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WISCONSIN ELECTRIC POWER COMPANY
1995 ANNUAL REPORT TO STOCKHOLDERS
ACCOMPANYING INFORMATION STATEMENT
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TABLE OF CONTENTS
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ITEM PAGE
---- ----
Business A-2
Market for Common Equity and Related Stockholder Matters A-3
Selected Financial Data A-4
Management's Discussion and Analysis of Financial
Condition and Results of Operations A-5
Income Statement A-24
Statement of Cash Flows A-25
Balance Sheet A-26
Capitalization Statement A-28
Common Stock Equity Statement A-29
Notes to Financial Statements A-30
Directors A-46
Executive Officers A-46
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BUSINESS
Wisconsin Electric Power Company ("WE" or the "Company") is an operating
public utility incorporated in the State of Wisconsin in 1896. Effective
January 1, 1996, Wisconsin Energy Corporation ("WEC"), WE's parent company,
merged its natural gas utility subsidiary, Wisconsin Natural Gas Company
("WN"), into WE to form a single combined utility subsidiary. Where
applicable, references to WE include WN prior to the merger. Additional
information concerning the merger may be found in Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
"RESULTS OF OPERATIONS - Mergers" and in Note B - "Mergers" in the NOTES TO
FINANCIAL STATEMENTS in Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WE's operations are conducted in three business segments, the primary
operations of which are as follows:
Business Segment Operations
---------------- ----------
Electric Operations WE 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.
Gas Operations The WE gas operations ("WEGO") purchases,
distributes and sells natural gas to retail
customers and transports customer-owned gas in
three distinct service areas in Wisconsin:
west and south of the City of Milwaukee, the
Appleton area and the Prairie du Chien area.
The gas service territory, which has an
estimated population of over 1,100,000, is
largely within WE's electric service area.
Steam Operations WE distributes and sells steam supplied by
WE's Valley Power Plant to space heating and
processing customers in downtown and near
southside areas of Milwaukee.
For additional financial information about business segments, see Note L -
"Information by Segments of Business" in the NOTES TO FINANCIAL STATEMENTS.
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MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The amount of cash dividends declared on WE's Common Stock during the two most
recent fiscal years are set forth below. Dividends were paid to WE's sole
common stockholder, WEC.
==============================================================================
Quarter Total Dividend *
- ------------------------------------------------------------------------------
1994 1 $ 36,325,000
2 $ 38,208,667
3 $ 38,208,667
4 $ 38,208,667
- ------------------------------------------------------------------------------
1995 1 $ 38,208,667
2 $ 40,455,444
3 $ 40,455,444
4 $ 40,455,444
==============================================================================
* Includes dividends paid by WN in 1994 and 1995.
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SELECTED FINANCIAL DATA
WISCONSIN ELECTRIC POWER COMPANY ***
SELECTED FINANCIAL DATA
===============================================================================================
Year Ended December 31 1995 1994 1993** 1992** 1991**
- ---------------------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Earnings available
for common stockholder $ 239,465 $ 180,403* $ 187,703 $ 170,034 $ 188,554
Operating revenues
Electric $1,437,480 $1,403,562 $1,347,844 $1,298,723 $1,292,809
Gas 318,262 324,349 331,301 283,699 273,803
Steam 14,742 14,281 14,090 13,093 12,986
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,770,484 $1,742,192 $1,693,235 $1,595,515 $1,579,598
========== ========== ========== ========== ==========
Total assets $4,318,924 $4,202,193 $4,078,973 $3,623,838 $3,366,063
Long-term debt and preferred stock-
redemption required $1,325,169 $1,257,776 $1,274,476 $1,280,012 $1,171,017
- -----------------------------------------------------------------------------------------------
Sales and Customers
Electric
Megawatt-hours sold 27,283,869 26,911,363 25,685,436 24,747,581 25,016,247
Customers (End of year) 955,616 944,855 932,285 919,466 907,871
Gas
Therms delivered (Thousands) 886,729 811,219 809,348 772,036 767,071
Customers (End of year) 357,030 347,080 336,571 327,247 317,891
Steam
Pounds sold (Millions) 2,532 2,395 2,376 2,284 2,282
Customers (End of year) 473 471 459 472 468
===============================================================================================
QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars)
- -----------------------------------------------------------------------------------------------
March June
Three Months Ended 1995 1994 1995 1994
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 471,122 $ 509,681 $ 405,093 $ 400,340
Operating income 84,572 43,436* 72,848 63,854
Earnings available
for common stockholder 62,121 22,712* 51,249 42,885
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
September December
Three Months Ended 1995 1994 1995 1994
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 426,413 $ 400,512 $ 467,856 $ 431,659
Operating income 80,704 71,248 90,897 84,735
Earnings available
for common stockholder 58,679 50,796 67,416 64,010
===============================================================================================
<FN>
Quarterly results of operations are not directly comparable because of seasonal and other factors.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Earnings and dividends per share are not provided as all of WE's common stock is held by WEC.
* Includes nonrecurring $73.9 million charge in 1994 ($45 million net of tax) related to WE's
Revitalization program.
** Restated to reflect the merger of Wisconsin Southern Gas Company, Inc. ("WSG") into Wisconsin
Natural Gas Company ("WN") effective on January 1, 1994.
*** Where applicable, prior year financial and statistical information has been restated to
include WN at historical values.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective January 1, 1996, Wisconsin Energy Corporation ("WEC"), Wisconsin
Electric Power Company's ("WE" or the "Company") parent company, merged its
natural gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE
to form a single combined utility subsidiary. Where applicable, references to
WE include WN prior to the merger and financial and statistical information
has been restated to include WN at historical values. Additional information
concerning the merger may be found below under "RESULTS OF OPERATIONS -
Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS.
As previously reported, WEC has entered into an agreement with Northern States
Power Company, a Minnesota corporation ("NSP"), which provides for a strategic
business combination involving the two companies in a "merger-of-equals"
transaction. The future operations and financial position of WE will be
significantly affected by the proposed merger. Consummation of the proposed
merger is subject to a number of conditions, including obtaining all required
regulatory approvals. Additional information concerning such agreement and
proposed transaction may be found below under "RESULTS OF OPERATIONS -
Mergers" and in Note B - "Mergers" in the NOTES TO FINANCIAL STATEMENTS
(including unaudited pro forma financial information).
RESULTS OF OPERATIONS
Earnings
1995 Compared to 1994: Earnings Available for Common Stockholder ("Earnings")
of WE increased to $239 million in 1995 compared to $180 million in 1994, an
increase of 32.8%. Earnings during 1994 reflect a nonrecurring charge of
approximately $73.9 million ($45 million net of tax) associated with the
organizational restructuring program at WE.
The 1994 nonrecurring charge primarily included the costs of early retirement
and severance packages which were elements of a revitalization program
("Revitalization") designed to better position the Company in a changing
energy marketplace. The Company has recovered the 1994 nonrecurring charge in
avoided labor costs that would have been charged to Other Operations and
Maintenance expense during 1994 and 1995.
Excluding the Revitalization charge, 1995 Earnings were 6.2% greater than 1994
Earnings of $225 million. The increase in 1995 Earnings reflects 1.4% higher
electric sales, 9.3% higher gas deliveries and a 3.1% decrease in Other
Operation and Maintenance expenses. Electric sales grew primarily as a result
of warmer summer weather during 1995. Gas deliveries increased due to
increased deliveries to Interruptible and Transportation customers and to
colder weather during the fourth quarter of 1995. Additional economic
activity in WE's service area also contributed to the increase in electric
sales and gas deliveries. The reduction in Other Operation and Maintenance
expenses primarily reflects payroll-related savings and efficiencies gained
through WE's Revitalization program.
1993 Through 1995: Earnings increased at a compound annual rate of 12.9% from
$188 million in 1993 to $239 million in 1995. The increase in Earnings
primarily resulted from corresponding growth in electric sales and therm
deliveries and a decline in Other Operation and Maintenance expense.
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Wisconsin Electric Revitalization
In response to increasing competitive pressures in the markets for electricity
and natural gas, WE implemented Revitalization in 1994 to increase
efficiencies and improve customer service by reengineering and restructuring
the organization. The new structure consolidated many business functions and
simplified work processes. See Note K - "Benefits Other Than Pensions" in the
NOTES TO FINANCIAL STATEMENTS.
Mergers
Wisconsin Natural Gas Company: As part of Revitalization, WEC has merged WN
into WE. The merger, which was effective January 1, 1996, is expected to
improve customer service and reduce operating costs. The accounting treatment
for this merger was similar to that which would result from a pooling of
interests. Accordingly, WE's prior year financial and statistical information
has been restated to include WN at historical values.
Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired
Wisconsin Southern Gas Company, Inc. ("WSG") through a statutory merger of WSG
into WN in which all of WSG's common stock was converted into common stock of
WEC. WSG was a gas utility engaged in the purchase, distribution,
transportation and sale of natural gas primarily in an area of southeastern
Wisconsin which was contiguous to WN's service territory. WSG was merged into
WN using the pooling of interests method of accounting. Accordingly, prior
years' financial and statistical information was restated to include WSG at
historical values.
Northern States Power Company: On April 28, 1995, WEC and NSP entered into an
Agreement and Plan of Merger, which was amended and restated as of
July 26, 1995 ("Merger Agreement"). The Merger Agreement provides for a
strategic business combination involving WEC and NSP in a "merger-of-equals"
transaction ("Transaction"). As a result, WEC will become a registered public
utility holding company under the Public Utility Holding Company Act of 1935,
as amended ("PUHCA"), and will change its name to Primergy Corporation
("Primergy"). Primergy will be the parent company of WE (which will be
renamed Wisconsin Energy Company), of NSP (which, for regulatory reasons, will
reincorporate in Wisconsin ("New NSP")), and of the other subsidiaries of WEC
and NSP. In connection with the Transaction, Northern States Power Company, a
Wisconsin corporation ("NSP-WI"), currently a utility subsidiary of NSP, will
be merged into Wisconsin Energy Company. Prior to the merger of NSP-WI into
Wisconsin Energy Company, New NSP will acquire from NSP-WI certain gas utility
assets. The Transaction is intended to be tax free for income tax purposes
and to be accounted for as a pooling of interests.
On September 13, 1995, stockholders of WEC and NSP voted to approve the
Transaction. Under the provisions of the Merger Agreement, each share of WEC
and NSP common stock will become 1.0 and 1.626 shares of Primergy common
stock, respectively, following the proposed Transaction.
As a result of the Transaction, the Company anticipates cost savings of
approximately $2 billion over a ten year period, net of transaction costs and
costs to achieve the savings of approximately $30 million and $122 million,
respectively. WE and NSP have proposed, in their filings with the numerous
state jurisdictions to which they are subject, a reduction of approximately
1.5% in retail electric rates beginning on or about January 1997 (assuming
that the Transaction is then consummated) and a rate freeze through the year
2000, subject to certain exceptions regarding matters beyond WE's or NSP's
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control. For the same periods and subject to the same types of exceptions, WE
and NSP-WI have proposed a $4.2 million reduction in retail gas rates on an
annualized basis in Wisconsin and Michigan and a rate freeze through the year
2000. Similarly, NSP anticipates proposing in 1996 a 1.25% rate reduction for
retail gas customers in North Dakota and four and two year rate freezes in
North Dakota and Minnesota, respectively, effective following consummation of
the Transaction. Subject to the same types of exceptions noted above, WE and
NSP have agreed to a freeze in their electric wholesale rates for a four year
period subsequent to the Transaction. In December 1995, WEC and NSP entered
into a settlement agreement with certain municipal Wisconsin intervenors that
ended the latters' participation in the FERC and state merger proceedings.
The settlement agreement, which provides for certain rate reductions on power
sales and transmission services, is pending FERC action. The state filings
include a request for deferred accounting treatment and rate recovery of costs
incurred associated with the Transaction. As of December 31, 1995, WEC has
deferred $8.1 million of costs associated with the Transaction as a component
of Deferred Charges and Other Assets-Other.
The Merger Agreement is subject to various conditions including approval by
all applicable regulatory authorities. In July 1995, WEC and NSP filed an
application and supporting testimony with the FERC seeking approval of the
Merger Agreement. In August 1995, WEC and NSP made similar filings with
regulatory agencies in the states where WEC and NSP provide utility services
and in which such filings are required. Applications for license amendments
and approvals relating to the Merger Agreement were filed with the Nuclear
Regulatory Commission ("NRC") in the fall of 1995. The FERC has put the
merger application on an accelerated schedule, ordering the administrative law
judge's initial decision by August 30, 1996 and briefs on exception by
September 30, 1996. In March 1996, the Public Service Commission of Wisconsin
("PSCW") requested that the FERC broaden the scope of the merger application
hearing to evaluate whether the proposed Transaction will impair effective
state oversight of retail rates. The matter is pending. Not all of the
regulatory agencies have established a timetable for their decision.
During 1995, WEC and NSP received a ruling from the Internal Revenue Service
indicating that the proposed successive merger transactions defined in the
Merger Agreement would not prevent the treatment of the Transaction as a tax-
free reorganization under applicable tax law if each transaction independently
so qualified. In 1996, WEC and NSP will file an application with the
Securities and Exchange Commission ("SEC") for authority to form Primergy
under the requirements of PUHCA as well as required notifications with the
Federal Trade Commission and the Department of Justice under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended. Subject to obtaining
all requisite approvals, WEC and NSP anticipate completing the Transaction by
January 1, 1997.
The SEC may require, as a condition to its approval of the Transaction, that
WEC and NSP divest their gas utility properties and possibly certain non-
utility ventures within a reasonable time after the Transaction is
consummated. In a few cases, the SEC has allowed the retention of such
properties or deferred the question of divestiture for a substantial period of
time. In those cases in which divestiture has taken place, the SEC has
usually allowed enough time to complete the divestiture so as to allow the
applicant to avoid a "fire sale" of the divested assets. WEC and NSP believe
strong policy reasons and prior SEC decisions exist which support their
retaining their existing gas utility properties and non-utility ventures, or,
alternatively, which support deferring the question of divestiture for a
substantial period of time; accordingly, WEC and NSP will request in their
merger application with the SEC that WEC and NSP be allowed to retain, or, in
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the alternative, that the question of divestiture be deferred with respect to,
WEC's and NSP's existing gas utility properties and non-utility ventures.
Regulatory authorities may also require the restructuring of transmission
system operations or administration. WEC and NSP currently cannot determine
if such restructuring will be required. In addition, Wisconsin State law
limits the total assets of non-utility affiliates of Primergy, which could
affect the amount of non-regulated operations.
Electric Revenues, Gross Margins and Sales
1995 Compared to 1994: Despite an annualized $16 million or 1.3% Wisconsin
retail electric fuel adjustment rate decrease that became effective on
August 4, 1994, total Electric Operating Revenues increased by 2.4% from
$1,404 million in 1994 to $1,437 million in 1995 due to increased 1995
electric sales. The gross margin on Electric Operating Revenues (Electric
Operating Revenues less Fuel and Purchased Power expenses) increased by 1.6%
from $1,075 million in 1994 to $1,092 million in 1995. The gross margin grew
because the increased electric sales were primarily to Residential and Small
Commercial/Industrial customers who contribute higher margins to earnings than
other customer classes.
==============================================================================
Electric Gross Margin ($000) 1995 1994 % Change
- ---------------------------- ---------- ---------- --------
Electric Operating Revenues $1,437,480 $1,403,562 2.4
Fuel & Purchased Power 345,387 328,485 5.1
---------- ----------
Gross Margin $1,092,093 $1,075,077 1.6
==============================================================================
Total electric sales, detailed below by customer class, increased by 1.4% to
approximately 27,284,000 megawatt-hours in 1995 compared to 26,911,000
megawatt-hours in 1994. Electric sales were positively impacted by
substantially warmer summer weather conditions during 1995, resulting in
increased use of electricity for air conditioning and other cooling purposes.
As measured by cooling degree days, the 1995 cooling season (June through
August) was 27.7% warmer than the same period in 1994. During the summer of
1995, WE experienced eight days of electric peak demands greater than the
previous record which had been set in June 1994. The increase in electric
sales also reflects colder winter weather during the fourth quarter of 1995
and a moderate increase in economic activity in WE's service area.
==============================================================================
Electric Sales (Megawatt-hours) 1995 1994 % Change
- ------------------------------- ---------- ---------- --------
Residential 7,042,691 6,670,081 5.6
Small Commercial/Industrial 7,047,277 6,699,073 5.2
Large Commercial/Industrial 10,639,782 10,471,869 1.6
Other 1,550,937 1,603,741 (3.3)
---------- ----------
Total Retail and Municipal 26,280,687 25,444,764 3.3
Resale-Utilities 1,003,182 1,466,599 (31.6)
---------- ----------
Total Sales 27,283,869 26,911,363 1.4
==============================================================================
The warmer 1995 summer weather increased sales primarily to Residential and
Small Commercial/Industrial customers. These customers are more sensitive to
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weather variations than other customer classes. The average number of
customers in the Residential and Small Commercial/Industrial customer classes
grew by 1.3% and 1.8% or from 846,745 and 88,765, respectively, in 1994 to
857,924 and 90,386 in 1995. Electric energy sales to the Empire and Tilden
iron ore mines, WE's two largest customers, decreased by 0.5% to 2,296,000
megawatt-hours in 1995 compared to 2,308,000 megawatt-hours in 1994.
