caused by stray voltage resulting from the operation of its electrical system. At the present time, fourthree such actions are pending and one case is on appeal. One of the fourthree cases was filed in Circuit Court, Kenosha County, Wisconsin and alleges that Wisconsin Electric was negligent with respect to the design, construction, maintenance and operation of the distribution line serving the plaintiffs' farm, and the 138 kV transmission line which crosses plaintiffs' property, thereby giving rise to stray currents which impacted dairy cows and caused physical injury. The claimed damage period commenced in early 1993 and continues to the present. No final damages claim has been provided to date and preliminary opinions of defense experts suggestdate. The Company believes that the case has little merit. The Company willmerit and intends to vigorously defend the claim. Trial has been sched uledscheduled to commence in April 2002.i n June 2003. Of the remaining threetwo cases, the claims made against Wisconsin Electric shouldare not expected to have a material adverse effect on the Company's financial statements.
Electromagnetic Fields:Claims have been made or threatened against electric utilities across the country for bodily injury, disease or other damages allegedly caused or aggravated by exposure to electromagnetic fields associated with electric transmission and distribution lines. Results of scientific studies conducted to date have not established the existence of a causal connection between electromagnetic fields and any adverse health affects. Wisconsin Electric and Edison Sault believe that their facilities are constructed and operated in accordance with all applicable legal requirements and standards. Currently, there are no cases pending or threatened against Wisconsin Electric nor against Edison Sault with respect to damage caused by electromagnetic fields.
ITEM 4. |
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No matters were submitted to a vote of Wisconsin Energy's security holders during the fourth quarter of 2001.2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages at December 31, 20012002 and positions of the executive officers of Wisconsin Energy 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 | Chairman of the Board, President and Chief Executive Officer of Wisconsin Energy Corporation since 1991. Chairman of the Board and Chief Executive Officer of Wisconsin Electric Power Company since 1990. Chairman of the Board and Director of Wisconsin Gas Company since April 2000. Director of Wisconsin Energy Corporation since 1988. Director of Wisconsin Electric Power Company since 1989. |
Charles R. Cole | Senior Vice President of Wisconsin Electric Power Company since January 1, 2001. Vice President -- Distribution Operations of Wisconsin Electric Power Company from August 1999 to December 2000. Vice President -- Customer Services of Kansas City Power & Light from 1995 to 1999. |
Stephen P. Dickson | Controller of Wisconsin Energy Corporation and Wisconsin Electric Power Company since April 2000. Controller of Wisconsin Gas Company since June 1998. Director |
James C. Donnelly | Vice President of WICOR since 1992. President and Chief Executive Officer of WICOR Industries, Inc. since June 2000. President and Chief Executive Officer of Sta-Rite Industries, Inc. since 1994. |
Paul Donovan |
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Richard R. Grigg |
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Larry Salustro | Senior Vice President and General Counsel of Wisconsin Energy Corporation, Wisconsin Electric Power Company and Wisconsin Gas Company since July 2000. Vice President of Wisconsin Electric Power Company from 1997 through June 2000. Regional Vice President -- Law and Governmental Affairs with AT&T from 1995 to 1997. |
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Certain executive officers also hold offices in Wisconsin Energy's non-utility subsidiaries.
PART II
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER |
NUMBER OF COMMON STOCKHOLDERS
As of December 31, 2001,2002, based upon the number of Wisconsin Energy Corporation stockholder accounts (including accounts in Wisconsin Energy's dividend reinvestment and stock purchase plan), there were 68,25364,720 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 WI Engy.
DIVIDENDS AND COMMON STOCK PRICES
Common Stock Dividends of Wisconsin Energy:Cash dividends on Wisconsin Energy's common stock, as declared by the board of directors, are normally paid on or about the first day of March, June, September and December. Wisconsin Energy reviews its dividend policy on a regular basis. Subject to any regulatory restrictions or other limitations on the payment of dividends, future dividends will be at the discretion of the board of directors and will depend upon, among other factors, earnings, financial condition and other requirements.
In September 2000, the board of directors authorized a quarterly cash dividend on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an annualized basis), which was reduced from prior quarterly dividends paid during 2000 of $0.39 per share (or $1.56 on an annualized basis).
Range of Wisconsin Energy Common Stock Prices and Dividends:
2001 | 2000 | 2002 | 2001 | |||||||||||
Quarter | High | Low | Dividend | High | Low | Dividend | High | Low | Dividend | High | Low | Dividend | ||
First | $22.56 | $19.13 | $0.20 | $21.19 | $16.81 | $0.39 | $25.49 | $22.07 | $0.20 | $22.56 | $19.13 | $0.20 | ||
Second | 24.04 | 20.10 | 0.20 | 22.94 | 19.81 | 0.39 | $26.48 | $24.60 | 0.20 | $24.04 | $20.10 | 0.20 | ||
Third | 24.62 | 20.81 | 0.20 | 23.56 | 18.94 | 0.39 | $26.16 | $20.17 | 0.20 | $24.62 | $20.81 | 0.20 | ||
Fourth | 23.70 | 20.50 | 0.20 | 23.00 | 17.88 | 0.20 | $25.30 | $21.20 | 0.20 | $23.70 | $20.50 | 0.20 | ||
Year | $26.48 | $20.17 | $0.80 | $24.62 | $19.13 | $0.80 | ||||||||
==== | ==== | |||||||||||||
Year | $24.62 | $19.13 | $0.80 | $23.56 | $16.81 | $1.37 |
30
(a) In the first quarter of 2002, Wisconsin Energy recorded a non-cash charge of $141.5 million related primarily to non-utility investments which are held for sale. (b) Includes WICOR, Inc. and its subsidiaries subsequent to their acquisition on April 26, 2000. (c) Quarterly results of operations are not directly comparable because of seasonal and other factors. See Management's Discussion
|
WISCONSIN ENERGY CORPORATION | |||||||||||||||
CONSOLIDATED SELECTED UTILITY OPERATING DATA | |||||||||||||||
Year Ended December 31 | 2002 | 2001 | 2000 (a) | 1999 | 1998 | ||||||||||
Electric Utility | |||||||||||||||
Operating Revenues (Millions) | |||||||||||||||
Residential | $703.0 | $654.5 | $606.7 | $584.3 | $576.2 | ||||||||||
Small Commercial/Industrial | 606.3 | 592.9 | 550.0 | 524.9 | 496.2 | ||||||||||
Large Commercial/Industrial | 483.1 | 479.7 | 472.8 | 459.4 | 455.3 | ||||||||||
Other - Retail/Municipal | 77.7 | 70.6 | 64.7 | 56.7 | 54.7 | ||||||||||
Resale - Utilities | 18.1 | 56.8 | 79.1 | 74.7 | 60.9 | ||||||||||
Other Operating Revenues | 22.6 | 12.9 | 24.5 | 22.1 | 20.3 | ||||||||||
Total Operating Revenues | $1,910.8 | $1,867.4 | $1,797.8 | $1,722.1 | $1,663.6 | ||||||||||
====== | ====== | ====== | ====== | ====== | |||||||||||
Megawatt-hour Sales (Thousands) | |||||||||||||||
Residential | 8,310.9 | 7,773.4 | 7,633.2 | 7,503.1 | 7,405.0 | ||||||||||
Small Commercial/Industrial | 8,719.5 | 8,595.4 | 8,524.7 | 8,257.7 | 7,746.2 | ||||||||||
Large Commercial/Industrial | 11,129.6 | 11,177.6 | 11,824.0 | 11,542.8 | 11,523.3 | ||||||||||
Other - Retail/Municipal | 2,051.9 | 1,828.6 | 1,755.8 | 1,531.4 | 1,409.3 | ||||||||||
Resale - Utilities | 650.7 | 1,687.6 | 2,304.7 | 2,422.1 | 1,856.6 | ||||||||||
Total Sales | 30,862.6 | 31,062.6 | 32,042.4 | 31,257.1 | 29,940.4 | ||||||||||
====== | ====== | ====== | ====== | ====== | |||||||||||
Number of Customers (Average) | |||||||||||||||
Residential | 963,988 | 950,271 | 934,494 | 915,713 | 904,703 | ||||||||||
Small Commercial/Industrial | 105,551 | 103,908 | 101,665 | 99,209 | 97,858 | ||||||||||
Large Commercial/Industrial | 709 | 710 | 716 | 720 | 724 | ||||||||||
Other | 2,389 | 2,363 | 2,327 | 1,978 | 1,899 | ||||||||||
Total Customers | 1,072,637 | 1,057,252 | 1,039,202 | 1,017,620 | 1,005,184 | ||||||||||
====== | ====== | ====== | ====== | ====== | |||||||||||
Gas Utility | |||||||||||||||
Operating Revenues (Millions) | |||||||||||||||
Residential | $591.0 | $645.9 | $450.2 | $193.8 | $176.5 | ||||||||||
Commercial/Industrial | 279.7 | 313.4 | 225.2 | 95.1 | 87.9 | ||||||||||
Interruptible | 12.6 | 17.0 | 13.7 | 5.3 | 7.1 | ||||||||||
Total Retail Gas Sales | 883.3 | 976.3 | 689.1 | 294.2 | 271.5 | ||||||||||
Transported Customer-Owned Gas | 38.3 | 36.7 | 31.3 | 14.6 | 12.0 | ||||||||||
Transported - Interdepartmental | 1.1 | 1.2 | 1.5 | 1.8 | 2.5 | ||||||||||
Other Operating Revenues | (4.6) | 60.3 | 14.4 | (3.8) | 9.9 | ||||||||||
Total Operating Revenues | $918.1 | $1,074.5 | $736.3 | $306.8 | $295.9 | ||||||||||
==== | ===== | ==== | ==== | ==== | |||||||||||
Therms Delivered (Millions) | |||||||||||||||
Residential | 817.1 | 756.3 | 569.0 | 329.0 | 289.5 | ||||||||||
Commercial/Industrial | 463.1 | 427.7 | 336.5 | 195.3 | 182.0 | ||||||||||
Interruptible | 29.3 | 25.8 | 24.9 | 16.3 | 23.3 | ||||||||||
Total Retail Gas Sales | 1,309.5 | 1,209.8 | 930.4 | 540.6 | 494.8 | ||||||||||
Transported Customer-Owned Gas | 786.0 | 762.4 | 650.1 | 347.9 | 349.4 | ||||||||||
Transported - Interdepartmental | 25.8 | 25.0 | 41.0 | 55.6 | 78.6 | ||||||||||
Total Therms Delivered | 2,121.3 | 1,997.2 | 1,621.5 | 944.1 | 922.8 | ||||||||||
===== | ===== | ===== | ==== | ==== | |||||||||||
Number of Customers (Average) | |||||||||||||||
Residential | 888,626 | 875,339 | 697,570 | 360,084 | 347,747 | ||||||||||
Commercial/Industrial | 82,973 | 79,503 | 62,626 | 32,594 | 31,586 | ||||||||||
Interruptible | 79 | 82 | 72 | 89 | 146 | ||||||||||
Transported Customer-Owned Gas | 1,502 | 4,463 | 3,247 | 328 | 271 | ||||||||||
Transported - Interdepartmental | 6 | 5 | 6 | 6 | 6 | ||||||||||
Total Customers | 973,186 | 959,392 | 763,521 | 393,101 | 379,756 | ||||||||||
===== | ===== | ===== | ===== | ===== | |||||||||||
Degree Days (b) | |||||||||||||||
Heating (6,769 Normal) | 6,551 | 6,338 | 6,716 | 6,318 | 5,848 | ||||||||||
Cooling (703 Normal) | 897 | 711 | 566 | 753 | 800 | ||||||||||
(a) | Includes Wisconsin Gas subsequent to the acquisition of WICOR, Inc. on April 26, 2000. Average gas customers | ||||||||||||||
are weighted for the eight months when Wisconsin Gas was a part of Wisconsin Energy. | |||||||||||||||
(b) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a | ||||||||||||||
twenty-year moving average. |
WISCONSIN ENERGY CORPORATION | ||||||||||||||
CONSOLIDATED SELECTED UTILITY OPERATING DATA | ||||||||||||||
Year Ended December 31 | 2001 | 2000 (a) | 1999 | 1998 | 1997 | |||||||||
Electric Utility | ||||||||||||||
Operating Revenues (Millions) | ||||||||||||||
Residential | $654.5 | $606.7 | $584.3 | $576.2 | $487.2 | |||||||||
Small Commercial/Industrial | 592.9 | 550.0 | 524.9 | 496.2 | 430.2 | |||||||||
Large Commercial/Industrial | 479.7 | 472.8 | 459.4 | 455.3 | 402.7 | |||||||||
Other - Retail/Municipal | 70.6 | 64.7 | 56.7 | 54.7 | 55.2 | |||||||||
Resale - Utilities | 56.8 | 79.1 | 74.7 | 60.9 | 24.6 | |||||||||
Other Operating Revenues | 12.9 | 24.5 | 22.1 | 20.3 | 12.2 | |||||||||
Total Operating Revenues | $1,867.4 | $1,797.8 | $1,722.1 | $1,663.6 | $1,412.1 | |||||||||
====== | ====== | ====== | ====== | ====== | ||||||||||
Megawatt-hour Sales (Thousands) | ||||||||||||||
Residential | 7,773.4 | 7,633.2 | 7,503.1 | 7,405.0 | 6,863.6 | |||||||||
Small Commercial/Industrial | 8,595.4 | 8,524.7 | 8,257.7 | 7,746.2 | 7,433.1 | |||||||||
Large Commercial/Industrial | 11,177.6 | 11,824.0 | 11,542.8 | 11,523.3 | 11,021.5 | |||||||||
Other - Retail/Municipal | 1,828.6 | 1,755.8 | 1,531.4 | 1,409.3 | 1,412.6 | |||||||||
Resale - Utilities | 1,687.6 | 2,304.7 | 2,422.1 | 1,856.6 | 941.0 | |||||||||
Total Sales | 31,062.6 | 32,042.4 | 31,257.1 | 29,940.4 | 27,671.8 | |||||||||
====== | ====== | ====== | ====== | ====== | ||||||||||
Number of Customers (Average) | ||||||||||||||
Residential | 950,271 | 934,494 | 915,713 | 904,703 | 876,776 | |||||||||
Small Commercial/Industrial | 103,908 | 101,665 | 99,209 | 97,858 | 93,259 | |||||||||
Large Commercial/Industrial | 710 | 716 | 720 | 724 | 714 | |||||||||
Other | 2,363 | 2,327 | 1,978 | 1,899 | 1,844 | |||||||||
Total Customers | 1,057,252 | 1,039,202 | 1,017,620 | 1,005,184 | 972,593 | |||||||||
======= | ======= | ======= | ======= | ====== | ||||||||||
Gas Utility | ||||||||||||||
Operating Revenues (Millions) | ||||||||||||||
Residential | $645.9 | $450.2 | $193.8 | $176.5 | $222.0 | |||||||||
Commercial/Industrial | 313.4 | 225.2 | 95.1 | 87.9 | 113.6 | |||||||||
Interruptible | 17.0 | 13.7 | 5.3 | 7.1 | 9.0 | |||||||||
Total Retail Gas Sales | 976.3 | 689.1 | 294.2 | 271.5 | 344.6 | |||||||||
Transported Customer-Owned Gas | 36.7 | 31.3 | 14.6 | 12.0 | 13.4 | |||||||||
Transported - Interdepartmental | 1.2 | 1.5 | 1.8 | 2.5 | 3.1 | |||||||||
Other Operating Revenues | 60.3 | 14.4 | (3.8) | 9.9 | (5.9) | |||||||||
Total Operating Revenues | $1,074.5 | $736.3 | $306.8 | $295.9 | $355.2 | |||||||||
====== | ===== | ===== | ===== | ===== | ||||||||||
Therms Delivered (Millions) | ||||||||||||||
Residential | 756.3 | 569.0 | 329.0 | 289.5 | 347.9 | |||||||||
Commercial/Industrial | 427.7 | 336.5 | 195.3 | 182.0 | 211.5 | |||||||||
Interruptible | 25.8 | 24.9 | 16.3 | 23.3 | 24.5 | |||||||||
Total Retail Gas Sales | 1,209.8 | 930.4 | 540.6 | 494.8 | 583.9 | |||||||||
Transported Customer-Owned Gas | 762.4 | 650.1 | 347.9 | 349.4 | 387.2 | |||||||||
Transported - Interdepartmental | 25.0 | 41.0 | 55.6 | 78.6 | 9.6 | |||||||||
Total Therms Delivered | 1,997.2 | 1,621.5 | 944.1 | 922.8 | 980.7 | |||||||||
===== | ===== | ==== | ==== | ==== | ||||||||||
Number of Customers (Average) | ||||||||||||||
Residential | 875,339 | 697,570 | 360,084 | 347,747 | 339,002 | |||||||||
Commercial/Industrial | 79,503 | 62,626 | 32,594 | 31,586 | 30,594 | |||||||||
Interruptible | 82 | 72 | 89 | 146 | 170 | |||||||||
Transported Customer-Owned Gas | 4,463 | 3,247 | 328 | 271 | 254 | |||||||||
Transported - Interdepartmental | 5 | 6 | 6 | 6 | 7 | |||||||||
Total Customers | 959,392 | 763,521 | 393,101 | 379,756 | 370,027 | |||||||||
====== | ====== | ====== | ====== | ====== | ||||||||||
Degree Days (b) | ||||||||||||||
Heating (6,821 Normal) | 6,338 | 6,716 | 6,318 | 5,848 | 7,101 | |||||||||
Cooling (685 Normal) | 711 | 566 | 753 | 800 | 407 | |||||||||
(a) | Includes Wisconsin Gas subsequent to the acquisition of WICOR, Inc. on April 26, 2000. Average gas customers | |||||||||||||
are weighted for the eight months when Wisconsin Gas was a part of Wisconsin Energy. | ||||||||||||||
(b) | 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 CONDITION AND RESULTS OF OPERATIONS |
CORPORATE DEVELOPMENTS
INTRODUCTION
Wisconsin Energy Corporation is a diversified holding company with subsidiaries primarily in a utility energy segment, a non-utility energy segment and a manufacturing segment. Unless qualified by their context, when used in this document the terms "Wisconsin Energy" or the "Company" refer to the holding company and all of its subsidiaries.
The utility energy segment, comprisedconsisting of Wisconsin Electric Power Company ("Wisconsin Electric"), and Wisconsin Gas Company ("Wisconsin Gas"), both doing business under the trade name of "We Energies", and Edison Sault Electric Company ("Edison Sault"), is engaged primarily in the business of generating electricity and distributing electricity and natural gas in Wisconsin and the Upper Peninsula of Michigan. The non-utility energy segment primarily comprisedconsists of Wisvest Corporation ("Wisvest") and W.E. Power, LLC ("W.E.We Power"),. We Power is principally engaged in independentthe engineering, construction and development of electric power developmentgenerating facilities for long term lease to Wisconsin Electric and production.other utilities. The manufacturing segment consists of companies which manufacture pumps as well as fluid processing and pump filtration equipment. In addition, Wisconsin Energy has several other subsidiaries, the primary two of which are engaged in the development and marketing of recycling technologies ("Minergy") and in the development of, and investment in real estate ("Wispark").
Acquisition of WICOR, Inc.: On April 26, 2000, Wisconsin Energy acquired WICOR, Inc. ("WICOR"). WICOR is the parent of Wisconsin Gas, the largest natural gas distribution utility in Wisconsin, and of WICOR Industries, Inc. ("WICOR Industries"), an intermediate holding company which owns several manufacturers of pumps as well as fluid processing and pump filtration equipment. This business combination was accounted for as a purchase and, therefore, is reflected prospectively in Wisconsin Energy's consolidated financial statements from and after the date of the acquisition.
Cautionary Factors: A numberCertain statements contained herein are "Forward Looking Statements" within the meaning of forward-looking statements are included in this document. When used, the terms "anticipate,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," "believe,"intends," "estimate,"anticipates," "expect,"believes," "forecast,"estimates," "objective,"expects," "plan,"forecasts," "objectives," "plans," "possible," "potential," "project" andor similar expressions are intended to identify 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 areset 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 filings with the Securities and Exchange Commission ("SEC") including factors described including the factors mentioned throughout this document and below in " Factors"Factors Affecting Results, Liquidity and Capital Resources."Resources".
CORPORATE STRATEGY
Business Opportunities
With the acquisition of WICOR in April of 2000, the Company redefined its core competencies to include electric generation within the Midwest, electric and gas distribution, and manufacturing. In 2000, as part of an internal strategic planning process, management and the Board concluded that it was not practical to continue the strategy of competing in the non-regulated energy market outside of the Midwest.
The Company seeks to increase shareholder value by leveraging on the core competencies within its business segments. Wisconsin Energy's key corporate strategy isPower the Future which was announced in September 2000. This strategy is designed to increase the electric generating capacity in the state of Wisconsin while maintaining a fuel diverse, reasonably priced electric supply. It also is designed to improve the delivery of energy within the Company's distribution systems to meet increasing customer demands.demands, and it is committed to improved environmental performance. ThePower the Future strategy, which is discussed further below, is expected to have a significant impact on the Company's utility and non-utility energy segments.
Utility Energy Segment: This segment is realizing operating efficiencies through the combinationintegration of the operations of Wisconsin Electric and Wisconsin Gas. These operating efficiencies should increase customer satisfaction and reduce operating costs. In connection with thePower the Future strategy, over the next decade, this segment is planningthe Company plans to invest approximately $2.7 billion to improve the existing energy distribution system and approximately $1.3 billion to upgrade existing electric generating assets. This segment is also plansplanning to invest approximately $100$150 million over the next three years to improve the availability of natural gas supplies to the state of Wisconsin.
Non-Utility Energy Segment: Subject to approval of the Public Service Commission of Wisconsin ("PSCW"), thissegment will primarily focus on improving the supply of electric generation in Wisconsin. W.E. Power has been formed to own and construct the new generation assets under thePower the Future strategy. The majority of Wisvest's assets are being divested in order to direct the capital and management attention toPower the Future.
Manufacturing Segment: This segment continues to build on the strong name recognition and customer relationships that were developed under WICOR. This segment intends to continue its growth through international expansion, acquiring value-adding businesses, capturing cost efficiencies, implementing operating process improvements, and increasing sales through new product introductions and expanded market share.
