SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ------------- -------------____________________
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether each of the registrants (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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (May(November 1, 1998):
Wisconsin Energy Corporation Common stock, $.01 Par Value,
112,865,844115,276,119 shares outstanding.
Wisconsin Electric Power Company Common stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company common stock.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 1998
TABLE OF CONTENTS
Item Page
- ---- ----
Introduction .Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I - Financial Information
------------------------------
1. Financial Statements:
Wisconsin Energy Corporation
Consolidated Condensed Income Statement. . . . . . . . . . . . . . 3
Consolidated Condensed Balance Sheet . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . 5
Wisconsin Electric Power Company
Condensed Income Statement . . . . . . . . . . . . . . . . . . . . 6
Condensed Balance Sheet. . . . . . . . . . . . . . . . . . . . . . 7
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements of
Wisconsin Energy Corporation and
Wisconsin Electric Power Company . . . . . . . . . . . . . . . . . 9
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for
Wisconsin Energy Corporation and
Wisconsin Electric Power Company . . . . . . . . . . . . . . . . . 1011
3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . 1322
Part II - Other Information
---------------------------
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 1422
5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 1523
6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 2029
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2130
INTRODUCTION
Wisconsin Energy Corporation ("WEC", "WisconsinWisconsin Energy" or the "Company") is a
holding company whose principal subsidiary is Wisconsin Electric Power Company
("WE" or "WisconsinWisconsin Electric"), an electric, gas and steam utility. Unless qualified
by its context, the term Wisconsin Energy refers to the holding company and
all of its subsidiaries when used in this combined Form 10-Q. The unaudited
interim financial statements presented in this combined Form 10-Q report
include the consolidated statements of WECWisconsin Energy as well as separate
statements for WE.Wisconsin Electric. The unaudited statements have been
prepared by WECWisconsin Energy and WEWisconsin Electric pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. The WECWisconsin Energy and
WEWisconsin Electric financial statements should be read in conjunction with the
financial statements and notes thereto included in WEC's
and WE'sthe companies' combined
Annual Report on Form 10-K for the year ended December 31, 1997. This
combined Form 10-Q is separately filed by WECWisconsin Energy and WE.Wisconsin
Electric. Information contained herein relating to any individual registrant
is filed by such registrant on its own behalf.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended March 31
-------------------------------------Nine Months Ended
September 30 September 30
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(Thousands of Dollars)
Operating Revenues
Electric $ 383,640464,548 $ 349,100359,522 $1,256,925 $1,045,843
Gas 119,411 152,84938,256 37,987 210,081 252,064
Steam 7,630 8,4343,526 3,105 14,973 16,304
---------- ---------- ---------- ----------
Total Operating Revenues 510,681 510,383506,330 400,614 1,481,979 1,314,211
Operating Expenses
Fuel 73,901 77,26187,017 86,804 241,125 240,269
Purchased power 36,591 27,86142,243 32,864 116,083 93,661
Cost of gas sold 72,301 103,29421,955 23,989 125,361 166,424
Other operation expenses 110,038 102,399118,846 89,659 353,144 298,763
Maintenance 40,818 31,46738,420 29,616 125,742 99,430
Depreciation 62,273 57,66560,472 61,160 179,960 175,893
Taxes other than income taxes 20,716 19,18720,529 18,443 60,541 56,669
Federal income tax 19,893 17,91929,874 7,563 61,040 23,906
State income tax 4,768 4,2957,023 2,019 14,572 6,184
Deferred income taxes - net 3,143 4,519(2,726) 3,178 1,615 12,583
Investment tax credit - net (1,172) (1,121)(1,190) (1,122) (3,540) (3,365)
---------- ---------- ---------- ----------
Total Operating Expenses 443,270 444,746422,463 354,173 1,275,643 1,170,417
Operating Income 67,411 65,63783,867 46,441 206,336 143,794
Other Income and Deductions
Interest income 6,735 6,3586,971 6,249 20,038 17,936
Allowance for other funds used
during construction 715 1,141585 625 2,177 2,982
Merger expenses (66) - (563) (30,684)
Miscellaneous - net 2,751 (59)(3,101) (461) (4,247) (2,394)
Income taxes 627 (155)585 (54) 1,966 11,870
---------- ---------- ---------- ----------
Total Other Income and Deductions 10,828 7,2854,974 6,359 19,371 (290)
Income Before Interest Charges and
Preferred Dividend 78,239 72,92288,841 52,800 225,707 143,504
Interest Charges
Interest expense 30,888 29,39132,539 30,153 94,857 89,410
Allowance for borrowed funds used
during construction (1,998) (1,839)(2,175) (1,629) (6,130) (5,220)
---------- ---------- ---------- ----------
Total Interest Charges 28,890 27,55230,364 28,524 88,727 84,190
Preferred Dividend Requirement of Subsidiary 301 301 902 902
---------- ---------- ---------- ----------
Net Income $ 49,04858,176 $ 45,06923,975 $ 136,078 $ 58,412
========== ========== ========== ==========
Average Number of Shares of Common
Stock Outstanding (Thousands) 115,276 112,866 111,959113,952 112,471
========== ========== ========== ==========
Earnings Per Share of Common
Stock $ 0.43 $ 0.40
(Basic and Diluted) $ 0.50 $ 0.21 $ 1.19 $ 0.52
========== ========== ========== ==========
Dividends Per Share of Common Stock $ 0.38500.390 $ 0.38000.385 $ 1.165 $ 1.150
========== ========== ========== ==========
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
March 31,September 30, 1998 December 31, 1997
---------------------------------- -----------------
(Thousands of Dollars)
Assets
--------------
Utility Plant
Electric $ 5,024,8734,868,724 $ 4,991,3304,690,347
Gas 525,419 521,814511,654 492,271
Steam 62,717 62,15662,694 61,921
Common 408,343 330,761
Accumulated provision for depreciation (2,782,438)(2,895,051) (2,700,839)
------------- -------------
2,830,5712,956,364 2,874,461
Construction work in progress 85,069 81,612
Leased facilities - net 137,267134,427 138,687
Construction work in progress 104,887 81,612
Nuclear fuel - net 90,78988,022 90,219
------------- -------------
Net Utility Plant 3,163,5143,263,882 3,184,979
Other Property and Investments 861,449935,366 825,357
Current Assets
Cash and cash equivalents 20,54122,351 19,607
Accounts receivable 166,674184,022 145,737
Accrued utility revenues 115,44181,679 141,273
Materials, supplies and fossil fuel 171,471194,891 197,204
Prepayments and other assets 104,12461,660 69,496
------------- -------------
Total Current Assets 578,251544,603 573,317
Deferred Charges and Other Assets
Accumulated deferred income taxes 174,329184,131 172,546
Other 285,240253,031 281,485
------------- -------------
Total Deferred Charges and Other Assets 459,569437,162 454,031
------------- -------------
Total Assets $ 5,062,7835,181,013 $ 5,037,684
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 730,783750,138 $ 730,783
Retained earnings 1,137,7431,135,581 1,132,149
------------- -------------
Total Common Stock Equity 1,868,5261,885,719 1,862,932
Preferred stock 30,450 30,450
Long-term debt 1,531,9391,695,446 1,532,405
------------- -------------
Total Capitalization 3,430,9153,611,615 3,425,787
Current Liabilities
Long-term debt due currently 78,83481,156 90,004
Short-term debt 303,860242,778 319,953
Accounts payable 161,999134,274 148,588
Accrued liabilities 109,742111,035 87,221
Other 69,50657,651 63,832
------------- -------------
Total Current Liabilities 723,941626,894 709,598
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 534,722554,549 525,666
Other 373,205387,955 376,633
------------- -------------
Total Deferred Credits and Other Liabilities 907,927942,504 902,299
------------- -------------
Total Capitalization and Liabilities $ 5,062,7835,181,013 $ 5,037,684
============= =============
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
ThreeNine Months Ended March 31September 30
-------------------------------------
1998 1997
---------- ----------
(Thousands of Dollars)
Operating Activities
Net income $ 49,048136,078 $ 45,06958,412
Reconciliation to cash
Depreciation 62,273 57,665179,960 175,893
Nuclear fuel expense - amortization 2,568 1,49413,634 2,562
Conservation expense - amortization 5,625 5,62516,874 16,874
Debt premium, discount & expense - amortization 1,127 2,2793,406 6,787
Deferred income taxes - net 3,143 4,5191,615 12,583
Investment tax credit - net (1,172) (1,121)(3,540) (3,365)
Allowance for other funds used during construction (715) (1,141)(2,177) (2,982)
Write-off of merger costs 563 30,684
Change in - Accounts receivable (20,937) (12,876)(33,478) 29,053
Inventories 25,733 37,3993,600 2,128
Accounts payable 13,411 (32,736)(17,177) (31,808)
Other current assets (8,796) 38,82669,902 78,621
Other current liabilities 28,195 38,40815,385 (7,140)
Other (418) (22,146)16,266 (39,668)
---------- ----------
Cash Provided by Operating Activities 159,085 161,264400,911 328,634
Investing Activities
Construction expenditures (77,784) (66,409)(280,275) (241,747)
Allowance for borrowed funds used during construction (1,998) (1,839)(6,130) (5,220)
Nuclear fuel (662) (4,297)(5,230) (5,837)
Nuclear decommissioning trust (11,820) (7,454)(24,354) (20,117)
Other 6,366 22,8355,064 17,175
---------- ----------
Cash Used in Investing Activities (85,898) (57,164)(310,925) (255,746)
Financing Activities
Sale of common stock 61 29,586
Sale of long-term debt 211,324 - 16,311
Retirement of long-term debt (12,706) (15,971)(80,972) (41,919)
Change in short-term debt (16,093) (7,857)(83,801) 93,741
Dividends on stockstock-common (132,429) (129,261)
Other (1,425) - common (43,454) (42,508)
---------- ----------
Cash Used in Financing Activities (72,253) (50,025)(87,242) (47,853)
---------- ----------
Change in Cash and Cash Equivalents $ 9342,744 $ 54,07525,035
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 27,25390,855 $ 20,65672,469
Income taxes 11,062 19,80268,562 49,816
The accompanying notes as they relate to Wisconsin Energy Corporation are an integral part of these
financial statements.
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended March 31
-------------------------------------Nine Months Ended
September 30 September 30
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(Thousands of Dollars)
Operating Revenues
Electric $ 383,640454,821 $ 349,100359,522 $1,244,001 $1,045,843
Gas 119,411 152,84938,256 37,987 210,081 252,064
Steam 7,630 8,4343,526 3,105 14,973 16,304
---------- ---------- ---------- ----------
Total Operating Revenues 510,681 510,383496,603 400,614 1,469,055 1,314,211
Operating Expenses
Fuel 73,901 77,26187,013 86,804 241,115 240,269
Purchased power 36,591 27,86137,054 32,864 109,444 93,661
Cost of gas sold 72,301 103,29421,955 23,989 125,361 166,424
Other operation expenses 110,038 102,399117,189 89,659 350,857 298,763
Maintenance 40,818 31,46737,949 29,616 125,077 99,430
Depreciation 62,273 57,66559,735 61,160 178,978 175,893
Taxes other than income taxes 20,716 19,18720,109 18,443 59,981 56,669
Federal income tax 19,893 17,91929,582 7,563 60,628 23,906
State income tax 4,768 4,2957,023 2,019 14,572 6,184
Deferred income taxes - net 3,143 4,519(2,672) 3,178 1,687 12,583
Investment tax credit - net (1,172) (1,121)(1,173) (1,122) (3,518) (3,365)
---------- ---------- ---------- ----------
Total Operating Expenses 443,270 444,746413,764 354,173 1,264,182 1,170,417
Operating Income 67,411 65,63782,839 46,441 204,873 143,794
Other Income and Deductions
Interest income 5,458 5,1035,236 4,635 16,256 13,210
Allowance for other funds used
during construction 715 1,141585 625 2,177 2,982
Merger expenses - - - (21,881)
Miscellaneous - net 5,378 (245)(2,268) (27) 1,865 (1,553)
Income taxes (929) (268)(245) (162) (2,226) 8,536
---------- ---------- ---------- ----------
Total Other Income and Deductions 10,622 5,7313,308 5,071 18,072 1,294
Income Before Interest Charges 78,033 71,36886,147 51,512 222,945 145,088
Interest Charges
Interest expense 28,112 28,29628,177 29,218 84,129 86,412
Allowance for borrowed funds used
during construction (375) (615)(287) (328) (1,108) (1,580)
---------- ---------- ---------- ----------
Total Interest Charges 27,737 27,68127,890 28,890 83,021 84,832
---------- ---------- ---------- ----------
Net Income 50,296 43,68758,257 22,622 139,924 60,256
Preferred Stock Dividend Requirement 301 301 902 902
---------- ---------- ---------- ----------
Earnings Available for Common Stockholder $ 49,99557,956 $ 43,38622,321 $ 139,022 $ 59,354
========== ========== ========== ==========
Note - Earnings and dividends per share of common stock are not applicable because all of Wisconsin
Electric Power Company's common stock is owned by Wisconsin Energy Corporation.