Excluding the mines, sales to Large Commercial/Industrial customers increased
2.2%.
The 3.3% reduction in 1995 sales to the Other customer class is largely the
result of reductions in sales to WPPI, WE's largest municipal power agency
customer. WPPI has been reducing its purchases from WE subsequent to
acquiring generating capacity in 1990, 1993 and 1996. Since that time, WPPI
has expanded the use of its existing generating facilities and has installed
additional capacity, further reducing its reliance on energy purchases from
WE. These sales reductions did not have a significant effect on earnings.
The market for electric wholesale customers (included in the Other customer
class) is increasingly competitive. WE is in the process of renegotiating or
has renegotiated long-term power sales contracts with most of its municipal
wholesale customers. While WE anticipates retaining most of these customers
over the long-term, WE expects that municipal wholesale revenues will begin to
decline starting in 1996 as a result of lower margins included in the
renegotiated contracts. WE is actively seeking to obtain new municipal
wholesale customers to increase sales in this customer class.
Resale of energy to other utilities declined 31.6% in 1995. This decline can
in part be attributed to unplanned or longer than expected outages at two of
WE's least cost generating facilities during 1995 and to increased retail
customer load as a result of the warmer summer weather, both of which reduced
the opportunity to sell electric energy to other utilities. Additionally,
Upper Peninsula Power Company has permanently reduced the amount of energy
that it is purchasing from WE for resale. These sales reductions did not have
a significant effect on earnings.
1993 Through 1995: Total Electric Operating Revenues increased at a compound
annual growth rate of 3.3% or from approximately $1,348 million in 1993 to
$1,437 million in 1995 due to increased electric sales. Total electric sales
grew from 25,685,000 megawatt-hours in 1993 to 27,284,000 megawatt-hours in
1995, a compound annual increase of 3.1%. These increases reflect, among
other things, more favorable weather conditions in 1995 and a moderate
increase in economic activity in WE's service area. The gross margin on
Electric Operating Revenues increased at a compound annual rate of 3.0% from
approximately $1,030 million in 1993 to $1,092 million in 1995. This was due
to increased electric sales to Residential and Small Commercial/Industrial
customers who contribute higher margins to earnings than other customer
classes.
From 1993 through 1995, sales to Residential and Small Commercial/Industrial
customers increased at compound annual rates of 3.7% and 5.3% or from
6,551,000 and 6,358,000 megawatt-hours, respectively, in 1993 to 7,043,000 and
7,047,000 megawatt-hours in 1995. This increase was due primarily to warm
summer weather in 1994 and 1995. The average number of Residential and Small
Commercial/Industrial customers has increased at compound annual rates of 1.3%
and 1.7%, respectively, during this period.
Large Commercial/Industrial sales increased from 9,771,000 megawatt-hours in
1993 to 10,640,000 megawatt-hours in 1995, a compound annual increase of 4.3%
attributable in part to a five-week long mine strike during the third quarter
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of 1993 which reduced 1993 sales. WE's contracts with the mines require the
payment of a demand charge regardless of power usage which partially offset
the impact on 1993 revenues of lost sales. Sales to the mines represented
8.4%, 8.6% and 7.8% of total electric sales during 1995, 1994 and 1993,
respectively. For the three year period ending with 1995, sales to the Other
customer class declined from 1,776,000 megawatt-hours in 1993 to 1,551,000
megawatt-hours in 1995, a compound annual decrease of 6.6% resulting from the
decreased sales to WPPI noted above. Sales for Resale to other utilities
declined from 1,229,000 megawatt-hours in 1993 to 1,003,000 megawatt-hours in
1995, a compound annual decrease of 9.7% resulting from the decreased
opportunity sales and the reduction in purchases by Upper Peninsula Power
Company described above.
In addition to the results of higher total electric sales, the compound annual
increase in Electric Operating Revenues since 1993 includes the impacts of
rate changes which were effective during 1993 and 1994 as shown below in
"Rates and Regulatory Matters."
Gas Revenues, Gross Margins and Sales
1995 Compared to 1994: Despite an increase in 1995 total gas deliveries,
total Gas Operating Revenues decreased by 1.9% or from $324 million in 1994 to
$318 million in 1995 as a result of a reduction in the cost of gas which is
recovered through the purchased gas adjustment clause. The gross margin on
Gas Operating Revenues (Gas Operating Revenues less Cost of Gas Sold)
increased by 3.7% or from $125 million in 1994 to $129 million in 1995. The
gross margin grew because of increased therm sales to Residential and
Commercial customers who contribute higher margins to earnings than other
customer classes.
==============================================================================
Gas Gross Margin ($000) 1995 1994 % Change
- ----------------------- ---------- ---------- --------
Gas Operating Revenues $ 318,262 $ 324,349 (1.9)
Cost of Gas Sold 188,764 199,511 (5.4)
---------- ----------
Gross Margin $ 129,498 $ 124,838 3.7
==============================================================================
Total natural gas therms delivered, detailed below by customer class,
increased by 9.3% or from 811,219 thousand therms in 1994 to 886,729 thousand
therms in 1995, due in part to the effects of weather. Colder weather during
the fourth quarter of 1995 contributed to net increased deliveries for the
year. As measured by heating degree days, the fourth quarter was 43.1% colder
than the same period in 1994. The increase in therms delivered also reflects
the warmer summer weather conditions noted above, which increased therm
deliveries to electric peak generating stations described below, and a
moderate increase in economic activity in WE's service area.
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==============================================================================
Therms Delivered - Thousands 1995 1994 % Change
- ---------------------------- ---------- ---------- --------
Residential 345,140 323,913 6.6
Commercial/Industrial 207,358 199,206 4.1
Interruptible 50,646 47,467 6.7
---------- ----------
Total Sales 603,144 570,586 5.7
Transported Customer Owned Gas 283,585 240,633 17.8
---------- ----------
Total Gas Delivered 886,729 811,219 9.3
==============================================================================
The colder fourth quarter of 1995 weather increased sales to Residential and
Commercial customers. These customers are more sensitive to weather
variations as a result of heating requirements than other customer classes.
The average number of Residential and Commercial/Industrial customers
increased by 3.3% and 2.7% or from 311,288 and 28,506, respectively, in 1994
to 321,643 and 29,287 in 1995.
During 1995, therm deliveries to Interruptible and Transportation customers
increased by 6.7% and 17.8%, respectively. WE attributes these increases in
part to increased electric generation peaking requirements of its Concord
("Concord") and Paris ("Paris") Generating Stations, especially given the
warmer weather during the summer of 1995. All of the gas fired generating
units at Concord and Paris were in operation by the end of the second quarter
of 1995 while only the generating units at Concord were in operation by the
end of the second quarter of 1994. Deliveries to the Concord and Paris
peaking power plants are at rates approved by the PSCW.
WE transports gas for customers who purchase gas directly from other
suppliers. Rates charged for transportation services are designed to recover
the same margin as natural gas sold directly by WE. WE arranges for its own
gas supply under contracts with terms of various lengths. Changes in the cost
of natural gas purchased at market prices are passed through to customers via
WE's purchased gas adjustment clause.
1993 Through 1995: While total Gas Operating Revenues decreased at a compound
annual rate of 2.0% or from $331 million in 1993 to $318 million in 1995, the
gross margin on Gas Operating Revenues increased at a compound annual rate of
5.1% or from $117 million in 1993 to $129 million in 1995. Total therms
delivered increased from 809,348 thousand therms in 1993 to 886,729 thousand
therms in 1995, or at a compound annual rate of 4.7%. Despite an annualized
$9 million or 3.3% rate increase that became effective September 2, 1993 and
the increased therm deliveries, Gas Operating Revenues declined due to a
reduction in the cost of gas which is passed through to customers via the
purchased gas adjustment clause. Gross margin grew as a result of increased
therm sales to Residential and Commercial customers who contribute higher
margins to earnings than other customer classes. Total therm deliveries
increased in part due to favorable weather conditions and moderate economic
growth in WE's service territory from 1993 through 1995.
From 1993 through 1995, therm sales to Residential and Commercial/Industrial
customers increased at compound annual rates of 3.5% and 1.2% or from 322,444
thousand and 202,549 thousand therms, respectively, in 1993 to 345,140
thousand and 207,358 thousand therms in 1995. The average number of
Residential and Commercial/Industrial customers increased at compound annual
rates of 3.1% and 2.5%, respectively, during this period. Therm deliveries to
Interruptible and to Transportation customers increased at compound annual
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rates of 21.0% and 6.6% or from 34,608 thousand and 249,747 thousand therms,
respectively, in 1993 to 50,646 thousand and 283,585 thousand therms in 1995.
