1
WISCONSIN ELECTRIC POWER COMPANY
1994 ANNUAL REPORT TO STOCKHOLDERS
ACCOMPANYING INFORMATION STATEMENT
----------------------------------
TABLE OF CONTENTS
-----------------
ITEM PAGE
- ---- ----
Business................................................................. A-2
Market for Common Equity and Related Stockholder Matters................. A-2
Selected Financial Data.................................................. A-3
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... A-4
Income Statement......................................................... A-14
Statement of Cash Flows.................................................. A-15
Balance Sheet............................................................ A-16
Capitalization Statement................................................. A-18
Common Stock Equity Statement............................................ A-19
Notes to Financial Statements............................................ A-20
Directors................................................................ A-33
Executive Officers....................................................... A-33
A-1
2
BUSINESS
Wisconsin Electric Power Company ("Wisconsin Electric" or "company") is an
operating public utility incorporated in the State of Wisconsin in 1896. Its
operations are conducted in two business segments, the primary operations of
which are as follows:
Business Segment Operations
---------------- ----------
Electric Operations Wisconsin Electric generates, transmits,
distributes and sells electric energy in a
territory of approximately 12,000 square
miles with a population estimated at over
2,200,000 in southeastern (including the
Milwaukee area), east central and northern
Wisconsin and in the Upper Peninsula of
Michigan.
Steam Operations Wisconsin Electric distributes and sells
steam supplied by its Valley Power Plant
to space heating and processing customers
in downtown and near southside Milwaukee.
For financial information about industry segments, see Note M to the Financial
Statements in Item 8 of this report.
Wisconsin Electric is a subsidiary of Wisconsin Energy Corporation ("Wisconsin
Energy"), which owns all of Wisconsin Electric's Common Stock, and is an
affiliated company to Wisconsin Natural Gas Company ("Wisconsin Natural"), the
gas utility subsidiary of Wisconsin Energy.
On October 11, 1994, Wisconsin Electric and Wisconsin Natural filed a joint
application with the Public Service Commission of Wisconsin ("PSCW") to merge
Wisconsin Natural into Wisconsin Electric. Wisconsin Electric also filed an
application to obtain the Michigan Public Service Commission's ("MPSC")
consent to assume Wisconsin Natural's liabilities in connection with the
merger. The merger, which was approved by the stockholders of Wisconsin
Electric in December 1994, is anticipated to be effective by year-end 1995.
The merger of Wisconsin Natural into Wisconsin Electric is expected to improve
customer service and reduce future operating costs.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The amount of cash dividends declared on Wisconsin Electric's Common Stock
during the two most recent fiscal years are set forth below. Dividends were
paid to Wisconsin Electric's sole common stockholder, Wisconsin Energy.
Quarter Total Dividend
- -----------------------------------------------------------------------------
1993 1 $16,250,000
2 $16,250,000
3 $16,250,000
4 $16,250,000
- -----------------------------------------------------------------------------
1994 1 $33,700,000
2 $35,583,667
3 $35,583,667
4 $35,583,667
A-2
3
SELECTED FINANCIAL DATA
FINANCIAL
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Thousands of Dollars)
Earnings available
for common
stockholder $ 165,594 $ 173,548 $ 155,826 $ 175,641 $ 179,990
Operating revenues
Electric $1,403,562 $1,347,844 $1,298,723 $1,292,809 $1,208,045
Steam 14,281 14,090 13,093 12,986 12,126
---------- ---------- ---------- ---------- --------
Total operating
revenues $1,417,843 $1,361,934 $1,311,816 $1,305,795 $1,220,171
Total assets $3,826,129 $3,693,556 $3,285,845 $3,052,133 $2,972,903
Long-term debt and
preferred stock-
redemption
required $1,191,257 $1,193,994 $1,195,210 $1,110,572 $1,002,852
SALES AND CUSTOMERS
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Electric
Megawatt-hours
sold 26,911,363 25,685,436 24,747,581 25,016,247 23,656,727
Customers
(End of year) 944,855 932,285 919,466 907,871 896,393
Steam
Pounds sold
(millions) 2,395 2,376 2,284 2,282 2,213
Customers
(End of year) 471 459 472 468 470
QUARTERLY FINANCIAL DATA
Three Months Ended
------------------
March June
----- ----
1994 1993 1994 1993
---- ---- ---- ----
(Thousands of Dollars)
Total operating revenues $362,102 $339,651 $341,838 $323,416
Operating income $ 29,185 $ 63,087 $ 62,785 $ 47,733
Earnings available
for common stockholder $ 10,478 $ 44,806 $ 43,476 $ 29,835
Three Months Ended
------------------
September December
----------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(Thousands of Dollars)
Total operating revenues $362,949 $355,436 $350,954 $343,431
Operating income $ 74,356 $ 68,489 $ 74,232 $ 63,528
Earnings available
for common stockholder $ 55,810 $ 51,707 $ 55,830 $ 47,200
<FN>
- -----------------------------------------------------------------------------
The quarterly results of operations are not directly comparable because of
seasonal and other factors. See Management's Discussion and Analysis in
Item 7 for further information.
Earnings and dividends per share are not provided as all Wisconsin Electric's
Common Stock is held by Wisconsin Energy.
A-3
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earnings
Net income for Wisconsin Electric decreased to $165,594,000 in 1994 compared
to $173,548,000 in 1993, reflecting a non-recurring charge of approximately
$63.5 million ($39 million net of tax), associated with Wisconsin Electric's
organizational restructuring program.
The charge primarily reflects the costs of severance and early retirement
packages which are elements of a "revitalization" program designed to better
position Wisconsin Electric in a changing energy marketplace. The company
anticipates that the non-recurring restructuring charge, which was taken in
the first quarter of 1994, will be offset by the end of 1995 through savings
in operation and maintenance costs.
Excluding the non-recurring charge, net income was $204,594,000 for the 12
months ended December 31, 1994, compared with $173,548,000 in 1993, an
increase of $31 million, or 18 percent. Earnings reflect a 4.8 percent
increase in electric kilowatt-hour sales and a 5.7 percent reduction in non-
fuel operation and maintenance expenses. Electric sales increased primarily
due to warmer weather during the summer of 1994 and additional economic
activity in the company's service area. The reduction in non-fuel operation
and maintenance expenses reflects, among other things, payroll-related savings
as a result of workforce reductions, and lower expenditures made in connection
with power plant renovation work as maintenance programs were completed.
Wisconsin Electric and Wisconsin Natural Revitalization
In response to increasing competitive pressures in the markets for electricity
and natural gas, Wisconsin Electric and Wisconsin Natural have developed and
are implementing a revitalization process to increase efficiencies and improve
customer service.
Wisconsin Electric and Wisconsin Natural are "reengineering" and restructuring
their organizations. The new structures consolidate many business functions
and simplify work processes. Due to productivity improvements, staffing
levels at Wisconsin Electric have been reduced; 347 employees elected to
retire under an early retirement option and 573 employees have enrolled in
severance packages. See Note H to the Financial Statements - Benefits Other
Than Pensions, for additional information.
As part of the revitalization effort, Wisconsin Energy Corporation intends to
merge Wisconsin Electric and Wisconsin Natural to form a single combined
utility subsidiary. The proposed merger will improve customer service and
reduce operating costs. The merger, which is anticipated to be effective by
year-end 1995, is subject to a number of conditions, including requisite
regulatory and other approvals. Wisconsin Electric and Wisconsin Natural
filed a joint application on October 11, 1994, to obtain the PSCW's approval
of the merger. Wisconsin Electric also filed an application to obtain the
MPSC consent to assume Wisconsin Natural's liabilities in connection with the
merger. Both approvals are expected by year-end 1995.
A-4
5
Electric Sales and Revenues
Total electric sales of Wisconsin Electric, detailed below by customer class,
increased 4.8 percent in 1994 compared to 1993.