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
March 31,September 30, 1998 December 31, 1997
---------------------------------- -----------------
(Thousands of Dollars)
Assets
--------------
Utility Plant
Electric $ 5,024,8734,789,988 $ 4,991,3304,690,347
Gas 525,419 521,814511,654 492,271
Steam 62,717 62,15662,694 61,921
Common 408,343 330,761
Accumulated provision for depreciation (2,782,438)(2,860,762) (2,700,839)
------------- -------------
2,830,5712,911,917 2,874,461
Construction work in progress 78,335 81,612
Leased facilities - net 137,267134,427 138,687
Construction work in progress 104,887 81,612
Nuclear fuel - net 90,78988,022 90,219
------------- -------------
Net Utility Plant 3,163,5143,212,701 3,184,979
Other Property and Investments 519,703514,401 488,463
Current Assets
Cash and cash equivalents 13,53818,239 10,100
Accounts receivable 159,374170,310 140,111
Accrued utility revenues 115,44180,693 141,273
Materials, supplies and fossil fuel 171,471193,657 197,204
Prepayments and other assets 91,27244,839 62,227
------------- -------------
Total Current Assets 551,096507,738 550,915
Deferred Charges and Other Assets
Accumulated deferred income taxes 171,090177,576 169,306
Other 277,578242,358 274,177
------------- -------------
Total Deferred Charges and Other Assets 448,668419,934 443,483
------------- -------------
Total Assets $ 4,682,9814,654,774 $ 4,667,840
============= =============
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $ 713,582 $ 713,582
Retained earnings 986,600985,840 980,926
------------- -------------
Total Common Stock Equity 1,700,1821,699,422 1,694,508
Preferred stock 30,450 30,450
Long-term debt 1,449,1141,555,337 1,448,558
------------- -------------
Total Capitalization 3,179,7463,285,209 3,173,516
Current Liabilities
Long-term debt due currently 77,22076,000 81,389
Short-term debt 209,278114,359 242,633
Accounts payable 154,021125,515 142,797
Accrued liabilities 105,040104,964 83,879
Other 64,82751,879 57,871
------------- -------------
Total Current Liabilities 610,386472,717 608,569
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 530,486543,795 521,429
Other 362,363353,053 364,326
------------- -------------
Total Deferred Credits and Other Liabilities 892,849896,848 885,755
------------- -------------
Total Capitalization and Liabilities $ 4,682,9814,654,774 $ 4,667,840
============= =============
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
/TABLE
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
-------------------------------------
1998 1997
---------- ----------
(Thousands of Dollars)
Operating Activities
Net income $ 139,924 $ 60,256
Reconciliation to cash
Depreciation 178,978 175,893
Nuclear fuel expense - amortization 13,634 2,562
Conservation expense - amortization 16,874 16,874
Debt premium, discount & expense - amortization 3,103 6,516
Deferred income taxes - net 1,687 12,583
Investment tax credit - net (3,518) (3,365)
Allowance for other funds used during construction (2,177) (2,982)
Write-off of merger costs - 21,881
Change in - Accounts receivable (30,199) 25,676
Inventories 3,547 2,128
Accounts payable (17,282) (34,058)
Other current assets 77,968 83,400
Other current liabilities 15,093 (5,263)
Other 35,265 (43,059)
---------- ----------
Cash Provided by Operating Activities 432,897 319,042
Investing Activities
Construction expenditures (230,048) (188,612)
Allowance for borrowed funds used during construction (1,108) (1,580)
Nuclear fuel (5,230) (5,837)
Nuclear decommissioning trust (24,354) (20,117)
Other 970 (649)
---------- ----------
Cash Used in Investing Activities (259,770) (216,795)
Financing Activities
Sale of long-term debt 169,657 -
Retirement of long-term debt (71,361) (40,350)
Change in short-term debt (128,274) 117,616
Dividends on - Common stock (134,108) (169,370)
Preferred stock (902) (902)
---------- ----------
Cash Used in Financing Activities (164,988) (93,006)
---------- ----------
Change in Cash and Cash Equivalents $ 8,139 $ 9,241
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 87,336 $ 73,908
Income taxes 66,807 47,308
The accompanying notes as they relate to Wisconsin Electric Power Company are an integral part of
these financial statements.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWSNOTES TO FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31
-------------------------------------
1998 1997
---------- ----------
(Thousands of Dollars)
Operating Activities
Net income $ 50,296 $ 43,687
Reconciliation to cash
Depreciation 62,273 57,665
Nuclear fuel expense - amortization 2,568 1,494
Conservation expense - amortization 5,625 5,625
Debt premium, discount & expense - amortization 1,028 2,189
Deferred income taxes - net 3,143 4,519
Investment tax credit - net (1,172) (1,121)
Allowance for other funds used during construction (715) (1,141)
Change in - Accounts receivable (19,263) (19,180)
Inventories 25,733 37,399
Accounts payable 11,224 (31,879)
Other current assets (3,213) 40,433
Other current liabilities 28,117 39,063
Other 394 (20,747)
---------- ----------
Cash Provided by Operating Activities 166,038 158,006
Investing Activities
Construction expenditures (66,894) (51,395)
Allowance for borrowed funds used during construction (375) (615)
Nuclear fuel (662) (4,297)
Nuclear decommissioning trust (11,820) (7,454)
Other (260) (786)
---------- ----------
Cash Used in Investing Activities (80,011) (64,547)
Financing Activities
Retirement of long-term debt (4,611) (14,876)
Change in short-term debt (33,355) 16,018
Dividends on - Common stock (44,322) (80,726)
Preferred stock (301) (301)
---------- ----------
Cash Used in Financing Activities (82,589) (79,885)
---------- ----------
Change in Cash and Cash Equivalents $ 3,438 $ 13,574
========== ==========
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $ 27,807 $ 21,252
Income taxes 10,687 17,927
1. The accompanying notes as they relate tounaudited consolidated financial statements for
Wisconsin Energy Corporation and the unaudited financial statements for
Wisconsin Electric Power Company should be read in conjunction with the
companies' combined 1997 Annual Report on Form 10-K. In the opinion of
management, all adjustments, normal and recurring in nature, necessary to
a fair statement of the results of operations and financial position of
Wisconsin Energy and Wisconsin Electric, have been included in the
accompanying income statements and balance sheets. The results of
operations for the nine months ended September 30, 1998 are not, however,
necessarily indicative of the results which may be expected for the year
1998 because of seasonal and other factors.
2. Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. ("ESELCO")
in a tax-free reorganization accounted for as a pooling of interests. In
connection with the acquisition, Wisconsin Energy issued 2,407,275 shares
of common stock, with fractional interests paid in cash, based upon an
integralexchange ratio of 1.5114 shares of Wisconsin Energy common stock for each
outstanding share of ESELCO common stock. Due to the immaterial nature
of the transaction, Wisconsin Energy has not restated any historical
financial or statistical information. Instead, Wisconsin Energy combined
ESELCO's May 31, 1998 balance sheet with Wisconsin Energy's, including a
$1.2 million credit to retained earnings of which $0.9 million represents
ESELCO's consolidated net income during the first five months of 1998.
For additional information, see Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations in Part I of
this report.
3. In June 1998, Wisconsin Electric issued $150 million of 6-1/2% Debentures
due 2028. Proceeds from the issue were added to Wisconsin Electric's
general funds to reduce short-term borrowings and for other general
corporate purposes. In April 1998, Wisconsin Michigan Investment
Corporation, a non-utility subsidiary of Wisconsin Energy, issued
$25 million of 6.48% medium-term notes due 2008. Proceeds from the issue
were added to Wisconsin Michigan Investment Corporation's general funds
and used to finance non-utility projects. During the first nine months
of 1998, WISPARK Corporation, another non-utility subsidiary of Wisconsin
Energy, secured $15 million of bank financing in the form of adjustable
rate mortgage notes due 2000-2008 to finance the construction or purchase
of various facilities.
4. Wisconsin Electric completed a scheduled refueling of Point Beach Nuclear
Plant ("Point Beach") Unit 1 and returned the generating unit to service
in late June 1998. Unit 2 is scheduled to begin a refueling and
maintenance outage in early December 1998. During the third quarter of
1998, Wisconsin Electric resumed loading VSC-24 casks with spent fuel for
temporary dry storage at Point Beach. For additional information
regarding Point Beach, see Item 5. Other Information - "Nuclear Matters"
in Part II of this report.
5. During the second quarter of 1998, WISVEST Corporation, a non-utility
subsidiary of Wisconsin Energy, purchased the Kimberly Cogeneration
Equipment from Wisconsin Electric and contributed the equipment to a
joint independent power project, the Androscoggin Cogeneration Center.
For additional information, see Item 5. Other Information - "Kimberly
Cogeneration Equipment" in Part II of Wisconsin Energy's and Wisconsin
Electric's combined Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
6. Effective January 1, 1998, Wisconsin Energy and Wisconsin Electric
adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components.
Wisconsin Energy and Wisconsin Electric currently have no items of other
comprehensive income.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is
effective January 1, 2000 for Wisconsin Energy and for Wisconsin
Electric. FAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or in other
comprehensive income depending upon how the derivative is designated.
Based upon the current limited use of derivative instruments at Wisconsin
Energy and at Wisconsin Electric, the adoption of FAS 133 would not have
a significant effect on their results of operations or financial
position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation is a holding company whose principal subsidiary
is Wisconsin Electric Power Company, an electric, gas and steam utility.
Unless qualified by their context, the terms "Wisconsin Energy" or the
"Company" refer to the holding company and all of its subsidiaries when used
in this document. As of September 30, 1998, approximately 90% of Wisconsin
Energy's consolidated total assets were attributable to Wisconsin Electric.
The following discussion and analysis of financial condition and results of
operations includes both Wisconsin Energy and Wisconsin Electric unless
otherwise stated.
Acquisition of ESELCO, Inc.: Effective May 31, 1998, Wisconsin Energy
acquired ESELCO in a tax-free reorganization accounted for as a pooling of
interests. In connection with the acquisition, Wisconsin Energy issued
2,407,275 shares of common stock, with fractional interests paid in cash,
based upon an exchange ratio of 1.5114 shares of Wisconsin Energy common stock
for each outstanding share of ESELCO common stock.
Due to the immaterial nature of the transaction, Wisconsin Energy has not
restated any historical financial or statistical information. Instead,
Wisconsin Energy combined ESELCO's May 31, 1998 balance sheet with Wisconsin
Energy's, including a $1.2 million credit to retained earnings of which
$0.9 million represents ESELCO's consolidated net income during the first five
months of 1998.
ESELCO was the parent company of Edison Sault Electric Company ("Edison
Sault"), an electric utility which serves approximately 21,000 residential,
commercial and industrial customers in Michigan's eastern Upper Peninsula.
Where appropriate, discussions as well as financial or statistical information
of Wisconsin Energy include Edison Sault's operations since June 1, 1998.
Wisconsin Energy is operating Wisconsin Electric and Edison Sault as separate
utility subsidiaries within their existing historical service territories.
Wisconsin Electric and Edison Sault continue to be separately regulated by
their respective states.
For additional information concerning ESELCO and Edison Sault, see ESELCO's
Annual Report on Form 10-K for the year ended December 31, 1997 as well as
ESELCO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
Cautionary Factors: A number of forward-looking statements are included in
this document. When used, the terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "possible", "potential", "project" and similar
expressions are intended to identify forward-looking statements. Forward-
looking statements are subject to certain risks, uncertainties and assumptions
which could cause actual results to differ materially from those that are
described, including the factors that are described in Item 5. Other
Information - "Cautionary Factors" in Part II of this report.
RESULTS OF OPERATIONS
1998 THIRD QUARTER
Earnings
During the third quarter of 1998, Wisconsin Energy's consolidated net income
and earnings per share of common stock were $58 million and $0.50,
respectively, compared to $24 million and $0.21, respectively, during the
third quarter of 1997. Between the comparative periods, Wisconsin Electric's
earnings increased to $58 million during 1998 compared to $22 million during
1997. As described below, 1998 earnings increased primarily because increased
revenues from Wisconsin retail rate increases at Wisconsin Electric during
1998 and from an increase in total 1998 electric kilowatt-hour sales more than
offset the effects of increased operating expenses during the third quarter of
1998. Also contributing to increased comparative earnings were the relatively
low earnings during the third quarter of 1997 reflecting replacement power
costs beyond those included in electric rates during a dual unit outage at
Point Beach.