These gas deliveries increased in part due to the increased electric
generation peaking requirements of Paris and Concord noted above. Therms of
Transported Customer Owned Gas accounted for 32.0%, 29.7% and 30.9% of WE's
total therms delivered during 1995, 1994 and 1993, respectively.
Operating Expenses
1995 Compared to 1994: Excluding Depreciation expense, total operating taxes
and the nonrecurring 1994 Revitalization charge, total Operating Expenses
decreased 0.9% in 1995, reflecting a reduction of approximately $16 million or
3.1% in Other Operation and Maintenance expenses attributable to payroll-
related savings and efficiencies gained through WE's Revitalization program.
Such reductions were partially offset by higher costs related to increased
generation, the availability of Paris and unscheduled or longer than expected
outages at two of WE's most efficient power plants.
Fuel expense increased by approximately $18 million or 6.2% while Purchased
Power expense declined approximately $1 million or 1.9% in 1995. Fuel expense
rose as a result of higher electric sales. Purchased Power expense fell as a
result of decreased marginal generating costs at three of WE's fossil plants
and the newly installed peaking capacity at Paris. Lower generating costs at
the fossil plants were due to decreased per unit fuel costs and the benefits
of Revitalization, allowing WE to substitute generation for power purchases.
The addition of Paris in 1995 allowed WE to eliminate firm power purchase
contracts that contained fixed demand charges. The unscheduled or longer than
expected outages in 1995 noted above, however, offset most of the decrease in
Purchased Power expense as WE purchased nonfirm replacement energy on the spot
market.
Despite the increase in therm deliveries during 1995 noted above, Cost of Gas
Sold decreased by approximately $11 million or 5.4% in 1995 as a result of a
decrease in the average cost per therm sold.
From 1994 to 1995, total operating taxes increased $41 million or 41.4% due to
lower taxable income in 1994 caused by the nonrecurring Revitalization charge.
Deferred Income Taxes - Net increased $22 million or 88.7% primarily due to
tax matters related to the timing of payments made in connection with WE's
Revitalization program.
1993 Through 1995: Since 1993, total Operating Expenses excluding
Depreciation expense, total operating taxes and the nonrecurring 1994
Revitalization charge have decreased at a compound annual rate of 2.1% or from
$1,088 million in 1993 to $1,042 million in 1995. Other Operation and
Maintenance expenses decreased from $555 million in 1993 to approximately $508
million in 1995, a compound annual decrease of 4.4% largely due to the
Revitalization related work force reductions and efficiency gains referred to
above as well as to lower expenditures made in connection with power plant
renovation work as certain major maintenance programs were completed in 1994.
These decreases have been partially offset by expenses associated with the
implementation of Revitalization and increases in conservation-related
expenses associated with improving the efficiency of customers' energy usage.
Fuel expense increased at a compound annual rate of 7.4% or from $263 million
in 1993 to approximately $304 million in 1995, primarily due to increased
electric sales. Purchased Power expense decreased at a compound annual rate
of 12.7% or from $55 million in 1993 to approximately $42 million in 1995 due
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to the decreased marginal generating costs at three of WE's fossil plants
noted above and to additional peak generating capacity placed in service at
Concord and Paris in 1994 and 1995, respectively. A 6.1% compound annual
decrease in the Cost of Gas Sold from $214 million in 1993 to approximately
$189 million in 1995 is attributable to a decrease in the average cost per
therm sold. Depreciation expense has increased at a compound annual rate of
4.9% from $167 million in 1993 to $184 million in 1995 as a result of higher
depreciable plant balances. During this period, total operating income taxes
and Deferred Income Taxes-Net have been affected by tax matters related to
Revitalization as noted above and by a prior period reclassification between
current and deferred income taxes.
Other Items
Other Interest Charges increased by $4 million between 1995 and 1994 and by
approximately $4 million between 1994 and 1993, reflecting increased average
short-term debt balances.
New Pronouncements: In 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets ("FAS 121"). FAS 121
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company will adopt FAS 121 prospectively in 1996. It is
anticipated that adoption will not have a material effect on the Company's net
income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed
Statement of Financial Accounting Standards ("FAS"), Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets. The proposed
FAS, if issued, would require WE to recognize as a liability the present value
of the estimated future total costs associated with closure or removal of
certain long-lived assets and to correspondingly capitalize those costs. The
capitalized costs would be depreciated to expense over the useful life of the
asset. The proposed statement would become effective in 1997. This proposed
FAS would apply to decommissioning costs for Point Beach Nuclear Plant ("Point
Beach") and would result in WE recording a decommissioning liability and
corresponding asset as required by the pronouncement. Currently, nuclear
decommissioning costs are accrued as depreciation expense over the expected
service lives of the two units at Point Beach based on an external sinking
fund method. Any changes in depreciation expense due to differing assumptions
between the proposed FAS and those currently required by the PSCW are not
expected to be material and would most likely be deferrable and recoverable in
rates. For additional information on the costs of decommissioning Point
Beach, see Note F - "Nuclear Operations" in the NOTES TO FINANCIAL STATEMENTS.
Effects of Inflation: With expectations of low-to-moderate inflation, the
Company does not believe the impact of inflation will have a material effect
on its future results of operations.
Electric Sales and Gas Deliveries Outlook
Assuming moderate growth in the economy of its service territory and normal
weather, WE presently anticipates total electric kilowatt-hour sales to grow
at a compound annual rate of approximately 1.1% over the five-year period
ending December 31, 2000. WE forecasts total therm deliveries of natural gas
to grow at a compound annual rate of approximately 2.1% over the same five-
year period. These forecasts are subject to a number of variables, including
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among others the economy, weather and the restructuring of the electric and
gas utility industries, which may affect the actual growth in sales. These
estimates do not reflect the operations of NSP, which will become a part of
Primergy after consummation of the Transaction. See "RESULTS OF OPERATIONS -
Mergers" above.
Rates and Regulatory Matters
The table below summarizes the projected annual revenue impact of recent rate
changes authorized by regulatory commissions for the electric, natural gas and
steam utilities of the Company based on the sales projections utilized by
those commissions in setting rates. The PSCW regulates Wisconsin retail
electric, steam and natural gas rates, while the FERC regulates wholesale
power and electric transmission and gas transportation service rates. The
Michigan Public Service Commission ("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, WE did not seek an increase in rates for 1994 or
1995.
==============================================================================
Revenue Percent
Increase Change in Effective
Service (Decrease) Rates Date
- ------------------------- ------------ --------- ---------
(Thousands)
Retail electric, WI $ (33,383) (2.8) 01/01/96
Retail electric, MI (1,128) (3.3) 01/01/96
Retail gas (8,298) (2.6) 01/01/96
Steam heating (790) (5.1) 01/01/96
Fuel electric, WI (16,179)* (1.3) 08/04/94
Fuel electric, WI (8,596)** (0.9) 11/05/93
Retail gas 9,172 3.3 09/02/93
Retail electric, MI 1,366 4.3 07/09/93
Wholesale electric 6,000 10.6 06/09/93
Retail electric, WI 26,655 2.3 02/17/93
Steam heating 505 3.5 02/17/93
==============================================================================
* The 8/4/94 fuel credit was eliminated 1/1/96 by PSCW Order.
** The 11/5/93 fuel credit was eliminated 1/1/94 by PSCW Order.
Under the Wisconsin retail electric fuel cost 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. WE believes that it has the ability
to maintain low fuel costs through efficient management of its power supply
system and fuel procurement practices. Therefore, WE has proposed the
elimination of the retail electric fuel cost adjustment procedure in its 1997
Test Year filing with the PSCW. On December 15, 1995, the MPSC approved the
suspension of the Power Supply Cost Recovery Clause (fuel adjustment
procedure) for a five-year period for Michigan retail electric customers. In
the case of natural gas costs, differences between the test year estimate and
the actual cost of purchased gas are accounted for through a purchased gas
adjustment clause.
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1996 Test Year: In a letter order dated September 11, 1995, the PSCW directed
WE to implement rate decreases for Wisconsin retail electric, gas and steam
customers of $33.383 million or 2.75%, $8.298 million or 2.6% and $0.790
million or 5.1%, respectively, on an annualized basis effective January 1,
1996. The decrease is based on a regulatory return on common equity of 11.3%,
down from 12.3% authorized since 1993. Also effective January 1, 1996, the
MPSC authorized WE to implement a rate decrease for Michigan non-mine retail
electric customers of $1.128 million or 3.3% on an annualized basis.