Electric Sales - Megawatt Hours 1994 1993 % Change
- ------------------------------- ---------- ---------- --------
Residential 6,670,081 6,551,061 1.8
Small Commercial and Industrial 6,699,073 6,357,510 5.4
Large Commercial and Industrial 10,471,869 9,771,383 7.2
Other 1,603,741 1,776,061 (9.7)
---------- ----------
Total Retail and Municipal 25,444,764 24,456,015 4.0
Resale-Utilities 1,466,599 1,229,421 19.3
---------- ----------
Total Sales 26,911,363 25,685,436 4.8
- --------------------------------------------------------------------------
Electric energy sales were positively impacted by warmer summer weather in
1994, which resulted in increased use of electricity for air conditioning and
other cooling purposes, and increased economic activity. The increase in
electric sales also reflects colder winter weather during the first quarter of
1994 and increased sales to the Empire and Tilden iron ore mines.
Electric energy sales to the Empire and Tilden iron ore mines, Wisconsin
Electric's two largest customers, were 15.0 percent higher in 1994 compared to
1993. The increase is attributable to a five-week long mine strike during the
third quarter of 1993 which reduced sales during 1993. Wisconsin Electric's
contracts with the mines require the payment of a demand charge regardless of
power usage which partially offset the impact of lost sales on 1993 revenues.
Excluding the mines, sales to large commercial and industrial customers
increased 5.1 percent in 1994. Sales to the mines represented 8.6 percent,
7.8 percent and 9.0 percent of total electric sales during 1994, 1993 and
1992, respectively.
The 19.3 percent increase in the resale of energy to other utilities is
attributable to the increased availability of Wisconsin Electric's power
plants. This allowed Wisconsin Electric additional energy for external sales.
The percentage change is not indicative of future sales growth in this
customer class.
The 9.7 percent reduction in sales to the Other customer class, referred to in
the table above, is largely the result of reductions in sales to WPPI,
Wisconsin Electric's largest municipal customer consortium. WPPI has been
reducing its purchases from Wisconsin Electric subsequent to acquiring
generation capacity in 1990. Since that time, WPPI has expanded the use of
its existing generation facilities and has installed additional capacity,
further reducing its reliance on energy purchases from Wisconsin Electric.
These sales reductions did not have a significant effect on earnings.
Total electric kilowatt-hour sales increased at a compound annual rate of 4.3
percent between the years 1992 and 1994, while electric revenues increased at
a compound annual rate of 4.0 percent during this period. These increases
reflect among other things, more favorable weather conditions in 1994 compared
to 1992. The warmer than normal summer in 1994 contrasted sharply with the
summer of 1992, the coolest since Wisconsin Electric began keeping records in
1948.
A-5
6
Electric Operation and Maintenance Expenses
Total electric operating expenses, excluding income taxes, depreciation and
the non-recurring revitalization charge, decreased $17 million in 1994
compared to 1993. The decrease largely reflects the payroll-related savings
as a result of workforce reductions referred to above and lower expenditures
made in connection with power plant renovation work as maintenance programs
were completed. These decreases were partially offset by expenses associated
with the implementation of the revitalization program and growth in
conservation- related expenses associated with improving the efficiency of
customers' electric energy usage. Operating expenses, excluding income taxes,
depreciation and the non-recurring charge, have remained relatively flat over
the three-year period ended December 31, 1994.
Other Items
Deferred Income Taxes decreased $33 million during 1994 compared to 1993, due
in part to tax matters related to the timing of payments made in connection
with the severance and early retirement packages associated with the company's
organizational restructuring program. Deferred Income Taxes also reflect a
prior period reclassification between current and deferred income taxes.
Other Interest increased $3.6 million during 1994 compared to 1993 reflecting
increased short-term debt balances at Wisconsin Electric. Interest charges on
long-term debt increased $11 million during 1993 compared to 1992 largely due
to the additional debt issued to finance Wisconsin Electric's construction
programs and the amortization of premiums associated with the debt securities
refinanced during 1992 and 1993.
With expectations of low-to-moderate inflation and future operating cost
reductions discussed above, Wisconsin Electric does not believe the impact of
inflation will have a material effect on its future results of operations.
Electric Sales Outlook
Assuming moderate growth in the service territory economy and normal weather,
Wisconsin Electric presently anticipates electric kilowatt-hour sales to grow
at a compound annual rate of approximately 1.0 percent over the five-year
period ending December 31, 1999. This forecast is subject to a number of
variables, including the economy and weather, which may affect the actual
growth in sales.
Rates and Regulatory Matters
The table below summarizes the projected annual revenue impact of recent rate
changes authorized by regulatory commissions based on the sales projections
utilized by those commissions in setting rates. The PSCW regulates Wisconsin
retail electric and steam rates, while the Federal Energy Regulatory
Commission ("FERC") regulates wholesale electric rates. The MPSC regulates
retail electric rates in Michigan. The PSCW has discontinued the practice of
conducting annual rate case proceedings, replacing it with a new schedule
which calls for future rate cases to be conducted once every two years.
In support of its goal to become the lowest-cost energy provider in the region
and in light of the operating cost reductions expected from the reengineering
process discussed above, Wisconsin Electric did not seek an increase in rates
for 1994 or 1995.
A-6
7
Revenue Percent
Increase Change in Effective
Company/Service (Decrease) Rates Date
- ------------------------- ------------ --------- ---------
Wisconsin Electric
Retail electric, WI $ 26,655,000 2.3 02/17/93
Steam heating 505,000 3.5 02/17/93
Wholesale electric 6,000,000 10.6 06/09/93
Retail electric, MI 1,366,000 4.3 07/09/93
Fuel electric, WI (8,596,000)* (0.9) 11/05/93
Fuel electric, WI (16,179,000) (1.3) 08/04/94
- ------------------------------------------------------------------------------
* The 1993 fuel credit was eliminated 1/1/94 by PSCW Order.
Under the Wisconsin retail electric fuel adjustment procedure, retail electric
rates may be adjusted, on a prospective basis, if cumulative fuel and
purchased power costs, when compared to the costs projected in the retail
electric rate proceeding, deviate from a prescribed range and are expected to
continue to be above or below that range.
On September 8, 1994, the PSCW issued a notice that it will conduct an
investigation into the state of the electric utility industry in Wisconsin,
particularly its institutional structure and regulatory regime, in order to
evaluate what changes would be beneficial for Wisconsin. The notice states
that this investigation may result in profound and fundamental changes to the
nature and regulation of the electric utility industry in Wisconsin. It is
the PSCW's stated intention that this proceeding will establish criteria and
direction for utilities to incorporate into any proposals involving structural
or regulatory changes they may put forward. The PSCW also intends that the
proceeding reflect input from all those having a stake in Wisconsin's electric
utility industry, including large and small retail customers; wholesale
customers; utility management; utility securities holders; independent power
producers; purveyors of demand-side options and renewable resources;
representatives of the environmental, financial, academic, labor, small
business and governmental communities; and elected representatives. The PSCW
invited interested persons to submit comments as to appropriate objectives for
regulation of the electric utility industry and the utility structures and
regulatory approaches likely to provide the best balance of such objectives.
On November 1, 1994, Wisconsin Electric submitted its comments to the PSCW in
a paper describing a framework for a restructured industry. Wisconsin
Electric's view of industry restructuring would seek to achieve the benefits
of competition while maintaining reliability of electric service, controlling
costs during the transition to the envisioned end-state, and protecting the
environment with increasing vigor. Today's various electric utility functions
would be split into two major categories--natural monopolies and competitive
entities. The natural monopolies are functions where a single entity can
provide the lowest cost. The competitive entities would perform functions
where competition can provide the lowest cost. The natural monopolies would
be re-regulated so the appropriate incentives exist to provide electricity at
reasonable prices. The competitive entities would eventually see an
elimination of traditional regulation.
In Wisconsin Electric's plan, the re-regulated natural monopolies are the
transmission and distribution functions. Re-regulation of these entities
should involve some form of price cap and performance-standard operation
rules. In the new structure, the FERC would regulate the transmission systems
through a regional transmission group to ensure open access, comparable
A-7
8
pricing, comparable service and adequate cost recovery. The PSCW would
regulate the distribution function for reasonable price, reliability, public
safety and customer satisfaction. The competitive entities in the Wisconsin
Electric model are the generation, customer service and energy merchant
functions.