Electric Revenues, Gross Margins and Sales
Wisconsin Energy: Primarily due to a Wisconsin retail electric rate increase
during 1998 at Wisconsin Electric and to an increase in total 1998 electric
kilowatt-hour sales, total electric operating revenues increased by
$105 million or 29.2% during the third quarter of 1998 compared to the third
quarter of 1997. Between the comparative periods, the gross margin on
electric operating revenues (electric operating revenues less fuel and
purchased power expenses) increased by $95 million or 39.8%. The following
table summarizes Wisconsin Energy's total electric operating revenues, gross
margin and electric kilowatt-hour sales during the third quarters of 1998 and
1997.
==============================================================================
Three Months Ended September 30
-------------------------------------
Electric Gross Margin ($000) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 464,548 $ 359,522 29.2%
Fuel & Purchased Power 129,260 119,668 8.0%
---------- ----------
Gross Margin $ 335,288 $ 239,854 39.8%
========== ==========
Total Electric Sales (Megawatt-hours) 8,515,696 7,046,623 20.8%
==============================================================================
The discussion that follows reflects Wisconsin Electric's contribution to
Wisconsin Energy's third quarter electric revenues, gross margin and sales.
Wisconsin Electric: Wisconsin Electric's total electric operating revenues
increased by $95 million or 26.5% during the third quarter of 1998 compared to
the third quarter of 1997 and the gross margin on electric operating revenues
increased by $91 million or 37.9%. Wisconsin Electric attributes these
increases to a Wisconsin retail electric rate increase, effective May 1, 1998,
of $160.2 million or 12.7% on an annualized basis and to an increase in total
electric kilowatt-hour sales during the third quarter of 1998.
==============================================================================
Three Months Ended September 30
-------------------------------------
Electric Gross Margin ($000) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 454,821 $ 359,522 26.5%
Fuel & Purchased Power 124,067 119,668 3.7%
---------- ----------
Gross Margin $ 330,754 $ 239,854 37.9%
========== ==========
==============================================================================
Due to the increased 1998 electric kilowatt-hour sales, fuel and purchased
power expenses increased by $4 million or 3.7% during the three months ended
September 30, 1998 compared to the same period in 1997. Availability of lower
cost per kilowatt-hour generating capacity at Point Beach during the third
quarter of 1998, however, allowed Wisconsin Electric to generate 27.1% more
electricity during 1998 while increasing fuel costs by only 0.2%. While
megawatt-hour power purchases decreased 27.4% between the comparative periods,
purchased power costs increased 12.7%. During 1998, Wisconsin Electric
arranged for the purchase of more reliable firm supplies of energy, resulting
in higher fixed contract and power transportation costs compared to 1997. In
addition, the per unit cost of wholesale energy has fluctuated more during
1998, increasing the cost of certain spot market purchases.
==============================================================================
Three Months Ended September 30
-------------------------------------
Electric Sales (Megawatt-hours) 1998 1997 % Change
- ------------------------------- ---------- ---------- --------
Residential 1,976,613 1,702,707 16.1%
Small Commercial/Industrial 2,115,095 1,942,548 8.9%
Large Commercial/Industrial 3,043,758 2,820,472 7.9%
Other-Retail/Municipal 328,239 326,254 0.6%
Resale-Utilities 852,595 254,642 234.8%
---------- ----------
Total Electric Sales 8,316,300 7,046,623 18.0%
========== ==========
==============================================================================
Compared to the third quarter of 1997, increased use per customer by
residential, small commercial/industrial and large commercial/industrial
customers, combined with growth during the third quarter of 1998 in the number
of residential and small commercial/industrial customers, contributed to an
increase in total electric sales of 18.0%. Warmer weather during the third
quarter of 1998 significantly increased 1998 sales, especially influencing the
16.1% and 8.9% increases in sales to residential and to small commercial/
industrial customers, respectively. As measured by cooling degree days, the
third quarter of 1998 was 115.0% warmer than the same period during 1997 and
19.1% warmer than normal. Primarily due to a temporary shutdown of the Tilden
mine during July and August 1997, electric energy sales to the Empire and
Tilden ore mines, Wisconsin Electric's two largest electric retail customers,
increased 28.1% during the third quarter of 1998 compared to the third quarter
of 1997. Excluding the Empire and Tilden ore mines, total electric sales
increased 17.3% and sales to the remaining large commercial/industrial
customers increased 3.6%. Sales for resale to other utilities, the resale-
utilities customer class, increased 234.8% in 1998 compared to 1997 primarily
due to higher opportunity sales.
Gas Revenues, Gross Margins and Sales
Compared to the third quarter of 1997, total gas operating revenues were flat
during the third quarter of 1998. However, the gross margin on gas operating
revenues (gas operating revenues less cost of gas sold) increased by
$2 million or 16.5%.
==============================================================================
Three Months Ended September 30
-------------------------------------
Gas Gross Margin ($000) 1998 1997 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 38,256 $ 37,987 0.7%
Cost of Gas Sold 21,955 23,989 (8.5%)
---------- ----------
Gross Margin $ 16,301 $ 13,998 16.5%
========== ==========
==============================================================================
Between the comparative periods, the positive effects on gas operating
revenues of a retail gas rate increase, effective May 1, 1998, of
$18.5 million or 5.4% on an annualized basis were offset by a decrease in the
cost of gas sold. The cost of gas sold decreased by $2 million or 8.5% during
the third quarter of 1998 due to a decrease in the cost per unit of purchased
gas. However, because changes in the cost of natural gas purchased at market
prices are included in customer rates through the purchased gas adjustment
mechanism, gas operating revenues change at the same rate as the cost of gas
sold and gross margin is unaffected. During 1998, the gross margin on gas
operating revenues increased due to the May 1998 rate increase, partially
offset by lower residential gas sales which contribute higher margins to
earnings than therm deliveries to other customer classes.
==============================================================================
Three Months Ended September 30
-------------------------------------
Therms Delivered - Thousands 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Residential 19,107 21,013 (9.1%)
Commercial/Industrial 13,536 12,659 6.9%
Interruptible 3,818 1,914 99.5%
Interdepartmental 21 223 (90.6%)
---------- ----------
Total Gas Sales 36,482 35,809 1.9%
Transported Customer Owned Gas 78,399 63,734 23.0%
Transported - Interdepartmental 37,018 24,284 52.4%
---------- ----------
Total Gas Delivered 151,899 123,827 22.7%
========== ==========
==============================================================================
Between the comparative periods, therm deliveries to residential customers
decreased 9.1% due to decreased therm use per residential customer. During
the third quarter of 1998, therm deliveries to the Whitewater Cogeneration
Facility, owned by LSP-Whitewater Limited Partnership, an unaffiliated
independent power producer, primarily contributed to a 23.0% increase in
transported customer owned gas deliveries. The Whitewater Cogeneration
Facility, a gas-fired electric cogeneration plant, went into commercial
operation in September 1997. Wisconsin Electric purchases the majority of the
electricity generated by the Whitewater Cogeneration Facility under a long-
term power purchase contract. Interdepartmental therm sales and
transportation deliveries to facilities owned by Wisconsin Electric, the
interdepartmental customer classes, increased 51.1% between the comparative
periods. Excluding deliveries to Wisconsin Electric facilities, total therm
deliveries increased 15.7%.
Operating Expenses
During the third quarter of 1998, Wisconsin Energy's other operation and
maintenance expenses increased by $38 million or 31.9% compared to the same
period during 1997, including a $22 million increase in Wisconsin Electric's
nuclear non-fuel expenses and a $12 million increase in Wisconsin Electric's
administrative and general expenses. Nuclear non-fuel expenses increased
during 1998 primarily due to efforts by Wisconsin Electric to continue to
improve overall performance at Point Beach. Also influencing the 1998
increase in nuclear non-fuel expenses, Wisconsin Electric deferred $20 million
of nuclear non-fuel operation and maintenance costs during 1997, $18 million
of which are currently being amortized to expense on a five year straight line
basis. Administrative and general expenses increased primarily due to efforts
to resolve Year 2000 technology issues. For additional information concerning
the Year 2000, see "Factors Affecting Results of Operations - Year 2000
Technology Issues" below.
Total operating income taxes at both Wisconsin Energy and Wisconsin Electric
increased by $21 million during the third quarter of 1998 as a result of
higher taxable income.
1998 YEAR-TO-DATE
Earnings
During the first nine months of 1998, Wisconsin Energy's consolidated net
income and earnings per share of common stock were $136 million and $1.19,
respectively, compared to $58 million and $0.52, respectively, during the
first nine months of 1997. Between the comparative periods, Wisconsin
Electric's earnings increased to $139 million during 1998 compared to
$59 million during 1997. As described below, 1998 earnings increased
primarily because increased revenues from interim and final 1998 Wisconsin
retail rate increases at Wisconsin Electric and from an increase in total 1998
electric kilowatt-hour sales more than offset the effects of a reduction in
natural gas therm deliveries as well as the effects of increased operating
expenses during the first nine months of 1998. Also contributing to increased
comparative earnings during 1998, earnings during the first nine months of
1997 were negatively impacted by (1) a one-time charge of $31 million at
Wisconsin Energy in the second quarter of 1997 (of which $22 million was
attributable to Wisconsin Electric) for the write-off of deferred costs
related to Wisconsin Energy's terminated merger agreement with Northern States
Power Company, and (2) increased costs beyond those included in electric rates
associated with buying replacement power for both generating units at Point
Beach, which were out of service during most of the first nine months of 1997.
Electric Revenues, Gross Margins and Sales
Wisconsin Energy: Primarily due to the Wisconsin retail electric rate
increases during 1998 at Wisconsin Electric and to an increase in total 1998
electric kilowatt-hour sales, total electric operating revenues increased by
$211 million or 20.2% during the first nine months of 1998 compared to the
first nine months of 1997. Between the comparative periods, the gross margin
on electric operating revenues increased by $188 million or 26.4%. The
following table summarizes Wisconsin Energy's total electric operating
revenues, gross margin and electric kilowatt-hour sales during the first nine
months of 1998 and 1997.
==============================================================================
Nine Months Ended September 30
-------------------------------------
Electric Gross Margin ($000) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,256,925 $1,045,843 20.2%
Fuel & Purchased Power 357,208 333,930 7.0%
---------- ----------
Gross Margin $ 899,717 $ 711,913 26.4%
========== ==========
Total Electric Sales(Megawatt-hours) 22,686,148 20,722,437 9.5%
==============================================================================
The discussion that follows reflects Wisconsin Electric's contribution to
Wisconsin Energy's year-to-date electric revenues, gross margin and sales.
Wisconsin Electric: Wisconsin Electric's total electric operating revenues
increased by $198 million or 18.9% during the first nine months of 1998
compared to the first nine months of 1997 and the gross margin on electric
operating revenues increased by $182 million or 25.5%. Wisconsin Electric
attributes these increases to an interim Wisconsin retail electric rate
increase, effective from January 1, 1998 through April 30, 1998, of
$134.9 million on an annualized basis, to a final Wisconsin retail electric
rate increase, effective May 1, 1998, of $160.2 million or 12.7% on an
annualized basis, and to increased total electric kilowatt-hour sales during
1998.
==============================================================================
Nine Months Ended September 30
-------------------------------------
Electric Gross Margin ($000) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,244,001 $1,045,843 18.9%
Fuel & Purchased Power 350,559 333,930 5.0%
---------- ----------
Gross Margin $ 893,442 $ 711,913 25.5%
========== ==========
==============================================================================
Due to the increased 1998 electric kilowatt-hour sales, fuel and purchased
power expenses increased by $17 million or 5.0% during the nine months ended
September 30, 1998 compared to the same period in 1997. Availability of lower
cost per kilowatt-hour generating capacity at Point Beach during the first
nine months of 1998, however, allowed Wisconsin Electric to generate 13.4%
more electricity during 1998 while increasing fuel costs by only 0.4%. While
megawatt-hour power purchases decreased 16.6% between the comparative periods,
purchased power costs increased 16.9%. During 1998, Wisconsin Electric
arranged for the purchase of more reliable firm supplies of energy, resulting
in higher fixed contract and power transportation costs compared to 1997. In
addition, the per unit cost of wholesale energy has fluctuated more during
1998, increasing the cost of certain spot market purchases.