Non-Utility Energy Segment: Thissegment will primarily focus on improving the supply of electric generation in Wisconsin. We Power has been formed to design, construct, own, finance and lease new generation assets and improvements in Wisconsin Electric's existing generation assets under thePower the Future strategy. The majority of Wisvest's assets have been divested in order to direct the capital and management attention toPower the Future.
Power the Future Strategy: In late February 2001, Wisconsin Energy announced enhancements to a 10-year, $7 billion strategy, originally proposed in September 2000, to improve the supply and reliability of electricity 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. According to a report issued in June 2001, by the Wisconsin Governor's Office, demand for electricity in the state of Wisconsin is currently expected to outstrip supply by 7,220 megawatts by the year 2016.Power the Future would add new coal and natural gas capacity to the state's power portfolio and would allow Wisconsin Electric to roughly maintain its current fuel mix.
As part of itsPower the Future strategy, Wisconsin Energy plans to make the following investments over the next decade:
Approximately $3 billion in 2,800 megawatts of new natural gas-based and coal-based generating | |
Approximately $1.3 billion in upgrades to existing electric generating assets; and | |
Approximately $2.7 billion in new and existing energy distribution system assets. |
In November 2001, Wisconsin Energy created a new non-utility energy subsidiary, W.E.We Power, that wouldwill design, construct, own, finance and ownlease the new generating capacity. Under the enhancedPower the Futurestrategy, Wisconsin Electric, subject to PSCW approval by the Public Service Commission of Wisconsin ("PSCW"), would lease each new facility and would operate and maintain the new plants as part of these 20under 25 to 25-year30-year lease agreements. At the end of the leases, Wisconsin Electric wouldcould have the right to acquire the plants outright at market value or renew the lease, depending on tax considerations at that time, the subsidiary could choose to extend the lease.time. Smaller investor-owned or municipal utilities, cooperatives and power marketing associations would have the opportunity to participate in the project, including expanding or extending wholesale power purchases from Wisconsin Electric as a result of the additional electric generating capacity included in the proposal. Wisconsin Electric expects that all lease payments and operating costs of the plants will be recoverable in rates.
Implementation of the Company'sPower the Future strategy is subject to a number of regulatory approvals.In lateapprovals. In February 2001, Wisconsin Energy made preliminary filings for its enhancedPower the Future proposal with the PSCW. Subsequently, the state legislature amended several laws, making changes which are critical to the implementation ofPower the Future.Future. On October 16, 2001, the PSCW issued a declaratory ruling finding, among other things, that it was prudent to proceed withPower the Future and for the Company to incur the associated pre-certification expenses. However, individual expenses are subject to review and must be approved by the PSCW in order to be recovered.
The PSCW also ruled that such expenses fall withinMidwest Independent Power Suppliers Coordination Group ("MWIPS") filed a Petition for Judicial Review with the reliability "carve-out" provisions contained inDane County Circuit Court asking the Circuit Court to reverse and remand the PSCW's declaratory ruling. Wisconsin Electric filed a Notice of Appearance and Statement of Position asking that the declaratory ruling be
The application for a Certificate of Public Convenience and Necessity ("CPCN") for thePower the Futureproject was filed with the PSCW in February of 2002. In April of 2002 the PSCW authorized the CPCN approval process to be bifurcated by fuel source, which would expedite the issuance of a CPCN certificate for the Port Washington combined cycle gas project. Correspondingly, on April 25, 2002 the CPCN application for the Port Washington Generating Station was deemed complete by the PSCW. Hearings for the Port Washington Generating Station were held in September 2002, and a written order approving the mergerissuance of WICORa CPCN for the project was received in December 2002. The CPCN filing for the generating station at the Company's existing Oak Creek Power Plant site was deemed complete by the PSCW on November 15, 2002. In January 2003, certain intervenors filed with the PSCW a Petition for Review of the completeness determination seeking its reversal. The Company is opp osing the petition and believes that the PSCW will reject the petition and reaffirm its completeness determination. Under the current schedule, Wisconsin Energy allowinganticipates receiving a decision from the CompanyPSCW on the Oak Creek site in late 2003. Wisconsin Energy continues to seek recoverywork with the PSCW and the Wisconsin Department of such expenses. Natural Resources ("WDNR") to obtain all required permits and project approvals.
Wisconsin Energy anticipates obtaining the capital necessary to finance and execute this strategyPower the Future from a combination of internal and external sources.
For further information concerning thePower the Future strategy, see "Factors Affecting Results, Liquidity and Capital Resources" below.
Divestiture of Non-Core Assets
ThePower the Future strategy led to a decision to divest non-core businesses. These non-core businesses primarily include non-utility generation assets located outside of the Midwest and a substantial amount of Wispark'sWispark LLC's real estate portfolio. DuringSince 2000, and 2001, the Company has received total proceeds of almost $700 millionapproximately $1 billion from the divestiture of non-core assets.
Utility Energy Segment: During 2000, Wisconsin Electric and Edison Sault agreed to join American Transmission Company LLC ("ATC") by transferring their electric utility transmission assets to ATC in exchange for equity interests in the new company. Transfer of these electric transmission assets, with a net book value of approximately $254.9 million, became effective on January 1, 2001. During 2001, ATC issued debt and distributed $119.8 million of cash back to Wisconsin Electric and Edison Sault as a partial return of their original equity contribution. Joining ATC is consistent with the Federal Energy Regulatory Commission's Order No. 2000, designed to foster competition, efficiency and reliability in the electric industry.follows:
The Company anticipates that the transfer of its electric transmission assets to ATC will be earnings neutral subject to approval of transmission cost rate recovery requests made with the PSCW and the Michigan Public Service Commission ("MPSC") during 2001. However, the asset transfer has changed where transmission-related activities are reflected on the income statement. Prior to the asset transfer, transmission-related costs were reflected in Other Operation and Maintenance expense, Depreciation expense and Financing Costs (for interest expense). Following transfer of the transmission assets, the Company reports fees paid to ATC for electric transmission service in Other Operation and Maintenance expense and recognizes an equity interest in ATC's reported earnings in Other Income (Deductions), Equity in Earnings of Unconsolidated Affiliates. See "Utility Rates and Regulatory Matters" below for information related to recovery of the Company's transmission costs.
Proceeds from: | (Millions of Dollars) |
Non-Utility Energy | $542 |
Transmission | 120 |
Real Estate | 332 |
Other | 19 |
Total Assets Divested | $1,013 |
===== | |
Non-Utility Energy Segment: During the second quarter of 2001, the Company sold FieldTech, Inc. and Wisvest's interest in Blythe Energy, LLC, an independent power production project in the state of California, in separate transactions. Wisconsin Energy realized after-tax gains of approximately $16.5 million or $0.14 per diluted share as a result of the sales of FieldTech and Blythe.
During April 2001, the operations of WICOR Energy Services Company were merged into Kaztex Energy Management, Inc., an unconsolidated affiliate of Wisconsin Energy. During the fourth quarter of 2001, the operations of Griffin Energy Marketing, L.L.C., a division of Wisvest, were halted, ending electric marketing activities by the non-utility energy segment. Griffin's activities had been winding down during 2001 as it closed out previously negotiated transactions.
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS
The Company's adjusted earnings for the year ended December 31, 2001 were $2.04 per share, an increase of $0.53 per share when compared to 2000 adjusted earnings. This increase reflected higher revenues and improved electric margins within the utility energy segment, improved earnings from Wisvest, stable manufacturing earnings in a soft economy, and the favorable impact of the Company's share repurchase program. Including non-recurring gains and charges and the impacts of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, reported earnings for 2001 were $1.86 per share, or a $0.59 per share increase when compared to reported earnings for 2000.
The following table compares Wisconsin Energy's diluted earnings per share by business segment for 20012002 and 19992001 with similar information for 2000 on an actual and pro forma basis.
Pro forma | Actual | Actual | Pro forma | |||||
Diluted Earnings Per Share | 2001 | 2000 (a) | 2000 | 1999 | 2002 | 2001 | 2000 | 2000 (a) |
Utility Energy Segment | $2.38 | $2.00 | $1.82 | $1.94 | $2.63 | $2.38 | $1.82 | $2.00 |
Manufacturing Segment | 0.31 | 0.25 | 0.18 | 0.24 | ||||
Non-Utility Energy Segment | 0.12 | - | 0.01 | 0.02 | (0.11) | 0.01 | - | |
Manufacturing Segment | 0.25 | 0.24 | 0.18 | - | ||||
Other and Merger-related Costs (b) | (0.71) | (0.73) | (0.50) | (0.08) | (0.51) | (0.53) | (0.38) | (0.55) |
Adjusted Earnings | 2.04 | 1.51 | 1.88 | 2.32 | 2.11 | 1.63 | 1.69 | |
Gains/(Losses) on Investments, Net (c) | (0.07) | 0.45 | - | |||||
Non-Recurring Charges (d) | - | (0.69) | (0.09) | |||||
SFAS 133 Charges, Net (e) | (0.11) | - | ||||||
Net Earnings | $1.86 | $1.27 | $1.79 | |||||
Valuation Charges (c) | (0.79) | (0.21) | (0.26) | |||||
Gains on Asset Sales, net (d) | - | 0.14 | 0.45 | |||||
Goodwill Amortization (e) | - | (0.18) | (0.12) | (0.18) | ||||
Litigation Charges (f) | (0.09) | - | ||||||
Non-Recurring Charges (g) | - | (0.43) | ||||||
Net Earnings - GAAP | $1.44 | $1.86 | $1.27 | |||||
==== |
(a) | Pro forma assumes that the WICOR acquisition had occurred on January 1, 2000 and includes estimated merger-related costs from January through April 2000. |
(b) | Includes the holding company, other non-utility companies and merger-related costs. Merger-related costs in 2001 and 2000 include primarily |
(c) | During 2002, the valuation charge consists of a $0.79 per share write-down primarily attributable to the non-utility energy segment. During 2001, the |
(d) | During 2001, the gain on |
| The Company adopted SFAS 142 effective January 1, 2002 which eliminated the amortization of goodwill and other intangibles with indefinite lives. |
(f) | During 2002, the litigation charges consist of $0.09 per share for the settlement 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. |
(g) | During 2000, non-recurring charges consist of $0.33 per share related to severance and employee benefits, |
|
|
Wisconsin Energy had net income of $1.44 per share during 2002 compared with net income of $1.86 per share during 2001. Adjusted earnings, which exclude a non-cash impairment charge and gains on asset sales, litigation charges and goodwill amortization increased to $2.32 per share during 2002 as compared to $2.11 per share for the same period in 2001. The Company had net income of $1.86 per share during 2001 compared with pro forma net income of $1.27 per share during 2000. Adjusted earnings, which exclude non-cash losses on investments and gains on asset sales and non-recurring charges, increased to $2.11 per share during 2001 as compared to $1.69 per share for 2000 on a pro forma basis. These changes in adjusted earnings are primarily due to the following items:
2002-2001 | 2001-2000 pro forma | |
per share | per share | |
Electric utility margins | $0.34 | $0.34 |
Gas utility margins | 0.11 | (0.08) |
Interest expense | 0.12 | 0.15 |
Manufacturing earnings | 0.06 | 0.01 |
Non-utility energy segment earnings (losses) | (0.12) | 0.01 |
2002 second outage nuclear expenses | (0.08) | - |
ATC incremental transmission expenses, net | (0.05) | - |
2001 interest income accrual on litigation | (0.05) | 0.05 |
2002 costs for early repayment of $103.4 million of long-term debt | (0.03) | - |
Other, net | (0.09) | (0.06) |
Total change in adjusted earnings per share | $0.21 | $0.42 |
==== | ==== |
An analysis of contributions to earnings by segment follows.
UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS
Net earnings for the utility energy segment increased by $20.8 million or 7.6% in 2002 compared to reported 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, $10.5 million in reduced 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.
Utility net earnings during 2001 increased by $114.4 million to $274.4 million compared to reported 2000 earnings. The primary causes for the growth in utility earnings were $90.0 million attributable to price increases to recover higher fuel, purchased power and other operating costs primarily from the electric business, a $24.5 million increase attributable to Wisconsin Gas operations as a result of the seasonality of the gas heating business, the timing of the acquisition of Wisconsin Gas as part of the acquisition of WICOR in April 2000 and $10.5 million of interest income accrued on the deposit tendered in the Giddings & Lewis, Inc./City of West Allis lawsuit.
Utility net earnings during 2001 increased by $100.0$54.0 million when compared to 2000 pro forma earnings. The primary causes for this increase were $65.8 million attributable to higher electric utility gross margins and $10.5 million of interest income accrued on the deposit in the Giddings & Lewis, Inc./City of West Allis lawsuit offset partially by a decrease of $15.6 million of gas utility gross margins.
Utility net earnings during 2000 decreased by $56.0 million when compared to 1999 reflecting $45.9 million of non-recurring charges primarily associated with the WICOR merger, increased fuel and purchased power costs at Wisconsin Electric and cooler than normal summer weather.
The following table summarizes the utility energy segment's earnings during 20012002 and 19992001 with similar information for 2000 on an actual and pro forma basis.
Pro forma | Actual | Actual | Pro forma | |||||||
Utility Energy Segment | 2001 | 2000 (a) | 2000 (b) | 1999 | 2002 | 2001 | 2000 (b) | 2000 (a) | ||
(Millions of Dollars) | (Millions of Dollars) | |||||||||
Operating Revenues | ||||||||||
Electric Utility | $1,867.4 | $1,797.8 | $1,722.1 | |||||||
Gas Utility | 1,074.5 | 952.3 | 736.3 | 306.8 | ||||||
Other Utility | 22.9 | 22.9 | 22.6 | 21.3 | ||||||
Electric | $1,910.8 | $1,867.4 | $1,797.8 | |||||||
Gas | 918.1 | 1,074.5 | 736.3 | 952.3 | ||||||
Other | 23.2 | 22.9 | 22.6 | 22.9 | ||||||
Total Operating Revenues | 2,964.8 | 2,773.0 | 2,556.7 | 2,050.2 | 2,852.1 | 2,964.8 | 2,556.7 | 2,773.0 | ||
Fuel and Purchased Power | 517.3 | 513.5 | 458.9 | 496.7 | 517.3 | 513.5 | ||||
Cost of Gas Sold | 751.6 | 613.8 | 486.7 | 174.0 | 574.9 | 751.6 | 486.7 | 613.8 | ||
Gross Margin | 1,695.9 | 1,645.7 | 1,556.5 | 1,417.3 | 1,780.5 | 1,695.9 | 1,556.5 | 1,645.7 | ||
Other Operating Expenses | ||||||||||
Other Operation and Maintenance | 765.5 | 741.6 | 705.2 | 656.6 | 830.2 | 765.5 | 757.9 | 742.3 | ||
Depreciation, Decommissioning | ||||||||||
and Amortization | 308.6 | 309.7 | 297.5 | 237.2 | 308.3 | 320.1 | 308.5 | 321.1 | ||
Property and Revenue Taxes | 75.4 | 71.1 | 70.9 | 68.3 | 79.9 | 75.4 | 71.0 | 71.1 | ||
Operating Income | 546.4 | 523.3 | 482.9 | 455.2 | 562.1 | 534.9 | 419.1 | 511.2 | ||
Other Income | 38.8 | 6.3 | 7.1 | 12.5 | ||||||
Other Income (Deductions) | 24.5 | 36.8 | (13.6) | 6.3 | ||||||
Financing Costs | 127.4 | 133.9 | 129.5 | 115.5 | 107.3 | 116.4 | 140.5 | 150.5 | ||
Adjusted Income Before Income Taxes | 457.8 | 395.7 | 360.5 | 352.2 | ||||||
Income Before Income Taxes | 479.3 | 455.3 | 265.0 | 367.0 | ||||||
Income Taxes | 177.3 | 153.5 | 140.3 | 125.4 | 184.1 | 180.9 | 105.0 | 146.6 | ||
Adjusted Earnings Before WICOR Merger Costs | 280.5 | 242.2 | 220.2 | 226.8 | ||||||
WICOR Merger Costs, After Tax (c) | 4.9 | 21.8 | 14.3 | - | ||||||
Adjusted Earnings (d) | $275.6 | $220.4 | $205.9 | $226.8 | ||||||
Net Earnings | $295.2 | $274.4 | $160.0 | $220.4 | ||||||
===== | ===== | ===== | ===== | |||||||
Net Earnings | $274.4 | $174.4 | $160.0 | $216.0 | ||||||
Adjusted Earnings (c) | $305.8 | $280.5 | $220.2 | $242.2 | ||||||
===== | ===== | ===== | ===== |
(a) | Includes Wisconsin Gas as if it had been part of Wisconsin Energy since January 1, 2000. |
(b) | Wisconsin Energy's financial statements reflect the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. |
(c) |
|
| During 2002, adjusted earnings exclude $10.6 million after tax related to the Giddings & Lewis, Inc./City of West Allis lawsuit. During 2001, adjusted earnings exclude a net loss on investments of $1.2 |
Electric Utility Revenues, Gross Margins and Sales
The following table compares Wisconsin Energy's electric utility operating revenues and its gross margin during 2002 with similar information for 2001 and 2000.
Electric Revenues and Gross Margin | Megawatt-Hour Sales | |||||
Electric Utility Operations | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 |
(Millions of Dollars) | (Thousands) | |||||
Operating Revenues | ||||||
Residential | $703.0 | $654.5 | $606.7 | 8,310.9 | 7,773.4 | 7,633.2 |
Small Commercial/Industrial | 606.3 | 592.9 | 550.0 | 8,719.5 | 8,595.4 | 8,524.7 |
Large Commercial/Industrial | 483.1 | 479.7 | 472.8 | 11,129.6 | 11,177.6 | 11,824.0 |
Other-Retail/Municipal | 77.7 | 70.6 | 64.7 | 2,051.9 | 1,828.6 | 1,755.8 |
Resale-Utilities | 18.1 | 56.8 | 79.1 | 650.7 | 1,687.6 | 2,304.7 |
Other Operating Revenues | 22.6 | 12.9 | 24.5 | - | - | - |
Total Operating Revenues | 1,910.8 | 1,867.4 | 1,797.8 | 30,862.6 | 31,062.6 | 32,042.4 |
====== | ====== | ====== | ||||
Fuel and Purchased Power | ||||||
Fuel | 278.9 | 308.8 | 325.3 | |||
Purchased Power | 211.1 | 202.3 | 182.0 | |||
Total Fuel and Purchased Power | 490.0 | 511.1 | 507.3 | |||
Gross Margin | $1,420.8 | $1,356.3 | $1,290.5 | |||
====== | ====== | ====== | ||||
Weather -- Degree Days (a) | ||||||
Heating (6,769 Normal) | 6,551 | 6,338 | 6,716 | |||
Cooling (703 Normal) | 897 | 711 | 566 |
(a) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
2002 vs 2001: During 2002, total electric energy sales decreased by 0.6% compared with 2001, primarily reflecting a decline in sales for resale to other utilities due to a reduced demand for wholesale power. Most of the remaining customer classes had increased sales in 2002 reflecting favorable weather and the growth in the average number of customers. Sales to Wisconsin Electric's largest commercial/industrial customers, two iron ore mines, declined by 2.8% between the comparative periods due to the shutdown of a mine in the first quarter of 2002. Excluding these mines, total commercial/industrial electric sales increased by 0.8% and sales to the remaining large commercial/industrial customers increased by 0.1% between the comparative periods.
During 2002, Wisconsin Energy's total electric utility operating revenues increased by $43.4 million or 2.3% compared with 2001 due to favorable weather, the full year impact of price increases related to fuel and purchased power and a surcharge related to transmission costs. As measured by cooling degree days, 2002 was 26.2% warmer than 2001 and 27.6% warmer than normal. In February and May 2001, Wisconsin Electric received increases in rates to cover increased fuel and purchased power costs. On a year to year basis, the fuel surcharge resulted in $10.0 million of additional revenue. For additional information concerning the rate increases, see "Factors Affecting Results, Liquidity and Capital Resources" below. Even with the increased fuel revenues, the Company estimates that it under-recovered fuel and purchased power costs by $2.3 million and $0.1 million for 2002 and 2001, respectively. In addition, in October 2002, the Company implemented a PSCW approved surcharge for r ecovery of increased annual transmission costs associated with American Transmission Company LLC ("ATC") which increased 2002 revenues by approximately $8.7 million.
Between the comparative periods, fuel and purchased power expenses decreased by $21.1 million or 4.1% 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 total gross margin on electric operating revenues increased by $64.5 million or 4.8% during 2002 compared with the same period in 2001.
2001 vs 2000: During 2001, total electric sales fell by 3.1% compared with 2000, reflecting a softening economy that especially affected large commercial and industrial customers such as Wisconsin Electric's largest retail customers, two iron ore mines. Sales to these mines decreased by 17.7% during 2001. Excluding the two mines, total electric sales decreased 1.8% during 2001 and sales to the remaining large commercial/industrial customers decreased by 2.3% when compared with 2000. Due to warmer weather during the summer of 2001, a 1.8% increase
During 2001, Wisconsin Energy's total electric utility operating revenues increased by $69.6 million or 3.9% compared with 2000. Wisconsin Energy attributes this growth mostly to incremental rate increases in effect during 2001 related to higher fuel, purchased power and other operating costs. For additional information concerning these rate increases, see "Factors Affecting Results, Liquidity and Capital Resources" below. Higher electric cooling load during the summer of 2001 caused by a return to normal summer weather also contributed to the growth in electric operating revenues. These revenue increases were partially offset by a reduction in total electric sales during 2001 due in large part to a softening economy in the region.
Purchased power expenses increased by $20.3 million or 11.2% during 2001 primarily as a result of higher natural gas prices and, to a lesser extent, as a result of higher demand costs during 2001 associated with purchased power contracts. A $16.5 million or 5.1% decline in fuel costs during 2001, primarily driven by a change in the Company's electric supply mix to lower cost nuclear generation and by an overall reduction in demand for electric energy during 2001, resulted in a net increase in fuel and purchased power expenses of $3.8 million or 0.7% when compared with 2000. Due to the 3.9% increase in operating revenues partially offset by the slightly higher fuel and purchased power costs, electric gross margin (total electric utility operating revenues less fuel and purchased power expenses) grew by $65.8 million or 5.1% during 2001 when compared with 2000.