Initial question and answer sessions were held November 28-29, 1994. At a
meeting on January 24, 1995, the PSCW approved the establishment of an
advisory committee that will examine all aspects of electrical service and the
electric utility industry and suggest which functions should be performed by a
competitive market. The PSCW established a timetable which would have a final
committee report available to the Wisconsin Legislature by the end of 1995.
Wisconsin Electric operates under utility rates which are subject to the
approval of the PSCW, MPSC and FERC. Such rates are designed to recover the
cost of service and provide a reasonable return to investors. Developing
competitive pressures in the utility industry may result in future utility
rates which are based upon factors other than the traditional original cost of
investment. In such a situation, continued deferral of certain regulatory
asset and liability amounts on Wisconsin Electric's books may no longer be
appropriate as allowed under Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation. At this
time, Wisconsin Electric is unable to predict whether any adjustments to
regulatory assets and liabilities will occur in the future. See Note A to the
Financial Statements - Summary of Significant Accounting Policies - Deferred
Regulatory Assets and Liabilities, for further information.
LIQUIDITY AND CAPITAL RESOURCES
Investing Activities
Wisconsin Electric invested $1,060 million in its businesses during the three
years ended December 31, 1994. The investments made during this three-year
period include construction expenditures for new or improved facilities
totaling $850 million, net capitalized conservation expenditures of $87
million, purchases of nuclear fuel at $64 million and payments to an external
trust for the eventual decommissioning of Wisconsin Electric's Point Beach
Nuclear Plant totaling $42 million.
During the second quarter of 1994, Wisconsin Electric placed in service the
last two units, or approximately 150 megawatts of capacity, at its Concord
Generating Station, a four unit 300 megawatt natural gas-fired combustion
turbine facility designed to meet peak demand requirements. The first two
units were completed in 1993. Capital expenditures of $6 million, $35 million
and $47 million were made during 1994, 1993 and 1992, respectively, for
construction of this facility. Total capital costs of the Concord facility
were approximately $107 million.
Additionally, during 1994, Wisconsin Electric continued construction of the
new Paris Generating Station, a four unit, approximately 300 megawatt natural
gas-fired combustion turbine facility intended to meet growing peak demand
requirements. This generating station, which is expected to have all four
units in service during the summer of 1995, is currently estimated to cost
$104 million. Capital expenditures of $54 million and $28 million were made
during 1994 and 1993, respectively, for construction of this facility.
A-8
9
Wisconsin Electric completed the $107 million renovation project at its Port
Washington Power Plant in 1994. Unit 4, the last of four units to be
renovated, returned to service in July. The renovation work, which began in
September 1991, restored approximately 320 megawatts of capacity and included
the installation of additional emission control equipment. Expenditures
totaling $12 million, $36 million and $43 million were made during 1994, 1993
and 1992, respectively.
Cash Provided by Operating and Financing Activities
During the three years ended December 31, 1994, cash provided by operating
activities totaled $1,109 million. During this period, internal sources of
funds, after the payment of dividends to Wisconsin Energy, Wisconsin
Electric's sole common shareholder, provided 79 percent of the company's
capital requirements.
Financing activities during the three-year period ended December 31, 1994,
included the issuance of $952 million of long-term debt, principally to
refinance higher coupon debt and the retirement of $73 million of preferred
stock. No preferred stock was issued during this period. Additionally,
during the three-year period ended December 31, 1994, Wisconsin Electric
retired a total of $846 million of long-term debt and increased short-term
debt by $148 million. Dividends on the company's common stock were $140
million, $65 million, and $65 million, during 1994, 1993 and 1992,
respectively.
During 1993, Wisconsin Electric issued five new series of First Mortgage Bonds
aggregating $350 million in principal amount, the proceeds of which were used
to redeem $284.3 million principal amount of four outstanding series of First
Mortgage Bonds and 626,500 shares of Wisconsin Electric's 6.75% Series
Preferred Stock.
During 1992, Wisconsin Electric issued five new series of First Mortgage Bonds
the proceeds of which provided $431 million principal amount to redeem 12
outstanding series of higher coupon First Mortgage Bonds and $130 million of
new capital.
These refunding transactions are expected to result in approximately $191
million in savings over the lives of the new debt issues. Depending on market
conditions and other factors, additional debt refundings may occur.
Capital Structure
The company's capitalization at December 31 is shown as follows:
1994 1993
------ ------
Common Equity 50.5% 50.7%
Preferred Stock 1.0 1.3
Long-Term Debt
(including current maturities) 42.0 43.7
Short-Term Debt 6.5 4.3
------ ------
100.0% 100.0%
A-9
10
Compared to the electric utility industry generally, Wisconsin Electric has
maintained a relatively high ratio of common equity to total capitalization
and low debt and preferred stock ratios. This conservative capital structure,
along with strong bond ratings (Wisconsin Electric currently has ratings of
AA+ by Standard & Poor's Corporation, Aa2 by Moody's Investors Service and AA+
by Duff & Phelps Inc.) and internal cash generation has provided, and should
continue to provide, the company with access to the capital markets when
necessary to finance the anticipated growth in the company's business. At
year-end 1994, the company had $102 million of unused lines of bank credit, $5
million of cash and cash equivalents, $207 million of short-term debt
(including long-term debt due currently) and $21 million of construction funds
held by trustees.
Capital Requirements 1995-1999
The estimated capital requirements for Wisconsin Electric for the years 1995-
1999 are outlined in the table below. The construction expenditures have
decreased significantly from the estimates reported previously in the 1993
Annual Report on Form 10-K. The primary reason for the decrease is the
revitalization initiative which will reduce the cost to design, build and
maintain company facilities.
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Millions of Dollars)
Construction $215 $198 $159 $151 $153
Conservation 14 13 13 14 14
Bond Maturities and
Refinancings 0 30 130 60 91
Changes in Fuel
Inventories 6 8 3 4 (2)
Decommissioning Trust
Payments 20 30 32 35 37
---- ---- ---- ---- ----
Total $255 $279 $337 $264 $293
In January 1994, a coordinated state-wide plan for meeting future electricity
needs of Wisconsin customers was filed with the PSCW in the Advance Plan 7
Docket. In the Advance Plan process, Wisconsin Electric, in conjunction with
the other regulated electric utilities located in Wisconsin, is required to
file long-term forecasts of resource requirements, such as the need for
generation and transmission facilities, along with plans to meet those
requirements, including the use of energy management and conservation.
In order to reliably meet its forecasted growth in demand, Wisconsin Electric
employs a least-cost integrated planning process which includes renovation of
existing power plants, promotion of cost-effective conservation and load
management options, development of renewable energy sources, purchases of
power and construction of new company-owned generation facilities.
Investments in demand-side management programs have reduced and delayed the
need to add new generating capacity but have not eliminated the need entirely.
Purchases of power from other utilities and transmission system upgrades will
also combine to help delay the need to install some new generating capacity in
the future. However, in order to serve the near-term growth in peak demand
requirements, Wisconsin Electric has received PSCW approval and is currently
A-10
11
in various stages of adding new capacity as previously described under
"Investing Activities".
Finally, Wisconsin Electric's Advance Plan 7 filing indicates a need for
additional peaking capacity after the turn of the century, along with an
anticipated need for additional intermediate-load capacity during the 2000 to
2010 time period. Wisconsin Electric's next base load power plant is not
expected to be placed in service until after 2010.
The addition of new generating units requires approval from various regulatory
agencies including the PSCW, the U.S. Environmental Protection Agency ("EPA")
and the Wisconsin Department of Natural Resources ("DNR"). All generating
facilities proposed by Wisconsin Electric will meet or exceed the applicable
federal and state environmental requirements.