1997 Test Year: On January 16, 1996, WE filed specific financial data with
the PSCW related to the 1997 test year showing an $82.2 million revenue
deficiency for its utility operations. The dollar impacts and percentage
increases requested for Wisconsin retail electric, gas and steam customers are
$77.0 million or 6.2%, $4.3 million or 1.4% and $0.9 million or 6.4%,
respectively, on an annualized basis. On March 15, 1996, WE filed testimony
and exhibits with the PSCW related to the 1997 test year. The PSCW had
determined that it required a special full review of WE's rates for the 1997
test year in connection with consideration of the application for approval of
the proposed merger of WEC and NSP.
Neither the 1996 nor 1997 Test Year changes reflect the proposed retail
electric and gas rate reductions and freezes nor the wholesale rate reductions
and freezes related to the proposed merger with NSP. See "RESULTS OF
OPERATIONS - Mergers" above for a separate discussion of rate actions related
to the proposed Transaction.
PSCW Electric Utility Industry Investigation: The PSCW has conducted an
investigation into 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 PSCW stated that this
investigation may result in profound and fundamental changes to the nature and
regulation of the electric utility industry in Wisconsin. In January 1995,
the PSCW established an advisory committee, including WE, to examine all
aspects of the electric utility industry and to suggest which functions should
be performed in a competitive market. The PSCW decided on December 12, 1995
the general direction of utility regulation in Wisconsin. This proposed
restructuring of the industry would permit all consumers to choose their
electricity provider by the year 2001 and it would establish a competitive
generation business. The transmission and distribution functions would remain
regulated. In a February 22, 1996 Report to the Wisconsin Legislature, the
PSCW identified a 32 step workplan that it would follow for Electric Utility
Restructuring in Wisconsin. In the plan, the PSCW indicated that during 1996
it will begin activities on 12 of these steps, some of which would seek
changes in applicable administrative rules under its jurisdiction, including
affiliated interest standards and quality of service standards. The PSCW
expects to present an electric utility restructuring proposal to the Wisconsin
State Legislature in 1997. In its February 22, 1996 report, the PSCW stated
that the implementation timetable for its plan is subject to change depending
on the pace of resolution of the specific restructuring steps and on external
events.
PSCW Natural Gas Utility Industry Investigation: The PSCW also continued a
generic investigation of the natural gas industry in Wisconsin and addressed
the extent to which traditional regulation should be replaced with a different
approach. In conjunction with this generic investigation, the PSCW staff is
reviewing the use of the current purchased gas adjustment ("PGA") mechanism
which is designed to pass on to gas customers increases or decreases in the
cost of natural gas purchased for resale. A separate docket has been
established to review the PGA. WE is participating in these PSCW
investigations.
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In June 1995, WE filed with the PSCW a proposal to replace the current PGA
mechanism with a new market-based pricing mechanism. The proposed gas pricing
mechanism would link gas commodity prices to market indices and incorporate
all other gas supply costs such as transportation and storage, under a price
cap. The price cap would be designed to provide balanced financial incentives
and risks for WE based upon performance standards, while ensuring a reliable
gas supply for consumers. In July 1995, the PSCW decided to analyze and
review this proposal as part of the generic docket established to review the
PGA. The matter is pending.
FERC Open Access Transmission NOPR: In March 1995, the FERC issued a Notice
of Proposed Rulemaking ("NOPR") on Open Access Non-Discriminatory Transmission
Services by Public Utilities. The NOPR's goal is to create a more competitive
wholesale electric power market. In the proposed rulemaking, FERC would
require all electric utilities that own or control
transmission facilities to file non-discriminatory open access transmission
tariffs available to wholesale sellers and buyers of electric energy, to take
service under the tariffs for their own wholesale sales and purchases of
electric energy and to provide utilities the opportunity to recover legitimate
and verifiable stranded costs on the federal and state levels. WE advocates
open access to transmission facilities as a necessary step in the competitive
restructuring of the electric utility industry and does not believe that the
issuance of a final rule by FERC will have a negative material impact on the
Company's financial position or results of operations. WE expects FERC to
finalize and issue its open access transmission rules in the second quarter of
1996.
Regulatory Accounting: WE operates under electric utility rates which are
subject to the approval of the PSCW, MPSC and FERC, and natural gas and steam
utility rates that are subject to the approval of the PSCW (see "Rates and
Regulatory Matters" above). 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 the utility'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, WE is unable to predict whether
any adjustments to regulatory assets and liabilities will occur in the future.
See Note A - "Summary of Significant Accounting Policies" in the NOTES TO
FINANCIAL STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Investing Activities
WE invested $1.035 billion in its businesses during the three years ended
December 31, 1995. The investments made during this three-year period include
construction expenditures for new or improved facilities totaling $855
million, purchases of nuclear fuel of approximately $70 million, net
capitalized conservation expenditures of approximately $54 million and
payments to an external trust for the eventual decommissioning of WE's Point
Beach Nuclear Plant totaling $32 million.
Paris Generating Station: During 1995, WE placed in service four units, or
approximately 300 megawatts of capacity, at its Paris Generating Station.
This natural gas-fired combustion turbine facility, located near Union Grove,
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Wisconsin, is designed to meet peak demand requirements. Capital expenditures
of $10 million, $54 million and $28 million were made during 1995, 1994 and
1993, respectively, for construction of this facility. The capital costs of
the Paris facility will total approximately $105 million.
Concord Generating Station: During 1994, WE placed in service the last two
units, or approximately 150 megawatts of capacity, at its Concord Generating
Station. This four unit 300 megawatt natural gas-fired combustion turbine
facility, located near Watertown, Wisconsin, is designed to meet peak demand
requirements. The first two units were completed in 1993. Capital
expenditures of $3 million, $6 million and $35 million were made during 1995,
1994 and 1993, respectively, for construction of this facility. The capital
costs of the Concord facility will total approximately $107 million.
Port Washington Power Plant Renovation: Additionally during 1994, WE
completed the $107 million renovation project at its Port Washington Power
Plant. The renovation work, which began in September 1991, included the
installation of additional emission control equipment. Expenditures totaling
$12 million and $36 million were made during 1994 and 1993, respectively.
Cash Provided by Operating and Financing Activities
During the three years ended December 31, 1995, cash provided by operating
activities totaled $1.252 billion. During this period, internal sources of
funds, after the payment of dividends to WEC, provided approximately 84% of
the Company's capital requirements.
Financing activities during the three-year period ended December 31, 1995
included the issuance of approximately $611 million of long-term debt,
principally to refinance higher coupon debt and the purchase or redemption of
approximately $71 million of preferred stock. No preferred stock was issued
during this period. Additionally, during the three-year period ended
December 31, 1995, the Company retired a total of $502 million of long-term
debt and increased short-term debt by $28 million. Dividends on the Company's
common stock were approximately $160 million, $151 million and $75 million
during 1995, 1994 and 1993, respectively.
In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8%
Debentures due 2095. Proceeds of the issue were added to WE's general funds
and were applied to the repayment of short-term borrowings.
In August 1995, WE called for optional redemption $98.35 million aggregate
principal amount of fixed rate tax exempt bonds issued by three political
jurisdictions on WE's behalf that were secured by issues of WE's First
Mortgage Bonds with terms corresponding to the tax exempt bonds called for
redemption. During September and October 1995, the three political
jurisdictions issued $98.35 million aggregate principal amount of new tax
exempt bonds on behalf of WE, collateralized by unsecured variable rate
promissory notes issued by WE, maturing between March 1, 2006 and September 1,
2030, with terms corresponding to the respective issues of the refunding tax
exempt bonds. The proceeds were used to finance the optional redemptions.
The WE First Mortgage Bonds, which collateralized the redeemed tax exempt
bonds, have been canceled.
During 1993, WE 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 WE's 6.75% Series Preferred Stock. These
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refunding transactions are expected to result in significant savings over the
lives of the new debt issues. Depending on market conditions and other
factors, additional debt refundings may occur.
The Merger Agreement, entered into by WEC and NSP, provides for restrictions
on certain transactions by both the Company and NSP, including the issuance of
debt and equity securities. While WE does not currently plan to enter into
transactions that would not comply with these restrictions, circumstances may
arise to make such transactions necessary. Under such circumstances, NSP
would need to agree to consent to any such change in the Merger Agreement.
Capital Structure
The Company's capitalization at December 31 was as follows:
==============================================================================
1995 1994
------ ------
Common Equity 52.1% 50.4%
Preferred Stock 1.0 0.9
Long-Term Debt
(including current maturities) 42.3 41.0
Short-Term Debt 4.6 7.7
------ ------
100.0% 100.0%
==============================================================================
Compared to the utility industry in general, WE 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 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 utility business. WE
currently has senior secured debt ratings of AA+ by Standard & Poor's
Corporation ("S&P"), Duff & Phelps Inc. and Fitch Investors Service Inc.
("Fitch") and Aa2 by Moody's Investors Service ("Moody's").