During 2000, Wisconsin Energy's total electric utility operating revenues increased by $75.7 million or 4.4% compared with 1999 primarily due to higher electric energy sales during 2000 and to electric rate increases at Wisconsin Electric that became effective in early April 2000 and on August 30, 2000, respectively. For additional information concerning these rate increases, see "Factors Affecting Results, Liquidity and Capital Resources" below. Fuel and purchased power expenses increased by $54.5 million or 12.0% during 2000 reflecting increased generation and significantly higher natural gas prices. Purchased power expenses also grew due to higher demand costs during 2000 associated with purchased power contracts. To a certain extent, Wisconsin Energy was able to limit the increase in fuel and purchased power costs during 2000 by changing its electric supply mix away from higher cost natural gas-fired generation and power purchases to lower cost nuclear and coal-fired generation.
The following table compares Wisconsin Energy's electric utility operating revenues and its gross margin during 2001 with similar information for 2000 and 1999.
Electric Revenues and Gross Margin | Megawatt-Hour Sales | |||||
Electric Utility Operations | 2001 | 2000 | 1999 | 2001 | 2000 | 1999 |
(Millions of Dollars) | (Thousands) | |||||
Operating Revenues | ||||||
Residential | $654.5 | $606.7 | $584.3 | 7,773.4 | 7,633.2 | 7,503.1 |
Small Commercial/Industrial | 592.9 | 550.0 | 524.9 | 8,595.4 | 8,524.7 | 8,257.7 |
Large Commercial/Industrial | 479.7 | 472.8 | 459.4 | 11,177.6 | 11,824.0 | 11,542.8 |
Other-Retail/Municipal | 70.6 | 64.7 | 56.7 | 1,828.6 | 1,755.8 | 1,531.4 |
Resale-Utilities | 56.8 | 79.1 | 74.7 | 1,687.6 | 2,304.7 | 2,422.1 |
Other Operating Revenues | 12.9 | 24.5 | 22.1 | - | - | - |
Total Operating Revenues | 1,867.4 | 1,797.8 | 1,722.1 | 31,062.6 | 32,042.4 | 31,257.1 |
Fuel and Purchased Power | ||||||
Fuel | 315.0 | 331.5 | 299.1 | |||
Purchased Power | 202.3 | 182.0 | 153.7 | |||
Total Fuel and Purchased Power | 517.3 | 513.5 | 452.8 | |||
Gross Margin | $1,350.1 | $1,284.3 | $1,269.3 | |||
Weather -- Degree Days (a) | ||||||
Heating (6,821 Normal) | 6,338 | 6,716 | 6,318 | |||
Cooling (685 Normal) | 711 | 566 | 753 |
|
|
During 2001, total electric sales fell by 3.1% compared with 2000, reflecting a softening economy that has especially affected large commercial and industrial customers such as Wisconsin Electric's largest retail customers, two iron ore mines. Sales to these mines decreased by 17.7% during 2001, with one of the mines currently idle pending a production decision by its owners. Excluding the two mines, total electric sales decreased 1.8% during 2001 and sales to the remaining large commercial/industrial customers decreased by 2.3% when compared with 2000. Due to warmer weather during the summer of 2001, a 1.8% increase in sales to residential customers, who are more weather sensitive and contribute higher margins than other customer classes, partially offset the effects of the soft economy on electric sales during 2001. As measured by cooling degree days, 2001 was 25.6% warmer than 2000 and 3.8% warmer than normal. Sales for resale to other utilities, the Resale-Utilities customer class, declined 26.8 % during 2001 primarily as a result of a reduced demand for wholesale power.
During 2000, total electric energy sales increased by 2.5% compared with 1999, mostly reflecting growth in the average number of residential, small commercial/industrial and other retail/municipal customers and a 13.1% increase in sales to the iron ore mines noted above. Excluding these mines, total electric sales increased by 1.7% and sales to the remaining large commercial/industrial customers were unchanged between the comparative periods. Growth in the average number of customers partially offset the effects of cooler weather during the 2000 cooling season on total electric energy sales and on operating revenues. As measured by cooling degree days, 2000 was 24.8% cooler than 1999 and 17.4% cooler than normal.
Gas Utility Revenues and Gross Margins and Therm Deliveries
The following table compares Wisconsin Energy's gas utility operating revenues and its gross margin (total gas utility operating revenues less cost of gas sold) during 20012002 and 19992001 with similar information for 2000 on an actual and pro forma basis.
Pro forma | Actual | Actual | Pro forma | ||||||
Gas Utility Operations | 2001 | 2000 (a) | 2000 (b) | 1999 | 2002 | 2001 | 2000 (b) | 2000 (a) | |
(Millions of Dollars) | (Millions of Dollars) | ||||||||
Gas Operating Revenues | $1,074.5 | $952.3 | $736.3 | $306.8 | $918.1 | $1,074.5 | $736.3 | $952.3 | |
Cost of Gas Sold | 751.6 | 613.8 | 486.7 | 174.0 | 574.9 | 751.6 | 486.7 | 613.8 | |
Gross Margin | $322.9 | $338.5 | $249.6 | $132.8 | $343.2 | $322.9 | $249.6 | $338.5 | |
===== | ===== | ==== |
(a) | Includes Wisconsin |
(b) | Wisconsin Energy's financial statements reflect the operations of Wisconsin Gas subsequent to the WICOR merger on April 26, 2000. |
2002 vs 2001: During 2002, total gas utility operating revenues decreased by $156.4 million or 14.6% compared to 2001, due to lower gas costs offset in part 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 gas cost recovery mechanisms.
2001 vs 2000:During 2001, Wisconsin Energy's gas operating revenues increased by $122.2 million or 12.8% when compared with 2000 pro forma revenues. This increase reflected a $137.8 million increase due to increases in the cost of gas sold offset in part by warmer weather which reduced volumes sold.
During 2000, Wisconsin Energy's total gas utility operating revenues increased by $429.5 million or 140.0% compared with the same period during 1999. Gross margin on gas utility operating revenues increased by $116.8 million or 88.0%. Of these changes, $336.7 million of the increase in total gas utility operating revenues and $109.3 million of the increase in gross margin were attributable to the addition of Wisconsin Gas to the Company in April 2000.
Pro Forma Gas Utility Gross Margins and Therm Deliveries
The following table compares pro forma gas utility gross margin and therm deliveries during 2002, 2001 2000 and 1999pro forma 2000 as if Wisconsin Gas had been part of Wisconsin Energy since January 1, 1999. Gross margin is a better performance indicator than revenues because changes in the cost of gas sold flow through to revenue under gas cost recovery mechanisms that do not impact gross margin.2000.
Pro Forma | Gross Margin | Therm Deliveries | ||||||||||||||
Gross Margin | Therm Deliveries | |||||||||||||||
Gas Utility Operations | Gas Utility Operations | 2001 | 2000 (a) | 1999 (a) | 2001 | 2000 (a) | 1999 (a) | Gas Utility Operations | 2002 | 2001 | 2000 (a) | 2002 | 2001 | 2000 (a) | ||
(Millions of Dollars) | (Millions) | (Millions of Dollars) | (Millions) | |||||||||||||
Customer Class | Customer Class | Customer Class | ||||||||||||||
Residential | Residential | $209.0 | $216.0 | $207.0 | 756.3 | 803.8 | 769.4 | Residential | $224.6 | $209.0 | $216.0 | 817.1 | 756.3 | 803.8 | ||
Commercial/Industrial | Commercial/Industrial | 62.3 | 64.4 | 61.6 | 427.7 | 462.1 | 445.8 | Commercial/Industrial | 67.4 | 62.3 | 64.4 | 463.1 | 427.7 | 462.1 | ||
Interruptible | Interruptible | 2.0 | 2.5 | 3.9 | 25.8 | 35.2 | 45.3 | Interruptible | 2.1 | 2.0 | 2.5 | 29.4 | 25.8 | 35.2 | ||
Total Retail Gas Gross Margin | 273.3 | 282.9 | 272.5 | 1,209.8 | 1,301.1 | 1,260.5 | ||||||||||
Total Gas Sold | Total Gas Sold | 294.1 | 273.3 | 282.9 | 1,309.6 | 1,209.8 | 1,301.1 | |||||||||
Transported Gas | Transported Gas | 41.4 | 47.0 | 41.2 | 787.4 | 897.1 | 903.7 | Transported Gas | 41.9 | 41.4 | 47.0 | 811.7 | 787.4 | 897.1 | ||
Other Operating | Other Operating | 8.2 | 8.6 | 8.1 | - | - | - | Other Operating | 7.2 | 8.2 | 8.6 | - | - | - | ||
Total Operating Gross Margin | $322.9 | $338.5 | $321.8 | 1,997.2 | 2,198.2 | 2,164.2 | ||||||||||
Total | Total | $343.2 | $322.9 | $338.5 | 2,121.3 | 1,997.2 | 2,198.2 | |||||||||
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Weather -- Degree Days (b) | Weather -- Degree Days (b) | Weather -- Degree Days (b) | ||||||||||||||
Heating (6,821 Normal) | 6,338 | 6,716 | 6,318 | |||||||||||||
Heating (6,769 Normal) | Heating (6,769 Normal) | 6,551 | 6,338 | 6,716 |
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(b) | As measured at Mitchell International Airport in Milwaukee, Wisconsin. Normal degree days are based upon a twenty-year moving average. |
2002 vs 2001:Gas gross margin for 2002 totaled $343.2 million, or an increase of $20.3 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, the Company 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 volumes fluctuations.
2001 vs 2000 pro forma:Gas margins totaled $322.9 million in 2001, or a $15.6 million decline from 2000 pro forma amounts. This decline was directly related to warmer winter weather which reduced the heating load. Total therm deliveries of natural gas decreased by 9.1% during 2001, but varied within customer classes. Volume deliveries for the residential and commercial/industrial customer classes decreased by 5.9% and 7.4%, respectively, reflecting warmer weather. Residential and commercial customers are more weather sensitive and contribute higher margins per therm than other customers. Transportation volumes were 12.2% lower than the prior year reflecting fuel switching to lower-cost fuel options and a softening economy.
Other Utility Segment Items
Other Operation and Maintenance Expenses: Other operation and maintenance expenses increased by $23.9$64.7 million or 8.5% 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 $9.8 million of higher electric transmission expenses associated with ATC which were offset by increased revenues recorded due to the surcharge which 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 wi th 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. One outage is scheduled for 2003. The Company also experienced an increase of $17.4 million for employee benefit and pension costs and $4.8 million in property insurance costs which were partially offset by cost reduction efforts during 2002.
Other operation and maintenance expenses increased by $23.2 million during 2001 when compared with 2000 pro forma amounts. The most significant change in other operation and maintenance expenses between the comparative periods resulted from $44.9 million of higher electric transmission expenses caused by a change in how electric transmission costs are recorded as a result of the transfer of Wisconsin Electric's and Edison Sault's electric transmission assets to ATC on January 1, 2001. Partially offsetting this was a reduction in costs as a result of the WICOR merger, which led to the consolidation of common operating and support areas.
The most significant change in other operation and maintenance expenses between 2000 and 1999 resulted from $52.7 million of non-recurring charges during 2000 at Wisconsin Electric associated with the WICOR merger including severance, benefits and other items. Increased other operation and maintenance expenses during 2000, excluding Wisconsin Gas, were also attributable to $14.8 million of higher non-fuel fossil generation expenses and $9.0 million of higher electric distribution expenses offset in part by an $8.8 million decline in nuclear non-fuel expenses and a $9.9 million decline in customer service expenses.
Depreciation, Decommissioning and Amortization Expenses: Depreciation, decommissioning and amortization expenses decreased by $11.8 million during 2002 compared with 2001. This decrease was primarily due to the impact of the retirement of several shorter-lived intangible assets and the adoption on January 1, 2002 of SFAS 142 which eliminated the amortization of goodwill.
Depreciation, decommissioning and amortization expenses were $1.1$1.0 million lower during 2001 compared with 2000 pro forma. The transfer of electric transmission assets to the ATC resulted in a reduction in depreciation expense, which was partially offset by increased capital asset additions for electric generation and for electric and gas distribution systems.
Excluding Wisconsin Gas, depreciation, decommissioning and amortization expenses were $39.0 million higher during 2000 compared with 1999. Pursuant to a 1998 rate order for the 1998/1999 test year, Wisconsin Electric was amortizing pre-1991 contributions in aid of construction. This amortization, which was completed as of December 31, 1999, had the effect of reducing depreciation expense by $22.8 million in 2000 compared to 1999. Higher average depreciable property during 2000 also contributed to an increase in depreciation expense.
NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS
As part of its ongoing efforts to divest non-core assets, the Company significantly reduced certain of Wisvest's operations during 2001. The Company is evaluating proposals to sell two fossil-fueled power plants in the state of Connecticut owned by Wisvest-Connecticut, LLC, a wholly-owned subsidiary of Wisvest. The ultimate timing, proceeds and any gain or loss as a result of the asset sale is dependent upon many factors, including, but not limited to the independent power markets, forward electric price curves, the ability of independent power producers to obtain financing and general economic conditions.
The following table compares the non-utility energy segment's earnings during 2001 and 1999 with similar actual and pro forma information for 2000. In addition, the table summarizes electric megawatt-hour sales by Wisvest-Connecticut's power plants as well as electric and natural gas sales from non-utility energy marketing, trading and services operations during the comparative periods.
Pro forma | Actual | |||
Non-Utility Energy Segment | 2001 | 2000 (a) | 2000 (b) | 1999(c) |
(Millions of Dollars, Except Statistics) | ||||
Operating Revenues | ||||
Independent Power Production | $213.8 | $149.5 | $149.5 | $101.1 |
Energy Marketing, Trading & Services | 97.9 | 220.0 | 194.2 | 74.5 |
Other | 25.6 | 33.1 | 29.1 | 17.6 |
Total Operating Revenues | 337.3 | 402.6 | 372.8 | 193.2 |
Fuel and Purchased Power | 142.8 | 168.6 | 168.6 | 129.2 |
Cost of Gas Sold | 72.2 | 133.5 | 108.0 | - |
Cost of Goods Sold | 6.8 | 8.2 | 8.2 | - |
Gross Margin | 115.5 | 92.3 | 88.0 | 64.0 |
Other Operating Expenses | 79.3 | 86.3 | 81.7 | 44.3 |
Operating Income | 36.2 | 6.0 | 6.3 | 19.7 |
Other Income | 5.6 | 24.0 | 24.0 | 6.8 |
Financing Costs | 17.2 | 30.0 | 29.8 | 21.8 |
Adjusted Income Before Income Taxes | 24.6 | - | 0.5 | 4.7 |
Income Tax Expense/ (Benefit) | 9.8 | (0.5) | (0.4) | 2.0 |
Adjusted Earnings (d) | $14.8 | $0.5 | $0.9 | $2.7 |
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Net Earnings | $18.7 | $39.0 | $39.4 | $2.7 |
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Statistics | ||||
Independent Power Production | ||||
Electric Megawatt-Hour Sales (Thousands) | 4,428.2 | 3,213.2 | 3,213.2 | 2,417.2 |
Energy Marketing, Trading & Services | ||||
Electric Megawatt-Hour Sales (e) (Thousands) | 457.6 | 2,091.2 | 2,091.2 | 1,598.1 |
Gas Therm Sales (b) (Millions) | 100.3 | 267.0 | 187.6 | - |
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During 2001, adjusted earnings of the non-utility energy segment grew by $13.9 million when compared with 2000 on an actual basis or by $14.3 million when compared with 2000 on a pro forma basis. Adjusted earnings during 2001 exclude $16.5 million of net gains on the sale of assets offset in part by net charges of $12.6 million as a result of the adoption of SFAS 133 on January 1, 2001 and subsequent valuation charges from applying SFAS 133 during the year. Adjusted earnings during 2000 exclude $54.6 million of net gains on the sale of assets offset in part by $16.1 million of after-tax non-recurring charges during the fourth quarter of 2000 relating to severance costs associated with the divestiture of non-core businesses and for write-downs associated with certain investments.
Adjusted earnings increased during 2001 primarily due to improved operating results from Wisvest-Connecticut's two power plants offset in part by start up costs associated with W.E. Power. Beginning in the fourth quarter of 2000, the Wisvest-Connecticut assets are accounted for as assets held for sale. Under this accounting, no depreciation expense of long-lived assets is reported. This change in accounting benefited the non-utility energy segment by approximately $0.05 per share when compared to 2000.
During 2001, both of Wisvest-Connecticut's plants operated for the full year. During 2000, one of Wisvest-Connecticut's plants experienced an extended outage which increased purchased power and maintenance costs. During 1999, the Company did not operate Wisvest-Connecticut's two plants until April, when the plants were originally acquired.
MANUFACTURING SEGMENT CONTRIBUTION TO EARNINGS
The manufacturing segment contributed $35.8 million to earnings during 2002, excluding costs related to the WICOR merger, compared to $29.1 million during 2001. Including WICOR merger costs, earnings were $24.0 million, or $14.3 million better than 2001.
During 2001, the manufacturing segment contributed $29.1 million to earnings before merger costs, which was slightly better than the prior year pro forma amounts. Including WICOR merger costs, net income wasearnings were $9.7 million, or $1.7 million better than 2000 pro forma amounts. Prior to the WICOR acquisition, Wisconsin Energy did not have a manufacturing segment. The following table summarizes the manufacturing segment's earnings during 2001with similar information for2002, 2001 and 2000 on an actual and pro forma basis.
Pro forma | Actual | Actual | Pro forma | ||||||||
Manufacturing Segment | 2001 | 2000 (a) | 2000 (b) | 2002 | 2001 | 2000 (b) | 2000 (a) | ||||
(Millions of Dollars) | (Millions of Dollars) | ||||||||||
Operating Revenues | |||||||||||
Domestic | $444.9 | $433.9 | $294.1 | $507.6 | $444.9 | $294.1 | $433.9 | ||||
International | 140.2 | 141.3 | 88.1 | 177.6 | 140.2 | 88.1 | 141.3 | ||||
Total Operating Revenues | 585.1 | 575.2 | 382.2 | 685.2 | 585.1 | 382.2 | 575.2 | ||||
Cost of Goods Sold | 423.6 | 414.1 | 270.8 | 513.2 | 428.0 | 274.5 | 415.8 | ||||
Gross Margin | 161.5 | 161.1 | 111.4 | 172.0 | 157.1 | 107.7 | 159.4 | ||||
Other Operating Expenses | 107.2 | 106.8 | 71.0 | 115.8 | 116.0 | 75.2 | 115.2 | ||||
Operating Income | 54.3 | 54.3 | 40.4 | 56.2 | 41.1 | 32.5 | 44.2 | ||||
Other Income (Deductions) | 0.3 | (0.5) | (0.8) | 0.3 | 0.3 | (3.7) | (5.7) | ||||
Financing Costs | 7.1 | 6.9 | 4.3 | 18.2 | 22.0 | 14.1 | 21.4 | ||||
Adjusted Income Before Income Taxes | 47.5 | 46.9 | 35.3 | ||||||||
Income Before Income Taxes | 38.3 | 19.4 | 14.7 | 17.1 | |||||||
Income Taxes | 18.4 | 18.0 | 13.8 | 14.3 | 9.7 | 7.2 | 9.0 | ||||
Adjusted Earnings Before WICOR merger costs | 29.1 | 28.9 | 21.5 | ||||||||
WICOR merger costs, after tax (c) | 19.4 | 20.9 | 14.0 | ||||||||
Net Earnings | $9.7 | $8.0 | $7.5 | $24.0 | $9.7 | $7.5 | $8.1 | ||||
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Adjusted Earnings (c) | $35.8 | $29.1 | $21.5 | $28.9 | |||||||
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(a) | Includes operations of the manufacturing segment as if it had been part of Wisconsin Energy since January 1, 2000. |
(b) | Wisconsin Energy's financial statements reflect operations of the manufacturing segment subsequent to the WICOR merger on April 26, 2000. |
(c) |
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2002 vs 2001: Manufacturing operating revenues increased by $100.1 million or 17.1% between 2002 and 2001. Recent acquisitions contributed incremental sales of $56.8 million in 2002. Excluding the impact of recent acquisitions, the Company experienced an 8.0% growth in its manufacturing business. Sales in almost all markets were up with the largest increases in water systems, pool/spa, R/V, and beverage and food markets. Domestic sales were up $62.7 million, and international sales increased $37.4 million for the twelve months ended December 31, 2002, or 14.1% and 26.7% respectively, compared to the same period in 2001. The increases were due to acquisitions in 2002 and 2001, market share/customer growth, drought conditions in the United States and Australia, and new product introductions. Gross profit margin decreased to 25.1% in 2002 from 26.9% in 2001 due primarily to changes in the custo mer/product mix as a result of acquisitions and increased customer rebates due to sales growth. Operating income was up 36.7% primarily due to recent acquisitions, cost savings achieved through consolidation of operations, the continuation of cost improvement programs, and the adoption of SFAS 142 which eliminated amortization of goodwill and certain intangible assets, offset by one-time costs associated with consolidation of facilities in the first quarter of 2002.
2001 vs 2000 pro forma:Operating revenues were up by $9.9 million during 2001 as compared to pro forma operating revenues in 2000 primarily due to acquisitions, offset partially by the effects of a decline in the economy on base-business sales and unfavorable foreign currency translations. The manufacturing segment's modest decline reflects the steadiness and diversification of the markets it serves. For the year, operating income of $54.3$41.1 million was essentially flatdown $3.1 million compared with 2000 on a pro forma basis. In spite ofOperating expenses increased slightly in 2001 primarily from additional operations due to the acquisitions other operating expenses increased slightly reflectingoffset in part by aggressive cost reduction initiatives implemented early in the year. The manufacturing segment's results for 2000 were impacted by a series of expenses associated with the defense of intellectual property rights, development of a new beverage dispensing technology and the integration of an acquisition.
NON-UTILITY ENERGY SEGMENT CONTRIBUTION TO EARNINGS
As part of its ongoing efforts to divest non-core assets, the Company significantly reduced certain of Wisvest's operations during 2002 and 2001. The following table compares the non-utility energy segment's earnings during 2002, 2001 and actual and pro forma information for 2000.