In 1993, the PSCW, after conducting a competitive bidding process, issued an
order selecting a proposal submitted by an unaffiliated IPP to construct a
generation facility to meet a portion of Wisconsin Electric's anticipated
increase in system supply needs. In accordance with the PSCW Order, Wisconsin
Electric subsequently signed a long-term agreement to purchase electricity
from the proposed facility. The agreement is contingent upon the facility
being completed and going into operation, which at this time is planned for
mid-1996. A number of parties have filed petitions for judicial review of
this PSCW Order, taking the position that the Order should be set aside on
various legal grounds. In a decision dated March 17, 1995, the Dane County
Circuit Court affirmed the PSCW's selection of the LS Power project and the
PSCW's approval of the power purchase agreement entered into by the Company
and LSP-Whitewater L.P., the project's developer. Other aspects of the PSCW's
Order, not involving the selection of the LS Power project, were remanded.
Prior to the PSCW selection of the IPP's generation facility, Wisconsin
Electric had proposed to construct its own 220 megawatt cogeneration facility
in Kimberly, Wisconsin, which was intended to provide process steam to Repap
Wisconsin, Inc. ("Repap") starting in mid-1995. Wisconsin Electric had made
expenditures toward the Kimberly facility amounting to approximately $70
million. These expenditures were primarily associated with the procurement of
combustion turbines, the steam turbine and the heat recovery boiler in order
to achieve the in-service dates as agreed to in a steam service contract with
Repap. Wisconsin Electric is currently evaluating its options regarding its
Kimberly Cogeneration Facility investment. The equipment procured to date is
a technology of natural gas-fired combined cycle generation equipment that is
marketed worldwide. Wisconsin Electric believes that a market for the
equipment exists and is investigating opportunities to sell the equipment or
to use it in another power project. At this time, Wisconsin Electric does not
believe that the PSCW's selection of an IPP proposal will have a material
adverse effect on its financial condition.
The PSCW has approved Wisconsin Electric's application to utilize dry storage
for spent nuclear fuel generated at Point Beach. The decision completed a
multi-year state review of the Wisconsin Electric proposal. The storage
system to be used at Point Beach also has been certified by the NRC after a
four-year technical review. Dry cask storage at Point Beach will use a two-
container system made of steel and reinforced concrete. Capital costs
associated with this facility are estimated at $6.5 million and are included
in the above forecast. In March 1995 separate petitions were filed by
intervenors in Dane County Circuit Court and Fond du Lac County Circuit Court.
The petitions seek reversal of the order and a remand to the PSCW directing it
to deny Wisconsin Electric's request for authorization to construct the dry
cask facility, or in the alternative, to correct the alleged errors in the
A-11
12
PSCW's order. No specific relief is identified in the petitions; however,
numerous grounds of error are alleged. Wisconsin Electric intends to fully
participate in both judicial review proceedings and to vigorously oppose the
petitions.
The temporary dry storage facility is necessary because the spent fuel pool
inside the plant is becoming full. The plant would be forced to shut down by
1998 without additional on-site storage capacity. The dry storage facility
will be used until the DOE takes ownership of the spent fuel. While the DOE
and the operators of nuclear power facilities have a contract mandated by
federal law that calls for the DOE to begin accepting fuel in 1998, the
government is not in a position to meet its commitment. If this commitment is
not met, Wisconsin Electric will need to construct additional casks and will
seek PSCW approval to do so.
In a related matter, Wisconsin Electric filed with the PSCW for a Certificate
of Authority to proceed with the planned 1996 replacement of the Unit 2 steam
generators at Point Beach. In 1984, Wisconsin Electric replaced the Unit 1
steam generators. Estimated at a cost of $119 million, which is also included
in the above forecast, the Unit 2 project would allow for its operation until
the expiration of its operating license in 2013. Without the replacement of
the steam generators, it is believed the unit would not be able to operate to
the end of its current license. The PSCW deferred a decision on Wisconsin
Electric's request to replace Unit 2 steam generators until early 1996, but
directed Wisconsin Electric to make arrangements with the fabricator of the
new steam generators to allow replacement to proceed promptly if authorized by
the PSCW.
Capital Resources
During the five-year forecast period ending December 31, 1999, Wisconsin
Electric expects internal sources of funds from operations, after dividends to
Wisconsin Energy, to provide about 80 percent of the utility capital
requirements. The remaining utility cash requirements are expected to be met
through the reduction of existing cash investments and construction funds on
deposit with trustees, short-term borrowings, the issuance of long-term debt
and capital contributions from Wisconsin Energy.
Exclusive of debt refundings, utility debt issues of $100 million are
anticipated in 1995 and 1997.
Environmental Issues
The 1990 Amendments to the Clean Air Act mandate significant nation-wide
reductions in sulfur dioxide ("SO2") and nitrogen oxide ("NOx") emissions to
address acid rain and ground level ozone control requirements.
In 1994, Wisconsin Electric completed the installation of continuous emission
monitors at all of its facilities and installed low NOx burners on one boiler
at its Oak Creek Power Plant and two boilers at its Valley Power Plant. These
actions, along with the burning of low sulfur coal and the installation of low
NOx burners on other boilers at Oak Creek and Valley Power Plants in early
1995, meet the requirements that became effective January 1, 1995. To date,
approximately $31 million has been spent on Clean Air Act compliance.
Wisconsin Electric elected to voluntarily bring the Valley and Port Washington
Power Plants under jurisdiction of the NOx and SO2 requirements of the Clean
Air Act, five years earlier than mandated. This was possible because these
units meet the more stringent phase II emissions standards today.
A-12
13
Wisconsin Electric projects a surplus of SO2 emission allowances and is
seeking additional allowances available as a result of energy conservation
programs. As an integral component of its least-cost plan, Wisconsin Electric
is active in SO2 allowance trading. Revenue from the sale of allowances is
being used to offset future potential rate increases.
Additional fuel switching and the installation of NOx controls at various
power plants will be required to meet the second phase of reduction
requirements that become effective January 1, 2000. These costs, along with
additional operating expenses, are not expected to exceed $54 million based on
today's cost.
Wisconsin Electric aggressively seeks environmentally acceptable, beneficial
uses of its combustion byproducts. However, ash byproducts have been, and to
some degree, continue to be disposed in company owned, licensed landfills.
Some early designed and constructed landfills may allow the release of low
levels of constituents, resulting in the need for various levels of
remediation. These costs are included in the environmental operating and
maintenance costs for Wisconsin Electric.
A-13
14
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENT
Year Ended December 31
1994 1993 1992
---- ---- ----
(Thousands of Dollars)
Operating Revenues
Electric $1,403,562 $1,347,844 $1,298,723
Steam 14,281 14,090 13,093
---------- ---------- ----------
Total Operating Revenues 1,417,843 1,361,934 1,311,816
Operating Expenses
Fuel (Note F) 285,862 263,385 266,716
Purchased power 42,623 54,880 63,745
Other operation expenses 344,765 341,748 318,253
Maintenance 118,138 149,247 143,618
Revitalization (Note H) 63,500 - -
Depreciation (Note C) 160,758 150,831 148,967
Taxes other than income taxes 70,156 68,969 68,380
Federal income tax (Note I) 94,712 68,239 61,235
State income tax (Note I) 22,155 13,887 14,783
Deferred income taxes - net (Note I) (21,303) 12,034 10,083
Investment tax credit - net (Note I) (4,081) (4,123) (3,960)
---------- ---------- ----------
Total Operating Expenses 1,177,285 1,119,097 1,091,820
Operating Income 240,558 242,837 219,996
Other Income and Deductions
Interest income 11,406 13,351 13,624
Allowance for other funds used during
construction (Note D) 4,985 8,453 6,936
Miscellaneous - net 10,827 9,638 6,547
Federal income tax (Note I) (1,431) (1,718) (1,127)
State income tax (Note I) (571) (811) (630)
---------- ---------- ----------
Total Other Income and Deductions 25,216 28,913 25,350
Income Before Interest Charges 265,774 271,750 245,346
Interest Charges
Long-term debt 95,625 96,110 84,843
Other interest 6,020 2,450 2,414
Allowance for borrowed funds used
during construction (Note D) (2,816) (4,735) (3,653)
---------- ---------- ----------
Total Interest Charges 98,829 93,825 83,604
---------- ---------- ----------
Net Income 166,945 177,925 161,742
Preferred Stock Dividend Requirement 1,351 4,377 5,916
---------- ---------- ----------
Earnings Available for Common
Stockholder $ 165,594 $ 173,548 $ 155,826
========== ========== ==========
<FN>
Note: Earnings and dividends per share of common stock are not applicable because all of the
company's common stock is owned by Wisconsin Energy Corporation.