Following announcement of the Transaction, on May 1, 1995 S&P reported that it
was placing on CreditWatch with negative implications its AA+ senior secured
debt and AA+ preferred stock ratings of WE. S&P stated that if the
Transaction is completed, the likely credit rating for the senior secured debt
of WE is expected to be AA or AA-. As part of its rating process, S&P intends
to review the financial and operating plans of the merged utilities. Also on
May 1, 1995, citing WE's continued operation as a separate utility subsidiary
after the Transaction, its strength within its rating category and its strong
capital structure, Moody's confirmed its Aa2 first mortgage bond rating of WE.
On December 5, 1995, Fitch changed WE's credit trend from "stable" to
"declining" based upon its analysis of cash flow trends versus its standards
for an AA+ rating.
At year-end 1995, WE had approximately $109 million of unused lines of bank
credit and $20 million of cash and cash equivalents.
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Capital Requirements 1996-2000
The estimated capital requirements for WE for the years 1996-2000 are outlined
in the table below. Compared to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, the table below no longer reflects
conservation expenditures. Effective January 1, 1995, WE began expensing
conservation expenditures currently. Through 1995, capitalized conservation
investments were amortized to Operating Expense over a ten-year amortization
period. Effective January 1, 1996, WE began amortizing the remaining
capitalized conservation investment to operating expense over a five-year
amortization period.
The capital requirements table below does not reflect the impact of the
proposed Transaction with NSP. See "RESULTS OF OPERATIONS - Mergers" above.
==============================================================================
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(Millions of Dollars)
Construction $228 $189 $181 $183 $215
Bond Maturities and
Refinancings 30 166 61 93 2
Changes in Fuel
Inventories 3 13 4 (5) 11
Decommissioning Trust
Payments 31 33 35 38 40
---- ---- ---- ---- ----
Total $292 $401 $281 $309 $268
==============================================================================
LS Power Generation Facility: In 1993, a competitive bidding process
conducted by the PSCW resulted in the selection of a proposal submitted by an
unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to
construct a generation facility to meet a portion of WE's anticipated increase
in system supply needs. WE subsequently signed a long-term agreement to
purchase electricity from the proposed facility. The agreement is contingent
upon the facility being completed and placed into operation, which at this
time is planned for mid-1997.
PSCW Advance Plan 7: 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, WE, in
conjunction with the other regulated electric utilities located in Wisconsin,
files 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. The
PSCW approved WE's Advance Plan 7 filing in December 1995.
In order to reliably meet its forecasted growth in demand, WE 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
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also combine to help delay the need to install some new generating capacity in
the future.
Finally, WE's Advance Plan 7 filing indicated 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. WE
does not anticipate needing additional base load generation until after 2010.
The addition of new generating units requires approval of the PSCW following a
two-stage bidding process, which could influence whether WE would construct
such facilities or purchase the required power. The United States
Environmental Protection Agency and the Wisconsin Department of Natural
Resources ("DNR") also must approve new generating units. All generating
facilities proposed by WE will meet or exceed the applicable federal and state
environmental requirements.
Kimberly Cogeneration Facility: Prior to the 1993 selection of the LS Power
generation facility by the PSCW, WE 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-1994.
In the PSCW Order, the WE project was selected as the second place conditional
project if the LS Power project did not proceed. WE had made expenditures for
the Kimberly facility of approximately $65.8 million associated with the
procurement of three combustion turbines, one steam turbine and three heat
recovery boilers in order to achieve the in-service dates as agreed to in a
steam service contract with Repap.
The Company is currently reviewing its options regarding its Kimberly
Cogeneration Facility equipment (the "Equipment"). The Equipment is of a
technology of natural gas-fired combined cycle generation equipment that is
marketed worldwide. The Company is investigating opportunities to sell the
Equipment or to use it in another power project and is currently evaluating
potential sales opportunities and/or power projects involving the Equipment.
At this time, the Company does not believe that disposition of the Equipment
will have a material adverse effect on its financial condition. However,
there is a possibility that WE may need to recognize an impairment of the
Equipment in the future should the projects noted above not occur and should
no other viable sales opportunities and/or power projects involving the
Equipment be identified.
Point Beach Unit 2 Steam Generators and Dry Cask Storage Facility: WE
operates two 500 megawatt generating units at Point Beach. During 1995, Point
Beach accounted for 26.9% of WE's net electric generation. The current
operating licenses for the two units at Point Beach expire in 2010 and 2013
for Units 1 and 2, respectively.
In October 1992, WE filed an application with the PSCW for replacement of the
Point Beach Unit 2 steam generators. As a result of degradation of some of
the tubes within the Unit 2 steam generators, the unit has been operating at
approximately 90% of its capacity since its return to service after its annual
refueling outage in the fall of 1995. In February 1995, the PSCW deferred a
decision on the replacement of the steam generators in part to gather more
information during the fall 1995 refueling outage. An evaluation of
information gathered during this outage was included in a Supplemental
Environmental Impact Statement ("SEIS") prepared by the PSCW that shows the
replacement of the Unit 2 steam generators to be the most cost-effective
option when compared to all credible alternatives. Considering the rate of
tube degradation in the steam generators, there is a likelihood that WE would
not be able to restart Unit 2 following the fall 1996 outage without
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replacement of the steam generators. In its SEIS, the PSCW estimates that
failure to replace the Unit 2 steam generators would cost WE customers up to
$494 million over the next 25 years to replace lost generation when compared
to the current estimated cost of replacement of $96 million.
In a related matter, WE received a Certificate of Authority from the PSCW in
February 1995 to construct and operate an Independent Spent Fuel Storage
Installation ("ISFSI"). The ISFSI will provide interim dry cask storage of
spent fuel from Point Beach using a system that was certified by the NRC after
a four-year technical review. Construction was completed in June 1995 with
associated capital costs of $8.5 million. WE loaded the first cask with spent
fuel in December 1995. On December 22, 1995, the Dane County Circuit Court
("Court") issued a decision vacating and remanding the February 1995 order of
the PSCW on procedural grounds, stating that the Environmental Impact
Statement prepared by the PSCW for this project was inadequate in two
respects. Transfer of additional spent fuel to the ISFSI has been temporarily
suspended by WE pending the PSCW's further action.
The PSCW has issued two SEIS's which address steam generator issues and the
inadequacies found by the Court with the original Environmental Impact
Statement for the ISFSI project. The PSCW held related hearings on these
matters in February and March 1996. WE anticipates that the PSCW will issue a
combined final order on replacement of the Unit 2 steam generators and the
remanded dry cask storage matters in May 1996. Failure by the PSCW to approve
the steam generator replacement and resolve the remanded issues could
jeopardize the continued operation of Point Beach and materially affect WE's
financial position and results of operations. WE would likely seek regulatory
relief to minimize the replacement power costs resulting from lost generating
capacity.
The ISFSI was necessary because the spent fuel pool inside the plant is
nearly full. The dry storage facility will be used until the United States
Department of Energy ("DOE") takes ownership of and removes the spent fuel.
While WE as well as other operators of nuclear power facilities in the United
States have a contract mandated by federal law that calls for the DOE to begin
accepting fuel in 1998, the DOE is not in a position to meet its commitment.
If this commitment is not met, WE will need to construct additional casks and
will seek PSCW approval to do so.
Milwaukee County Power Plant: In December 1995, WE signed an agreement with
Milwaukee County to purchase the Milwaukee County Power Plant located in
Wauwatosa, Wisconsin. The 11 megawatt power plant provides steam, chilled
water and electricity for the Milwaukee Regional Medical Center and several
other large customers located on the Milwaukee County grounds. WE had
previously obtained approval from the PSCW for the purchase of the electric
generation and distribution facilities and acquired them in December 1995 with
a capital expenditure of $7 million. WE will integrate the electric
facilities into its current electric utility operations. In February 1996, WE
filed an application with the PSCW for a Certificate of Authority to acquire
and place in operation the steam production and distribution facilities.
Capital costs for the steam facilities will be $20 million. WE anticipates
PSCW approval of the acquisition by mid-1996 and will integrate the steam
facilities into its current steam utility operations. In conjunction with the
steam facility acquisition anticipated in mid-1996, WEC will acquire and
operate the chilled water facility as a non-regulated business. Purchase of
the steam and chilled water portions of the plant is contingent upon PSCW
approval to acquire the steam facilities and upon the five major customers
signing ten-year steam and chilled water service agreements.
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Capital Resources
During the five-year period ending December 31, 2000, WE expects internal
sources of funds from operations, after dividends to WEC, to provide about 87%
of the utility capital requirements. The remaining utility cash requirements
are expected to be met through short-term borrowings and the issuance of
intermediate or long-term debt. The specific form, amount and timing of debt
securities which may be issued have not yet been determined and will depend,
to a large extent, on market conditions and other factors. The anticipated
capital resources during this period do not reflect the impact of the proposed
merger with NSP. See "RESULTS OF OPERATIONS - Mergers" above.