Actual | Pro forma | ||||
Non-Utility Energy Segment | 2002 | 2001 | 2000 | 2000 (c) | |
(Millions of Dollars) | |||||
Wisvest-Connecticut Operations | ($1.4) | $20.8 | $2.4 | $2.4 | |
SFAS 133, net | 12.6 | (12.6) | - | - | |
We Power costs | (4.1) | - | - | - | |
Other Non-utility energy operations | (20.2) | (6.0) | (1.6) | (2.0) | |
Asset Sales/Valuation Charges (a) | (81.3) | 16.5 | 54.6 | 54.6 | |
Non recurring Charges (b) | - | - | (16.0) | (16.0) | |
Net Earnings (Loss) | ($94.4) | $18.7 | $39.4 | $39.0 | |
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(a) | During the first quarter of 2002, the Company recorded an impairment charge of $0.79 per share after-tax primarily related to the decline in value in non-utility assets held for sale. During 2001, the gain on asset sales consists of $0.14 per share of gains on the sale of the Company's interests in Blythe and FieldTech. During 2000, the gain on asset sales consists of a $0.45 per share gain on the sale of the Company's interests in SkyGen Energy Holdings, LLC ("SkyGen"). |
(b) | During 2000, non-recurring charges consist of $0.13 per share related to severance and employee benefits. |
(c) | Includes the operations of the WICOR subsidiaries as if they had been part of Wisconsin Energy since January 1, 2000. In addition, earnings during 2000 include $16.1 million of net non-recurring charges relating to severance costs associated with the divestiture of non-core businesses and to write-downs associated with certain investments. |
2002 vs 2001: The decrease in earnings at Wisvest-Connecticut, LLC can be broken down between operation of the assets and SFAS 133 gains or charges. During 2002, Wisvest-Connecticut had an operating loss of $1.4 million compared to earnings of $20.8 million in 2001. This decline is directly related to lower wholesale market prices for electricity in the Northeast United States and an extended unscheduled outage at one of its major generating units from the last half of August through November 2002. In addition, on December 6, 2002, Wisvest completed the sale of Wisvest-Connecticut to Public Service Enterprise Group.
Under SFAS 133, Wisvest-Connecticut recorded the changes in fair market value related to fuel oil contracts associated with its plants in the Northeast. During 2002, the Company recorded an after-tax gain of $12.6 million on these contracts due to settlement of contract transactions and increases in fuel oil prices. During 2001, the Company recorded an after-tax gain of $10.5 million related to the cumulative effect of a change in accounting upon the adoption of SFAS 133 offset by after-tax charges of $23.1 million related to settlement of contract transactions and decreases in fuel oil prices.
The loss from We Power operations in 2002 primarily relates to increased start-up costs as it continues to develop power plants for thePower the Future initiative.
The loss from other non-utility energy segment operations for 2002 primarily relates to Wisvest's Calumet natural gas-based peaking power plant in Chicago, which was placed in service in June of 2002, and to an equity method investment in a power plant in Maine. The Calumet plant experienced start-up costs and limited power production due to lower wholesale market prices for electricity in the Midwest during the last six months of 2002. The Maine plant also was negatively impacted by lower than expected wholesale electric prices.
Asset Sales / Valuation Charges: During the first quarter of 2002, the Company recorded a non-cash impairment charge of $92.0 million after-tax or $0.79 per share. The impairment charge primarily related to two non-utility energy assets classified as "Assets Held for Sale" as of December 31, 2001: the Wisvest-Connecticut power plants and costs associated with a 500 megawatt power island consisting of gas turbine generators and related equipment.
During the first quarter of 2002, the Company determined that the carrying value of these assets exceeded market values due to a significant decline in the non-regulated energy markets resulting from many factors, including the collapse of Enron Corporation and the resulting tightening and downgrading of credit related to independent power producers. In addition, the electric forward price curves for the region declined due to the decline in natural gas costs and increased generating capacity. With the decline in market values, the non-utility energy assets held for sale were written down $0.71 per share to current fair value less costs to sell.
2001 vs 2000: During 2001, earnings of Wisvest-Connecticut increased by $18.4 million when compared with 2000 due primarily to both of Wisvest-Connecticut's plants operating for the full year resulting in improved operating results. Beginning in the fourth quarter of 2000, the Wisvest-Connecticut assets were accounted for as assets held for sale. Under this accounting, no depreciation expense of long-lived assets is reported. This change in accounting benefited the operating results by approximately $0.05 per share when compared to 2000. During 2000, one of Wisvest-Connecticut's plants experienced an extended outage which increased purchased power and maintenance costs.
The earnings from other non-utility energy segment operations for 2001 decreased by $4.4 million on an actual basis or by $4.0 million when compared with 2000 on a pro forma basis. During 2001, the operations of WICOR Energy Services Company were merged into an unconsolidated affiliate of Wisconsin Energy, ending direct gas marketing activities by the non-utility energy segment.
During the second quarter of 2001, the Company sold FieldTech, Inc. and Wisvest's interest in Blythe Energy, LLC, an independent power production project in the state of California, in separate transactions. Wisconsin Energy realized after-tax gains of approximately $16.5 million or $0.14 per share as a result of the sales of FieldTech and Blythe. In October 2000, the Company closed on the sale of its interest in SkyGen Energy Holdings, LLC., which resulted in cash proceeds totaling approximately $332 million (including approximately $112 million for the repayment of certain advances, short-term notes receivable and interest) and an after tax gain of $54.6 million or $0.45 per share.
CONSOLIDATED OTHER INCOME AND DEDUCTIONS
Other income and deductions increased by $43.3 million in 2002 compared to 2001. This increase is primarily due to $12.6 million in SFAS 133 gains for 2002 compared with charges of $12.6 million in 2001 discussed above, and $22.9 million due to a reduction in the level of write-downs in the Witech Corporation venture capital portfolio offset in part by a decline in interest income during 2002 of $12.4 million primarily due to an interest accrual recorded in 2001 related to litigation.
During 2001, the Company incurred $73.0 million of charges, which are recorded as "Other" in Other Income and Deductions. These charges primarily represented $38.5 million of SFAS 133 charges related to the decline in oil prices discussed above and $37.6 million in write-downs in the Witech venture capital portfolio. During 2000, the Company incurred $39.3 million of charges which are recorded in "Other" in Other Income and Deductions. These charges primarily represented write-downs of non-core assets.
CONSOLIDATED FINANCING COSTS
Total financing costs decreased by $17.4 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. During 2001, total financing costs were $246.6 million, up slightly from 2000 amounts but mitigated by the decline in short-term interest rates in 2001. During 2000, financing costs were $244.8 million, or $94.3 million higher than 1999.million. The 2000 financing costs were influenced by the April 2000 acquisition of WICOR, which resulted in almost $1.5 billion of additional debt for the Company.
CONSOLIDATED INCOME TAXES
The Company's consolidated effective income tax rate was 41.9%38.8%, 44.9%41.9%, and 34.7%44.9% for each of the three years ending December 31, 2002, 2001, and 2000, respectively. The lower rate in 2002 reflects the elimination of goodwill amortization and the recognition of historical rehabilitation tax credits. The 2001 effective income tax rate reflects the amortization of the WICOR goodwill which is not deductible for income tax purposes. The 2000 effective income tax rate includes the amortization of WICOR goodwill for eight months, as well as the impact of a net unrealized capital losses.loss. The 1999 effective income tax rate does not include WICOR goodwill amortization, and it includesis negatively impacted by the inability to obtain a regulatory adjustmentstate tax benefit for state taxable losses of some of the accountingseparate legal entities within the Company. Those state taxable losses result primarily from interest expense. If the prospects for contributions in aid of construction which reducedfuture taxable income for these legal entities should improve, the effective tax rate by 2.5%.in years subsequent to 2002 may be favorably impacted.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table summarizes Wisconsin Energy's cash flows during 2002, 2001 2000 and 1999:2000:
Wisconsin Energy Corporation | 2001 | 2000 (a) | 1999 | 2002 | 2001 | 2000 (a) |
(Millions of Dollars) | (Millions of Dollars) | |||||
Cash Provided by (Used in) | ||||||
Operating Activities | $555.8 | $461.0 | $306.9 | $711.3 | $570.6 | $461.0 |
Investing Activities | ($464.3) | ($1,520.5) | ($888.8) | ($365.8) | ($479.1) | ($1,520.5) |
Financing Activities | ($85.0) | $1,026.5 | $638.8 | ($348.9) | ($85.0) | $1,026.5 |
(a) | Includes the operations of the WICOR subsidiaries subsequent to the merger on April 26, 2000. |
Operating Activities
During 2002, cash flow from operations increased to $711.3 million, or a $140.7 million improvement over 2001. This increase was primarily attributable to the return of a $100 million deposit plus accrued interest as a result of a favorable court ruling. During 2001, cash flow from operations increased to $555.8$570.6 million or a $94.8$109.6 million improvement over 2000. This increase was2000 levels primarily attributable to increased operating income and higher non-cash charges. During 2000, cash flow from operations increased by $154.1 million over 1999 due primarily to increased non-cash charges and a $110 million payment made in 1999 related to litigation. This payment was returned to the Company with interest in early 2002.
Investing Activities
During 2002, Wisconsin Energy had net cash outflows for investing activities of $365.8 million as compared to $479.1 million in 2001. For 2002 and 2001, capital expenditures totaled $556.8 million and $672.5 million, respectively. This decline in capital expenditures is due to less spending in the non-utility energy segment. During 2001, the Company spent $672.5 million on capital expenditures, which was a $61.5 million increase over 2000. The largest increase in capital expenditures came within the utility energy segment for electric and gas distribution assets. During 2002 and 2001, the Company's manufacturing segment also made acquisitions totaling $16.5 million and $35.7 million.million, respectively. In 2000, the Company completed the WICOR acquisition at a purchase price of $1.2 billion, as well as a small manufacturing acquisition. These acquisitions were initially financed with short-term commercial paper.
In 2002 and 2001, the Company continued its strategy of divesting non-core assets. During 2002 and 2001, the Company received proceeds from asset divestitures of $310.0 million and $294.4 million, respectively, related to the sale of the Wisvest-Connecticut power plants in 2002, the transfer in 2001 of electric transmission assets to ATC, and the successful sale in 2001 of the Wisvest Blythe project and FieldTech. During 2000, the Company received proceeds from asset sales of approximately $408.4 million which primarily reflects the sale of Wisvest's investment in SkyGen, an independent power producer. The SkyGen sale resulted in a gain of $0.45 per share in 2000. From 2000 through 2002, there were real estate sales totaling approximately $332.0 million.
Financing Activities
In September 2000, the Company initiated a share repurchase program. UnderSince inception, the program, the Company has repurchased and retired 10.913.1 million shares through December 31, 20012002 at a cost of $234.5$286.7 million. It is expected that thisIn December 2002 the Board of Directors extended the program will continuethrough December 31, 2004. There were no share repurchases in the fourth quarter of 2002 due to the delay in the sale of non-utility assets. Also, during 2002.2002, Wisconsin Energy issued approximately 2.7 million of new shares of common stock and received payments aggregating $52.6 million under the Company's dividend reinvestment plan, other benefit plans and from the exercise of stock options. In September 2000, the Company also announced a reduction in the quarterly dividend from $0.39 per share to $0.20 per share. This action reduced the dividends paid in 2001 as compared to 2000 and also reduced the proceeds from the issuance of common stock under the dividend reinvestment program.Company's stock plans.
During 2001, the Company refinanced approximately $1.3 billion of commercial paper through the issuance of intermediate-term senior notes. In January 2002, the Company redeemed $100 million of 8 3/8% long-term debt and $3.4 million of 9 1/8% long-term debt. In December 2002, Wisconsin Electric retired $150.0 million of 6 5/8% debentures at maturity. These redemptions and maturity were financed with short-term commercial paper bearing rates of approximately 2%. TheIn 2002, redemptions are expected to have an initial costWisvest-Connecticut paid down $180.5 million of $0.03 per share associated withnonrecourse variable rate notes following the redemption premium; however, it is expected that the current short-term rates will result in reduced interest costs during 2002.sale of Wisvest-Connecticut.
CAPITAL RESOURCES AND REQUIREMENTS
As Wisconsin Energy continues to implement its strategy of leveraging on the core competencies of its business segments and building financial strength, Wisconsin Energy expects to continue to divest of non-core assets, invest in core assets, buy back common stock and pay down debt.
Capital Resources
The Company anticipates meeting its capital requirements during 20022003 primarily through internally generated funds, short-term borrowings, existing lines of credit supplemented through the issuance of debt securities and net proceeds as a resultthe issuance of asset sales.common stock under the Company's stock plans. Beyond 2002,2003, Wisconsin Energy anticipates meeting its capital requirements through internally generated funds supplemented, when required, through the issuance of debt securities.
Wisconsin Energy has previously filed a shelf registration statement with the Securities and Exchange Commission, under which $200 million of securities remained unissued at year-end 2002. Depending on market conditions and other factors, Wisconsin Energy may issue up to $200 million of debt securities during 2003 under this shelf registration statement. The Company's largest utility subsidiary, Wisconsin Electric, is planning to issue $575 million of debt securities in 2003 under an existing $800 million shelf registration statement, depending on market conditions and other factors, and use the proceeds to redeem four series of its outstanding debt securities aggregating $425.0 million and to repay short-term debt incurred to retire $150 million of debt that matured in December 2002.
The Company has access to the capital markets and has been able to generate funds internally and externally to meet its capital requirements. Wisconsin Energy's ability to attract the necessary financial capital at reasonable terms is critical to the Company's overall strategic plan. Wisconsin Energy believes that it has adequate capacity to fund its operations for the foreseeable future through its borrowing arrangements and internally generated cash.
On December 31, 2001,2002, Wisconsin Energy had $945 million of total available unused short-term borrowing capacity on a consolidated basis under existing commercial paper programs and other short-term borrowing arrangements. On that date, Wisconsin Energy had $1.7approximately $1.2 billion of available unused lines of bank back-up credit facilities on a consolidated basis. The Company had approximately $1.0 billion of total consolidated short-term debt outstanding on such date.
Wisconsin Energy and its subsidiaries review their bank back-up credit facility needs on an ongoing basis and expect to be able to maintain adequate credit facilities to support itstheir operations. The following table summarizes such facilities at December 31, 2002:
|
|
|
| Facility | Facility |
(Millions of Dollars) | |||||
Wisconsin Energy | $300.0 | $ - | $300.0 | Apr-2003 | 364 day |
Wisconsin Energy | 500.0 | $ - | 500.0 | Apr-2003 | 3 year |
Wisconsin Electric | 230.0 | $ - | 230.0 | June-2003 | 364 day |
Wisconsin Gas | 185.0 | $ - | 185.0 | Dec-2003 | 364 day |
On April 9, 2002, Wisconsin Energy entered into an unsecured 364 day $300 million bank back-up credit facility to replace a credit facility that was expiring. The credit facility may be extended for an additional 364 days, subject to lender agreement. Assuming certain conditions are met, any outstanding commercial paper program and other short-term borrowing arrangements.loans under the facility can be converted to a one-year term loan. In addition to the Wisconsin Energy 364 day bank back-up credit facility, the Company has an unsecured three year $500 million bank back-up credit facility that will expire in April, 2003.
On June 26, 2002, Wisconsin Electric entered into an unsecured 364 day $230 million bank back-up credit facility to replace a credit facility that was expiring. The credit facility may be extended for an additional 364 days, subject to lender agreement.
On December 11, 2002, Wisconsin Gas entered into an unsecured 364 day $175 million bank back-up credit facility to replace a credit facility that was expiring. On December 18, 2002, the credit facility was increased from $175 million to $185 million. The credit facility may be extended for an additional 364 days, subject to lender agreement.
During 2003, the Company intends to make arrangements for the construction financing of the We Power gas-based Port Washington Generating Station project. The exact nature of the financing arrangements have not yet been determined.
The following table shows Wisconsin Energy's consolidated capitalization structure at December 31:
Capitalization Structure | 2001 | 2000 | 2002 | 2001 | ||||
(Millions of Dollars) | (Millions of Dollars) | |||||||
Common Equity | $2,056.1 | 31.4% | $2,016.8 | 31.4% | $2,139.4 | 33.5% | $2,056.1 | 31.4% |
Preferred Stock | 30.4 | 0.5% | 30.4 | 0.5% | ||||
Preferred Stock of Subsidiaries | 30.4 | 0.5% | 30.4 | 0.5% | ||||
Trust Preferred Securities | 200.0 | 3.0% | 200.0 | 3.1% | 200.0 | 3.1% | 200.0 | 3.0% |
Long-Term Debt (including | ||||||||
current maturities) | 3,721.6 | 56.7% | 2,788.1 | 43.4% | 3,070.8 | 48.0% | 3,721.6 | 56.7% |
Short-Term Debt | 550.4 | 8.4% | 1,386.1 | 21.6% | 953.1 | 14.9% | 550.4 | 8.4% |
Total | $6,558.5 | 100.0% | $6,421.4 | 100.0% | $6,393.7 | 100.0% | $6,558.5 | 100.0% |
====== | ===== | ====== | ===== |
As described in "Note A -- Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements, certain restrictions exist on the ability of Wisconsin Energy's subsidiaries to transfer funds to Wisconsin Energy. The Company does not expect these restrictions to have any material effect on its operations or ability to meet its cash obligations.
Access to capital markets at a reasonable cost is determined in large part by credit quality. The following table summarizes the current ratings of the debt securities of Wisconsin Energy and its subsidiaries by Standard & Poors Corporation ("S&P"), Moody's Investors Service ("Moody's") and Fitch.Fitch as of December 31, 2002. Commercial paper of WICOR Industries is unrated.
S&P | Moody's | Fitch | |
Wisconsin Energy | |||
Commercial Paper | A-2 | P-1 | F1 |
Unsecured Senior Debt | A- | A2 |
|
Wisconsin Electric | |||
Commercial Paper | A-1 | P-1 | F1+ |
Secured Senior Debt | A | Aa2 | AA |
Unsecured Debt | A- | Aa3 | AA- |
Preferred Stock | BBB+ | A2 | AA- |
Wisconsin Gas | |||
Commercial Paper | A-1 | P-1 | F1+ |
Unsecured Senior Debt | A | Aa2 | AA- |
Wisconsin Energy Capital Corporation | |||
Unsecured Debt | A- | A2 |
|
WEC Capital Trust I | |||
Trust Preferred Securities | BBB | A3 |
|
In February 2003, Moody's placed under review for possible downgrade the security ratings of Wisconsin Energy and Wisconsin Energy Capital Corporation. Moody's also placed under review for possible downgrade the long-term security ratings of Wisconsin Electric and Wisconsin Gas and confirmed the commercial paper rating of Wisconsin Electric and Wisconsin Gas. S&P's and Moody'sFitch's current outlook for Wisconsin Energy and its subsidiaries is stable while Fitch currently maintains a negative outlook for Wisconsin Energy Corporation and for Wisconsin Energy Capital Corporation. Fitch's outlook for Wisconsin Electric and Wisconsin Gas is currently stable.
Wisconsin Energy believes 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.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 and any manufacturing acquisitions, are currently estimated to be $661$693 million during 20022003 attributable to the following operating segments:
Estimated | Actual | Estimated | Actual | |
Capital Expenditures | 2002 | 2001 | 2003 | 2002 |
(Millions of Dollars) | (Millions of Dollars) | |||
Utility Energy | $466 | $428.7 | $455 | $405 |
Non-Utility Energy | ||||
Power the Future | 44 | 6.1 | 186 | 53 |
Other | 23 | 121.6 | 5 | 40 |
Manufacturing | 20 | 27.1 | 20 | 15 |
Other | 108 | 89.0 | 27 | 44 |
Total | $661 | $672.5 | $693 | $557 |
==== |
Due to changing environmental and other regulations such as air quality standards or electric reliability initiatives that impact the Company's utility energy segments, future long-term capital requirements may vary from recent capital requirements. The utility energy segment currently expects capital expenditures, excluding the purchase of nuclear fuel and expenditures for new generating capacity contained in thePower the Future strategy described below, to be between $400 million and $500 million per year during the next five years.
Capital requirements over the next decade forPower the Future include approximately $3.0 billion to construct 2,800 megawatts of new natural gas-based and coal-based generating capacity, approximately $1.3 billion to upgrade existing electric generating assets and approximately $2.7 billion for energy distribution system upgrades.
The capital required to support the $3.0 billion of new generation over the next 10 yearsdecade is expected to come from a combination of internal and external sources. With the dividend reduction that began in 2001, the Company is expected to retain almost $90 million per year of additional cash flows, which will provide substantial funding for new generation. The Company is also divesting non-utility assets which will provide additional cash. Subject to PSCW approval, theThe new generating plantswill be constructed by W.E.We Power, a non-utility subsidiary, and leased to the utilityWisconsin Electric under 20-2525-30 year lease agreements. It is expected that the utilityWisconsin Electric will recover the lease payments in its utility rates. It is anticipated that the utilityCompany will need external financing as the plants are constructed, but the cash flows from the lease payments, the asset divestitures and the additional cash retained within the Company as a result of the dividend reduction are expected to eliminate the need for additional equ ityequity fi nancing.
Pension Investments: The Company has funded its pension obligations in outside trusts. During 2002, the pension investments in the trusts have performed consistent with the stock market which has resulted in double digit negative returns. In addition, interest rates have fallen, which results in a higher discounted pension obligation. The Company has recorded a minimum pension liability as of December 31, 2002 for $113.5 million due to the negative returns on pension assets and lower discount rates.
Guardian Pipeline: As previously disclosed, the Company's subsidiary WICOR, Inc., is an equal one third joint venture partner in the Guardian Pipeline project ("Guardian"). In November 2001, Guardian Pipeline, L.L.C. obtained $170 million of fixed rate financing for the project, secured by guarantees severally from each partner, or an affiliate of each of the partners, for their one third share of the debt financing. The guarantees are effective
Financial Instruments:Wisconsin Energy is a party to various financial instruments with off-balance sheet risk as a part of its normal course of business, including financial guarantees and letters of credit which support construction projects, commodity contracts and other payment obligations. The Company's estimated maximum exposure under such agreements is approximately $106$135 million as of December 31, 2001.2002. However, the Company believes the likelihood is remote that material payments will be required under these agreements. See "Note O -- Guarantees" in the Notes to Consolidated Financial Statements in Item 8 for more information.