See Notes to Financial Statements.
A-14
15
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
Year Ended December 31
1994 1993 1992
---- ---- ----
(Thousands of Dollars)
Operating Activities
Net income $166,945 $177,925 $161,742
Reconciliation to cash
Depreciation 160,758 150,831 148,967
Revitalization - net 37,253 - -
Nuclear fuel expense - amortization 21,437 21,366 20,818
Conservation expense - amortization 20,910 15,254 13,009
Debt premium, discount & expense -
amortization 13,858 12,813 4,483
Deferred income taxes - net (21,303) 12,034 10,083
Investment tax credit - net (4,081) (4,123) (3,960)
Allowance for other funds used
during construction (4,985) (8,453) (6,936)
Change in Accounts receivable 1,744 (16,981) 9,993
Inventories 1,579 15,181 (5,294)
Accounts payable (14,186) 11,620 9,195
Other current assets (15,144) 3,231 (10,073)
Other current liabilities 1,785 15,453 (3,664)
Other (14,940) (5,176) 8,272
-------- -------- --------
Cash Provided by Operating Activities 351,630 400,975 356,635
Investing Activities
Construction expenditures (245,967) (310,513) (293,589)
Allowance for borrowed funds used
during construction (2,816) (4,735) (3,653)
Nuclear fuel (26,351) (20,016) (17,709)
Nuclear decommissioning trust (10,138) (11,371) (20,212)
Conservation investments - net (20,823) (35,252) (31,087)
Other (7,807) 1,080 1,184
-------- --------- --------
Cash Used in Investing Activities (313,902) (380,807) (365,066)
Financing Activities
Sale of long-term debt 23,184 361,049 567,360
Retirement of long-term debt (21,373) (328,771) (495,940)
Change in short-term debt 69,124 44,179 34,820
Stockholder capital contribution 30,000 - -
Retirement of preferred stock (5,250) (65,504) (2,035)
Dividends on stock - common (140,451) (65,000) (65,000)
- preferred (1,381) (4,729) (5,928)
-------- --------- --------
Cash Provided by (Used in) Financing Activities (46,147) (58,776) 33,277
Change in Cash and Cash Equivalents $ (8,419) $(38,608) $ 24,846
======== ========= ========
Supplemental information disclosures
Cash Paid For
Interest (net of amount capitalized) $ 78,082 $ 77,357 $ 82,193
Income taxes 138,606 94,103 82,126
<FN>
See Notes to Financial Statements.
A-15
16
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
ASSETS
1994 1993
---- ----
(Thousands of Dollars)
Utility Plant
Electric $4,304,925 $4,079,794
Steam 40,103 39,113
---------- ----------
4,345,028 4,118,907
Accumulated provision for depreciation (1,914,277) (1,784,110)
---------- ----------
2,430,751 2,334,797
Construction work in progress 205,343 208,834
Nuclear fuel - net (Note F) 56,606 52,665
---------- ----------
Net Utility Plant 2,692,700 2,596,296
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 226,805 214,421
Construction funds held by trustees 21,075 20,550
Conservation investments 138,489 136,995
Other 9,555 3,491
---------- ----------
Total Other Property and Investments 395,924 375,457
Current Assets
Cash and cash equivalents 5,002 13,421
Accounts receivable, net of allowance for
doubtful accounts - $10,547 and $7,201 90,105 91,849
Accrued utility revenues 95,051 89,306
Fossil fuel (at average cost) 58,956 57,955
Materials and supplies (at average cost) 66,777 69,357
Prepayments 56,691 47,939
Other assets 6,520 5,873
---------- ----------
Total Current Assets 379,102 375,700
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note I) 119,132 97,788
Deferred regulatory assets (Note A) 188,126 191,969
Other 51,145 56,346
---------- ----------
Total Deferred Charges and Other Assets 358,403 346,103
---------- ----------
Total Assets $3,826,129 $3,693,556
========== ==========
<FN>
See Notes to Financial Statements.
A-16
17
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
CAPITALIZATION AND LIABILITIES
1994 1993
---- ----
(Thousands of Dollars)
Capitalization (See Capitalization Statement)
Common stock equity $1,454,554 $1,399,686
Preferred stock - redemption not required 30,451 30,451
Preferred stock - redemption required - 5,250
Long-term debt (Note K) 1,191,257 1,188,744
---------- ----------
Total Capitalization 2,676,262 2,624,131
Current Liabilities
Long-term debt due currently (Note K) 19,846 19,254
Notes payable (Note L) 187,027 117,903
Accounts payable 67,444 81,630
Payroll and vacation accrued 23,672 26,058
Taxes accrued - income and other 12,904 14,422
Interest accrued 21,461 21,295
Other 18,761 13,238
---------- ----------
Total Current Liabilities 351,115 293,800
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note I) 440,564 444,717
Accumulated deferred investment tax credits 87,414 91,495
Deferred regulatory liabilities (Note A) 159,912 167,403
Other 110,862 72,010
---------- ----------
Total Deferred Credits and Other
Liabilities 798,752 775,625
Commitments and Contingencies (Note N)
---------- ----------
Total Capitalization and Liabilities $3,826,129 $3,693,556
========== ==========
<FN>
See Notes to Financial Statements.
A-17
18
WISCONSIN ELECTRIC POWER COMPANY
CAPITALIZATION STATEMENT
December 31
1994 1993
---- ----
(Thousands of Dollars)
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $10 par value; authorized 65,000,000 shares;
outstanding - 33,289,327 shares $ 332,893 $ 332,893
Other paid in capital 169,673 139,673
Retained earnings 951,988 927,120
---------- ----------
Total Common Stock Equity 1,454,554 1,399,686
Preferred Stock - Cumulative
Six Per Cent. Preferred Stock - $100 par value; authorized 45,000 shares;
outstanding - 44,508 shares 4,451 4,451
Serial preferred stock - $100 par value; authorized 2,360,000 shares;
outstanding -
3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock - Redemption Not Required (Note J) 30,451 30,451
6.75% Series - 0 shares and 52,500 shares - 5,250
---------- ----------
Total Preferred Stock - Redemption Required (Note J) - 5,250
Long-Term Debt
First mortgage bonds
Series Due
------ ---
4-1/2% 1996 30,000 30,000
5-7/8% 1997 130,000 130,000
5-1/8% 1998 60,000 60,000
6.10 % 1999-2008 25,000 25,000
6.25 % 1999-2008 1,000 1,000
6-1/2% 1999 40,000 40,000
6-5/8% 1999 51,000 51,000
6.45 % 2004 12,000 12,000
7-1/4% 2004 140,000 140,000
6.45 % 2006 4,000 4,000
6.50 % 2007-2009 10,000 10,000
9-3/4% 2015 46,350 46,350
7-1/8% 2016 100,000 100,000
6.85 % 2021 9,000 9,000
7-3/4% 2023 100,000 100,000
7.05 % 2024 60,000 60,000
9-1/8% 2024 3,443 3,443
8-3/8% 2026 100,000 100,000
7.70 % 2027 200,000 200,000
---------- ----------
1,121,793 1,121,793
Note (unsecured) - Variable rate due 2016 67,000 67,000
Obligations under capital lease (Note F) 43,696 41,870
Unamortized discount - net (21,386) (22,665)
Long-term debt due currently (19,846) (19,254)
---------- ----------
Total Long-Term Debt (Note K) 1,191,257 1,188,744
---------- ----------
Total Capitalization $2,676,262 $2,624,131
========== ==========
<FN>
See Notes to Financial Statements.