==============================================================================
Nine Months Ended September 30
-------------------------------------
Electric Sales (Megawatt-hours) 1998 1997 % Change
- ------------------------------- ---------- ---------- --------
Residential 5,451,892 5,116,164 6.6%
Small Commercial/Industrial 5,859,232 5,578,497 5.0%
Large Commercial/Industrial 8,559,153 8,239,765 3.9%
Other-Retail/Municipal 979,351 1,051,350 (6.9%)
Resale-Utilities 1,571,729 736,661 113.4%
---------- ----------
Total Electric Sales 22,421,357 20,722,437 8.2%
========== ==========
==============================================================================
Compared to the first nine months of 1997, increased use per customer by
residential, small commercial/industrial and large commercial/industrial
customers, combined with growth during the first nine months of 1998 in the
number of residential and small commercial/industrial customers, contributed
to an increase in total electric sales of 8.2%. Warmer weather during the
second and the third quarters of 1998 significantly increased 1998 sales,
especially influencing the 6.6% and 5.0% increases in sales to residential and
to small commercial/industrial customers, respectively. Electric energy sales
to the Empire and Tilden ore mines increased 8.8% between the comparative
periods primarily due to a temporary shutdown of the Tilden mine during July
and August 1997. Excluding the Empire and Tilden ore mines, total electric
sales increased 8.1% and sales to the remaining large commercial/industrial
customers increased 2.6%. During the nine months ended September 30, 1998,
sales in the other-retail/municipal customer class decreased 6.9% primarily
due to reduced contractual requirements nominations by Wisconsin Public Power
Inc. effective May 1997. Sales for resale to other utilities, the resale-
utilities customer class, increased 113.4% in 1998 compared to 1997 primarily
due to higher opportunity sales.
Gas Revenues, Gross Margins and Sales
Despite an interim retail gas rate increase, effective from January 1, 1998
through April 30, 1998, of $18.5 million on an annualized basis and a final
retail gas rate increase, effective May 1, 1998, of $18.5 million or 5.4% on
an annualized basis, total gas operating revenues decreased by $42 million or
16.7% and the gross margin on gas operating revenues decreased by $1 million
or 1.1% during the first nine months of 1998 compared to the first nine months
of 1997.
==============================================================================
Nine Months Ended September 30
-------------------------------------
Gas Gross Margin ($000) 1998 1997 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 210,081 $ 252,064 (16.7%)
Cost of Gas Sold 125,361 166,424 (24.7%)
---------- ----------
Gross Margin $ 84,720 $ 85,640 (1.1%)
========== ==========
==============================================================================
Between the comparative periods, the cost of gas sold decreased by $41 million
or 24.7% due to decreased gas sales and to a lower cost per unit of purchased
gas. Changes in the cost of natural gas purchased at market prices are
included in customer rates through the purchased gas adjustment mechanism,
reducing 1998 operating revenues but not gross margin. Total gas operating
revenues and gross margin both declined in the first nine months of 1998 due
to a decrease in therm deliveries, especially to residential and
commercial/industrial customers who contribute higher margins to earnings than
other customers.
==============================================================================
Nine Months Ended September 30
-------------------------------------
Therms Delivered - Thousands 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Residential 191,267 232,231 (17.6%)
Commercial/Industrial 125,985 146,599 (14.1%)
Interruptible 16,327 16,755 (2.6%)
Interdepartmental 335 9,535 (96.5%)
---------- ----------
Total Gas Sales 333,914 405,120 (17.6%)
Transported Customer Owned Gas 260,586 223,035 16.8%
Transported - Interdepartmental 71,858 69,670 (3.1%)
---------- ----------
Total Gas Delivered 666,358 697,825 (4.5%)
========== ==========
==============================================================================
Compared to the same period in 1997, total natural gas therm deliveries
decreased 4.5% during the first nine months of 1998 primarily due to
significantly lower therm use per residential and commercial/industrial
customer. While the number of residential and commercial/industrial customers
increased between the comparative periods, residential and
commercial/industrial therm deliveries decreased 17.6% and 14.1%,
respectively, mostly due to warmer weather during the heating months of 1998.
During the first nine months of 1998, therm deliveries to the Whitewater
Cogeneration Facility contributed to a 16.8% increase in transported customer
owned gas. During the same period in 1998, natural gas therm deliveries to
the interdepartmental customer classes decreased 8.9% primarily due to
increased availability of Wisconsin Electric's Point Beach, allowing Wisconsin
Electric to reduce generation at its Concord and Paris Generating Stations,
natural gas-fired peaking plants. Therm deliveries to these Wisconsin
Electric facilities are at rates approved by the Public Service Commission of
Wisconsin ("PSCW"). Excluding deliveries to facilities owned by Wisconsin
Electric, total therm deliveries during the nine months ended September 30,
1998 decreased 4.0% compared to the same period in 1997.
Operating Expenses
During the first nine months of 1998, Wisconsin Energy's other operation and
maintenance expenses increased by $81 million or 20.3% compared to the same
period during 1997, including a $56 million increase in Wisconsin Electric's
nuclear non-fuel expenses, a $7 million increase in Wisconsin Electric's non-
nuclear, non-fuel power generation expenses and a $14 million increase in
Wisconsin Electric's administrative and general expenses. As noted above,
nuclear non-fuel expenses increased during 1998 primarily due to efforts by
Wisconsin Electric to continue to improve overall performance at Point Beach.
Also influencing the 1998 increase in nuclear non-fuel expenses, Wisconsin
Electric deferred $20 million of nuclear non-fuel operation and maintenance
costs during 1997, $18 million of which are currently being amortized to
expense on a five year straight line basis. Non-nuclear, non-fuel power
generation expenses increased primarily due to a scheduled maintenance outage
at Wisconsin Electric's Oak Creek Power Plant during the second quarter of
1998 and to other reliability improvement efforts. Administrative and general
expenses increased primarily due to efforts to resolve Year 2000 technology
issues. For additional information concerning the Year 2000, see "Factors
Affecting Results of Operations - Year 2000 Technology Issues" below.
Wisconsin Energy's depreciation expense increased by $4 million or 2.3% during
the first nine months of 1998 compared to the first nine months of 1997
primarily due to increased nuclear decommissioning expenses at Wisconsin
Electric. Total operating income taxes at both Wisconsin Energy and at
Wisconsin Electric increased by $34 million during the first nine months of
1998 as a result of higher taxable income.
Other Items
During the second quarter of 1997, Wisconsin Energy recorded a charge of
$31 million ($19 million net of tax) to write off deferred merger costs
related to the terminated merger agreement with Northern States Power Company,
of which $22 million was attributable to Wisconsin Electric. The write-off of
these merger expenses appears in other income and deductions on Wisconsin
Energy's and Wisconsin Electric's income statements.
FACTORS AFFECTING RESULTS OF OPERATIONS
YEAR 2000 TECHNOLOGY ISSUES
The Company is working to resolve the potential impact of the Year 2000 on its
ability to operate critical systems and to accurately process information that
may be date sensitive. Wisconsin Energy, including Wisconsin Electric, Edison
Sault and the non-utility subsidiaries, utilizes business application software
as well as infrastructure and process control systems across its operations.
Related computer programs and hardware may use two-character digits such as
'00' to define the applicable year rather than four-character digits such as
'2000'. When these systems or applications encounter the Year 2000, they
could potentially read the year as '1900' and either process data incorrectly
or shut down altogether. If not addressed in a timely manner, this Year 2000
problem could have a materially adverse impact on the operations or financial
condition of the Company.
Year 2000 Project: During 1997, the Company created Year 2000 program teams,
overseen by executives of the Company, to address its Year 2000 issues. The
teams, comprised of representatives with subject matter expertise, are
evaluating:
* Business applications that provide function and process to the business
units;
* Infrastructure including information technology voice, video, data systems
and related structure;
* Process control systems including the impact of embedded systems across all
operations;
* Supplier compliance dealing with critical direct suppliers of services and
materials; and
* Significant customers and their ability to avoid major Year 2000-related
business interruptions.
The Year 2000 teams are following a structured process of inventorying and
assessing potential Year 2000 problems, of remediating, testing, and
certifying Year 2000 readiness and of developing and implementing Year 2000
risk management contingency plans. Although additional systems or processes
may be identified as the program moves forward, the Company has substantially
completed an initial inventory of potential Year 2000 problems across all
operating areas and expects to have substantially completed its assessment
phase in the fourth quarter of 1998. The remediation and testing phases are
currently in progress and extensive contact with critical third party
suppliers is ongoing. Based upon an initial assessment of critical supplier
Year 2000 readiness that was completed in the third quarter of 1998, the
Company is currently initiating additional supplier risk mitigation actions.
Wisconsin Energy expects to evaluate its significant customers during 1999.
The Company has structured its Year 2000 program to identify, prioritize and
address critical business functions within the Company including:
* Providing Energy Supply, which includes the safe operation and maintenance
of all nuclear, fossil and hydro generating facilities;
* Providing a Reliable Energy Pathway, which includes the safe operation and
maintenance of the Company's electric transmission and electric, gas and
steam distribution systems;
* Providing Customer Service, which includes the ability to respond to
customer emergencies both from a customer contact point of view and from a
restoration perspective as well as the ability to handle customer calls, to
bill customers and to process payments;
* Supporting the Business, which includes the critical human resource, supply
chain, finance and information resource activities that support operation
of the business; and
* Critical Facilities operations.
With the exception of those projects that are dependent upon other activities
such as power plant unit outages scheduled to occur later in the third or
fourth quarter of 1999, the Company currently expects to certify its core,
critical business functions as "Year 2000 Ready" in July 1999. However,
additional refinements and testing may continue through the end of 1999.
Based upon the Nuclear Energy Institute's standard definition, which has been
accepted by the Nuclear Regulatory Commission and has been adopted by
Wisconsin Energy, "Year 2000 Ready" systems or applications will be suitable
for continued use into the Year 2000 even though the system or application may
not be fully "Year 2000 Compliant".
Potential Risks and Contingency Planning: The Company is continuing an
ongoing process of assessing potential Year 2000 risks and uncertainties.
However, Wisconsin Energy believes that it is currently premature to define
most reasonably likely worst case scenarios related to the Year 2000 issue.
The Company's structured Year 2000 program is designed to address its critical
business functions, and the Company currently expects to successfully mitigate
its controllable internal Year 2000 problems. For its core operations,
Wisconsin Energy also relies upon third parties such as (1) other power
providers to and operators of the integrated electric transmission and
distribution grid, (2) fuel suppliers, (3) producers of natural gas and
suppliers of interstate natural gas transportation services, and (4) providers
of external infrastructure such as telecommunications, municipal sewer and
water as well as emergency services. Failure of these critical third parties
to identify and remediate their Year 2000 problems could have a material
impact on the Company's operations and financial condition. While the
Company's Year 2000 program is structured to identify, assess and mitigate
these third party risks where possible, the potential impact and related costs
of third party failures have not yet been identified.
As part of its normal business practice, the Company maintains and
periodically initiates various contingency plans to maintain and restore its
energy services during emergency circumstances, some of which could arise from
Year 2000 related problems. During 1999, Wisconsin Energy intends to leverage
this experience in the development and implementation of Year 2000-related
contingency and business continuity plans. As part of this effort, the
Company is coordinating its Year 2000 readiness program with various trade
associations and industry groups and is working with the Mid America
Interconnection Network, the North American Electric Reliability Council and
the Wisconsin Reliability Assessment Organization to develop and implement
regional electric reliability contingency plans.
Financial Implications: Wisconsin Energy currently estimates that it will
incur approximately $42 million of expenses, including direct costs for
internal employees, during 1998 through 2000 for its Year 2000 program of
which $9 million has been incurred as of September 30, 1998. In addition, the
Company expects to capitalize costs of approximately $19 million to replace
certain existing infrastructure and process control systems of which
$4 million has been capitalized as of September 30, 1998. In its May 1998
rate order from the PSCW, Wisconsin Electric received approval for recovery in
rates of approximately $13 million per year of Year 2000-related expenses in
the Wisconsin jurisdiction during the 1998-1999 biennial period. In addition,
the 1998 PSCW rate order included the associated capital expenditures related
to Wisconsin Electric's Year 2000 program.