Contractual Obligations/Commercial Commitments: The Company has the following contractual obligations and other commercial commitments as of December 31, 2001:2002:
Payments Due by Period | Payments Due by Period | ||||||||
Contractual Obligations (a) | Less than 1 yr | 2-5 years | After 5 years | Total | Less than 1 yr. | 1-3 years | 3-5 years | After 5 years | Total |
(Millions of Dollars) | (Millions of Dollars) | ||||||||
Long-Term Debt (b) | $456.9 | $1,215.1 | $1,880.6 | $3,552.6 | $15.2 | $231.0 | $761.3 | $1,880.7 | $2,888.2 |
Capital Lease Obligations (c) | 56.7 | 149.6 | 469.9 | 676.2 | 56.1 | 89.9 | 71.1 | 437.5 | 654.6 |
Operating Lease Obligations (d) | 7.4 | 20.7 | 14.8 | 42.9 | 33.6 | 77.0 | 77.8 | 88.2 | 276.6 |
Unconditional Purchase Obligations (e) | 9.6 | 38.4 | - | 48.0 | 8.9 | 81.3 | 3.3 | 11.8 | 105.3 |
Other Long-Term Obligations (f) | 348.1 | 609.5 | 357.0 | 1,314.6 | 268.2 | 351.0 | 151.8 | 245.4 | 1,016.4 |
Total Contractual Cash Obligations | $878.7 | $2,033.3 | $2,722.3 | $5,634.3 | $382.0 | $830.2 | $1,065.3 | $2,663.6 | $4,941.1 |
==== | ==== | ===== | ===== | ===== |
(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 Long-Term Debt of Wisconsin Energy and affiliates (excluding capital lease obligations). |
(c) | Capital Lease Obligations of Wisconsin Electric for nuclear fuel lease and purchase power commitments. |
(d) | Operating Leases Obligations for |
(e) | Unconditional Purchase Obligations for information technology and other services for utility and We Power operations. |
(f) |
|
Obligations for utility operations by Wisconsin Energy's utility affiliates have historically been included as part of the rate making process and therefore are generally recoverable from customers.
Guarantees: Wisconsin Energy provides various guarantees supporting certain of its subsidiaries. The guarantees issued by Wisconsin Energy guarantee payment or performance by its subsidiaries under specified agreements or transactions. As a result, the Company's exposure under the guarantees is based upon the net liability of the relevant subsidiary under the specified agreements or transactions. The majority of the guarantees issued by Wisconsin Energy limit the exposure of the Company to a maximum amount stated in the guarantees. See "Note O -- Guarantees" in the Notes to Consolidated Financial Statements in Item 8 for more information.
FACTORS AFFECTING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
MARKET RISKS AND OTHER SIGNIFICANT RISKS
The Company is potentially exposed to market and other significant risks as a result of the nature of its businesses and the environment in which those businesses operate. Such risks, described in further detail below, include but are not limited to: (1) Commodity price risks related to electric generation fuel costs, the market price of electricity and the price of natural gas; (2) Regulatory risk associated with the recovery of fuel and purchased power costs of Wisconsin Electric; (3) Weather fluctuations; (4) Interest rate risks associated with the Company's portfolio of short and long-term debt; (5) Marketable securities return risk related to debt and equity investments held in various trust funds; (6) Independent power project risks associated with the divestiture of non-utility energy segment assets; (7) Foreign currency exchange rate risks linked to purchases and sales within the manufacturing segment; (8) Economic risks; and (9) Inflationary risks to future results of operations, especially as they relate to expenses associated with employee medical benefit plans and post retirement benefits.
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. This is done 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 for the purchase of coal, uranium, natural gas and fuel oil.
Wisconsin's retail electric fuel cost adjustment procedure mitigates some of Wisconsin Electric's risk of electric fuel cost fluctuation. On a prospective basis, 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 noted below.including regulatory lag. The PSCW has authorized dollar for dollar recovery of natural gas costs for the gas utility operations of Wisconsin Electric and Wisconsin Gas through gas cost recovery mechanisms, which mitigates most of the risk of gas cost variations. For additional information concerning the electric utility fuel cost adjustment procedure and the natural gas utilities' gas cost recovery mechanisms, see "Rates and Regulatory Matters" below.
At December 31, 2001, the majority of the commodity contracts in the non-utility segment are at Wisvest Connecticut. Assuming a 10% price change for fuel oil based upon forward market prices as of December 31, 2001, the Company would record approximately a $12.4 million increase or decrease in pre-tax income.
Regulatory Recovery Risk: The electric operations of Wisconsin Electric burn natural gas in several of its peakerpeaking power plants or as a supplemental fuel at several coal-firedcoal-based plants, and the cost of purchased power is tied to the cost of natural gas in many instances. Wisconsin Electric bears significantsome regulatory risk for the recovery of such fuel and purchased power costs when they are higher than the base rate established in its rate structure.
As noted above, the electric operations ofWisconsin Electric operate under a fuel cost adjustment clause in the Wisconsin retail jurisdiction for fuel and purchased power costs associated with the generation and delivery of electricity. This clause establishes a base rate for fuel and purchased power, and Wisconsin Electric assumes the risks and benefits of fuel cost variances that are within 3% of the base rate. For 2002, 2001 and 2000, actual fuel and purchased power costs at Wisconsin Electric exceeded base fuel rates by $2.3 million, $0.1 million and $25.9 million, respectively. In 2002 and 2001, the base fuel rates included a fuel surcharge. For 1999, actual Wisconsin Electric fuel and purchased power costs were $1.5 million less than base fuel rates.
Weather:
Weather: The rates of Wisconsin Electric and Wisconsin Gas are set by the PSCW based upon estimated temperatures which approximate 20-year averages. Wisconsin Electric's electric revenues are sensitive to the summer cooling season, and to some extent, to the winter heating season. The gas revenues of Wisconsin Electric and Wisconsin Gas are sensitive to the winter heating season. A summary of actual weather information in the utility segment's service territory during 2002, 2001 2000 and 1999,2000, as measured by degree-days, may be found above in "Results of Operations".
Temperature can also impact demand for electricity in regions where the Company has invested in non-utility energy assets or projects. In addition, to the extent weather conditions incurred in various regions are extreme rather than normal or mild the manufacturing segment demand for products can be impacted.
Interest Rate Risk:The Company, including its affiliates, has various short-term borrowing arrangements to provide working capital and general corporate funds. Wisconsin Energy also has variable rate long-term debt outstanding at December 31, 2001.2002. Borrowing levels under such arrangements vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels.
The Company performed an interest rate sensitivity analysis at December 31, 20012002 of its outstanding portfolio of $550.4$953.1 million short-term debt with a weighted average interest rate of 2.09%1.51% and $578.0$176.6 million of variable-rate
On September 24, 2002, Wisconsin Energy entered into a treasury lock agreement in order to mitigate Wisconsin Energy's interest rate risk associated with the anticipated issuance of fixed-rate debt. This treasury lock agreement locked in the underlying Treasury yield for $100 million of an anticipated $200 million debt issuance expected by the end of the first quarter 2003. Under a treasury lock agreement, Wisconsin Energy agrees to pay or receive an amount equal to the difference between the net present value of the cash flows for the notional amount of the instrument based on: a) the yield of a U.S. treasury bond at the date when the agreement is established and b) the yield of a U.S. treasury bond at the date when the agreement is settled, which typically coincides with the debt issuance. The treasury rate lock agreement was entered into with a major financial institution in order to minimize counterparty credit risk.
Marketable Securities Return Risk:The Company funds its pension, other postretirement benefit and nuclear decommissioning obligations through various trust funds, which in turn invest in debt and equity securities. Changes in the market price of the assets in these trust funds can affect future pension, other postretirement benefit and nuclear decommissioning expenses. Future annuity payments to these trust funds can also be affected by changes in the market price of trust fund assets. Wisconsin Energy expects that the risk of expense and annuity payment variations as a result of changes in the market price of trust fund assets would be mitigated in part through future rate actions by the Company's various utility regulators. TheHowever, the Company is currently operating under a PSCW ordered, qualified five-year rate freeze.restriction period through 2005. For further information about the rate freeze,restriction, see "Rates and Regulatory Matters" below.
At December 31, 2001,2002, the Company held the following total trust fund assets at fair value, primarily consisting of publicly traded debt and equity security investments.
Wisconsin Energy Corporation | Millions of Dollars |
Pension trust funds | $ |
Nuclear decommissioning trust fund | $ |
Other postretirement benefits trust funds | $ |
The Company manages its fiduciary oversight of the pension and other postretirement plan trust fund investments through a Board-appointed Investment Trust Policy Committee. Qualified external investment managers are engaged to manage the investments. The Company conducts 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.
Wisconsin Electric insures 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. Wisconsin Electric has received at least $9.0 million before taxes as its share of distributions in recent years. Adverse loss experience, rising reinsurance costs, or impaired investment results at NEIL could result in increased costs or decreased distributions to Wisconsin Electric.
Non-Utility Wholesale Price Risk: The Company is exposed to non-utility wholesale price risks in the operations of its non-utility segment. Some of the markets in which the Company operates non-utility energy generation assets have become oversaturated. The Company has experienced a decline in capacity contracts in these markets. The Company uses diversification in its portfolio of businesses to reduce its exposure to wholesale electric price fluctuations.
Independent Power Project ("IPP") Market Risk: Prior to the September 2000Power the Future strategic announcement, the Company made significant commitments to develop, build and own non-utility power plants. Subsequent to September 2000, the Company made significant progress in exiting many of these projects, which resulted in gains during 2001 and 2000.2000 and losses in 2002. As of December 31, 2001,2002, the Company had approximately $650$350 million of investments in non-utility energy assets. Management believes that the projected cash flows from these investments over the life of these assets will exceed the recorded carrying value. However, the market value of some of these investments is currently believed not to exceed cost. In the fourth quarter of 2001 and continuing into 2002, the IPP market experienced a significant decline driven by several factors, including the softening economy, the financial viability of energy companies with large IPP investments, lowerlo wer forward electric price curves and a significant tightening of credit to this market. These factors may adversely impact the timing, proceeds and the gain or loss on future sales of non-utility energy assets.
Foreign Currency Exchange Rate Risk:The Company manages foreign currency market risks through the use of a variety of financial and derivative instruments. The Company uses forward exchange contracts and other activities to hedge the U.S. dollar value resulting from anticipated foreign currency transactions. The notional amount of these contracts is not significant to the Company.
The Company generally uses natural hedges to minimize exposures to the revaluation of assets and liabilities denominated in foreign currencies. The Company's net exposure at December 31, 20012002 was immaterial.
Economic Risk. The Company is exposed to market risks in the regional Midwest economy for the utility energy segment and worldwide economic trends for the manufacturing segment. The Company uses diversification in its portfolio of businesses to reduce its exposure to economic fluctuations.
Inflationary Risk: The Company continues 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 the Company's medical and post retirement benefit plans, the Company has expectations of low-to-moderate inflation. Wisconsin Energy does not believe the impact of general inflation will have a material effect on its 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, steam and water rates in the state of Wisconsin, while the Federal Energy Regulatory Commission ("FERC") regulates wholesale power, electric transmission and interstate 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 Wisconsin Electric and Wisconsin Gas effective January 1, 2001. The Company may seek biennial rate reviews during the five-year rate restriction period limited to "carve out" 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 the gas operations of Wisconsin Electric and Wisconsin Gas, the Company's total gas revenue requirements are to remain revenue neutral
Wisconsin Electric Power Company: The table below summarizes the anticipated annualized revenue impact of recent rate changes, primarily in the Wisconsin jurisdiction, authorized by regulatory commissions for Wisconsin Electric's electric, natural gas and steam utilities.
See "Rates and Regulatory Matters" above for the web site addresses where the related rate orders can be found.
Incremental | ||||
Annualized | Authorized | |||
Revenue | Percent | Return on | ||
Increase | Change | Common | Effective | |
Service -- Wisconsin Electric | (Decrease) | in Rates | Equity | Date |
(Millions) | (%) | (%) | ||
Retail gas (a) | $3.6 | 0.9% | 12.2% | 12/20/01 |
Fuel electric, WI (b) | $20.9 | 1.4% | - | 5/03/01 |
Fuel electric, WI (b) | $37.8 | 2.5% | - | 2/09/01 |
Fuel electric, MI | $1.0 | 2.4% | - | 1/01/01 |
Retail electric, WI | $27.5 | 1.8% | 12.2% | 1/01/01 |
Retail electric, WI (c) | $11.3 | 0.8% | 12.2% | 8/30/00 |
Retail gas (c) | ($3.6) | (0.9)% | 12.2% | 8/30/00 |
Retail electric, WI (c) | $25.2 | 1.7% | 12.2% | 4/11/00 |
Retail gas (c) | $11.6 | 3.3% | 12.2% | 4/11/00 |
Fuel electric, WI | ($7.8) | (0.5%) | - | 5/01/99 |
Incremental | ||||
Annualized | Authorized | |||
Revenue | Percent | Return on | ||
Increase | Change | Common | Effective | |
Service -- Wisconsin Electric | (Decrease) | in Rates | Equity | Date |
(Millions) | (%) | (%) | ||
Retail electric, WI (a) | $48.1 | 3.2% | - | 10/22/02 |
Retail electric, MI (b) | $3.2 | 7.8% | 11.0% | 9/16/02 |
Fuel electric, MI | $1.6 | 3.8% | - | 1/01/02 |
Retail gas (c) | $3.6 | 0.9% | 12.2% | 12/20/01 |
Fuel electric, WI (d) | $20.9 | 1.4% | - | 5/03/01 |
Fuel electric, WI (d) | $37.8 | 2.5% | - | 2/09/01 |
Fuel electric, MI | $1.0 | 2.4% | - | 1/01/01 |
Retail electric, WI | $27.5 | 1.8% | 12.2% | 1/01/01 |
Retail electric, WI (e) | $11.3 | 0.8% | 12.2% | 8/30/00 |
Retail gas (e) | ($3.6) | (0.9)% | 12.2% | 8/30/00 |
Retail electric, WI (e) | $25.2 | 1.7% | 12.2% | 4/11/00 |
Retail gas (e) | $11.6 | 3.1% | 12.2% | 4/11/00 |
(a) |
|
(b) | 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 the Company to include the transmission costs from ATC prospectively in its Power Supply Cost Recovery clause. |
(c) | In November 2001, the Milwaukee County Circuit Court overturned the PSCW's |
| The |
| The |
OnIn March 23, 2000, the PSCW approved Wisconsin Electric's request for interim price increases related to the 2000/2001 biennial period, authorizing a $25.2 million (1.7%) increase for electric operations and an $11.6 million (3.3%(3.1%) increase for gas operations. The interim increase, which was subject to potential refund, became effective in April 11, 2000. Rates in the interim order were based upon a 12.2% return on common equity.
OnIn August 30, 2000, the PSCW issued its final order in the 2000/2001 pricing proposal. The final order authorized a $36.5 million (2.5%) increase for electric operations (or $11.3 million higher than authorized in the interim order) as well as an $8 million (2.1%) increase for gas operations (or $3.6 million lower than authorized in the interim order). Wisconsin Electric refunded to gas customers revenues that resulted from the difference in gas rates between the interim and final orders. In its August 30, 2000 final order, the PSCW authorized a second $27.5 million (1.8%)
OnIn November 14, 2000, Wisconsin Electric filed a petition for judicial review with the Milwaukee County Circuit Court challenging the PSCW's decision to limit the final gas rate increase to $8.0 million rather than the $11.6 million found reasonable for the interim increase. OnIn November 1, 2001 the Milwaukee County Circuit Court ruled in Wisconsin Electric's favor and remanded itthe case back to the PSCW for action. The PSCW did not challenge the courtscourt's decision and authorized the Company to increase natural gas rates by $3.6 million effective in December 20, 2001.
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 arewere subject to refund at the end of 2001 to the extent that actual expenditures arewere less than forecasted expenditures included in the final order. During 2002, the Company 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, the PSCW had previously authorized all Wisconsin utilities to depreciate NOx emission reduction costs over an accelerated 10-year recovery period. Due to the uncertainty regarding the level and timing of these expenditures, the PSCW, in its final order, required Wisconsin Electric to establishestab lish escrow accounting for the revenue requirement components associated with NOx expenditures. Wisconsin Electric's actual NOx remediation expenditures during the 2000/200 1 biennial period resulted in an under-spent balance of approximately $8.0$11.9 million in the escrow account at the end of 2001 in the2002. The NOx escrow account whichbalance will need to be addressed inimpacted by future NOx expenditures and rate making activities.
The Company has the ability to request biennial rate reviews for certain "carve out" items. The Company is currently evaluating the need for regulatory relief for the year beginning January 1, 2004.
Electric Transmission Cost Recovery:Recovery: In September 2001, Wisconsin Electric 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.efficiency in the state of Wisconsin. Wisconsin Electric was also is seeking to recover associated incremental transmission costs of the Midwest Independent Transmission System Operator Inc., the multi-state organization that will monitor and control electric transmission throughout the Midwest. These increased costs are primarily due to the implementation of capital improvement projects for the period 2001-2005 and associated operation costs that are expected to increase transmission capacity and reliability. The Company anticipates that cost recovery of the transmission related costs under this request and similar requests in thet he Michigan Jurisdictionjurisdiction will be earnings neutral subject to approval of these requests by the PSCW and MPSC. In October 2002, the PSCW issued its order authorizing a surcharge for recovery of $48 million of annual costs reflecting lower projected transmission costs through 2005 than estimated by the Company. 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 is expected to increase annual revenues and operating costs by $48 million, with an insignificant impact to net earnings.
Wisconsin Gas Company: Wisconsin Gas rates were set within the framework of the Productivity-based Alternative Ratemaking Mechanism, which was established in 1994 and expired on October 31, 2001. Under this mechanism, Wisconsin Gas hashad the ability to raise or lower margin rates within a specified range on a quarterly basis. Currently, Wisconsin Gas'sGas rates recover $1.5 million per year less than the maximum amount allowed by the PSCW's rate order. The Productivity-based Alternative Ratemaking Mechanism has certain criteria that allow it to be reopened at any time for significant deterioration in safety, failures to meet conservation goals, significant changes in interest rates and "extraordinary items." To date, none of the criteria has been triggered. In its approval of the WICOR acquisition, the PSCW ordered that Wisconsin Gas' natural gas rates remain under the Productivity-based Alternative Ratemaking Mechanism for the program's duration and remain revenue neutral during the remainder of the five-year rate restriction period noted above. Pursuant to that PSCW directive, Wisconsin Gas rates remain at the same levels as were set prior to the expiration of the Productivity-based Alternative Ratemaking Mechanism.
In October 2002, the PSCW issued an order which eliminated escrow accounting for bad debts effective October 1, 2002. Under escrow accounting Wisconsin Gas expensed amounts included in rates for bad debt expense. If actual bad debt costs exceeded amounts allowed in rates, such amounts were deferred as a regulatory asset. The escrow amount accumulated at September 30, 2002 of approximately $6.9 million is expected to be collected in future rates, but future bad debt expense at Wisconsin Gas will no longer be subject to this separate true-up mechanism.
Fuel Cost Adjustment Procedure: As previously reported, Wisconsin Electric operates under a fuel cost adjustment clause for fuel and purchased power costs associated with the generation and delivery of electricity and
OnDuring the second quarter of 2002, the PSCW issued an order authorizing new fuel cost adjustment rules to be implemented in the Wisconsin retail jurisdiction. The new rules will not be effective for Wisconsin Electric until January 2006, the end of a five year rate freeze associated with the WICOR Merger Order. Until such time, Wisconsin Electric will operate under an approved transaction mechanism similar to the old fuel cost adjustment procedure.
In addition, as previously reported, on June 4, 2001, two consumer advocacy groups petitioned the Dane County Circuit Court for review of these decisions ofrelated to authorization by the PSCW authorizingfor Wisconsin Electric to add a surcharge to its electric rates to recover its expected 2001 power supply costs. The petitioners allegealleged that the PSCW made various material errors of law and procedure as a result of which the Court should set aside both the interim and final orders and remand the case to the PSCW. The matter is pending.case was settled and, in May 2002, the Dane County Circuit Court issued a final order dismissing the petition.
In February 2003, Wisconsin Electric intendscompleted a power supply cost analysis which included updated natural gas cost projections for 2003. Based on this analysis, in February 2003 the Company filed a request with the PSCW to vigorously defendincrease Wisconsin retail electric rates by $55.0 million annually to recover forecasted increases in fuel and purchased power costs. Under the PSCW's orderscurrent fuel cost adjustment procedure, Wisconsin Electric expects to receive an interim order from the PSCW authorizing an increase in electric rates in March 2003. The interim order would be subject to refund pending the PSCW audit and believesfinal order later in the Court will affirm the PSCW's actions.year.
Gas Cost Recovery Mechanism: As a result of the acquisition of WICOR by Wisconsin Energy, the PSCW required similar gas cost recovery mechanisms ("GCRM") for the gas operations of Wisconsin Electric and for Wisconsin Gas. In recent years, Wisconsin Electric hashad operated under a modified dollar-for-dollar GCRM, which included after the fact prudence reviews by the PSCW, while the Wisconsin Gas GCRM included an incentive mechanism that provides an opportunity for Wisconsin Gas to increase or decrease earnings within certain limited ranges as a result of gas acquisition activities and transportation costs. For both companies, the majority of gas costs are passed through to customers under their existing gas cost recovery mechanisms.
In February 2001, the PSCW issued an order to Wisconsin Electric and to Wisconsin Gas authorizing a similar GCRM for each company. These new GCRMs, which were effective in April 1, 2001, are similar to the existing GCRM at Wisconsin Gas. Under the new GCRMs, gas costs will beare passed directly to customers through a purchased gas adjustment clause. However, both companies will have the opportunity to increase or decrease earnings by up to approximately 2.5% of their total annual gas costs based upon how closely actual gas commodity and capacity costs compare to benchmarks established by the PSCW. Recent changes in the benchmarks applied resulted in no increasesignificant impact in current earnings under the GCRM in 2002 and 2001 versuscompared to an increase in the earnings offor Wisconsin Gas of $3.0 million before tax in 2000.
Commodity Price Risk:The gas operations of Wisconsin Electric and Wisconsin Gas have commodity risk management programs that have been approved by the PSCW. These programs hedge the cost of natural gas and therefore changes in the value of the financial instruments do not impact net income. These programs allow the Company's gas utilities to utilize call and put option contracts to reduce market risk associated with fluctuations in the price of natural gas purchases and gas in storage. Under these programs, Wisconsin Gas and Wisconsin Electric have the ability to hedge up to 50% of their 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 Wisconsin Gas and Wisconsin
Ixonia Lateral: In April 2002, Wisconsin Gas announced that construction of the 35-mile lateral ("Ixonia Lateral") to connect its distribution system to the Guardian Pipeline would be delayed until the spring of 2003 in order to obtain all permits and easements. On August 30, 2002, Wisconsin Gas filed a request with the PSCW for approval of an increased cost estimate for the Ixonia Lateral. The original cost estimate of $62 million has increased to approximately $97.5 million based on an in-service date in the fourth quarter of 2003.