A-18
19
WISCONSIN ELECTRIC POWER COMPANY
COMMON STOCK EQUITY STATEMENT
Common Stock Common Stock Other Paid Retained
Shares $10 Par Value In Capital Earnings Total
------------ ------------- ---------- -------- -----------
(Thousands of Dollars)
Balance - December 31, 1991 33,289,327 $332,893 $142,462 $727,865 $1,203,220
Net income 161,742 161,742
Cash dividends
Common stock (65,000) (65,000)
Preferred stock (5,928) (5,928)
Other 65 65
----------- -------- -------- -------- ----------
Balance - December 31, 1992 33,289,327 332,893 142,527 818,679 1,294,099
Net income 177,925 177,925
Cash dividends
Common stock (65,000) (65,000)
Preferred stock (4,729) (4,729)
Purchase of Preferred Stock (Note J) (2,854) (2,854)
Other 245 245
----------- -------- -------- -------- ----------
Balance - December 31, 1993 33,289,327 332,893 139,673 927,120 1,399,686
Net income 166,945 166,945
Cash dividends
Common stock (140,451) (140,451)
Preferred stock (1,381) (1,381)
Stockholder capital contribution 30,000 30,000
Other (245) (245)
----------- -------- -------- -------- ----------
Balance - December 31, 1994 33,289,327 $332,893 $169,673 $951,988 $1,454,554
=========== ======== ======== ======== ==========
<FN>
See Notes to Financial Statements.
A-19
20
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A - Summary of Significant Accounting Policies
- ----------------------------------------------
General
- -------
The accounting records of the company are kept as prescribed by the Federal
Energy Regulatory Commission (FERC), modified for requirements of the Public
Service Commission of Wisconsin (PSCW).
Revenues
- --------
Utility revenues are recognized on the accrual basis and include estimated
amounts for service rendered but not billed.
Fuel
- ----
The cost of fuel is expensed in the period consumed.
Property
- --------
Property is recorded at cost. Additions to and significant replacements of
utility property are charged to utility plant at cost; minor items are charged
to maintenance expense. Cost includes material, labor and allowance for funds
used during construction (see Note D). The cost of depreciable utility
property, together with removal cost less salvage, is charged to accumulated
provision for depreciation when property is retired.
Deferred Regulatory Assets and Liabilities
- ------------------------------------------
Pursuant to Statement of Financial Accounting Standards No. 71, Accounting for
the Effects of Certain Types of Regulation, the company capitalizes as
deferred regulatory assets incurred costs which are expected to be recovered
in future utility rates. The company also records as deferred regulatory
liabilities the current recovery in utility rates of costs which are expected
to be paid in the future.
A significant portion of the company's deferred regulatory assets and
liabilities relate to the amounts recorded due to the adoption of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109).
See Note I.
Statement of Cash Flows
- -----------------------
Cash and cash equivalents includes marketable debt securities acquired three
months or less from maturity.
A-20
21
A - Summary of Significant Accounting Policies - (Cont'd)
- ---------------------------------------------------------
Conservation Investments
- ------------------------
The company directs a variety of demand-side management programs to help
foster energy conservation by its customers. As authorized by the PSCW, the
company has capitalized certain conservation program costs. Utility rates
approved by the PSCW provide for a current return on these conservation
investments. Conservation investments are amortized to operating expense over
a ten-year period.
B - Utility Merger
- ------------------
In January 1994, Wisconsin Energy Corporation (WEC) announced plans to merge
its wholly-owned natural gas subsidiary, Wisconsin Natural Gas Company (WN),
into Wisconsin Electric. The completion of the merger, which is subject to a
number of conditions including requisite regulatory approvals, is currently
anticipated to occur by year-end 1995.
C - Depreciation
- -----------------
Depreciation expense is accrued at straight line rates, certified by the PSCW,
which include estimates for salvage and removal costs.
Depreciation as a percent of average depreciable utility plant was 3.9% in
1994 and 1993, and 4.1% in 1992.
Nuclear plant decommissioning is accrued as depreciation expense (see Note F).
D - Allowance for Funds Used During Construction (AFUDC)
- --------------------------------------------------------
AFUDC is included in utility plant accounts and represents the cost of
borrowed funds used during plant construction and a return on stockholders'
capital used for construction purposes. On the income statement the cost of
borrowed funds (before income taxes) is a reduction of interest expense and
the return on stockholders' capital is an item of noncash other income.
Utility rates approved by the PSCW provide for a current return on investment
for selected long-term projects included in construction work in progress
(CWIP). AFUDC was capitalized on the remaining CWIP at a rate of 10.83% in
1994 and 1993, and 11.10% in 1992, as approved by the PSCW.
E - Transactions with Associated Companies
- ------------------------------------------
Managerial, financial, accounting, legal, data processing and other services
may be rendered between associated companies and are billed in accordance with
service agreements approved by the PSCW. WN also delivers gas to the company
for electric generation at rates approved by the PSCW. The company received
from WEC a stockholder capital contribution of $30,000,000 in 1994.
A-21
22
F - Nuclear Operations
- ----------------------
Nuclear Fuel
- ------------
The company has a nuclear fuel leasing arrangement with Wisconsin Electric
Fuel Trust (Trust), which is treated as a capital lease. The nuclear fuel is
leased for a period of 60 months or until the removal of the fuel from the
reactor, if earlier. Lease payments include charges for the cost of fuel
burned, financing costs and a management fee. In the event the company or the
Trust terminates the lease, the Trust would recover its unamortized cost of
nuclear fuel from the company. Under the lease terms, the company is in
effect the ultimate guarantor of the Trust's commercial paper and line of
credit borrowings financing the investment in nuclear fuel.
Provided below is a summary of nuclear fuel investment at December 31 and
interest expense on the nuclear fuel lease:
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 89,705 $ 91,201
Accumulated provision for amortization (50,983) (54,207)
In process/stock 17,884 15,671
-------- --------
Total nuclear fuel $ 56,606 $ 52,665
======== ========
Interest expense on nuclear fuel lease $ 1,896 $ 1,697 $ 2,098
The future minimum lease payments under the capital lease and the present
value of the net minimum lease payments as of December 31, 1994 are as
follows:
(Thousands of Dollars)
1995 $22,620
1996 14,705
1997 7,992
1998 1,472
1999 539
-------
Total Minimum Lease Payments 47,328
Less: Interest (3,632)
-------
Present Value of Net Minimum
Lease Payments $43,696
=======
The estimated cost of disposal of spent fuel based on a contract with the U.S.
Department of Energy (DOE) is included in nuclear fuel expense. The Energy
Policy Act of 1992 establishes a Uranium Enrichment Decontamination and
Decommissioning fund (fund) for the DOE's nuclear fuel enrichment facilities.
Deposits to the fund will be derived in part from special assessments to
utilities. As of December 31, 1994, the company has on its books a remaining
estimated liability equal to the projected special assessments of $31,133,000.
A corresponding deferred regulatory asset will be amortized to nuclear fuel
expense and included in utility rates over the next 13 years.
A-22
23
F - Nuclear Operations - (Cont'd)
- ---------------------------------
Nuclear Insurance
- -----------------
The Price-Anderson Act (Act) provides an aggregate limitation of $8.9 billion
on public liability claims arising out of a nuclear incident. The company has
$200 million of liability insurance from commercial sources. The Act also
establishes an industry-wide retrospective rating plan under which nuclear
reactor owners could be assessed up to $79 million per reactor (the company
owns two), but not more than $10 million in any one year for each reactor, in
the event of a nuclear incident.
An industry-wide insurance program, with an aggregate limit of $200 million,
has been established to cover radiation injury claims of nuclear workers first
employed after 1987. If claims in excess of the available funds develop, the
company could be assessed a maximum of approximately $3.2 million per reactor.
The company has property damage, decontamination and decommissioning insurance
totaling $2.0 billion for loss from damage at the Point Beach Nuclear Plant
with Nuclear Mutual Limited (NML) and Nuclear Electric Insurance Limited
(NEIL). Under the NML and NEIL policies, the company has a potential maximum
retrospective premium liability per loss of $6.0 million and $15.9 million,
respectively.
The company also maintains additional insurance with NEIL covering extra
expenses of obtaining replacement power during a prolonged accidental outage
(in excess of 21 weeks) at the Point Beach Nuclear Plant. This insurance
coverage provides weekly indemnities of $3.5 million per unit for outages
during the first year, declining to 80% of the amounts during the second and
third years. Under the policy, the company's maximum retrospective premium
liability is approximately $9.0 million.