The discussion above includes many forward looking statements concerning
potential schedules, plans, costs, risks and uncertainties facing Wisconsin
Energy as a result of the Year 2000 problem. Based upon its activities to
date, the Company expects to successfully implement the changes necessary to
become "Year 2000 Ready" by the end of 1999. However, the Year 2000 problem
has many elements and potential consequences, some of which may not be
reasonably foreseeable, and there can be no assurances that every Year 2000
problem will be identified and addressed or that unforeseen consequences will
not arise. Unanticipated factors while implementing the changes necessary to
mitigate Year 2000 problems, including the ongoing availability and costs of
trained personnel, the ability to locate and correct all relevant codes in
computer and embedded systems, or the failure of critical third parties to
communicate about and to mitigate their Year 2000 problems could result in
unanticipated interruptions in certain core business activities or operations
of Wisconsin Energy.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by Wisconsin Energy's consolidated operating activities totaled
$401 million during the nine months ended September 30, 1998 compared to
$329 million provided during the same period in 1997. Between the comparative
periods, cash provided by Wisconsin Electric's operating activities totaled
$433 million during 1998 compared to $319 million provided during 1997. Cash
provided by Wisconsin Electric's operating activities reflect the sale of the
Kimberly Cogeneration Equipment in April 1998 to WISVEST Corporation. The
sale of this equipment was eliminated in Wisconsin Energy's consolidated
statement of cash flows. For additional information concerning the Kimberly
Cogeneration Equipment, see "Note M - Commitments and Contingencies" in the
Notes to Financial Statements in Wisconsin Energy's and Wisconsin Electric's
combined Annual Report on Form 10-K for the year ended December 31, 1997 and
in Item 5. Other Information in Part II of Wisconsin Energy's and Wisconsin
Electric's combined Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
Wisconsin Energy's consolidated net investing activities totaled $311 million
for the nine months ended September 30, 1998 compared to $256 million during
the same period in 1997. Investments during the first nine months of 1998
included $280 million for the construction of new or improved facilities of
which $230 million was for investments in utility plant at Wisconsin Electric.
During the first nine months of 1998, Wisconsin Electric recorded $24 million
of payments to and earnings of the Nuclear Decommissioning Trust Fund for the
eventual decommissioning of Point Beach and $5 million for the acquisition of
nuclear fuel.
In June 1998, Wisconsin Electric issued $150 million of 6-1/2% debentures due
2028. Proceeds from the issue were used to reduce short-term borrowings and
are being used for other general corporate purposes. In April 1998, Wisconsin
Michigan Investment Corporation issued $25 million of 6.48% medium-term notes
due in 2008. Proceeds from the issue were added to Wisconsin Michigan
Investment Corporation's general funds and used to finance non-utility
projects. During the first nine months of 1998, WISPARK Corporation secured
$15 million of bank financing in the form of adjustable rate mortgage notes
due 2000-2008 to finance the construction or purchase of various facilities.
During 1998, Wisconsin Electric decreased its short-term debt by $128 million
while Wisconsin Energy's consolidated short-term debt decreased by
$84 million. Financing activities during the first nine months of 1998
included a $7 million payment of principal on the maturity of 5.80% Wisconsin
Michigan Investment Corporation medium-term notes due 1998 and a $60 million
payment of principal on the maturity of 5-1/8% Wisconsin Electric First
Mortgage Bonds due 1998.
Capital requirements for the remainder of 1998 are expected to be principally
for construction expenditures and for payments to the Nuclear Decommissioning
Trust Fund for the eventual decommissioning of Point Beach. These cash
requirements are expected to be met primarily through internal sources of
funds from operations and short-term borrowings.
In August 1998, Wisconsin Energy entered into a $100 million 364-day revolving
credit agreement and a $150 million five-year revolving credit agreement to
provide backup credit support of a commercial paper program. In August 1998,
Wisconsin Energy began issuing commercial paper under this program. Proceeds
from the sale of the Wisconsin Energy commercial paper are being added to
working capital and applied to reduce certain existing non-utility borrowings
as well as for non-utility investments.
On November 1, 1998, Wisconsin Energy resumed issuing new shares of common
stock through the Company's stock plans. Since July 1, 1997, Wisconsin Energy
had been purchasing shares for its stock plans on the open market.
In October 1998, WISVEST Corporation entered into an agreement to purchase two
fossil-fueled power plants for $272 million from The United Illuminating
Company, an unaffiliated investor owned utility in New Haven, Connecticut.
The sale is expected to close in the second quarter of 1999. WISVEST
Corporation anticipates financing the acquisition through long-term project or
other financing arrangements. For additional information concerning the
purchase of these two power plants, see Item 5. Other Information - "Non-
utility Activities" in Part II of this report.
Wisconsin Energy is reviewing additional non-utility growth opportunities on
an ongoing basis and may make further investments and/or acquisitions from
time to time. The specific form, amount and timing of securities which may be
issued to support these opportunities have not yet been determined and will
depend, to a large extent, on market conditions and other factors. For
additional information, see Item 5. Other Information - "Non-utility
Activities" in Part II of this report.
For certain other information which may impact Wisconsin Energy's or Wisconsin
Electric's future financial statements.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements for
Wisconsin Energy Corporation and unaudited financial statements for
Wisconsin Electric Power Company should be read in conjunction with WEC's
and WE's combined 1997 Annual Report on Form 10-K. In the opinion of
management, all adjustments, normal and recurring in nature, necessary to
a fair statement of the results of operations and financial position of
WEC and WE have been included in the accompanying income statements and
balance sheets. The results of operations for the three months ended
March 31, 1998 are not, however, necessarily indicative of the results
which may be expected for the year 1998 because of seasonal and other
factors.
2. On May 13, 1997, WEC and ESELCO, Inc., parent company of Edison Sault
Electric Company ("Edison Sault"), entered into an Agreement and Plan of
Reorganization setting forth the terms of the proposed acquisition of
ESELCO, Inc. by WEC. On October 7, 1997, the shareholders of ESELCO,
Inc. voted to approve the proposed transaction. Consummation of the
proposed transaction, currently expected by the end of June 1998, is
contingent upon several conditions including appropriate regulatory
approvals and fulfillment of other customary conditions. The Federal
Energy Regulatory Commission ("FERC") approved the proposed acquisition
in April 1998. WEC plans to operate Edison Sault, an electric utility
which serves approximately 21,000 residential, commercial and industrial
customers in Michigan's eastern Upper Peninsula, as a separate utility
subsidiary. ESELCO, Inc. is traded under the symbol EDSE on the NASDAQ
National Market.
3. In April 1998, Wisconsin Michigan Investment Corporation ("WMIC"), a non-
utility subsidiary of WEC, issued $25.4 million of 6.48% medium-term
notes due 2008. Proceeds from the issue were added to WMIC's general
funds and will be used to finance non-utility projects.
4. Effective January 1, 1998, WEC and WE adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130").
FAS 130 establishes standards for reporting and display of comprehensive
income and its components. WEC and WE currently have no items of other
comprehensive income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation is a holding company whose principal subsidiary
is Wisconsin Electric Power Company, an electric, gas and steam utility. As
of March 31, 1998, approximately 93% of WEC's consolidated total assets were
attributable to WE. The following discussion and analysis of financial
condition and results of operations includes both WEC and WE unless otherwise
stated.
Cautionary Factors: A number of forward-looking statements are included in
this document. When used, the terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "project" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are
subject to certain risks, uncertainties and assumptions which could cause
actual results to differ materially from those that are described, including
the factors that are described in Item 5. Other Information - "Cautionary
Factors" in Part II of this report.
RESULTS OF OPERATIONS
1998 FIRST QUARTER
EARNINGS
During the first quarter of 1998, WEC's consolidated net income and earnings
per share of common stock were $49 million and $0.43, respectively, compared
to $45 million and $0.40, respectively, during the first quarter of 1997.
During the first three months of 1998, WE's earnings increased to $50 million
from $43 million during the first three months of 1997. As described below,
1998 earnings rose primarily because increased revenues from interim 1998
Wisconsin retail rate increases more than offset the effects of weather
related reductions in sales to certain electric and gas customers as well as
the effects of increased other operation and maintenance expenses during the
first quarter of 1998.
ELECTRIC REVENUES, GROSS MARGIN AND SALES
Total electric operating revenues increased by $34.5 million or 9.9% during
the first quarter of 1998 compared to the first quarter of 1997. Between the
comparative periods, the gross margin on electric operating revenues (electric
operating revenues less fuel and purchased power expenses) increased by
$29.2 million or 12.0%. WE attributes these increases primarily to an interim
Wisconsin retail electric rate increase, approved by the Public Service
Commission of Wisconsin ("PSCW") in December 1997 and effective January 1,
1998, of $134.9 million on an annualized basis. See Item 1. Legal
Proceedings - "Rate Matters" in Part II of this report for information
concerning a PSCW rate order authorizing a permanent Wisconsin retail electric
rate increase effective May 1, 1998 of $160.2 million or 12.7% on an
annualized basis.
==============================================================================
Three Months Ended March 31
---------------------------
Electric Gross Margin ($000) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $ 383,640 $ 349,100 9.9%
Fuel & Purchased Power 110,492 105,122 5.1%
---------- ----------
Gross Margin $ 273,148 $ 243,978 12.0%
========== ==========
==============================================================================
Primarily due to higher per unit purchased power costs during 1998, fuel and
purchased power expenses increased by $5.4 million or 5.1% during the three
months ended March 31, 1998 compared to the same period in 1997.
==============================================================================
Three Months Ended March 31
---------------------------
Electric Sales (Megawatt-hours) 1998 1997 % Change
- ------------------------------- ---------- ---------- --------
Residential 1,808,720 1,827,036 (1.0%)
Small Commercial/Industrial 1,845,369 1,837,063 0.5%
Large Commercial/Industrial 2,689,491 2,645,604 1.7%
Other-Retail/Municipal 326,722 394,388 (17.2%)
Resale-Utilities 287,132 254,846 12.7%
---------- ----------
Total Electric Sales 6,957,434 6,958,937 0.0%
========== ==========
==============================================================================
Total electric sales during the first quarter of 1998 were unchanged compared
to the first quarter of 1997. During the first three months of 1998, customer
growth in the residential and the small commercial/industrial customer classes
and increased use per customer in the large commercial/industrial customer
class offset a weather related decrease in use per residential and small
commercial/industrial customer. Electric energy sales to the Empire and
Tilden ore mines, WE's two largest electric retail customers, decreased
approximately 1.9% during the first quarter of 1998 compared to the first
quarter of 1997. Excluding the Empire and Tilden ore mines, total electric
sales increased 0.1% and sales to the remaining large commercial/industrial
customers increased 2.6%. During the three months ended March 31, 1998, sales
in the other-retail/municipal customer class decreased 17.2% primarily due to
expiration of a 65 megawatt ("MW") demand contract with Upper Peninsula Power
Company on December 31, 1997 and to reduced contractual requirements
nominations by Wisconsin Public Power Inc. effective May 1997. Sales for
resale to other utilities, the resale-utilities customer class, increased
12.7% in 1998 compared to 1997 primarily due to higher opportunity sales.
GAS REVENUES, GROSS MARGIN AND SALES
Total gas operating revenues decreased by $33.4 million or 21.9% during the
first quarter of 1998 compared to the first quarter of 1997. Between the
comparative periods, the gross margin on gas operating revenues (gas operating
revenues less cost of gas sold) decreased by $2.4 million or 4.9%. The cost
of gas sold decreased by $31.0 million or 30.0% due to decreased gas sales
during 1998 and to a higher per unit cost of purchased gas in the first
quarter of 1997.
==============================================================================
Three Months Ended March 31
---------------------------
Gas Gross Margin ($000) 1998 1997 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 119,411 $ 152,849 (21.9%)
Cost of Gas Sold 72,301 103,294 (30.0%)
---------- ----------
Gross Margin $ 47,110 $ 49,555 (4.9%)
========== ==========
==============================================================================
Despite an interim retail gas rate increase effective January 1, 1998 of
$18.5 million on an annualized basis, total gas operating revenues and gross
margin declined as a result of warmer winter weather during the first quarter
of 1998. Decreased therm deliveries during the first three months of 1998
were primarily to residential and commercial customers who are more sensitive
to weather variations and who contribute higher margins to earnings than other
customer classes. Changes in the cost of natural gas purchased at market
prices are included in customer rates through the purchased gas adjustment
mechanism and do not affect gross margin. See Item 1. Legal Proceedings -
"Rate Matters" in Part II of this report for information concerning a PSCW
rate order authorizing a permanent retail gas rate increase effective May 1,
1998 of $18.5 million or 5.4% on an annualized basis.
==============================================================================
Three Months Ended March 31
---------------------------
Therms Delivered (Thousands) 1998 1997 % Change
- ---------------------------- ---------- ---------- --------
Residential 133,829 160,936 (16.8%)
Commercial/Industrial 83,815 99,336 (15.6%)
Interruptible 7,711 9,487 (18.7%)
Transported Customer Owned Gas 99,196 86,499 14.7%
Other - Interdepartmental 8,492 27,373 (69.0%)
---------- ----------
Total Gas Delivered 333,043 383,631 (13.2%)
========== ==========
==============================================================================
Compared to the same period in 1997, total natural gas therm deliveries
decreased during the first quarter of 1998 primarily due to warmer winter
weather. As measured by heating degree days, the first three months of 1998
were 11.6% warmer than the same period in 1997 and 15.0% warmer than normal.