On January 15, 2003, Wisconsin Gas received from the WDNR a Chapter 30 permit to construct the Ixonia Lateral after lengthy negotiations with WDNR and interested parties. Wisconsin Gas filed in February 2003 updated cost estimates reflecting additional costs of approximately $14.0 million required by the WDNR permit conditions. The Ixonia Lateral continues to be economically feasible and provides substantial gas cost savings as well as critical additional pipeline capacity. Wisconsin Gas expects to complete and place the Ixonia Lateral in service during the fourth quarter of 2003. In the event that the Ixonia Lateral is not completed prior to November 2003, Wisconsin Gas would incur additional operating costs for gas to be delivered into its service territory.
On August 24, 2001, Neighbors Standing United ("NSU"), a landowner group, and an individual landowner, filed petitions for review of the PSCW order dated July 25, 2001, which approved Wisconsin Gas Company's application to construct and operate the Ixonia Lateral. The petitioners allege, among other issues, that the final environmental impact statement ("FEIS") for this pipeline project did not meet applicable legal requirements and that affected landowners' due process rights were not satisfied during the PSCW review process. After briefing of the issues and oral argument, the Jefferson County Circuit Court on November 5, 2002, rendered a decision denying the petitions for review and request for injunctive relief with one modification by the Court which narrowed the approved pipeline route corridor from 800 to 200 feet. On December 18, 2002, the landowner filed a Notice of Appeal of the Court decision to the Wisconsin Court of Appeals.
These two petitioners also filed on February 21 and 22, 2002, respectively, petitions for review of a January 17, 2002, WDNR decision which concluded that the FEIS for the Guardian Pipeline and Ixonia Lateral projects fully complied with the Wisconsin Environmental Policy Act. These petitions for review and associated proceedings have been stayed by the Jefferson County Circuit Court pending resolution of the proceedings for the court review of the PSCW's order.
Power the Future Port Washington Order: The PSCW issued its written order on December 20, 2002 granting We Power a CPCN to commence construction of two 545 megawatt natural gas-based combined cycle generating units on the site of Wisconsin Electric's existing Port Washington, Wisconsin generating station ("Port Units 1 & 2"). The 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 station. As part of the Order the PSCW also approved in substance the lease agreements and related documents under which Wisconsin Electric will staff, operate and maintain Port Units 1 & 2. Key financial terms of the leased generation contracts include:
We Power is required to begin construction of Port Unit 1 no later then 12 months after it receives all necessary federal, state and local permits. We Power anticipates commencing construction of Port Unit 1 during the summer of 2003. We Power has entered into binding contracts with third parties to secure necessary engineering, design and construction services and major equipment components for Port Unit 1. 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
Michigan Jurisdiction
Wisconsin Electric Power Company: In mid-November 2000, Wisconsin Electric submitted an application with the Michigan Public Service Commission ("MPSC")MPSC requesting an electric retail rate increase of $3.7 million (9.4%)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 Wisconsin Electric transmission assets to ATC. Hearings are scheduled forwere completed on April 10, 2002. In September 2002, withthe 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 Proposal for Decision expected around June 1, 2002.claim of appeal from the Michigan Public Service Commission's final order in Case No. U-12725, which awarded the Company a $3.2 million rate increase and changed the procedures by which the Company recovers the cost of obtaining transmission services. T he Company believes the Commission will prevail in defense of its order.
Edison Sault Electric Company: In September 1995, the MPSC approved Edison Sault's application to implement price cap regulation for its electric customers in the state of Michigan, capping base rates at existing levels, rolling its existing fuel cost adjustment procedure or Power Supply Cost Recovery ("PSCR") factor into base rates and suspending its existing PSCR clause. Edison Sault is required to give thirty days notice for rate decreases. 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. OnIn October 2, 2000, Edison Sault filed a report with the MPSC addressing its experience under the price-cap mechanism. In September of 2000,2001, Edison Sault submitted an application to reinstate its PSCR clause in January 2002 and to incorporate therein 2002 incremental ATC charges and certain miscellaneous costs. OnIn October 1, 2001, Edison Sault filed an application with the MPSC to establish its PSCR factor for the year 2002. The matter is pending. AnyIn April 2002, the MPSC issued orders authorizing Edison Sault to reimplement its PSCR clause, beginning May 1, 2002. PSCR revenues collected during 2002 would beare subject to a true-up hearing.
Electric Transmission Cost Recovery: Consistent with the requests in Wisconsin noted above, both Wisconsin Electric and Edison Sault requested fromfiled requests with the MPSC in September 2001 for rate recovery of estimated 2002 transmission costs over 2001 levels in the amount of $0.3 million for Wisconsin Electric and $0.6 million for Edison Sault for their operations in Michigan through the Michigan Power Supply Cost Recovery mechanism. BothIn April 2002, the requests are pending.MPSC issued an order that authorized Edison Sault to reimplement a Power Supply Cost Recovery clause which included the transmission costs from ATC in its determination. In September 2002 the MPSC issued an order that authorized Wisconsin Electric to recover transmission costs in its Power Supply Cost Recovery Clause prospectively. During the fourth quarter of 2002, the Company filed a separate request with the MPSC for ATC start-up and incremental ATC cost deferrals to date that amounted to approximately $1.2 million.
ELECTRIC SYSTEM RELIABILITY
In response to customer demand for higher quality power as a result of modern digital equipment, Wisconsin Energy is evaluating and updating its electric distribution system as part of its enhancedPower the Future strategy. The Company is 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 the Company's existing system, better resource management to speed restoration and improved customer communication, are near-term efforts to enhance the Company's current electric distribution infrastructure. In the long-term, Wisconsin Energy is 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 thePower the Future strategy is subject to a number of state and f ederal regulatory approvals. For additional information, see "Corporate Developments" above.
Wisconsin Electric had adequate capacity to meet all of its firm electric load obligations during 2001.2002. All of Wisconsin Electric's generating plants performed well during the hottest periods of the summer and all power purchase commitments under firm contract were received. 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. AllDeliveries were curtailed on several occasions to certain special contract customers in the Upper Peninsula of Wisconsin Electric's generating plants performed well duringMichigan because of transmission constraints in the hottest periods of the summer and all power purchase commitments under firm contract were received.area.
Wisconsin Electric expects to have adequate capacity to meet all of its firm load obligations during 2002.2003. However, extremely hot weather, along with unexpected equipment failure or unavailability could require Wisconsin Electric to call upon load management procedures during 20022003 as it has in past years.
ENVIRONMENTAL MATTERS
Consistent with other companies in the energy industry, Wisconsin Energy faces potentially significant ongoing environmental compliance and remediation challenges related to current and past operations. Specific environmental issues affecting the Company's utility and non-utility energy segments 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.
Wisconsin Energy is currently pursuing a proactive strategy to manage its environmental issues including (1) substitution ofsubstituting new and cleaner generating facilities for older facilities as part of thePower the Future strategy, (2) development ofdeveloping additional sources of renewable elec tricelectric energy supply, (3) participationparticipating in regional initiatives to reduce the emissions of NOx from the Company's fossil fuel-firedfuel-based generating facilities, (4) participation inentering into a voluntary programsmulti-emission agreement with the Wisconsin Department of Natural Resources to reduce overall emissions includingof SO2, NOx, and mercury by 45-50%, 60-65%, and 50%, respectively, within 10 years from Wisconsin Electric's coal-firedcoal-based power plants in Wisconsin, (5) recycling of ash from coal-firedcoal-based generating units and (6) the clean-up of former manufactured gas plant sites. For further information concerning disposal of used nuclear fuel and nuclear power plant decommissioning, see "Nuclear Operations" below and "Note F;G -- Nuclear Operations" in the Notes to Consolidated Financial Statements in Item 8, respectively.
National Ambient Air Quality Standards:In July 1997, the EPA 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 SO2 and NOx emissions from coal-firedcoal-based generating facilities. If these new standards withstand ongoing legal challenges, Wisconsin Electric expects that reductions needed to achieve compliance with the ozone attainment standards will be implemented in stages from 2004 through 2012, beginning with the ozone transport reductions described below. Reductions associated with the new particulate matter standards are expected to 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 EPA promulgated ozone transport rules to address transport of NOx and ozone into ozone non-attainment areas in the eastern half of the United States. The rules 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. A court decision on these challenges was issued in March 2000 excluding the state of Wisconsin but continuing to include southern Michigan as one of 19 states in a region east of the Mississippi River that would remain subject to the October 1998 rules.
Independent of any court decisions, Wisconsin and some other states in the Lake Michigan region have concluded rulemaking proceedings that require utilities, including Wisconsin Electric, to reduce NOxemissions as part of separate, existing 1-hour ozone attainment demonstration rules required by the EPA for the Lake Michigan region's severe non-attainment areas. In the meantime, ambient monitoring data from the past three years shows that the Lake Michigan region is now in attainment with the 1-hour ozone standard. The state of Wisconsin and other Lake Michigan region states are in the process of submitting a redesignation (to attainment) plan to the EPA. This plan will continue to require the utility NOx reductions previously required when the area was in nonattainment. The NOx reductions will now be part of the maintenance and contingency plans required by the redesignation plan.
Michigan's and Wisconsin's rules are both in effect. Wisconsin Electric currently expects to incur total capital costsannual expenditures of $150$12.7 million to $200$18.4 million and annual operation and maintenance costs of $6 million to $9$1 million during the period 20012003 through 2004 to comply with the Michigan and Wisconsin rules. Wisconsin Electric believes that compliance with the NOx emission reductions requirements will substantially mitigate costs to comply with the EPA's July 1997 revisions to the ozone National Ambient Air Quality Standards discussed above.
In January 2000, the PSCW approved Wisconsin Electric's comprehensive plan to meet the Wisconsin 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.
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 will develop draft rules within the next three years.by December 2003 and issue final rules by December 2004. In June 2001, the Wisconsin Department of Natural Resources ("WDNR")WDNR independently developed draft mercury emission control rules that would affect electric utilities in Wisconsin. The draft rules call for 30%, 50% and 90% reductions in mercury air emissions over 5, 10 and 15 years, respectively. The draft rules also require offsets for new mercury-emitting generating facilities. Wisconsin's draft rules werehave not been finalized before the end of 2001 and will likely be revised before being finalized.if finalized at some future date. The Company is currently unable to predict the ultimate rules that will be developed and adopted by the EPA or the WDNR, nor is it able to predict the impacts, if any, that the EPA's and WDNR's mercury emissi onemission control rulemakingsrulemaki ngs might have on the operations of its existing or potential coal-firedcoal-based generating facilities.
Manufactured Gas Plant Sites:Wisconsin Electric and Wisconsin Gas are voluntarily reviewing and addressing environmental conditions at a number of former manufactured gas plant sites. For further information, see "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.
Ash Landfill Sites:Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its combustion byproducts. For further information, see "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.
Manufacturing Segment: WICOR Industries has provided reserves sufficient to cover its estimated costs related to known contamination associated with its manufacturing facilities.
EPA Information Requests:Wisconsin Electric and Wisvest-Connecticut LLC., formerly a wholly owned subsidiary of Wisvest, have each received requests during 2001 for information from the EPA regional offices pursuant to Section 114(a) of the Clean Air Act. For further information, see "Note OR -- 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 Wisconsin Electric awarding the plaintiffs $4.5 million in compensatory damages and $100 million in punitive damages in an action alleging that Wisconsin Electric 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 back to the lower court for retrial. In January 2002, the Wisconsin State Supreme Court denied the plaintiffsplaintiffs' petition for review. Plaintiffs' claims were settled during 2002 for a total cost of $17.3 million. For further information, see "Note OR -- Commitments and Contingencies" in the Notes to Consolidated Financial Statements.Statements in Item 8.
Other:
Wisconsin International Electric Power Litigation: During 1999, Wisconsin Electric and Wisconsin International Electric Power, Ltd. reached settlementWisvest has an investment of litigation broughtapproximately $30 million in a cogeneration plant in the State of Maine, called Androscoggin Energy LLC which is operated by Wisconsin International Electric Powera third party. Androscoggin has an energy services agreement with a customer which receives steam from the cogeneration plant. The customer has filed a lawsuit against Wisconsin Electric claiming that Wisconsin Electric had breached contractual duties allegedly owedAndroscoggin alleging breach of the energy services agreement. In November 2002, a federal judge awarded partial summary judgment to the plaintiff relatingcustomer against Androscoggin. A trial will be scheduled in 2003 for the determination of damages to development of an electric generating plant at Subic Baybe awarded, if any, under the claim. This dispute could significantly impair the Company's investment 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. $18.0 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.Androscoggin.
NUCLEAR OPERATIONS
Point Beach Nuclear Plant:Wisconsin Electric owns two 510-megawatt electric generating units at Point Beach Nuclear Plant in Two Rivers, Wisconsin which are operated by Nuclear Management Company, LLC ("NMC"), a joint venture of the Company and affiliates of other unaffiliated utilities. During 2002, 2001, 2000, and 1999,2000, Point Beach provided 25%22%, 23%25% and 22%23% of Wisconsin Electric's net electric energy supply, respectively. The United States Nuclear Regulatory Commission ("NRC") operating licenses for Point Beach expire in October 2010 for Unit 1 and in March 2013 for Unit 2.
In July 2000, Wisconsin Electric's senior management authorized the commencement of initial design work for the power uprate of both units at Point Beach. Subject to approval by the Wisconsin Energy Board of DirectorsPSCW and a decision to relicense the PSCW,units, the project may be completed by May 20082007 and could add approximately 90 megawatts of electrical output to Point Beach.
Wisconsin ElectricNMC has formed an operating license renewal team which is expected to complete a technical and economic evaluation of license renewal by late 2002.mid-2003. Based upon the results of this evaluation and subject to approval by executive management and by the Board of Directors of Wisconsin Energy in early 2003,and Wisconsin Electric, Wisconsin Electric will determine whether to seek appropriate regulatory approvals, including submittal of an application to the Nuclear Regulatory Commission,NRC, in mid 2003early 2004 for an extension of the operating licenses for Point Beach Nuclear Plant for a period of up to 20 years.
In August 2001, the NRC issued Bulletin 2001-01, Circumferential Cracking of Reactor Pressure Vessel Head Penetration Nozzles, requesting that pressurized water reactor licensees provide information on the structural integrity of the subject nozzles. NMC responded that tests and inspections conducted at Point Beach over the last several years had not identified any evidence of such cracking. NMC conducted more thorough inspections of the reactor pressure vessel head and nozzles during the Spring 2002 Unit 2 refueling outage and found no indications of degradation. On August 9, 2002, NRC issued Bulletin 2002-02, "Reactor Pressure Vessel Head and Vessel Head Penetration Nozzle Inspection Programs," providing additional NRC expectations for reactor vessel head examinations. As a result of this new NRC guidance, NMC conducted more extensive examinations of the Unit 1 reactor pressure vessel head during the Fall 2002 refueling outage. The results of these examinations were also acceptable. The Company plans to replace both reactor vessel heads during the 2005 refueling outages as an alternative to incurring the additional time and costs of these examinations. The estimated cost of this capital expenditure is approximately $40 million in 2002 dollars.
On July 12, 2002, the NRC issued a Notice of Violation and provided its final significance determination, upholding its April 8, 2002 preliminary red finding for Point Beach related to a potential failure of the plant's auxiliary feedwater system under certain postulated accident scenario analyses. In November 2001, as part of a comprehensive risk assessment, plant employees discovered the potential for a common mode failure of the plant's auxiliary feedwater pumps. The matter was immediately reported to the NRC and prompt interim corrective actions were implemented. Point Beach has completed equipment modifications and updated its procedures to ensure operators have explicit guidance that matches training and to ensure plant personnel take appropriate actions when necessary. The NRC conducted an inspection in September 2002 to gather additional information. On October 2, 2002, the NRC determined that treatment as an old design issue not representative of current performance is appropriate. However, NRC's consideration of this finding in their assessment of Point Beach's current overall performance is presently on hold pending final resolution of a subsequent issue involving the plant's auxiliary feedwater system. On October 24, 2002, while conducting post-maintenance testing, plant employees discovered the potential for another common mode failure mechanism under specific conditions for the plant's auxiliary feedwater pumps. The matter was immediately reported to the NRC and prompt interim corrective actions were implemented. Analysis and evaluation of the susceptibility of the auxiliary feedwater system to this failure mode, assessment of the safety significance of this postulated condition, and interactions with NRC to achieve appropriate resolution are continuing. The Company is currently unable to estimate the impact, if any, that may result.
Nuclear Insurance: The Price-Anderson Act, as amended and extended to August 1, 2002, currently limits the total public liability for damages arising from a nuclear incident at a nuclear power plant. A provision extending the Price-Anderson Act through the end of 2003 was adopted by Congress in February 2003.
Used Nuclear Fuel Storage and Disposal: During 1995, Wisconsin Electric completed construction of a facility at Point Beach for the temporary dry storage of up to 48 canisters containing used nuclear fuel. During 2000, Wisconsin Electric finished loading the last of twelve canisters originally authorized by the PSCW. On March 13, 2001, the PSCW approved a May 2000 application for authority to load additional temporary used fuel dry storage containers beyond the twelve that were originally authorized.containers. The application requested authorization for sufficient additional containers, at a cost of up to approximately $46 million, to operate Point Beach Units 1 and 2 to the end of their current operating licenses, but not to exceed the original 48-canister capacity of the facility. NMC is under contract with a new vendor to supply the next generation of used fuel dry storage containers for Point Beach.
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 Wisconsin Electric has paid a total of $177.6$185.3 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 in the Standard Contract, providing clear grounds for filing complaints in the Court of Federal Claims. Consequently, Wisconsin Electric filed a complaint on November 16, 2000 against the Department of Energy in the Court of Federal Claims. The matter is pending. As of August 2000,December 2002, Wisconsin Electric has incurred damages in excess of $35 million, which it seeks to recover from the United States Department of Energy. Damages will continue to accrue, and, accordingly, Wisconsin Electric expects to seek to recover allrecovery of its damages in this lawsuit.
During 2000, President Clinton vetoed legislation that would have required the United States Department of Energy to establish a temporary used fuel repository in the state of Nevada until a permanent repository is available and to begin taking ownership from utilities and removing used fuel as required by the Waste Act. The Senate and the House failed to override the President's veto. Wisconsin Electric is unable to predict whether similar legislation might be reintroduced and passed during 2002 or President Bush's administration might support and sign such legislation.
In January 2002, as required by the Nuclear Waste Policy Act, the Secretary of Energy Spencer Abraham notified Nevadathe Governor Kenny Guinnof Nevada and the Nevada Legislature that he intended to recommend to the President Bush that the Yucca Mountain site is scientifically sound and suitable for development as the nation's long-term geological repository for used nuclear fuel. On February 14, 2002, the Secretary Abraham provided the formal recommendation to President Bush.the President. In a February 2002 letter to Congress, the President Bush 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 Nuclear Waste Policy Act. On April 8, 2002, the Nevada Governor announced the state's official disapproval of the President's recommendation. On May 8, 2002, the U.S. Ho use of Representatives endorsed the President'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. On July 9, 2002, the U.S. Senate approved Yucca Mountain as such a repository. The President signed the resolution on July 23, 2002 which now clears the way for the U.S. 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
DrivenAcross the United States, electric industry restructuring progress has generally stalled subsequent to the California price and supply problems in early 2001. States that had restructured and implemented retail access before the California problems generally have not gone back to traditional regulation. Several states (Arkansas, Montana, New Mexico and Oklahoma) have delayed retail access or plan to implement limited retail access (Nevada and Oregon). Texas and Michigan implemented restructuring by offering retail access on January 1, 2002. FERC has come out strongly supporting large Regional Transmission Organizations ("RTOs") which will affect the structure of the wholesale market. The timeline for restructuring and retail access has been stretched out, and it is uncertain when retail access will happen in Wisconsin. There are many federal bills on electric industry restructuring currently before the U.S. House and Senate. These bills are receiving some attention, but the direction is not cl ear as both the House and Senate do not appear to have developed a strong vision of where they want the industry to go. Major
Restructuring in the cost of electricity in California has revitalized public debateWisconsin:Electric utility revenues in Wisconsin concerning deregulation. Givenare regulated by the current status of restructuring initiatives in regulatory jurisdictions where the Company primarily does business, Wisconsin Energy cannot predict the ultimate timing or impact of a restructured electric indu stry on its financial position or results of operations.
Restructuring in Wisconsin: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 United States. Instead, the PSCW has been focused in recent years on electric reliability infrastructure issues for the state of Wisconsin such as:
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 are regulated by the MPSC. In June 2000, the Governor of the state of Michigan signed the "Customer Choice and Electric Reliability Act" into law empowering the MPSC to implement electric retail access in Michigan. In effect, theThe 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 after January 1, 2002.producer. The Michigan Retail Access law was characterized by the Michigan Governor Engler as "Choice for those who want it and protection for those who need it."
As of January 1, 2002, Michigan retail customers of Wisconsin Electric and Edison Sault were allowed to remain with their regulated utility at regulated rates or choose an alternative electric supplier to provide power supply service. Wisconsin Electric and Edison Sault plan to maintainhave maintained their generation capacity and distribution assets and provide regulated service as they have in the past. Wisconsin Electric and Edison Sault expect to continue providing distribution and customer service functions regardless of the customer's power supplier.
Power supply revenue in 2001 from Wisconsin Energy's eligible electric Michigan retail choice customers was less than $40 million, or approximately 1.6% of total utility operating revenue. Competition and customer switching to alternative suppliers in the companies' service territories in Michigan has started very slowly with littlebeen limited. No alternate supplier activity has occurred in the companies' service territories in Michigan, reflecting the small market area, the companies' competitive regulated power supply prices and a lack of interest in general ofin 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 Wisconsin Electric's business. Wisconsin Electric has one wholesale customer in Illinois, the City of Geneva, whose contract is scheduled to expire on December 31, 2005. However, Wisvest's wholly-owned subsidiary, Calumet Energy Team, LLC, does compete in the Illinois electric generation market with power produced from its 308 MW gas based peaking plant that entered commercial operation in 2002. Wisconsin Energy believes that the Illinois choice legislation will not materially affect Calumet Energy's operating results.
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
ACCOUNTING DEVELOPMENTS
New Pronouncements: In June 2001,December 2002, the Financial Accounting Standards BoardFASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123." This statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company does not intend to adopt the recognition provisions of SFAS 123, as amended by SFAS 148.