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect the company from
material adverse impact.
Nuclear Decommissioning
- -----------------------
The company expects to operate the two units at its Point Beach Nuclear Plant
to the expiration of their current operating licenses, 2010 for Unit 1 and
2013 for Unit 2. The estimated cost to decommission the plant in 1994 dollars
is $335 million based upon a site specific decommissioning cost study
completed in 1994. Assuming plant shutdown at the expiration of the current
operating licenses, prompt dismantlement and annual escalation of costs at
specific inflation factors established by the PSCW, it is projected that
approximately $1.6 billion will be spent over a twenty-year period, beginning
in 2010, to decommission the plant.
Nuclear decommissioning costs are accrued as depreciation expense over the
expected service lives of the two units based upon an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund (Fund) along with the earnings on the Fund will
provide sufficient funds at the time of decommissioning. The company believes
it is probable that any shortfall in funding would be recoverable in utility
rates.
A-23
24
F - Nuclear Operations - (Cont'd)
- ---------------------------------
In a generic proceeding in 1994, the PSCW issued an order setting forth the
requirement of a site specific estimate with prompt dismantlement for
determining decommissioning funding levels for the owners of nuclear power
plants located in Wisconsin. WE will modify its funding requirements based on
the order in its next utility rate case filing; an increase in funding is
anticipated along with a corresponding increase in expense.
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities (FAS 115), the company's
debt and equity security investments in the Fund are classified as Available
for Sale. Gains and losses on the Fund were determined on the basis of
specific identification; net unrealized holding gains on the Fund were
recorded as part of accumulated provision for depreciation.
Following is a summary of decommissioning costs and earnings charged to
depreciation expense and the Fund balance included in accumulated provision
for depreciation at December 31:
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 3,456 $ 3,456 $ 12,162
Earnings 6,682 7,915 8,050
-------- -------- --------
Depreciation Expense $ 10,138 $ 11,371 $ 20,212
======== ======== ========
Total costs accrued to date $224,559 $214,421
Unrealized gain 2,246
-------- --------
Accumulated Provision for Depreciation $226,805 $214,421
======== ========
The December 31, 1994 Fund balance was stated at fair value, whereas the
December 31, 1993 Fund balance was stated at historical cost. The fair value
of the Fund at December 31, 1993 was $231,991,000.
G - Pension Plans
- -----------------
Effective in 1993, the PSCW adopted Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions (FAS 87), for ratemaking.
For 1992, the PSCW recognized funded amounts for ratemaking and the company
charged $3,962,000 to expense as paid.
The company has several noncontributory pension plans covering all eligible
employees. Pension benefits are based on years of service and the employee's
compensation. The majority of the plans' assets are equity securities; other
assets include corporate and government bonds and real estate. The plans are
funded to meet the requirements of the Employee Retirement Income Security Act
of 1974.
A-24
25
G - Pension Plans - (Cont'd)
- ----------------------------
In the opinion of the company, current pension trust assets and amounts which
are expected to be paid to the trusts in the future will be adequate to meet
future pension payment obligations to current and future retirees.
Pension Cost calculated per FAS 87 1994 1993 1992
- ---------------------------------- --------- --------- ---------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31 -
Cost of pension benefits earned by
employees $ 9,427 $ 9,185 $ 8,290
Interest cost on projected benefit
obligation 33,712 31,650 28,874
Actual (return) loss on plan assets 5,972 (37,846) (14,090)
Net amortization and deferral (44,756) 1,176 (30,216)
--------- --------- ---------
Total pension cost (credit) calculated
under FAS 87 $ 4,355 $ 4,165 $ (7,142)
========= ========= =========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31 -
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $ 381,148 $ 343,265
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 1,000 6,124
--------- ---------
Total obligation $ 382,148 $ 349,389
========= =========
Funded Status of Plans: Pension Assets and
Obligations at December 31 -
Pension assets at fair market value $ 459,456 $ 483,391
Projected benefit obligation
at present value (447,946) (437,461)
Unrecognized transition asset (23,057) (25,497)
Unrecognized prior service cost (1,895) 143
Unrecognized net (gain) loss 11,443 (954)
--------- ---------
Projected status of plans $ (1,999) $ 19,622
========= =========
Rates used for calculations (%) -
Discount Rate-interest rate used to
adjust for the time value of money 8.25 7.5 8.0
Assumed rate of increase
in compensation levels 5.0 5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
A-25
26
H - Benefits Other Than Pensions
- --------------------------------
Postretirement Benefits
- -----------------------
Effective in 1993, the company adopted prospectively Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions (FAS 106), and elected the 20 year option for
amortization of the previously unrecognized accumulated postretirement benefit
obligation. The PSCW has issued an order recognizing FAS 106 for ratemaking;
therefore, adoption has no material impact on net income. Prior to 1993, the
cost of these postretirement benefits was expensed when paid and was
$4,151,000 in 1992.
The company sponsors defined benefit postretirement plans that cover both
salaried and nonsalaried employees who retire at age 55 or older with at least
10 years of credited service. The postretirement medical plan provides
coverage to retirees and their dependents. Retirees contribute to the medical
plan. The group life insurance benefit is based on employee compensation and
is reduced upon retirement.
Employees' Benefit Trusts (Trusts) are used to fund a major portion of
postretirement benefits. The funding policy for the Trusts is to maximize tax
deductibility. The majority of the Trusts' assets are mutual funds.
A-26
27
H - Benefits Other Than Pensions - (Cont'd)
- -------------------------------------------
Postretirement Benefit Cost calculated per FAS 106 1994 1993
- -------------------------------------------------- --------- ---------
(Thousands of Dollars)
Components of Net Periodic Postretirement Benefit Cost,
Year Ended December 31 -
Cost of postretirement benefits earned by employees $ 2,284 $ 2,291
Interest cost on projected benefit obligation 8,723 8,404
Actual return on plan assets (3,675) (2,096)
Net amortization and deferral 5,530 4,161
--------- ---------
Total postretirement benefit cost calculated
under FAS 106 $ 12,862 $ 12,760
========= =========
Funded Status of Plans: Postretirement Obligations
and Assets at December 31 -
Accumulated Postretirement Benefit Obligation at
December 31 -
Retirees $ (71,562) $ (57,061)
Fully eligible active plan participants (5,991) (13,434)
Other active plan participants (32,074) (43,485)
--------- ---------
Total obligation (109,627) (113,980)
Postretirement assets at fair market value 31,466 26,216
--------- ---------
Accumulated postretirement benefit obligation in
excess of plan assets (78,161) (87,764)
Unrecognized transition obligation 72,029 77,943
Unrecognized net (gain) loss (8,357) 4,981
--------- ---------
Accrued Postretirement Benefit Obligation $ (14,489) $ (4,840)
========= =========
Rates used for calculations (%) -
Discount Rate-interest rate used to adjust
for the time value of money 8.25 7.5
Assumed rate of increase in compensation levels 5.0 5.0
Expected long-term rate of return on
postretirement assets 9.0 9.0
Health care cost trend rate 12.0 declining to
5.0 in year 2002
Changes in health care cost trend rates will affect the amounts reported. For
example, a 1% increase in rates would increase the accumulated postretirement
benefit obligation as of December 31, 1994 by $7,415,000 and the aggregate of
the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by $887,000.
A-27
28
H - Benefits Other Than Pensions - (Cont'd)
- -------------------------------------------
Revitalization
- --------------
In the first quarter of 1994, the company recorded a $63.5 million charge
related to its revitalization program. This charge included $32.1 million for
Early Retirement Incentive Packages (ERIP) and $21.1 million for Severance
Packages (SP). These plans are being used to reduce employee staffing levels.
ERIP provided for a monthly income supplement, medical benefits and waiver of
an early retirement pension reduction. The SP included a severance payment,
medical/dental insurance, outplacement services, personal financial planning
and tuition support. Availability of these plans to various bargaining units
was based upon agreements made between the company and the bargaining units.
These plans have been available to most management employees but not elected
officers.