Environmental Issues
Clean Air Act: The 1990 Amendments to the Clean Air Act mandate significant
nation-wide reductions in SO2 and NOx emissions to address acid rain and
ground level ozone control requirements.
In 1994, WE 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
$45.3 million has been spent on compliance with the 1990 amendments to the
Clean Air Act.
WE elected to voluntarily bring the Valley and Port Washington Power Plants
under jurisdiction of the NOx and SO2 requirements of the Clean Air Act
amendments of 1990, five years earlier than mandated. This was possible
because these units meet the more stringent phase II emissions standards
today.
WE 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, WE 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 $40.3 million based
on today's costs.
Manufactured Gas Plant Sites: WE's natural gas business unit is investigating
the remediation of a number of former manufactured gas plant ("MGP") sites.
Operations at these MGP sites ceased over 40 years ago. Limited remediation
activities occurred at a number of these sites during the 1980's, with removal
of waste materials known to be present at that time. In 1995, WE presented a
plan to investigate and further remediate sites to the DNR. During 1995, WE
conducted site investigations at four sites and partial remediation activities
were conducted at one site. Approximately $1.6 million has been spent through
December 31, 1995 for such activities. Remediation costs to be incurred
through the year 2000 have been estimated to be $12 million, but the total
costs are uncertain pending the results of further site specific
investigations and the selection of site specific remedial actions. In its
September 11, 1995 letter order, the PSCW allowed WE to defer MGP site
A-22
23
remediation costs with final rate treatment of such costs to be determined in
future rate cases. As of December 31, 1995, WE has recorded an accrued
liability of $1.6 million for MGP site remediation and a related deferred
regulatory asset of $3.2 million. WE expects to accrue additional MGP site
remediation liabilities during 1996 as site specific investigations are
completed and site specific remedial actions are identified. WE will seek
rate recovery for these costs and does not anticipate that there will be a
material adverse effect on its net income or financial position.
Ash Landfill Sites: WE aggressively seeks environmentally acceptable,
beneficial uses of its combustion byproducts. However, ash materials 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. Where WE has become aware of these conditions, efforts have
been expended to define the nature and extent of any release, and work has
been performed to address these conditions. These costs are included in the
environmental operating and maintenance costs of WE.
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24
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENT
Year Ended December 31
1995 1994 1993
---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues
Electric $1,437,480 $1,403,562 $1,347,844
Gas 318,262 324,349 331,301
Steam 14,742 14,281 14,090
---------- ---------- ----------
Total Operating Revenues 1,770,484 1,742,192 1,693,235
Operating Expenses
Fuel (Note F) 303,553 285,862 263,385
Purchased power 41,834 42,623 54,880
Cost of gas sold 188,764 199,511 214,132
Other operation expenses 395,242 399,011 399,135
Maintenance 112,400 124,602 156,085
Revitalization (Note K) - 73,900 -
Depreciation (Note C) 183,876 177,614 167,066
Taxes other than income taxes 74,765 76,035 74,653
Federal income tax (Note D) 119,939 104,725 74,463
State income tax (Note D) 28,405 24,756 15,530
Deferred income taxes - net (Note D) (2,833) (25,095) 13,096
Investment tax credit - net (Note D) (4,482) (4,625) (4,626)
---------- ---------- ----------
Total Operating Expenses 1,441,463 1,478,919 1,427,799
Operating Income 329,021 263,273 265,436
Other Income and Deductions
Interest income 12,850 11,715 13,753
Allowance for other funds used during
construction (Note E) 3,650 4,985 8,457
Miscellaneous - net 5,677 10,727 9,568
Federal income tax (Note D) (535) (1,504) (1,832)
State income tax (Note D) (370) (589) (832)
---------- ---------- ----------
Total Other Income and Deductions 21,272 25,334 29,114
Income Before Interest Charges 350,293 288,607 294,550
Interest Charges
Long-term debt 99,727 102,059 103,262
Other interest 11,960 7,610 3,945
Allowance for borrowed funds used
during construction (Note E) (2,062) (2,816) (4,737)
---------- ---------- ----------
Total Interest Charges 109,625 106,853 102,470
---------- ---------- ----------
Net Income 240,668 181,754 192,080
Preferred Stock Dividend Requirement 1,203 1,351 4,377
---------- ---------- ----------
Earnings Available for Common
Stockholder $ 239,465 $ 180,403 $ 187,703
========== ========== ==========
<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.
The notes are an integral part of the financial statements.
A-24
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WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
Year Ended December 31
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Operating Activities
Net income $240,668 $181,754 $192,080
Reconciliation to cash
Depreciation 183,876 177,614 167,066
Revitalization - net (5,404) 43,860 -
Nuclear fuel expense - amortization 22,324 21,437 21,366
Conservation expense - amortization 21,870 20,910 15,254
Debt premium, discount & expense -
amortization 12,652 14,368 13,617
Deferred income taxes - net (2,833) (25,095) 13,096
Investment tax credit - net (4,482) (4,625) (4,626)
Allowance for other funds used
during construction (3,650) (4,985) (8,457)
Change in - Accounts receivable (32,639) 7,684 (17,952)
Inventories 5,233 11,455 (11,186)
Accounts payable 16,650 (20,683) 7,864
Other current assets (4,068) (9,878) 1,039
Other current liabilities 17,097 9,980 19,273
Other (29,204) (13,123) (5,606)
-------- -------- --------
Cash Provided by Operating Activities 438,090 410,673 402,828
Investing Activities
Construction expenditures (248,867) (271,448) (334,932)
Allowance for borrowed funds used
during construction (2,062) (2,816) (4,737)
Nuclear fuel (23,454) (26,351) (20,016)
Nuclear decommissioning trust (10,861) (10,138) (11,371)
Conservation investments - net 2,130 (20,823) (35,252)
Other (4,511) (10,205) 612
-------- -------- --------
Cash Used in Investing Activities (287,625) (341,781) (405,696)
Financing Activities
Sale of long-term debt 217,453 32,474 361,049
Retirement of long-term debt (134,172) (35,069) (332,862)
Change in short-term debt (91,811) 49,294 71,004
Stockholder capital contribution 30,000 30,000 10,000
Retirement of preferred stock - (5,250) (65,504)
Dividends on stock - common (159,576) (150,951) (74,771)
- preferred (1,203) (1,381) (4,729)
Other - - 135
-------- -------- --------
Cash Used in Financing Activities (139,309) (80,883) (35,678)
-------- -------- --------
Change in Cash and Cash Equivalents $ 11,156 $(11,991) $(38,546)
======== ======== ========
Supplemental information disclosures
Cash Paid For
Interest (net of amount capitalized) $ 99,352 $ 93,383 $ 85,299
Income taxes 149,224 148,552 101,216
<FN>
The notes are an integral part of the financial statements.