In January 2003, the FASB authorized issuance of StatementInterpretation 46, Consolidation of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), and SFAS 142, Goodwill and Other Intangible Assets. Both accounting pronouncements were effective beginning January 1, 2002, although both standards require that business combinations which occurred after June 30, 2001 be accounted for using the new accounting standards. For further information, see "Note A -- Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. In June 2001, the Financial Accounting Standards Board also authorized issuance of SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143,Variable Interest Entities. Interpretation 46, which is effective for fiscal yearsinterim periods beginning after June 15, 2002,2003, which requires companies with variable interests in variable interest entities to recordevaluate whether they must consolidate these entities subject to the fair value of a legal liability for an asset retirement obligationprovisions included in Interpretation 46. The Interpretation must be applied to any existing interests in variable interest entities beginning in the periodthird quarter of 2003. The Company does not expect to consolidate any existing interest in which it is incurred . Upon adoption, theunconsolidated entities as a result of Interpretation 46. The Company may be requiredexpects to modify its accounting for nuclear decommissioning. Wisconsin Energy has not yet completed the evaluation ofbegin application of this Interpretation July 1, 2003.
In October 2000, the FASB issued two exposure drafts: Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both, and Proposed Amendment to FASB 6 to Revise the Definition of Liabilities. In March 2003, the FASB is expected to authorize issuance of SFAS 143 rules.149, Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity, which is effective at the beginning of the first interim period beginning after June 15, 2003, requiring classification of mandatorily redeemable instruments as liabilities. The Company expects to adopt SFAS 143149 effective JanuaryJuly 1, 2003. The Company will reclassify its mandatorily redeemable instruments to long-term debt upon adoption of SFAS 149.
In August 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment
CRITICAL ACCOUNTING POLICIES
Preparation of Long-Lived Assets. SFAS 144, which is effective for financial statements issued for fiscal years beginning after December 15, 2001,and related disclosures in compliance with generally accepted accounting principles ("GAAP") requires entities to test long-lived assets (asset groups) for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company adopted SFAS 144 effective January 1, 2002. Wisconsin Energy has not yet completed the evaluation of application of appropriate technical accounting rules and guidance, as well as the SFAS 144 rules.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 the business, but on the 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 Wisconsin Energy's financial condition and results of operations and that require management's most difficult, subjective or complex judgments.
SIGNIFICANT ACCOUNTING POLICIES
Regulatory Accounting:Wisconsin Energy's utility subsidiaries operate under rates established by state and federal 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 a situation, continued deferral of certain regulatory asset and liability amounts on the utilities' books, as allowed under Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation ("SFAS 71"), may no longer be
Accounting for Derivative Instruments: SFAS 133, Accounting for Derivative InstrumentsPension and Hedging Activities, is effective for fiscal years beginning after June 15, 2000.Postretirement Plans: The Company adopted this statementhas significant pension and postretirement obligations and costs that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets and medical trend rates. Changes in these assumptions are primarily influenced by factors outside the Company's control and can have a significant effect on the amounts reported in the financial statements.
Goodwill and Other Intangible Assets: As a result of adoption of SFAS 142 Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), effective January 1, 2001,2002, the Company is required to perform annual assessments of its goodwill for impairment by applying fair-value-based tests. As of December 31, 2002, Wisconsin Energy had $833 million of goodwill on its balance sheet attributable to the gas utility and manufacturing businesses of WICOR, Inc., which resultedwas acquired in April 2000 (see "Note D -- Mergers and Acquisitions" in the Notes to Consolidated Financial Statements). To perform its annual impairment test of goodwill, Wisconsin Energy is required to make various assumptionsregarding these tests including assumptions about the future profitability of its gas utility and manufacturing operations correlated with published projections for other simi lar businesses. A significant change in these markets, including the market values for similar assets, or in the Company's projections could result in the recognition of a netgoodwill impairment loss related to a decrease in the goodwill asset.
The Company reviewed its goodwill for impairment as of January 1, 2002 upon adoption of SFAS 133 charge142 and during the third quarter of $0.11 per share2002 as part of its annual test as required by SFAS 142. In both cases, the Company determined that there were no impairments to the recorded goodwill balance for 2001. any of its reporting units.
Unbilled Revenues: The Company records utility operating revenues when energy is delivered to its 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 revenue is estimated each month based upon actual generation and throughput volumes, recorded sales, estimated customer usage by class, weather factors, line losses and applicable customer rates.
Asset Retirement Obligations: Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, Accounting for 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 the utility energy segment's Point Beach Nuclear Plant. Using a discounted future cash flow methodology, the Company estimated that its nuclear asset retirement obligation was approximately $673 million at January 1, 2003. Calculation of this asset retirement obligation is based upon projected decommissioning costs calculated by an independent decommissioning consulting firm as well as several significant assumptions including the timing of future cash flows, future inflation rates, the discount rate applied to future cash flows and an 85% probability of plant relicensing.
For furtheradditional information concerning adoption of SFAS 143 and the Company's estimated nuclear asset retirement obligation, see "Note AB -- Summary of SignificantRecent Accounting Policies"Pronouncements" and "Note KG -- Derivative Instruments"Nuclear Operations" in the Notes to Consolidated Financial Statements.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain forward-looking statements made by or on behalf of Wisconsin Energy. Such statements are based upon management's current expectations and are subject to risks and uncertainties that could cause Wisconsin Energy's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "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 such statements, factors that could cause Wisconsin Energy's actual results to differ materially from those contemplated in any forward-looking statements or otherwise affect its future results of operations and f inancial condition include, among others, the following:
Wisconsin Energy undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See "Factors Affecting Results, Liquidity and Capital Resources -- Market Risks and Other Significant Risks" in Item 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 its subsidiaries are exposed.
WISCONSIN ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General:The consolidated financial statements include the accounts of Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company"), a diversified holding company, as well as its principal subsidiaries in the following operating segments:
Other non-utility subsidiaries of Wisconsin Energy include primarily Minergy Corp., which develops and markets recycling technology products, and Wispark LLC ("Wispark"), which develops and invests in real estate. All significant intercompany transactions and balances have been eliminated from the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in 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:
Revenues:
Wisconsin Electric's rates include base amounts for estimated fuel and purchased power costs. It can request recovery of fuel and purchased power costs prospectively from retail electric customers in the Wisconsin jurisdiction through its 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. Wisconsin Electric's and Wisconsin Property and Depreciation:Utilityproperty, plant and equipment is recorded at cost. Cost includes material, labor, overhead 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. The cost of depreciable utility property, together with removal cost less salvage value, is charged to accumulated depreciation when property is retired. Capitalized software costs associated with regulated operations are included in the subcaption "Utility Energy" under the caption "Property, Plant and Equipment" on the Consolidated Balance Sheet. As of December 31, 2002 and 2001, capitalized software costs totaled $68.9 million and $79.6 million, respectively. Capitalized software costs associated with non-utility companies as of December 31, 2002 and 2001 are approximately $0.2 million and $1.2 million, respectively. 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 4.5% in 2002, 4.6% in 2001, and 4.5% in Other property, plant and equipment is recorded at cost. Cost includes material, labor, overhead and capitalized interest. Additions to and significant replacements of property are charged to property, plant and equipment at cost; minor items are charged to maintenance expense. Upon retirement or sale of other property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in "Other Income and Deductions - Gain (loss) on asset sales" in the Consolidated Income Statements. Depreciation expense is accrued at Estimated useful lives for non-regulated assets are 3 to 10 years for manufacturing equipment, 3 to Allowance For Funds Used During Construction: Allowance for funds used during construction ("AFUDC") is included in As approved by the PSCW, Wisconsin Electric capitalized
Prior to August 31, 2000, based on PSCW authorization, Wisconsin Electric accrued an As approved by the PSCW in September 2001, Wisconsin Gas began to accrue AFUDC on Earnings Per Common Share: Basic earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted earnings per share Materials, Supplies and Inventories: Inventory at December 31
Substantially all fossil fuel, materials and supplies and natural gas in storage inventories are priced using the Goodwill and Long-Lived Assets:
Regulatory Accounting: The utility energy segment accounts for its regulated operations in accordance with Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation. 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 ratemaking 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. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for Deferred regulatory assets and liabilities at December 31 consist of:
As of December 31, 2002, the Company recorded a minimum pension liability of $113.5 million to reflect the funded status of its pension plans. The Company has concluded that substantially all of the unrecognized pension costs which arose from recording the minimum pension liability under SFAS 87 qualify as a regulatory asset. As such, as of December 31, 2002, the Company recorded a pre-tax regulatory asset totaling $288.5 million. In connection with the WICOR acquisition, the Company recorded the funded status of Wisconsin Gas pension and postretirement medical plans at fair value. Due to the expected regulatory treatment of Wisconsin Electric directs a variety of demand-side management programs to help foster energy conservation by its customers. As authorized by the PSCW, Wisconsin Electric capitalized certain conservation program costs prior to 1995. Utility rates approved by the PSCW provide for a current return on these conservation investments. Included in Investments on the Consolidated Balance Sheet at December 31, 2002 and 2001, are conservation investments of $6.0 million and $11.6 million, respectively, which are amortized to income based upon PSCW order. During 2000, Wisconsin Electric discontinued operation of its lightweight aggregate plant at Oak Creek Power Plant. As authorized by the PSCW, Wisconsin Electric transferred the associated remaining undepreciated plant balance of $19.7 million on December 31, 2000 to a deferred regulatory asset account, which is being amortized over the five year period ending December 31, 2005. Derivative Financial Instruments: The Company has 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 use of financial instruments is limited and Statement of Cash Flows:Cash and cash equivalents include marketable debt securities acquired three months or less from maturity. Restrictions:
Assets Held for Sale: Property, equipment and goodwill related to businesses held for sale are carried at the lower of cost or estimated fair value less costs to sell.
Investments: Investments of Witech Corporation ("Witech"), a wholly owned venture capital company, are reported at fair value with changes in fair value reported Income Taxes: Wisconsin Energy files a consolidated Federal income tax return. As such, Wisconsin Energy allocates Federal current tax expense benefits and credits to its subsidiaries based on their separate tax computations. Stock Options: The Company Nuclear Fuel Amortization: The Company leases nuclear fuel and amortizes it to fuel expense B -- RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations and Goodwill: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS 142, goodwill and other intangibles with indefinite lives are no longer subject to amortization. However, goodwill along with other intangibles are subject to new fair value-based rules for measuring impairment, and resulting write-downs, if any, are to be reflected as a change in accounting principle upon adoption and in operating expense in subsequent periods. The Company assessed the fair value of its SFAS 142 reporting units by considering future discounted cash flows. This analysis was supplemented with a review of fair value based on public company trading multiples and merger and acquisition transaction multiples for similar companies. This evaluation utilized the information available in the circumstances, including reasonable and supportable assumptions and projections. The Company has determined that there was no impairment to the recorded goodwill balance for any of its reporting units at the date of adoption of SFAS 142. The Company has elected to perform its annual impairment test as of August 31. There was no impairment to the recorded goodwill balance as of the annual 2003 impairment test date for any of the Company's reporting units. The adoption of SFAS 142 by Wisconsin Energy and elimination of goodwill and indefinite-lived intangible asset amortization on January 1, 2002 resulted in an increase in net income of $21.2 million for 2002. The following table presents pro forma net income, basic earnings per share and diluted earnings per share as if SFAS 142 had been adopted at the beginning of fiscal 2000.
The following table presents the details of the Company's identifiable intangible assets which are included on the consolidated balance sheets in "Other Assets".
The amount of amortization expense included in operating income for identifiable intangibles was $1.6 million, $2.9 million and $1.8 million for 2002, 2001 and 2000, respectively. The estimated future annual intangible amortization expense for the years 2003 through 2006 is estimated to be $1.6 million per year and $1.2 million for the year 2007. The following table presents the changes in goodwill during fiscal 2002:
Long-Lived Assets: In August 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment or Variable Interest Entities: In January 2003, the Financial Accounting Standards Board issued Interpretation 46, Consolidation of Variable Interest Entities. This standard will require an enterprise that is the primary beneficiary of a variable interest entity to consolidate that entity. The Interpretation must be applied to any existing interests in variable interest entities beginning in the third quarter of 2003. The Company does not expect to consolidate any existing interest in unconsolidated entities as a result of Interpretation 46. Asset Retirement Obligations: In June 2001, the Financial Accounting Standards Board issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143, which is effective January 1, 2003, requires entities to record the fair value of a legal liability for an asset retirement obligation in the period in which it is incurred. When a new liability is recorded beginning in 2003, the entity will capitalize the costs of the liability by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Company adopted SFAS 143 effective January 1, 2003. The Company has completed a detailed assessment of the specific applicability and implications of SFAS 143. The scope of SFAS 143 includes primarily decommissioning costs for the Point Beach Nuclear Plant ("Point Beach"). It also applies to a smaller extent to several other utility assets including: active ash landfills, water treatment basins, removal of certain coal handling equipment and water intake facilities located on lakebed, and the dismantlement of certain hydro facilities. Other than for Point Beach, the Company's asset retirement obligations as of January 1, 2003 will not be significant. As it relates to regulated operations, the Company believes that adoption of SFAS 143 results primarily in timing differences in the recognition of legal asset retirement costs that the Company is currently recovering in rates and will be deferring such differences under SFAS 71 (See Note A). Prior to January 2003, the Company recorded nuclear decommissioning charges in Accumulated Depreciation. Upon adoption of SFAS 143, the Company will reverse the $550 million it had previously recorded in Accumulated Depreciation, and it will record a liability of approximately $673 million, and a net asset of approximately $30 million. The difference between amounts previously recorded and the net SFAS 143 liability will be deferred as a regulatory asset and is expected to approximate $93 million. The asset retirement obligations for active ash landfills, water treatment basins and the removal of certain coal handling equipment and water intake facilities located on lakebeds cannot be reasonably estimated due to an indeterminate life for the The regulated operations of the Company also collect removal costs in rates for certain assets that do not have associated legal asset retirement obligations. As of December 31, 2002, the Company estimates that it has approximately $570 million of such regulatory liabilities recorded in Accumulated Depreciation.
C -- CHARGES In the first quarter of 2002, the Company recorded a non-cash impairment charge of $141.5 million ($92.0 million after tax or $0.79 per share). The impairment charge primarily related to two non-utility energy assets previously classified as Held for Sale: the Company's Wisvest-Connecticut, LLC power plants and costs associated with a 500 megawatt power island consisting of gas turbine generators and related equipment (See Note E). In the first quarter of 2002, the Company determined that the carrying value of these assets exceeded market values due to a significant decline in the non-regulated energy markets resulting from many factors, including lower forward electric price curves, tightening of credit to non-regulated energy companies and a soft economy. The fair value of these assets was determined based on bids received on the Wisvest-Connecticut generating plants and prices from other third party sale transactions for comparable gas turbines. This led to the impairment charge on non-utility energy assets of $0.71 per share. In addition, the Company recorded an impairment charge of $0.08 per share related to the decline in value of a venture capital investment, whose results are included in the "Other Corporate & Reconciling Eliminations" column under the Segment Reporting information in Note P of the Notes to Consolidated Financial Statements. In 2001, the Company recorded a non-cash charge of $0.21 per share primarily related to the decline in the value of a venture capital investment. During the fourth quarter of 2000, the Company recorded one-time charges totaling $0.69 per diluted share. Of this, $0.33 per share related to severance and employee benefits and merger-related items. In connection with the WICOR merger and the divestiture of non-core businesses, approximately 300 employees received severance benefits under severance agreements and enhanced retirement initiatives. The Company has paid all of the anticipated expenses except approximately $0.7 million of severance benefits as of December 31, 2002. No other adjustments were made to the reserves. The Company also recorded charges totaling $0.26 per share during the fourth quarter of 2000 related to the valuation of non-core investments. The Company reviewed its non-core businesses and investments and determined that the expected future cash flows on certain investments, including real estate, international waste to energy projects and energy marketing companies would not exceed the historical co sts of those investments. In addition, the Company made a contribution of $0.10 per share after tax to the Wisconsin Energy Foundation to assist it in becoming self-funding. D -- MERGERS AND ACQUISITIONS Utility Energy Segment WICOR, Inc.: On April 26, 2000, the Company acquired all of the outstanding common stock of WICOR, Inc. ("WICOR"), a diversified utility holding company. The purchase price included the payment of $1.2 billion of cash, the assumption of stock options and restricted shares valued at $37.1 million and the payment of $10.2 million in transaction costs. The Company also assumed approximately $267 million of existing WICOR debt. The cash purchase price of approximately $1.2 billion was funded with commercial paper The following unaudited pro forma data summarize the results of operations for the periods indicated as if the WICOR acquisition had been completed as of the beginning of
(a)Pro forma assumes that the WICOR acquisition occurred on January 1,
Manufacturing Segment
was recorded as goodwill and other intangibles. Due to the immaterial nature of the transactions, Wisconsin Energy has
E -- ASSET SALES AND DIVESTITURES During 2000, the Company's management announced a strategy, which, among other things, identified the divestiture of non-core investments. These assets primarily related to non-utility energy investments and real estate. In October 2000, the Company closed on the sale of its interest in SkyGen Energy Holdings, LLC., which resulted in cash proceeds totaling approximately $332 million (including approximately $112 million for the repayment of certain advances, short-term notes receivable and interest) and an after tax gain of $54.6 million or $0.45 per share. During the second quarter of 2001, the Company sold FieldTech, Inc. and Wisvest's interest in Blythe Energy, LLC, an independent power production project in the state of California, in separate transactions. Wisconsin Energy realized after-tax gains of approximately $16.5 million or $0.14 per share as a result of the sales of FieldTech and Blythe.
Wisvest-Connecticut to Public Service Enterprise Group. Wisvest Effective January 1, 2001, Wisconsin Electric and Edison Sault transferred electric utility transmission system assets with a net book value of approximately $254.9 million to American Transmission Company LLC ("ATC") in exchange for an equity interest in this new company. No gain or loss was recorded in this transaction. During 2001, ATC issued debt and distributed $119.8 million of cash back to Wisconsin Electric and Edison Sault as a partial return of the original equity contribution.
As of
F -- 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 ("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 the Company's 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:
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:
The components of SFAS 109 deferred income taxes classified as net current assets and net long-term liabilities at December 31 are as follows:
Wisconsin Electric, Wisconsin Gas and Edison Sault have also recorded deferred regulatory assets and liabilities representing the future expected impact of deferred taxes on utility revenues (see Note A). As of December 31, 2002 and 2001, the Company had not recorded $24.0 million and $12.0 million of tax benefits primarily related to state
G -- NUCLEAR OPERATIONS Point Beach Nuclear Plant: Wisconsin Electric owns two 510-megawatt electric generating units at Point Beach Nuclear Plant ("Point Beach") in Two Rivers, Wisconsin. Point Beach is operated by Nuclear Management Company, a company that, as of December 31, Nuclear Insurance: The Price-Anderson Act, as amended and extended to August 1, 2002, currently limits the total public liability for damages arising from a nuclear incident at a nuclear power plant to approximately Wisconsin Electric, through its membership in Nuclear Electric Insurance Limited ("NEIL"), carries decontamination, property damage and decommissioning shortfall insurance covering losses of up to $1.5 billion at Point Beach. Under policies issued by NEIL, the insured member is liable for a retrospective premium adjustment in the event of catastrophic losses exceeding the full financial resources of NEIL. Wisconsin Electric's maximum retrospective liability under its policies is Wisconsin Electric also maintains insurance with NEIL covering business interruption and extra expenses during any prolonged accidental outage at Point Beach, where such outage is caused by accidental property damage from radioactive contamination or other risks of direct physical loss. Wisconsin Electric's maximum retrospective liability under this policy is It should not be assumed that, in the event of a major nuclear incident, any insurance or statutory limitation of liability would protect Wisconsin Electric from material adverse impact. Nuclear Decommissioning: Nuclear decommissioning costs are
The Company records decommissioning expense in amounts equal to the amounts collected in rates and funded to the external trusts. As of December 31, 2002 and 2001, the Company had accumulated provisions for decommissioning expense of $550.0 million and $589.6 million, respectively. Such amounts were included on the consolidated balance sheets under Accumulated Depreciation. Beginning January 1, 2003, the Company adopted SFAS 143 Accounting for Asset Retirement Obligations. Under SFAS 143, the Company recorded a liability on its balance sheet for the net present value of the expected cash flows associated with the Company's legal obligation to decommission its nuclear plants. The Company estimates that this liability was approximately $673 million as of January 1, 2003. Under SFAS 71, Accounting for the Effects of Certain Types of Regulation, the Company recorded a regulatory asset for the amounts that the Asset Retirement Obligation liability exceeded amounts collected in rates. The Company estimates that this regulatory asset was approximately $93 million as of January 1, 2003. In the future, if the SFAS 143 liability is less than the amounts funded, then the Company would expect to record a regulatory liability for the difference based on the expected rate treatment from its primary regulator. 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 interest rate to discount the future cash flows. These assumptions differ significantly from the assumptions used by the PSCW to calculate the nuclear decommissioning liability for funding purposes. Under SFAS 143, the Company estimated an 85% probability of plant relicensing based strictly on industry averages. The Company has not made a decision to apply for relicensing. In 2002, the Company 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 2002 year dollars was approximately $1,072 million. The following table reconciles the regulatory funding liability with the anticipated SFAS 143 liability as of January 1, 2003:
The ultimate timing and amount of future cash flows associated with nuclear decommissioning is dependent upon many significant variables including the scope of work involved, the ability to relicense the plants, future inflation rates and discount rates. However, based on the current plant licenses, the Company does not expect to make any nuclear decommissioning expenditures in excess of $1.0 million before the year 2009. Decontamination and Decommissioning Fund: The Energy Policy Act of 1992 established a Uranium Enrichment Decontamination and Decommissioning Fund ("D&D Fund") for the United States Department of Energy's nuclear fuel enrichment facilities. Deposits to the D&D Fund are derived in part from special assessments on utilities using enrichment services. As of December 31,
H -- COMMON EQUITY During 2000, the Board of Directors approved a common stock repurchase plan which authorized the Company to purchase up to $400 million of its shares of common stock in the open market over the following 24 months. Through December 31, Wisconsin Energy issued approximately 2.7 million In September 2000, the Board of Directors authorized a quarterly cash dividend on its common stock, payable December 1, 2000, of $0.20 per share ($0.80 on an annualized basis), which was reduced from prior quarterly dividends paid during 2000 of $0.39 per common share (or $1.56 on an annualized basis). Stock Option Plans and Restricted Stock: The 1993 Omnibus Stock Incentive Plan ("OSIP"), as approved by stockholders in 1994 and amended by the Board of Directors in 1998 and again amended in 2001, which amendments were approved by stockholders at the 2001 annual meeting, enables the Company to provide a long-term incentive, through equity interests in Wisconsin Energy, to outside directors, selected officers and key employees of the Company and its subsidiaries. The OSIP provides for the granting of stock options, stock appreciation rights, stock awards and performance units during the ten-year extension of the plan. Awards may be paid in common stock, cash or a combination thereof. No stock appreciation rights have been granted to date. In addition, the table below reflects the Company's assumption of former WICOR options to purchase shares of WICOR common stock, which were converted into options to purchase shares of the Company's common stock on the same terms and conditions as were applicable under such WICOR options. 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 except in the event of a change in control. The following is a summary of the Company's stock options issued through December 31,
The following table summarizes information about stock options outstanding at December 31,
The Company applies APB 25 and related interpretations in accounting for its stock option plans and has adopted the disclosure-only provisions of SFAS
Had
The Company has granted restricted shares of common stock to certain key employees. The following restricted stock activity occurred during 2002, 2001
Recipients of the restricted shares, who have the right to vote the shares and to receive dividends, are not required to provide consideration to the Company other than rendering service. Forfeiture provisions on the restricted stock expire 10 years after award grant subject to an accelerated expiration schedule based on the achievement of certain financial performance goals. Under the provisions of APB 25, the market value of the restricted stock awards on the date of grant is recorded as a separate unearned compensation component of common stock equity and is then charged to expense over the vesting period of the awards. Adjustments are also made to expense for acceleration of vesting due to achievement of performance goals. Restricted stock compensation charged to expense during 2002, 2001
I -- TRUST PREFERRED SECURITIES In March 1999, WEC Capital Trust I, a Delaware business trust of which Wisconsin Energy owns all of the outstanding common securities, issued $200 million of 6.85% trust preferred securities to the public. The sole asset of WEC Capital Trust I is $206 million of 6.85% junior subordinated debentures issued by Wisconsin Energy and due March 31, 2039. The terms and interest payments on these debentures correspond to the terms and distributions on the trust preferred securities. Wisconsin Energy initially used the proceeds from the sale of its junior subordinated debentures to fund a capital contribution of approximately $105 million to Wisvest-Connecticut 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.