During the first quarter of 1998, natural gas therm deliveries to the other-
interdepartmental customer class decreased 69.0% primarily due to increased
availability of WE's Point Beach Nuclear Plant ("Point Beach"), allowing WE to
reduce generation at its Concord and Paris Generating Stations, natural gas-
fired peaking generating units. Therm deliveries to these WE facilities are
at rates approved by the PSCW. Excluding the other-interdepartmental customer
class, total therm deliveries during the three months ended March 31, 1998
decreased 8.9%.
OPERATING EXPENSES
During the first quarter of 1998, other operation and maintenance expenses
increased by $17.0 million or 12.7% compared to the same period during 1997,
including a $14.5 million increase in nuclear non-fuel expenses and a
$2.7 million increase in non-fuel steam power generation expenses. Nuclear
non-fuel expenses increased during 1998 primarily due to ongoing efforts by
WE's nuclear operations to strengthen plant performance at Point Beach and to
address concerns identified by WE and certain other concerns previously
identified by the Nuclear Regulatory Commission ("NRC"). Non-fuel steam power
generation expenses increased primarily due to a scheduled maintenance outage
at Oak Creek Power Plant during the first quarter of 1998.
Depreciation expense increased 8.0% or by $4.6 million between the comparative
periods primarily due to increased decommissioning expenses.
OTHER ITEMS
WE's miscellaneous-net other income and deductions increased by $5.6 million
between the comparative periods primarily due to realized gains on investments
in the Nuclear Decommissioning Trust Fund.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by WEC's consolidated operating activities totaled $159 million
during the three months ended March 31, 1998. This compares to $161 million
provided during the same period in 1997.
WEC's consolidated net investing activities totaled approximately $86 million
for the three months ended March 31, 1998 compared to $57 million during the
same period in 1997. Investments during the first quarter of 1998 included
$78 million for the construction of new or improved facilities of which
$67 million was for a number of projects related to utility plant. During the
first three months of 1998, WE made $12 million of payments to the Nuclear
Decommissioning Trust Fund for the eventual decommissioning of Point Beach
Nuclear Plant. Net investing activities for the three months ended March 1998
include $7 million of cash proceeds, included in investing activities-other,
from the sale of buildings and other capital distributions from investments by
WISPARK Corporation, a non-utility subsidiary of WEC.
During the first quarter of 1998, WEC used $72 million for financing
activities compared to $50 million during the first quarter of 1997.
Financing activities during the first three months of 1998 included a
$7 million payment of principal on the maturity of 5.80% Wisconsin Michigan
Investment Corporation unsecured notes. WMIC is a non-utility subsidiary of
WEC.
Capital requirements for the remainder of 1998 are expected to be principally
for construction expenditures, for long term debt maturity and sinking fund
requirements and for payments to the Nuclear Decommissioning Trust Fund for
the eventual decommissioning of Point Beach. These cash requirements are
expected to be met primarily through internal sources of funds from
operations, the issuance of intermediate of long-term debt and short-term
borrowings. WE may issue up to $200 million of additional intermediate or
long-term debt in a public offering during the second or third quarter of
1998. The specific form, amount and timing of debt securities which might be
issued have not yet been determined and would depend upon market conditions
and other factors. In April 1998, WMIC issued $25.4 million of 6.48% medium-
term notes due 2008. Proceeds from the issue were added to WMIC's general
funds and will be used to finance non-utility projects.
For certain other information which may impact WEC and WE's future financial
condition or results of operations, see Item 1. Financial Statements - "Notes
to Financial Statements" in Part I of this report as well as Item 1. Legal
Proceedings and Item 5. Other Information in Part II of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning WEC's and WE's market risk exposures, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations - Market Risks" in Part
II of WEC's and WE's combined Annual Report on Form 10-K for the year ended
December 31, 1997. Griffin Energy Marketing LLC ("Griffin"), a subsidiary of
WISVEST Corporation, began marketing energy related services and limited
trading of electricity in January 1998. Griffin's activities during the first
quarter of 1998 were insignificant. WISVEST Corporation is a non-utility
subsidiary of WEC.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 1. Business -
"Environmental Compliance" and Item 3. Legal Proceedings in Part I of WEC's
and WE's combined Annual Report on Form 10-K for the year ended December 31,
1997.
RATE MATTERS
WISCONSIN RETAIL JURISDICTION
1998 Test Year: On December 23, 1997, the PSCW issued an order authorizing
WE to implement interim Wisconsin retail rate increases effective January 1,
1998 in the amount of $154.2 million on an annualized basis, including
$134.9 million for electric operations, $18.5 million for gas operations and
$0.8 million for the City of Milwaukee steam operations. The PSCW authorized
permanent annualized Wisconsin retail base rate increases effective May 1,
1998 of $160.2 million or 12.7% for electric operations, $18.5 million or 5.4%
for gas operations, and $1.2 million or 9.3% for City of Milwaukee steam
operations. The increases were based upon an authorized regulatory return on
common equity of 12.2%.
Fuel Cost Adjustment Proceeding: On December 23, 1997, the PSCW issued a
combined final order on two 1997 WE filings under Wisconsin's fuel cost
adjustment procedure, authorizing WE to recover up to $27 million of
additional 1997 fuel and purchased power costs from Wisconsin retail electric
customers during the 1997-1998 biennial period. The temporary fuel surcharge
ended as of May 1, 1998.
OTHER MATTERS
Thor Technology Litigation: In 1995, PSI Sales, Inc. and Process
Solutions, Inc. brought suit against WITECH Corporation, a non-utility
subsidiary of WEC, and one of its portfolio investment companies, Thor
Technology Corporation, in Federal District Court for the Southern District of
Alabama seeking compensatory damages of $3 million under a contract involving
Thor Technology Corporation and an unspecified amount of punitive damages. In
May 1996, the complaint was amended to include WEC. In April 1998, the
parties reached a settlement of the litigation. The amount of the settlement
was not significant.condition or results of operations, see Item 1.
Financial Statements - "Notes to Financial Statements" in Part I of this
report as well as Item 1. Legal Proceedings and Item 5. Other Information in
Part II of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning Wisconsin Energy's and Wisconsin Electric's market
risk exposures, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Market Risks" in Part II of Wisconsin Energy's and Wisconsin
Electric's combined Annual Report on Form 10-K for the year ended December 31,
1997. Griffin Energy Marketing LLC ("Griffin"), a subsidiary of WISVEST
Corporation, began marketing energy related services and limited trading of
electricity in January 1998. Griffin's activities during the first nine
months of 1998 were financially insignificant. WISVEST Corporation is a non-
utility subsidiary of Wisconsin Energy.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 1. Business and Item 3.
Legal Proceedings in Part I and with Item 8. Financial Statements and
Supplementary Date in Part II of Wisconsin Energy's and Wisconsin Electric's
combined Annual Report on Form 10-K for the year ended December 31, 1997 as
well as with Item 1. Legal Proceedings in Part II of Wisconsin Energy's and
Wisconsin Electric's combined Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998.
RATE MATTERS
MICHIGAN RETAIL JURISDICTION
1998 Test Year: In November 1998, Wisconsin Electric filed testimony and
exhibits with the Michigan Public Service Commission showing a $3.8 million
annual revenue deficiency for its electric utility operations in the State of
Michigan. Wisconsin Electric is proposing a two stage rate increase in the
filing. The first stage would increase rates 9.4% on an annualized basis
effective with issuance of an order in the case. The second stage, proposed
to be effective July 1, 1999, would increase the stage one rates by another
4.8% on an annualized basis.
The primary factors influencing the requested rate increases include:
(1) increased costs related to the construction, operation and maintenance of
electric generation, transmission and distribution facilities to assure the
reliability of electric service, (2) increased costs associated with the need
to resolve Year 2000 technology issues and to implement technological
solutions to meet customer expectations, (3) increased personnel,
(4) increased fuel and purchased power costs, and (5) increased cost of
capital. To lessen the impact of these increased costs, Wisconsin Electric is
proposing to accelerate the amortization of contributions previously received
for customer facilities, similar to what Wisconsin Electric did in its 1998
Test Year proceedings in the Wisconsin retail jurisdiction.
ENVIRONMENTAL COMPLIANCE
ASH LANDFILLS
Highway 59 Landfill: Wisconsin Electric has petitioned the City of Waukesha
to extend city water service to residents of the Town of Waukesha affected by
contamination from Wisconsin Electric's Highway 59 ash landfill, located in
Waukesha County, Wisconsin. The City Council has agreed to extend service at
Wisconsin Electric's cost. In addition to providing city water to the ten
affected residents, Wisconsin Electric anticipates excavating saturated ash
from and capping the landfill. Total remediation cost at the site is
anticipated to be $7 million.
MANUFACTURED GAS PLANT SITES
Wisconsin Electric has begun remediation activities at former manufactured gas
plant sites in the Cities of Kenosha and Burlington, Wisconsin. Wisconsin
Electric also anticipates beginning remediation at the Fort Atkinson,
Wisconsin, manufactured gas plant site in 1999. Wisconsin Electric's
remediation of these sites is anticipated to be accomplished at an aggregate
cost of between $6 million and $11 million.
OTHER MATTERS
Uranium Enrichment Charges: On October 11, 1996, Wisconsin Electric and six
other utilities filed an action in the U.S. Court of Federal Claims appealing
a final October 1995 decision by the United States Department of Energy's
contracting officer, which denied claims of the utilities for damages by
reason of overcharges for uranium enrichment services provided under Utility
Services Contracts between October 1, 1992 and June 30, 1993. The damages
sought by Wisconsin Electric total $1.3 million. On December 1, 1997, the
government filed a motion for judgment on the pleadings based upon a prior
decision of the U.S. Court of Appeals for the Federal Circuit in a related
matter. On August 12, 1998, the U.S. Court of Federal Claims granted the
government's motion for summary judgment, dismissing the utilities' complaint.
On October 9, 1998, Wisconsin Electric and the other utilities filed an appeal
with the U.S. Court of Appeals for the Federal Circuit. The matter is
pending.
Personal Injury Suit: On October 1, 1994, a jury returned a $2.85 million
verdict against Wisconsin Natural Gas Company ("Wisconsin Natural") in a case
in the Circuit Court for Milwaukee County involving a gas pipe fire which
injured the plaintiff. (Wisconsin Energy merged Wisconsin Natural, its wholly
owned natural gas utility subsidiary, into Wisconsin Electric in January
1996.) On December 23, 1994, Wisconsin Natural resolved the litigation
between itself and the plaintiff with a payment of $2.55 million to the
plaintiff, of which $550,000 was covered by Wisconsin Natural's general
liability insurer. The contract with the construction company that installed
the gas pipe provides for indemnification of Wisconsin Natural. On
September 5, 1995, Wisconsin Natural Gas Company ("WN") in a case in the Circuit
Court for Milwaukee County ("Circuit Court") involving a gas pipe fire which
injured the plaintiff. (WEC merged WN, its wholly owned natural gas utility
subsidiary, into WE in January 1996.) On December 23, 1994, WN resolved the
litigation between itself and the plaintiff with a payment of $2.55 million to
the plaintiff, of which $550,000 was covered by WN's general liability
insurer. The contract with the construction company that installed the gas
pipe provides for indemnification of WN. On September 5, 1995, WN commenced an action for such
indemnification in the Circuit Court for Milwaukee County against the
construction company and its insurers. On October 7, 1996, the Circuit Court
granted Wisconsin Natural's motion for summary judgment requiring such
indemnification in the amount of $2.55 million plus costs. The defendants
appealed this decision to the Wisconsin Court of Appeals. On May 5, 1998, the
Wisconsin Court of Appeals reversed the Circuit Court's 1996 decision and
granted summary judgment to the construction company and its insurers which
denies Wisconsin Natural's right to indemnification. On July 24, 1998, the
Wisconsin Supreme Court denied a petition filed by Wisconsin Electric, as
successor to Wisconsin Natural, seeking a review of this decision.
ITEM 5. OTHER INFORMATION
NUCLEAR MATTERS
Previous information concerning the status of Point Beach Nuclear Plant is
contained in Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Nuclear Matters" in Wisconsin Energy's and Wisconsin Electric's
combined Annual Report on Form 10-K for the year ended December 31, 1997 as
well as in Item 5. Other Information - "Nuclear Matters" in Part II of
Wisconsin Energy's and Wisconsin Electric's combined Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998.
Point Beach Nuclear Plant: Wisconsin Electric currently expects to begin a
scheduled refueling and maintenance outage of Point Beach Unit 2 in early
December 1998 and to return the unit to service in February 1999. During this
outage, Wisconsin Electric plans to replace the unit's low pressure turbine
rotors, which is expected to increase the dependable generating capability of
Unit 2 from 500 to approximately 512 megawatts. Wisconsin Electric also
intends to initiate an extended fuel cycle following this outage, which should
allow for the operation of Unit 2 until its next scheduled outage in the fall
of 2000. The next refueling and maintenance outage for Point Beach Unit 1 is
scheduled to begin during the fall of 1999.