Under ERIP, 347 employees elected to retire and 573 employees have enrolled in
SP. It is anticipated that the revitalization charge will be offset by the
end of 1995 through savings in operation and maintenance costs. ERIP
supplemental income costs are being paid from pension plan trusts and
medical/dental benefits from employee benefit trusts. Remaining ERIP and SP
costs are being paid from general corporate funds. The ultimate timing of
cash flows for revitalization will depend in part upon the funding limitations
of the company's pension plans. Through December 31, 1994, $26.2 million have
been paid against the revitalization liability.
I - Income Taxes
- ----------------
Comprehensive interperiod income tax allocation is used for federal and state
temporary differences. The federal investment tax credit is accounted for on
the deferred basis and is reflected in income ratably over the life of the
related property.
A-28
29
I - Income Taxes - (Cont'd)
- ---------------------------
Following is a summary of income tax expense and a reconciliation of total
income tax expense with the tax expected at the federal statutory rate.
1994 1993 1992
-------- -------- --------
(Thousands of Dollars)
Current tax expense $118,869 $ 84,655 $ 77,775
Investment tax credit-net (4,081) (4,123) (3,960)
Deferred tax expense (21,303) 12,034 10,083
-------- -------- --------
Total tax expense $ 93,485 $ 92,566 $ 83,898
======== ======== ========
Income before income
taxes $260,430 $270,491 $245,640
======== ======== ========
Expected tax at federal
statutory rate $ 91,150 $ 94,672 $ 83,518
State income tax net of
federal tax reduction 12,875 10,808 12,242
Investment tax credit
restored (4,081) (4,738) (4,071)
Other (no item over
5% of expected tax) (6,459) (8,176) (7,791)
-------- -------- --------
Total tax expense $ 93,485 $ 92,566 $ 83,898
======== ======== ========
FAS 109 requires the recording of deferred assets and liabilities to recognize
the expected future tax consequences of events that have been reflected in the
company's financial statements or tax returns, the adjustment of deferred tax
balances to reflect tax rate changes and the recognition of previously
unrecorded deferred taxes. Following is a summary of deferred income taxes
under FAS 109.
December 31
1994 1993
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 42,685 $ 44,888
Construction advances 32,126 30,777
Accrued vacation 5,854 6,692
ERIP Accrual 14,969 -
Other 23,498 15,431
-------- --------
Total Deferred Income Tax Assets $119,132 $ 97,788
======== ========
Deferred Income Tax Liabilities
Plant related $397,850 $383,796
Conservation investments 27,564 51,882
Other 15,150 9,039
-------- --------
Total Deferred Income Tax Liabilities $440,564 $444,717
======== ========
A-29
30
I - Income Taxes - (Cont'd)
- ---------------------------
The company also has recorded the following deferred regulatory assets and
liabilities which represent the future expected impact of deferred taxes on
utility revenues.
December 31
1994 1993
-------- --------
(Thousands of Dollars)
Deferred regulatory assets $154,882 $155,881
Deferred regulatory liabilities 159,912 167,403
J - Preferred Stock
- -------------------
Serial Preferred Stock authorized but unissued is cumulative, $25 par value,
5,000,000 shares.
In the event of default in the payment of preferred dividends or in the
mandatory redemption requirements, no dividends or other distributions may be
paid on the company's common stock.
Redemption Not Required -
The 3.60% Series Preferred Stock is redeemable in whole or in part at the
option of the company at $101 per share plus any accrued dividends.
Redemption Required -
In 1994 the company called for redemption all of its 52,500 outstanding shares
of 6.75% Series Preferred Stock at a redemption price of par. In 1993 the
company called for redemption 626,500 shares at a purchase price of $104.05
per share plus accrued dividends to the redemption date.
A-30
31
K - Long-Term Debt
- ------------------
The maturities and sinking fund requirements through 1999 for the aggregate
amount of long-term debt outstanding (excluding obligations under capital
lease, see Note F) at December 31, 1994 are shown below.
(Thousands of Dollars)
1995 $ -
1996 30,000
1997 130,000
1998 60,000
1999 92,040
Sinking fund requirements for the years 1995 through 1999, included in the
table above, are $1,040,000. Substantially all utility plant is subject to
the applicable mortgage.
Long-term debt premium or discount and expense of issuance are amortized by
the straight line method over the lives of the debt issues and included as
interest expense. Unamortized amounts pertaining to reacquired debt are
written off currently, when acquired for sinking fund purposes, or amortized
in accordance with PSCW orders, when acquired for early retirement.
Fair value of first mortgage bonds is estimated based upon the market value of
the same or similar issues. The fair value of the company's first mortgage
bonds was $1.0 billion and $1.2 billion at December 31, 1994 and 1993,
respectively.
L - Notes Payable
- -----------------
Short-term notes payable balances and their corresponding weighted average
interest rates consist of:
December 31
1994 1993
------------------ ------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $ 50,400 6.02% $ 50,000 3.28%
Commercial paper 136,627 6.06% 67,903 3.34%
-------- --------
$187,027 $117,903
======== ========
Unused lines of credit for short-term borrowing amounted to $101,600,000 at
December 31, 1994. In support of various informal lines of credit from banks,
the company has agreed to maintain unrestricted compensating balances or to
pay commitment fees; neither the compensating balances nor the commitment fees
are significant.
A-31
32
M - Information by Segments of Business
- ---------------------------------------
Year ended December 31 1994 1993 1992
- ---------------------- ---- ---- ----
(Thousands of Dollars)
Electric Operations
Operating revenues $1,403,562 $1,347,844 $1,298,723
Operating income before income taxes 329,216 329,727 299,902
Depreciation 159,414 149,646 147,859
Construction expenditures 244,718 305,467 292,031
Steam Operations
Operating revenues 14,281 14,090 13,093
Operating income before income taxes 2,825 3,147 2,235
Depreciation 1,344 1,185 1,108
Construction expenditures 1,213 4,940 1,530
Total
Operating revenues 1,417,843 1,361,934 1,311,816
Operating income before income taxes 332,041 332,874 302,137
Depreciation 160,758 150,831 148,967
Construction expenditures
(including nonutility) 245,967 310,513 293,589
At December 31
- --------------
Net Identifiable Assets
Electric $3,798,186 $3,665,536 $3,262,031
Steam 25,315 25,119 20,972
Nonutility 2,628 2,901 2,842
---------- ---------- ----------
Total Assets $3,826,129 $3,693,556 $3,285,845
========== ========== ==========
N - Commitments and Contingencies
- ---------------------------------
Plans for the construction and financing of future additions to utility plant
can be found elsewhere in this report in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 7.
A-32
33
DIRECTORS
The information under "Election of Directors" in Wisconsin Electric's
definitive Information Statement dated April 21, 1995, attached hereto, is
incorporated herein by reference.
EXECUTIVE OFFICERS
(Figures in brackets indicate age and years of service with Wisconsin Electric
Power Company as of December 31, 1994.)
JOHN W. BOSTON [60, 11] ANN MARIE BRADY [41, 5]
Richard A. Abdoo [50,19] Kristine M. Krause [40,16]
Chairman of the Board Vice President - Fossil Operations
& Chief Executive Officer
Richard R. Grigg, Jr. [46,24] Robert E. Link [43,20]
President & Chief Operating Officer Vice President - Nuclear Power
Jerry G. Remmel [63,39] Kristine A. Rappe [38,12]
Chief Financial Officer Vice President - Customer Services
David K. Porter [51,25] Bernard F. Van Dinter [61,39]
Senior Vice President Vice President - Electric Operations
Calvin H. Baker [51,3] Ann Marie Brady [42,6]
Vice President-Finance Secretary
Francis Brzezinski [43,5] Anne K. Klisurich [47,22]
Vice President-Bulk Power Controller
A-33
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Wisconsin Electric Power Company
In our opinion, the accompanying balance sheet and capitalization statement
and the related statements of income, of common stock equity and of cash flows
present fairly, in all material respects, the financial position of Wisconsin
Electric Power Company at December 31, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/Price Waterhouse LLP
- -----------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 25, 1995
A-34