J -- LONG-TERM DEBT First Mortgage Bonds, Debentures and Notes: At December 31,
Sinking fund requirements for the years Long-term debt premium or discount and expense of issuance are amortized In January 2002, the Company redeemed $100 million of 8-3/8% first mortgage bonds due 2026 and $3.4 million of 9-1/8% first mortgage bonds due 2024. Early redemption of this long-term debt was financed through the issuance of short-term commercial paper. In November 2001, Wisconsin Energy issued $300 million of intermediate-term unsecured senior debt securities in the form of 5.50% Senior Notes due December 1, 2008. Proceeds from this debt issue were added to the Company's general funds and were used to repay commercial paper borrowings. In March 2001, Wisconsin Energy issued $1 billion of intermediate-term unsecured senior debt securities consisting of $550 million of 5.875% Senior Notes due April 1, 2006 and $450 million of 6.50% Senior Notes due April 1, 2011. Proceeds from these debt issues were added to the Company's general funds and were used to repay commercial paper borrowings related primarily to the WICOR acquisition. In April 1999, Wisvest-Connecticut Obligations Under Capital Leases: In 1997, Wisconsin Electric entered into a 25 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 Electric may, at its option and with proper notice, renew for another ten years or purchase the generating facility at fair value or allow the contract to expire. Wisconsin Electric The long-term power purchase contract is treated as an operating lease for rate-making purposes and the minimum lease payments are recorded as purchased power expense on the Consolidated Income Statements. Such payments totaled $22.3 million, $21.5 million and $21.0 million during 2002, 2001 and Wisconsin Electric has a nuclear fuel leasing arrangement with Wisconsin Electric Fuel Trust ("Trust") which is treated as a capital lease. The nuclear fuel is leased and amortized to fuel expense Following is a summary of Wisconsin Electric's capitalized leased facilities and nuclear fuel at December 31.
Future minimum lease payments under the capital leases and the present value of the net minimum lease payments as of December 31,
K -- SHORT-TERM DEBT Short-term notes payable balances and their corresponding weighted-average interest rates at December 31 consist of:
On December 31, Wisconsin Energy, Wisconsin Electric and Wisconsin Gas have entered into various bank back-up credit agreements to
At adoption in January 2001, SFAS 133 required that the difference between the fair value of derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in Net Income or Accumulated Other Comprehensive Income, as appropriate as a cumulative effect of a change in accounting principle. The adoption of SFAS 133 by Wisconsin Energy, related to the Wisvest-Connecticut fuel oil contracts, resulted in an increase in net income of $10.5 million or $0.09 per share reported as a cumulative effect of a change in accounting principle. Wisconsin Energy has 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
For the
On September 24, 2002, Wisconsin Energy entered into a treasury lock agreement in order to mitigate its interest rate risk associated with the anticipated issuance of fixed rate debt. The Accumulated Other Comprehensive Income. Upon settlement of the agreement, any gain or loss will be deferred in Accumulated Other Comprehensive Income and will be amortized to interest expense over the same period in which During the third quarter of 2002, Wisconsin Energy's
M -- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair value of certain of Wisconsin Energy's recorded financial instruments at December 31 are as follows:
The carrying value of cash and cash equivalents, net accounts receivable, accounts payable and short-term borrowings approximates fair value due to the short
Pensions and Other Postretirement Benefits: The Company provides defined benefit pension and other postretirement benefit plans to employees. The status of these plans, including a reconciliation of qualified and unqualified benefit obligations, a reconciliation of plan assets and the funded status of the plans follows.
The components of net periodic pension and other postretirement benefit costs as well as the weighted-average assumptions used in accounting for the plans include the following: Other Postretirement Pension Benefits Benefits Benefit Plan Cost Components 2001 2000 1999 2001 2000 1999 (Millions of Dollars) Net Periodic Benefit Cost Service cost $23.9 $17.7 $16.3 $6.8 $4.7 $3.3 Interest cost 73.7 67.2 51.1 18.7 18.0 12.5 Expected return on plan assets (105.0) (89.0) (64.3) (13.0) (11.3) (5.8) Amortization of: Transition obligation (asset) (2.3) (2.3) (2.2) 1.6 4.6 4.6 Prior service cost 3.5 3.9 3.1 0.1 0.1 0.2 Actuarial loss (gain) 1.1 0.6 0.7 1.5 (0.2) 0.2 Terminations/curtailment - 1.2 - - 8.8 - Net Periodic Benefit Cost ($5.1) ($0.7) $4.7 $15.7 $24.7 $15.0 ==== ==== ==== ==== ==== ==== Weighted-Average Assumptions at December 31 (%) Discount rate 7.25 7.5 7.5 7.25 7.5 7.5 Expected return on plan assets 9.0 9.0 9.0 9.0 9.0 9.0 Rate of compensation increase 4.0 to 3.0 to 3.0 to 4.0 to 3.0 to 4.75 to 5.0 5.0 5.0 5.0 5.0 5.0
Pension Plans:
Open window benefits were offered in 2000 to certain participants in the Wisconsin Electric Retirement Account Plan and Wisconsin Gas Pension Plan for Non-Union Employees. This benefit enhancement resulted in a one-time FAS 88 cost of $1.2 million. Other Postretirement Benefits Plans: The Company uses Employees' Benefit Trusts to fund a major portion of other postretirement benefits. The majority of the trusts' assets are mutual funds or commingled indexed funds. Effective January 1, 1992, postretirement benefit costs have been calculated in accordance with FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and are recoverable from the utility customers of Wisconsin Electric, Wisconsin Gas and Edison Sault. Wisconsin Gas and Edison Sault have recorded deferred regulatory assets, which are being amortized over a twenty-year period effective January 1, 1992, for the cumulative difference between the amounts funded and In 2000, the benefit attribution period was modified for the Wisconsin Electric Postretirement medical plans to equal the 10 years of service following the later of age at hire or age 45. This change resulted in a "negative" plan amendment and a "plan curtailment". The assumed health care cost trend rate for A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Savings Plans: Certain operating subsidiaries of the Company sponsor savings plans which allow employees to contribute a portion of their pretax and/or after tax income in accordance with plan-specified guidelines. Matching contributions under these plans charged to expense amounted to
O -- GUARANTEES Wisconsin Energy and certain subsidiaries enter into various guarantees to provide financial and performance assurance to third parties on behalf of affiliates. As of December 31, 2002 Wisconsin Energy and subsidiaries had the following guarantees:
Wisconsin Energy has provided a $60 million guarantee for WICOR's one-third interest in the Guardian Pipeline project, which went into commercial operation in December 2002. Wisconsin Energy's expects to be released from this guarantee during the second quarter of 2003. The Wisconsin Energy guarantees issued in support of energy related affiliates are for obligations under commodity contracts and credit agreements between the affiliates and third parties. Failure of the affiliates to fulfill their obligations under the agreements would require Wisconsin Energy 's performance under the guarantees. The majority of these guarantees are on-going, terminating upon prior Wisconsin Energy notice to the third party. The remaining guarantees terminate during 2003. Other Wisconsin Energy guarantees support obligations of affiliates to third parties under loan agreements. In the event the affiliates fail to perform under the loan agreements, Wisconsin Energy would be responsible for the obligations. Wisconsin Electric guarantees support the commercial paper and line of credit borrowings for the Wisconsin Electric Fuel Trust (See Note J). Wisconsin Electric guarantees the potential retrospective premiums that could be assessed under the Wisconsin Electric's nuclear insurance program (See Note G). Subsidiary guarantees support loan obligations between affiliates and third parties. In the event the loan obligations are not performed, the subsidiary would be responsible for the obligations. Postemployment benefits: Postemployment benefits provided to former or inactive employees are recognized when an event occurs. As of December 31, 2002, the Company has recorded an estimated liability, based on an accrual analysis, of $8 million. P -- SEGMENT REPORTING Wisconsin Energy Corporation is a diversified holding company with subsidiaries in utility and non-utility businesses. Wisconsin Energy's reportable operating segments include a utility energy segment, a The utility energy segment primarily includes Wisconsin Energy's electric and natural gas utility operations. The electric utility operation engages in the generation, Summarized financial information concerning Wisconsin Energy's reportable operating segments for each of the years ended December 31, 2002, 2001
Q -- RELATED PARTIES American Transmission Company ("ATC"): The Company has a 42.5% interest in ATC, a regional transmission company established in 2000 under Wisconsin legislation. During 2002 and 2001, the Company paid ATC $87.3 million and $72.9 million, respectively, for transmission services. The Company also provides a variety of operational, maintenance and project management work for ATC, which are reimbursed to the Company by ATC. Guardian Pipeline: The Company has a one third ownership interest in Guardian Pipeline, an interstate natural gas pipeline. Wisconsin Gas has committed to purchase 650,000 dekatherms per day of capacity (approximately 87% of the pipeline's total capacity) under the terms of a 10 year transportation agreement. Guardian began deliveries to Wisconsin Gas in December 2002. R -- COMMITMENTS AND CONTINGENCIES Capital Expenditures: Certain commitments have been made in connection with Operating Leases: The Company enters into long-term purchase power contracts to meet a portion of its 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 operating leases. Future minimum payments for the next five years and thereafter for these contracts are as follows:
Giddings & Lewis, Inc./City of West Allis On September 25, 2002, Wisconsin Electric filed a lawsuit against its insurance carriers to recover those costs and expenses associated with this matter covered by insurance. Wisconsin Electric intends to fully pursue any and all rights of recovery against its carriers under the applicable insurance policies. As previously reported, in July 1999, a Milwaukee County Circuit Court jury had issued a verdict against Wisconsin Electric awarding the plaintiffs, Giddings & Lewis,
On August 21, 2000 and September 29, 2000, two shareholders, who had made prior demands upon Wisconsin Energy Environmental Matters: The Company periodically reviews its exposure for remediation costs as evidence becomes available indicating that its remediation liability has changed. Given current information, including the following, management believes that future costs in excess of the amounts accrued and/or disclosed on all presently known and quantifiable environmental contingencies will not be material to the Company's financial position or results of operations. During 2000, the Company expanded a voluntary program of comprehensive environmental remediation planning for former manufactured gas plant sites and coal-ash disposal sites. Company is working with the Wisconsin Department of Natural Resources Manufactured Gas Plant Sites: The Company The PSCW has allowed Wisconsin utilities, including Wisconsin Electric and Wisconsin Gas, to defer the costs spent on the remediation of manufactured gas plant sites, and has allowed for such costs to be recovered in rates over five years. As such, the Company has recorded a regulatory asset for remediation Ash Landfill Sites: Wisconsin Electric aggressively seeks environmentally acceptable, beneficial uses for its combustion by-products. However, such coal-ash by-products have been, and to some degree, continue to be disposed in company-owned, licensed landfills. Some early designed and constructed landfills may allow the release of low levels of constituents resulting in the need for various levels of monitoring or adjusting. 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 fuel costs of Wisconsin Electric. During 2002, 2001 and 2000, the Company incurred $2.1 million, $1.2 million and $2.9 million, respectively, in coal-ash remediation As a result of the Cooperative Agreement, an innovative regulatory agreement signed with the Wisconsin Department of Natural Resources in February 2001, the Company is now able to recover fly ash from Manufacturing Segment: The Company's manufacturing subsidiaries are involved in various environmental matters, including matters in which the subsidiaries or alleged predecessors have been named as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act. The Company has established reserves for all of these environmental contingencies of which management is currently aware. EPA Information Requests: Wisconsin Electric Wisvest-Connecticut, formerly a wholly-owned subsidiary of Wisvest, received requests for information from the US EPA regional office pursuant to Section 114(a) of the Clean Air Act in May 2000 and February 2001. Wisvest-Connecticut submitted information responsive to these requests. All membership interests in Wisvest-Connecticut were sold on December 6, 2002 to PSEG Fossil, LLC, which is now the new owner and operator of the electric generating facilities that were the subject of the US EPA information requests. Additionally, any liabilities relating to the information requests which were covered under the guaranty of Wisvest and the Company to United Illuminating, the prior owner of the facilities, have been covered by a guaranty to Wisvest and the Company by PSEG Power, LLC. INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Wisconsin Energy Corporation: We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Wisconsin Energy Corporation and its subsidiaries (the "Company") as of December 31, 2002, and the related consolidated statements of income, common equity and cash flows for the year then ended. Our audit also included the 2002 financial statement schedule listed in Item 15(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit. The consolidated financial statements of Wisconsin Energy Corporation and its subsidiaries as of December 31, 2001, and for the year then ended, prior to the addition of the transitional disclosures discussed in Note B, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, and included an exp lanatory paragraph relating to the change in accounting for derivatives effective January 1, 2001, in their report dated February 5, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Wisconsin Energy Corporation and its subsidiaries at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic 2002 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As described in Note B, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards (Statement) No. 142, "Goodwill and Other Intangible Assets." As discussed above, the consolidated financial statements of the Company as of December 31, 2001, and for the year then ended were audited by other auditors who have ceased operations. As described in Note B, these financial statements have been revised to include the transitional disclosures required by Statement No. 142, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosure in Note B, included (a) agreeing the previously reported net income to the previously issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes in amortization periods for intangible assets that will continue to be amortized as a result of initially applying Statement No. 142 (including any related tax effects) to the Company's underlying records obtained from management, and (b) testi ng the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings per share amounts. In our opinion, the disclosures for 2001 in Note B are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.
/s/DELOITTE & TOUCHE LLP Milwaukee, Wisconsin The following report is a copy of a report previously issued by Arthur Andersen LLP in connection with the Company's 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. In fiscal 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). As discussed in Note B of the Notes to Consolidated Financial Statements, the Company has presented the transitional disclosures for fiscal 2001 required by SFAS 142. The Arthur Andersen LLP report does not extend to these transitional disclosures. These disclosures are reported on by Deloitte & Touche LLP as stated in their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Wisconsin Energy Corporation: We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Wisconsin Energy Corporation and its subsidiaries as of December 31, 2001, and the related consolidated statements of income, common equity and cash flows for the year then ended. These financial statements and the supplemental schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and supplemental schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wisconsin Energy Corporation and its subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. As described in Note K, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
/
Milwaukee, Wisconsin
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the In our opinion, the consolidated /s/PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin
In July 2002, Wisconsin Energy Corporation announced that the Board of Directors, upon recommendation of its Audit and Oversight Committee, ended the engagement of Arthur Andersen LLP as the Company's independent public accountants and engaged Deloitte & Touche LLP to serve as the Company's independent auditors for the fiscal year ended December 31, 2002. For more information, see the Company's current reports on Form 8-K
PART III
The information under "Item 1: Election of Directors -- Terms Expiring in
The information under "Compensation of the Board of Directors," "Executive Officers' Compensation," "Employment and Severance Arrangements" and "Retirement Plans" in the
The security ownership information called for by Item 12 of Form 10-K is incorporated herein by reference to such information included under EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information about the Company's equity compensation plans as of December 31, 2002.
None.
The Company maintains disclosure controls and procedures designed to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. The Company's principal executive officer and principal financial officer have reviewed and evaluated the Company's disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company required to be included in the Company's periodic filings under the Exchange Act. Since the Evaluation Date, there have not been any significant changes in the internal controls of the Company, or in other factors that could significantly affect these controls subsequent to the Evaluation Date. PART IV
Consolidated Income Statements for the three years ended December 31, Consolidated Statements of Cash Flows for the three years ended December 31, Consolidated Balance Sheets at December 31, Consolidated Statements of Capitalization at December 31, Consolidated Statements of Common Equity for the three years ended December 31, Notes to Consolidated Financial Statements.
Schedule I Condensed Parent Company Financial Statements for the three years ended December 31,
See the Exhibit Index included as the last part of this report, which is incorporated herein by reference. Each management contract and compensatory plan or arrangement required to be filed as an exhibit to this report is identified in the Exhibit Index by two asterisks (**) following the description of the exhibit.
A Current Report on Form 8-K dated as of December No other reports on A Current Report on Form 8-K, dated as of February 11, 2003 to report Wisconsin Energy Corporation's 2002 Annual Financial Statements.
WISCONSIN ENERGY CORPORATION INCOME STATEMENTS SCHEDULE I -- CONDENSED PARENT COMPANY
WISCONSIN ENERGY CORPORATION STATEMENTS OF CASH FLOWS SCHEDULE I - CONDENSED PARENT COMPANY
WISCONSIN ENERGY CORPORATION BALANCE SHEETS SCHEDULE I - CONDENSED PARENT COMPANY
WISCONSIN ENERGY CORPORATION NOTES TO FINANCIAL STATEMENTS SCHEDULE I - CONDENSED PARENT COMPANY
1. The condensed parent company financial statements and notes should be read in conjunction with the consolidated financial statements and notes of Wisconsin Energy Corporation appearing in this Annual Report on Form 10-K. 2. Various financing arrangements and regulatory requirements impose certain restrictions on the ability of the principal utility subsidiaries to transfer funds to Wisconsin Energy in the form of cash dividends, loans or advances. Under Wisconsin law, Wisconsin Electric Power Company and Wisconsin Gas Company are prohibited from loaning funds, either directly or indirectly, to Wisconsin Energy. The Company does not believe that such restrictions will affect its operations. 3. In March 2001, Wisconsin Energy issued $1 billion of intermediate-term unsecured senior debt securities consisting of $550 million of 5.875% Senior Notes due April 1, 2006 and $450 million of 6.50% Senior Notes due April 1, 2011. In addition, in November 2001, Wisconsin Energy issued $300 million of intermediate-term unsecured senior debt securities in the form of 5.50% Senior Notes due December 1, 2008. 4. As of December 31, 2002, Wisconsin Energy recorded a minimum pension liability of $302.3 million to reflect the funded status of its pension plans. The Company has concluded that substantially all of the unrecognized pension costs which arose from recording the minimum pension liability under SFAS 87 qualify as a regulatory asset. As such, as of December 31, 2002, the Company recorded a pre-tax regulatory asset totaling $279.4 million. 5. Wisconsin Energy and certain subsidiaries enter into various guarantees to provide financial and performance assurance to third parties on behalf of affiliates. As of December 31, 2002 Wisconsin Energy had the following guarantees:
Wisconsin Energy has provided a $60 million guarantee for WICOR's one-third interest in the Guardian Pipeline project, which went into commercial operation in December 2002. Wisconsin Energy expects to be released from this guarantee during the second quarter of 2003. The Wisconsin Energy guarantees issued in support of energy related affiliates are for obligations under commodity contracts and credit agreements between the affiliates and third parties. Failure of the affiliates to fulfill their obligations under the agreements would require Wisconsin Energy 's performance under the guarantees. The majority of these guarantees are on-going, terminating upon prior Wisconsin Energy notice to the third party. The remaining guarantees terminate during 2003. The remaining Wisconsin Energy guarantees in support of the nonutility segment guaranty performance and payment obligations of Wisvest -- Connecticut and Calumet Energy Team and We Power. Guarantees in support of Wisvest -Connecticut provide financial assurance for obligations relating to environmental remediation under the original purchase agreement with UI, commodity contracts and the purchase agreement with PSEG for the sale of Wisvest - Connecticut. The obligations for environmental remediation which are unlimited and commodity contracts are reimbursable by PSEG under the terms of the purchase agreement in the event that Wisconsin Energy is required to perform under the guarantees. The guarantees relating to the sale of Wisvest-Connecticut will terminate during 2003. The guarantees which support We Power and Calumet Energy Team are for obligations under purchase and management agreements with third parties. These guarantees expire during 2003 and 2004. Other Wisconsin Energy guarantees support obligations to third parties under loan agreements. In the event the guarantee fail to perform under the loan agreements, Wisconsin Energy would be responsible for the obligations.
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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.
I, Richard A. Abdoo, certify that: 1. I have reviewed this annual report on Form 10-K of Wisconsin Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
I, Paul Donovan, certify that: 1. I have reviewed this annual report on Form 10-K of Wisconsin Energy Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
WISCONSIN ENERGY CORPORATION EXHIBIT INDEX
The following exhibits are filed with or incorporated by reference in the report with respect to Wisconsin Energy Corporation. (An asterisk (*) indicates incorporation by reference pursuant to Exchange Act Rule 12b-32.)
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