In August 1998, Wisconsin Electric announced that it was participating in
cooperative alliances with three other unaffiliated investor owned utilities
in the region to take advantage of the combined skills of their employees and
share resources in an effort to improve plant performance and reliability,
strengthen operational efficiency and maintain high safety levels. Working
teams are currently being organized to implement cooperative alliances in
several areas including fuel management, Year 2000 initiatives, inventory
management, information exchange and self-assessment programs. The companies
participating in the cooperative alliances own and operate a total of five
nuclear plants in the States of Iowa, Minnesota and Wisconsin with total
generation exceeding 3,600 megawatts. Wisconsin Electric continues to examine
other potential joint operation approaches that could benefit the safe,
reliable and cost effective operation of Point Beach.
Spent Fuel Storage and Disposal: Wisconsin Electric completed construction
of an Independent Spent Fuel Storage Installation ("ISFSI") in 1995 for the
temporary dry storage of spent nuclear fuel at Point Beach. The PSCW has
authorized Wisconsin Electric to load up to twelve casks containing a total of
288 fuel assemblies with spent fuel and transfer the casks to the ISFSI. To
date, four VSC-24 casks, designed by Sierra Nuclear Corporation and containing
a total of 96 spent fuel assemblies, have been loaded and moved to the ISFSI.
Wisconsin Electric is currently loading one additional VSC-24 cask with spent
fuel and plans to load four additional casks during 1999 and the remaining
three authorized casks in 2000.
To increase its options associated with the continued temporary dry storage of
spent fuel at Point Beach, Wisconsin Electric has initiated the process of
obtaining three alternative model TN-32 casks from Transnuclear Corp.. The
TN-32 dry storage casks have been previously approved by the United States
Nuclear Regulatory Commission ("NRC") for specific use at other nuclear
generating facilities in the United States. Wisconsin Electric currently
plans to obtain the three TN-32 casks by the spring of 2000. In August 1998,
the PSCW issued an order approving the substitution of up to six TN-32 casks
for VSC-24 casks at Point Beach in the event that this becomes necessary.
Wisconsin Electric believes that the NRC will authorize general use of TN-32
casks by early in the year 2000.
Wisconsin Electric estimates that, with implementation of the extended fuel
cycles, with the remaining authorized casks and with the remaining space in
the spent fuel pool in its current configuration, it has sufficient temporary
spent fuel storage capacity to continue operating Point Beach until 2004.
Wisconsin Electric currently plans to apply with the PSCW in the spring of
1999 for authority to load additional casks beyond the twelve that are
currently authorized. In its application with the PSCW, Wisconsin Electric
anticipates seeking authority to begin loading these additional casks by no
later than 2002 so that it can preserve its current ability to unload a full
core into the spent fuel pool thereby maintaining operational flexibility at
Point Beach.
ELECTRIC SYSTEM RELIABILITY INITIATIVES & COMPETITION
For information concerning electric system reliability, structure and
competition matters, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results of
Operations - Electric System Reliability Matters" and "Industry Restructuring
and Competition" in Part II of Wisconsin Energy's and Wisconsin Electric's
combined Annual Report on Form 10-K for the year ended December 31, 1997 as
well as Item 5. Other Information in Part II of Wisconsin Energy's and
Wisconsin Electric's combined Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 and June 30, 1998.
ADDITIONAL GENERATING CAPACITY
300-Megawatt Facility: In August 1998, Wisconsin Electric and Atlanta-based
Southern Energy, Inc., a subsidiary of Southern Company, signed a formal power
purchase agreement wherein Southern Energy, Inc. will license, construct, own
and operate a 300-megawatt natural gas-fired peaking power plant and sell its
electric output to Wisconsin Electric for eight years. The agreement
satisfies Wisconsin Electric's responsibility under directives from the PSCW
and under the new reliability legislation, 1997 Wisconsin Act 204, signed into
law in April 1998 by Wisconsin's Governor. The primary site for the facility
is in Neenah, Wisconsin.
Southern Energy filed a certificate of public convenience and necessity
("CPCN") application for the facility, and the PSCW has accepted the
application as complete. A CPCN from the PSCW is expected by early
February 1999. The facility is scheduled for commercial operation by
June 2000.
PSCW RULEMAKING PROCEEDINGS
Electric Transmission Report: As required in 1997 Wisconsin Act 204, the
PSCW published its "Report to the Wisconsin Legislature on the Regional
Electric Transmission System" on September 1, 1998. The report identifies
transmission constraints on the regional bulk power transmission system and
identifies a short list of twelve representative new transmission line
options. The report emphasizes the need to approximately double the State of
Wisconsin's power import capability to 3,000 megawatts to maintain
reliability. Detailed studies are underway to select the best options. The
licensing process for one or more new high voltage transmission lines will
begin in 1999.
MIDWEST ISO
By order dated September 16, 1998, the Federal Energy Regulatory Commission
("FERC") conditionally approved the Midwest Independent Transmission System
Operator ("ISO"). The Midwest ISO applicants have requested rehearing of
certain portions of that order and FERC action for such indemnification in the Circuit Court against the
construction company and its insurers. On October 7, 1996, the Circuit Court
granted WN's motion for summary judgment requiring such indemnification in the
amount of $2.55 million plus costs. The defendants appealed this decision to
the Wisconsin Court of Appeals. On May 5, 1998, the Court of Appeals reversed
the 1996 Circuit Court decision and granted summary judgment to the
construction company and its insurers which denies WN's right to
indemnification. Within the next thirty days, WE, as successor to WN, expects
to file a petition with the Wisconsin Supreme Court seeking a review of this
decision.
ITEM 5. OTHER INFORMATION
NUCLEAR MATTERS
Point Beach Nuclear Plant: Point Beach Unit 1 began a scheduled refueling
outage in mid-February 1998. With completion of this outage, WE will be
implementing its first extended fuel cycle, allowing operation of Unit 1 for
more than 12 months between refueling outages. WE expects to complete the
Unit 1 refueling outage in June 1998.
Spent Fuel Storage and Disposal: WE currently has remaining space in the
spent fuel pool at Point Beach to complete the current Unit 1 refueling as
well as the scheduled fall 1998 Unit 2 and fall 1999 Unit 1 refuelings. With
completion of the current Unit 1 refueling, however, WE will no longer have
the capability to unload a full core into the pool, reducing to some extent
operational flexibility at Point Beach.
In response to reduced spent fuel pool storage capacity, WE completed
construction of an Independent Spent Fuel Storage Installation ("ISFSI") in
1995 for the temporary dry storage of spent nuclear fuel at Point Beach. The
PSCW has authorized WE to load up to twelve casks containing up to 288 total
fuel assemblies with spent fuel and transfer the casks to the ISFSI. To date,
WE has loaded two such casks containing 48 spent fuel assemblies and currently
has two additional casks available at Point Beach for loading. WE estimates
that, with implementation of extended fuel cycles, with the current
authorization to load an additional 240 spent fuel assemblies into casks, and
with the remaining space in the spent fuel pool in its current configuration,
it has available storage capacity at Point Beach to complete the anticipated
fall 2003 Unit 1 refueling outage.
As a result of the ignition of hydrogen gas during welding operations
associated with loading a third cask at Point Beach in May 1996, WE
discontinued loading until the Nuclear Regulatory Commission completes its
review of WE's proposed corrective actions to avoid future hydrogen gas
ignitions as well as proposed changes in lid welding and weld inspection
processes. WE expects the NRC to complete the review in June 1998. WE hopes
to be able to resume cask loading during the summer of 1998 and to load at
least two additional casks with spent fuel during 1998.
Due to continuing uncertainty about the future use of VSC-24 casks designed by
Sierra Nuclear Corporation which are currently used at Point Beach, WE has
initiated steps to purchase up to six alternative model TN-32 dry storage
casks from Transnuclear Corp. The TN-32 casks have been previously approved
by the NRC for specific use at other nuclear generating facilities in the
United States. WE currently plans to obtain the first two TN-32 containers in
December 1999 and a third container in the spring of the year 2000. WE
believes that the TN-32 casks can be approved for use at Point Beach within
these time frames.
On January 31, 1998, the United States Department of Energy ("DOE") failed to
comply with its obligation to begin removing spent fuel from Point Beach under
a contract with WE required by the Nuclear Waste Policy Act of 1982, as
amended in 1987. In February 1998, WE joined other utilities in a motion to
enforce the July 1996 mandate of the United States Court of Appeals for the
District of Columbia Circuit ("Court") that the DOE had an unconditional
obligation to begin accepting spent fuel by January 31, 1998. WE and the
other utilities requested an order (1) compelling the DOE to submit a detailed
program for disposing of spent fuel from utilities, (2) declaring that the
utilities are relieved of their obligation to pay fees into the Nuclear Waste
Fund for a permanent spent fuel repository and are authorized to place such
fees into escrow until the DOE commences with disposing of spent fuel pursuant
to its obligation, and (3) precluding the DOE from using any fees paid into
the Nuclear Waste Fund to reimburse utilities for damages they have incurred
as a result of the DOE's breach of its obligations. On May 5, 1998, the Court
issued a decision denying the motion of WE and the other utilities to enforce
the Court's mandate, principally on the ground that the question of whether
the DOE could properly use the Nuclear Waste Fund as a source to pay damages
to utilities was not ripe for review. The Court further held that the other
requested remedies fall outside the scope of its mandate, which was limited to
defining the nature of the DOE's statutory obligations and did not extend to
requiring the DOE to perform under its contracts with WE and the other
utilities. WE is currently evaluating the May 5, 1998 decision to determine
the most appropriate forum in which to proceed with its contract remedies.
ELECTRIC SYSTEM RELIABILITY,
STRUCTURE, AND COMPETITION MATTERS
For information concerning electric system reliability, structure and
competition matters, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results of
Operations - Electric System Reliability Matters" and "Industry Restructuring
and Competition" in Part II of WEC's and WE's combined Annual Report on Form
10-K for the year ended December 31, 1997.
During the summer of 1998, WE expects to be able to meet the electrical
requirements of its customers. However, regional power shortages within the
Mid-America Interconnected Network ("MAIN"), which includes all or portions of
the States of Illinois, Michigan, Missouri and Wisconsin, could have an impact
on WE's customers. An assessment conducted by MAIN indicates that supply in
the upper midwest during the summer of 1998 will be tight.
Reciprocal operating agreements with other MAIN utilities may require WE to
interrupt or curtail electric service to interruptible or curtailable
customers. These are customers who receive electric energy at a discounted
rate in return for which they have agreed to have their electricity supply
limited or cut-off during periods of tight supply.
WE will initiate interruptions or curtailments to assist another MAIN utility
if, after interrupting and curtailing its own customers, that utility is
unable to meet its load obligations without resorting to public appeal for
reduced energy usage by its firm customers. If a MAIN utility is unable to
meet its load requirements following issuance of a public appeal, WE will
issue a public appeal for conservation by its firm customers to help prevent
the affected utility from having to initiate rotating blackouts.
GOVERNOR'S RELIABILITY INITIATIVE
In April 1998, electric industry reliability legislation drafted by the
Governor of the State of Wisconsin was approved by the Wisconsin Legislature
and signed into law. Provisions of the 1997 Wisconsin Act 204 ("Governor's
Electric Reliability Legislation") can be divided into four categories:
Regulatory Streamlining: Eases the planning burden and facilitates the
regulatory approvals necessary to start the construction of transmission
facilities and non-merchant plant generation.
Transmission:
* Directs the PSCW to evaluate electric transmission system constraints that
adversely affect reliability in the state by September 1, 1998 and
authorizes the PSCW to order (through the year 2004) electric utilities to
construct transmission facilities to relieve such constraints.
* Requires transfer by a utility of operational authority over its electric
transmission facilities to a regional Independent System Operator ("ISO")
by June 30, 2000, after which time, if not done, the PSCW shall order such
utility to file an application with the FERC for participation in a
regional ISO or could order divestiture of electric transmission facilities
under certain circumstances.
* Establishes minimum requirements for ISOs.
* Requires all Wisconsin utilities to take electric transmission service from
the ISO by June 30, 2000.
New Generation Facilities:
* Orders the winners of requests for proposals by utilities for new
generation capacity to enter into contracts by July 31, 1998 (or a later
date approved by the PSCW) and to apply with the PSCW by August 31, 1998
for any preconstruction approvals required to complete those projects.
* Establishes an expedited approval process at the Wisconsin Department of
Natural Resources for review of these applications and associated permits.
* Allows merchant generating plants to be built in the State of Wisconsin.
* Allows affiliates of utilities to build merchant plants if the PSCW finds
that this is not anti-competitive.
* Provides that if such merchant plants are built in the midwest, the value
of their assets would not count towards the Wisconsin public utility
holding company non-utility diversification asset cap.
* Requires that 50 megawatts of renewable energy sources be constructed or
procured by Wisconsin investor-owned utilities by December 31, 2000.
Other Provisions:
* Directs the PSCW to promulgate rules concerning market power for generation
facilities.
* Directs the PSCW to promulgate maintenance standards for electric
generation and distribution facilities.
* Directs the PSCW to promulgate rules regarding assignment of costs for
sales to customers outside the state which the utility does not have a
requirement to serve.
WISCONSIN ELECTRIC RELIABILITY INITIATIVES
During 1998, WE has continued the following mid-range projects to improve its
electric supply capacity outlook:
Additional 250 MW of Capacity: WE began evaluating bids received in
response to a request for proposal for contracts for 250 MW of generation
capacity to be built in eastern Wisconsin. This project is currently on
schedule to meet the requirements of the Governor's Electric Reliability
Legislation regarding requests for proposals for new generation.
Combustion Turbine Inlet Coolers: WE has received all required regulatory
approvals for the addition of inlet coolers at the Paris and Concord
combustion turbine generating facilities, which are expected to boost the
generating capacity of these two plants by a combined total of approximately
110 megawatts.
Midwest ISO: New participants have joined the Midwest ISO, bringing total
participation to 13 utilities operating in portions of 13 states (Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, Ohio,
Pennsylvania, Virginia, West Virginia and Wisconsin). The PSCW is completing
a review of ISO issues as part of its restructuring activities. The PSCW held
hearings during March 1998 and is scheduled to issue an order in mid-June
1998. Pending the outcome of the PSCW process and approval at the FERC, WE
participation in the Midwest ISO is on schedule to meet the legislative
requirements regarding participation in a regional ISO.
MINERGY GLASS AGGREGATE PLANT
During the first quarter of 1998, Minergy Corp., a non-utility subsidiary of
WEC, began test operations of its $45 million Fox Valley Glass Aggregate
Plant, located in Neenah, Wisconsin. The Fox Valley Glass Aggregate Plant
went into commercial operation in late April 1998.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of WEC or WE. Such statements
are based upon management's current expectations and are subject to risks and
uncertainties that could cause WEC's or WE's actual results to differ
materially from those contemplated in the statements. Readers are cautioned
not to place undue reliance on these forward-looking statements. When used in
written documents or oral presentations, the terms "anticipate", "believe",
"estimate", "expect", "objective", "plan", "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 WEC's or WE's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of WE's generating
facilities including Point Beach Nuclear Plant; unscheduled generation
outages, maintenance or repairs; unanticipated changes in fossil fuel,
nuclear fuel, purchased power or gas supply costs or availability due to
higher demand, shortages, transportation problems or other developments;
nonperformance by electric energy or natural gas suppliers under existing
power purchase or gas supply contracts; nuclear or environmental incidents;
resolution of spent nuclear fuel storage and disposal issues; electric
transmission or gas pipeline system constraints; unanticipated
organizational structure or key personnel changes; collective bargaining
agreements with union employees or work stoppages; inflation rates; or
demographic and economic factors affecting utility service territories or
operating environment.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; changes in the Nuclear Regulatory Commission's regulations
related to Point Beach; changes in the United States Environmental
Protection Agency's as well as the Wisconsin or Michigan Department of
Natural Resources' regulations related to emissions from fossil-fuel-fired
power plants; or the siting approval process for new generation and
transmission facilities.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of WE to transfer funds to WEC in
the form of cash dividends, loans or advances.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Unanticipated developments while implementing the modifications necessary
to mitigate Year 2000 compliance problems, including the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the indirect impacts of third parties with
whom the company does business and who do not mitigate their Year 2000
compliance problems, and similar uncertainties.
* Changes in social attitudes regarding the utility and power industries.
* Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; or environmental and energy regulations.
* Other business or investment considerations that may be disclosed from time
to time in WEC's or WE's Securities and Exchange Commission filings or in
other publicly disseminated written documents.
WEC and WE undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed with the applicable Form 10-Q report:
Exhibit No.
WEC Exhibits
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the
three months ended March 31, 1998.
WE Exhibits
(27)-2 Wisconsin Electric Power Company Financial Data Schedule for
the three months ended March 31, 1998.
(b) Reports on Form 8-K.
Current reports on Form 8-K dated as of December 23, 1997 were filed by
WEC and WE on January 8, 1998 to report the issuance by the PSCW of an
order authorizing interim rate increases effective January 1, 1998.
Current reports on Form 8-K dated as of April 28, 1998 were filed by WEC
and WE on May 6, 1998 to report authorization by the PSCW of permanent
electric, gas and City of Milwaukee steam rate increases effective
May 1, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
--------------------------------------
(Registrant)
/s/ Calvin H. Baker
---------------------------------------
Date: May 15, 1998 Calvin H. Baker, Treasurer, Chief
Financial Officer and duly
authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------------
(Registrant)
/s/ Calvin H. Baker
---------------------------------------
Date: May 15, 1998 Calvin H. Baker, Vice President -
Finance, Chief Financial Officer
and duly authorized officer
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED MARCH 31, 1998
EXHIBIT INDEX
Exhibit No.
- -----------
The following Exhibits are filed with this report:
(27)-2 Wisconsin Electric Power Company Financial Data Schedule for
the three months ended March 31, 1998.
MPSC ELECTRIC UTILITY INDUSTRY CHOICE SCHEDULE
In the State of Michigan, restructuring proposals are being considered by
policy makers on several fronts. The Michigan Public Service Commission
("MPSC") has issued several orders that phase in competition through the year
2002. The Michigan Legislature is also working on a plan to restructure the
electric industry.
In June 1997, the MPSC issued an order that initiated the framework for
electric industry restructuring and would phase in competition for all
Michigan retail electric customers by the year 2002. The MPSC issued
additional orders in October 1997 and January 1998 that continued the process
of establishing the framework to introduce competition into the Michigan
electric market. The October 1997 orders dealt with determination of the
rates and conditions of service for those customers choosing direct access and
suspended the direct access bidding schedule included in the June 1997 order.
In the January 1998 orders, the MPSC concluded that statewide uniform timing
was not necessary for direct access and established a schedule for customers
of Consumers Energy and Detroit Edison, the two major investor owned utilities
with service territories in Michigan's Lower Peninsula. Several parties,
including Consumers Energy and Detroit Edison, have petitioned for rehearing
of the MPSC's orders.
During 1998, the utilities in the Upper Peninsula of Michigan proposed a plan
to implement full customer choice on the latter of January 1, 2002 or the date
of implementation for Consumers Energy and Detroit Edison. The MPSC staff has
supported the proposal and a settlement agreement is being developed.
NON-UTILITY ACTIVITIES
In October 1998, WISVEST Corporation entered into an agreement to purchase two
fossil-fueled power plants for $272 million from The United Illuminating
Company, an unaffiliated investor owned utility in New Haven, Connecticut.
Pursuant to the agreement, WISVEST Corporation is purchasing the Bridgeport
Harbor Station, which has an active generating capacity of 590 megawatts and a
total generating capacity of 667 megawatts, as well as the 466-megawatt New
Haven Harbor Station. The Bridgeport Harbor Station, located in Bridgeport
Connecticut, is comprised of two oil-fired units, one oil and coal-fired unit
and one jet-fueled unit. The New Haven Harbor Station, located in New Haven,
Connecticut, has one oil and gas-fired generating unit. The sale, expected to
close in the second quarter of 1999, is contingent upon approval from the
Connecticut Department of Public Utility Control, the FERC and other federal
and State of Connecticut agencies.
Wisconsin Energy is reviewing additional non-utility growth opportunities on
an ongoing basis, primarily in the areas of power generation development and
acquisitions, waste to energy recycling technologies and real estate
investments. The Company may make further investments and/or acquisitions
from time to time.
WISCONSIN ENERGY BOARD OF DIRECTORS
In October 1998, Wisconsin Energy's Board of Directors elected two new board
members effective November 1, 1998, increasing Wisconsin Energy's board to ten
directors. Barbara L. Bowles is president and founder of The Kenwood Group,
Inc., a Chicago-based investment advisory firm that manages pension funds for
corporations, public institutions and endowments. Ms. Bowles, whose term
expires at the Wisconsin Energy annual meeting in 2000, was formerly corporate
vice president and director of investor relations at Kraft, Inc. Judi North
is president and CEO of VSI Enterprises, Inc., an Atlanta-based company with
five subsidiaries that design, manufacture, market and support
videoconferencing and integrated telecommunications software and services.
Ms. North, whose term expires at the Wisconsin Energy annual meeting in 1999,
was formerly president of consumer services at BellSouth Telecommunications.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of Wisconsin Energy or
Wisconsin Electric. Such statements are based upon management's current
expectations and are subject to risks and uncertainties that could cause
Wisconsin Energy's or Wisconsin Electric's actual results to differ materially
from those contemplated in the statements. Readers are cautioned not to place
undue reliance on these forward-looking statements. When used in written
documents or oral presentations, the terms "anticipate", "believe",
"estimate", "expect", "objective", "plan", "possible", "potential", "project"
and similar expressions are intended to identify forward-looking statements.
In addition to the assumptions and other factors referred to specifically in
connection with such statements, factors that could cause Wisconsin Energy's
or Wisconsin Electric's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following:
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of Wisconsin Electric's
or Edison Sault's generating facilities including Point Beach Nuclear
Plant; unscheduled generation outages, maintenance or repairs;
unanticipated changes in fossil fuel, nuclear fuel, purchased power, gas
supply or water supply costs or availability due to higher demand,
shortages, transportation problems or other developments; nonperformance by
electric energy or natural gas suppliers under existing power purchase or
gas supply contracts; nuclear or environmental incidents; resolution of
spent nuclear fuel storage and disposal issues; electric transmission or
gas pipeline system constraints; unanticipated organizational structure or
key personnel changes; collective bargaining agreements with union
employees or work stoppages; inflation rates; or demographic and economic
factors affecting utility service territories or operating environment.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; changes in the United States Nuclear Regulatory Commission's
regulations related to Point Beach Nuclear Plant; changes in the United
States Environmental Protection Agency's as well as the Wisconsin or
Michigan Department of Natural Resources' regulations related to emissions
from fossil-fuel-fired power plants; or the siting approval process for new
generation and transmission facilities.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of Wisconsin Electric to transfer
funds to Wisconsin Energy in the form of cash dividends, loans or advances.
* Changes in social attitudes regarding the utility and power industries.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Unanticipated developments while implementing the modifications necessary
to mitigate Year 2000 compliance problems, including the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes in computer and embedded systems, the indirect
impacts of third parties with whom the Company does business and who do not
mitigate their Year 2000 compliance problems, and similar uncertainties.
* Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; the cyclical nature of property values that could affect real
estate investments; unanticipated changes in environmental or energy
regulations; timely regulatory approval without onerous conditions of
potential acquisitions; and risks associated with minority investments,
where there is a limited ability to control the development, management or
operation of the project.
* Legislative or regulatory restrictions or caps on non-utility acquisitions,
investments or projects.
* Factors affecting foreign non-utility operations including foreign
governmental actions; foreign economic and currency risks; political
instability; and unanticipated changes in foreign environmental or energy
regulations.
* Other business or investment considerations that may be disclosed from time
to time in Wisconsin Energy's or Wisconsin Electric's Securities and
Exchange Commission filings or in other publicly disseminated written
documents.
Wisconsin Energy and Wisconsin Electric undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibits are filed with the applicable Form 10-Q report:
Exhibit No.
Wisconsin Energy Exhibits
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the
nine months ended September 30, 1998.
Wisconsin Electric Exhibits
(27)-2 Wisconsin Electric Power Company Financial Data Schedule for
the nine months ended September 30, 1998.
(b) Reports on Form 8-K.
Neither Wisconsin Energy nor Wisconsin Electric filed any Form 8-K
reports during the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
(Registrant)
/s/ Calvin H. Baker
----------------------------
Date: November 13, 1998 Calvin H. Baker, Treasurer,
Chief Financial Officer and
duly authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
(Registrant)
/s/ Calvin H. Baker
----------------------------
Date: November 13, 1998 Calvin H. Baker, Vice President
Finance, Chief Financial
Officer and duly authorized
officer
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1998
EXHIBIT INDEX
Exhibit No.
- -----------
The following Exhibit is filed with this report:
(27)-2 Wisconsin Electric Power Company Financial Data Schedule for the
nine months ended September 30, 1998.