A-25
26
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
ASSETS
1995 1994
---------- ----------
(Thousands of Dollars)
Utility Plant
Electric $4,531,404 $4,304,925
Gas 489,739 467,732
Steam 40,078 40,103
---------- ----------
5,061,221 4,812,760
Accumulated provision for depreciation (2,288,080) (2,134,469)
---------- ----------
2,773,141 2,678,291
Construction work in progress 78,153 205,835
Nuclear fuel - net (Note F) 59,260 56,606
---------- ----------
Net Utility Plant 2,910,554 2,940,732
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 275,125 226,805
Conservation investments 115,523 138,489
Other 36,979 32,974
---------- ----------
Total Other Property and Investments 427,627 398,268
Current Assets
Cash and cash equivalents 19,550 8,394
Accounts receivable, net of allowance for
doubtful accounts - $13,400 and $12,078 144,476 111,837
Accrued utility revenues 140,201 128,107
Fossil fuel (at average cost) 83,366 88,587
Materials and supplies (at average cost) 70,347 70,359
Prepayments 55,147 61,160
Other assets 4,637 6,650
---------- ----------
Total Current Assets 517,724 475,094
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 136,581 137,931
Deferred regulatory assets (Note A) 193,757 197,103
Other 132,681 53,065
---------- ----------
Total Deferred Charges and Other Assets 463,019 388,099
---------- ----------
Total Assets $4,318,924 $4,202,193
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-26
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WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
1995 1994
---------- ----------
(Thousands of Dollars)
Capitalization (See Capitalization Statement)
Common stock equity $1,696,565 $1,586,676
Preferred stock 30,451 30,451
Long-term debt (Note H) 1,325,169 1,257,776
---------- ----------
Total Capitalization 3,052,185 2,874,903
Current Liabilities
Long-term debt due currently (Note H) 51,419 32,136
Notes payable (Note I) 150,694 242,505
Accounts payable 107,115 90,465
Payroll and vacation accrued 26,699 26,507
Taxes accrued - income and other 18,378 20,589
Interest accrued 21,617 23,254
Other 48,762 28,009
---------- ----------
Total Current Liabilities 424,684 463,465
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 479,828 472,746
Accumulated deferred investment tax credits 89,672 94,154
Deferred regulatory liabilities (Note A) 167,483 171,599
Other 105,072 125,326
---------- ----------
Total Deferred Credits and Other
Liabilities 842,055 863,825
Commitments and Contingencies (Note N)
---------- ----------
Total Capitalization and Liabilities $4,318,924 $4,202,193
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-27
28
WISCONSIN ELECTRIC POWER COMPANY
CAPITALIZATION STATEMENT
December 31
1995 1994
---------- ----------
(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 280,689 250,689
Retained earnings 1,082,983 1,003,094
---------- ----------
Total Common Stock Equity 1,696,565 1,586,676
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 2,286,500 and
2,360,000 shares; outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,451 30,451
Long-Term Debt
First mortgage bonds
Series Due
------ ---
5-5/8% 1995 - 10,000
4-1/2% 1996 30,000 30,000
5-7/8% 1997 130,000 130,000
6-5/8% 1997 10,000 10,000
5-1/8% 1998 60,000 60,000
6.10 % 1999-2008 - 25,000
6.25 % 1999-2008 - 1,000
6-1/2% 1999 40,000 40,000
6-5/8% 1999 51,000 51,000
6.45 % 2004 - 12,000
7-1/4% 2004 140,000 140,000
6.45 % 2006 - 4,000
6.50 % 2007-2009 - 10,000
9-3/4% 2015 - 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
---------- ----------
1,033,443 1,141,793
Debentures (unsecured)
6-1/8% 1997 25,000 25,000
10-1/4% 1998 - 2,290
9.47% 2006 7,000 7,000
8-1/4% 2022 25,000 25,000
6-7/8% 2095 100,000 -
Notes (unsecured)
Variable rate due 2006 1,000 -
Variable rate due 2015 17,350 -
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 -
Obligations under capital lease (Note F) 43,924 43,696
Unamortized discount - net (23,129) (21,867)
Long-term debt due currently (51,419) (32,136)
---------- ----------
Total Long-Term Debt (Note H) 1,325,169 1,257,776
---------- ----------
Total Capitalization $3,052,185 $2,874,903
========== ==========
<FN>
The notes are an integral part of the financial statements.
A-28
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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, 1992 33,289,327 $332,893 $213,409 $ 861,092 $1,407,394
Net income 192,080 192,080
Cash dividends
Common stock (74,771) (74,771)
Preferred stock (4,729) (4,729)
Purchase of preferred stock (Note G) (2,854) (2,854)
Stockholder capital contribution 10,000 10,000
Other 134 245 379
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1993 33,289,327 332,893 220,689 973,917 1,527,499
Net income 181,754 181,754
Cash dividends
Common stock (150,951) (150,951)
Preferred stock (1,381) (1,381)
Stockholder capital contribution 30,000 30,000
Other (245) (245)
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1994 33,289,327 332,893 250,689 1,003,094 1,586,676
Net income 240,668 240,668
Cash dividends
Common stock (159,576) (159,576)
Preferred stock (1,203) (1,203)
Stockholder capital contribution 30,000 30,000
- -------------------------------------------------- ----------------------------------------------------------
Balance - December 31, 1995 33,289,327 $332,893 $280,689 $1,082,983 $1,696,565
================================================== ==========================================================
<FN>
The notes are an integral part of the financial statements.
A-29
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WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A - Summary of Significant Accounting Policies
General: The accounting records of Wisconsin Electric Power Company ("WE" or
the "Company") are kept as prescribed by the Federal Energy Regulatory
Commission ("FERC"), modified for requirements of the Public Service
Commission of Wisconsin ("PSCW").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of certain assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 E). 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, WE capitalizes, as deferred regulatory assets, incurred
costs which are expected to be recovered in future utility rates. WE 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 WE'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 D.)
Statement of Cash Flows: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity.
Conservation Investments: WE directs a variety of demand-side management
programs to help foster energy conservation by its customers. As authorized
by the PSCW, WE capitalized certain conservation program costs prior to 1995.
Utility rates approved by the PSCW provide for a current return on these
conservation investments. Through 1995, conservation investments were charged
to operating expense over a ten-year amortization period. Beginning in 1996,
the capitalized conservation balance will be charged to operating expense on a
straight line basis over a five-year amortization period.
New Pronouncements: In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets ("FAS 121"). FAS 121 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
A-30
31
NOTES TO FINANCIAL STATEMENTS - (cont'd)
A - Summary of Significant Accounting Policies - (cont'd)
indicate that the carrying amount of an asset may not be recoverable. The
Company will adopt FAS 121 prospectively in 1996. It is anticipated that
adoption will not have a material effect on net income or financial position.
B - Mergers
Wisconsin Natural Gas Company: Effective January 1, 1996, Wisconsin Energy
Corporation ("WEC"), WE's parent company, merged its natural gas utility
subsidiary, Wisconsin Natural Gas Company ("WN") into WE. The accounting
treatment for this merger was similar to that which would result from a
pooling of interests. The Company's prior years' financial information has
been restated to include WN at historical values. Where applicable,
references to WE include WN prior to their merger.
Wisconsin Southern Gas Company, Inc.: Effective January 1, 1994, WEC acquired
all of the outstanding common stock of Wisconsin Southern Gas Company, Inc.
("WSG") through a statutory merger of WSG into WN in which all of WSG's common
stock was converted into common stock of WEC. WSG was a gas utility engaged
in the purchase, distribution, transportation and sale of natural gas
primarily in a section of southeastern Wisconsin which was contiguous to WN's
service territory. WSG was merged into WN using the pooling of interests
method of accounting. Accordingly, prior years' financial and statistical
information was restated to include WSG at historical values.
Northern States Power Company: On April 28, 1995, WEC and Northern States
Power Company, a Minnesota corporation ("NSP"), entered into an Agreement and
Plan of Merger, which was amended and restated as of July 26, 1995 ("Merger
Agreement"). The Merger Agreement provides for a strategic business
combination involving WEC and NSP in a "merger-of-equals" transaction
("Transaction"). As a result, WEC will become a registered public utility
holding company under the Public Utility Holding Company Act of 1935, as
amended, and will change its name to Primergy Corporation ("Primergy").
Primergy will be the parent company of WE (which will be renamed Wisconsin
Energy Company), of NSP (which, for regulatory reasons, will reincorporate in
Wisconsin ("New NSP")), and of the other subsidiaries of WEC and NSP. The
Transaction is intended to be tax-free for income tax purposes and to be
accounted for as a pooling of interests. On September 13, 1995, stockholders
of WEC and NSP voted to approve the Transaction. The Merger Agreement is
subject to various conditions, including the approval of various regulatory
agencies. Subject to obtaining all requisite approvals, WEC and NSP
anticipate completing the Transaction by January 1, 1997.
In connection with the Transaction, Northern States Power Company, a Wisconsin
corporation ("NSP-WI"), currently a subsidiary of NSP, will be merged into
Wisconsin Energy Company. Prior to the merger of NSP-WI into Wisconsin Energy
Company, New NSP will acquire from NSP-WI certain gas utility assets in
LaCrosse and Hudson, Wisconsin with a net historical cost at December 31, 1995
of approximately $19.3 million.
The following summarized Wisconsin Energy Company unaudited pro forma
financial information combines historical balance sheet and income statement
information of WE and NSP-WI to give effect to the Transaction, including the
transfer of the gas assets from NSP-WI to New NSP, and should be read in
A-31
32
NOTES TO FINANCIAL STATEMENTS - (cont'd)
B - Mergers - (cont'd)
conjunction with the historical financial statements and related notes thereto
of WE and NSP-WI. The unaudited pro forma income statement information does
not reflect adjustments for 1995 revenues of $28.9 million and related
expenses associated with the transfer of the gas assets from NSP-WI to New
NSP. A $136.6 million pro forma adjustment has been made to conform the
presentation of noncurrent deferred income taxes in the summarized unaudited
pro forma combined balance sheet information as a net liability. The
allocation between WEC and NSP and their customers of the estimated cost
savings resulting from the Transaction, net of costs incurred to achieve such
savings, will be subject to regulatory review and approval. None of the
estimated cost savings, the costs to achieve such savings, nor transaction
costs are reflected in the unaudited pro forma financial information. All
other financial statement presentation and accounting policy differences are
immaterial and have not been adjusted in the unaudited pro forma financial
information.
The unaudited pro forma balance sheet information gives effect to the
Transaction as if it had occurred at December 31, 1995. The unaudited pro
forma income statement information gives effect to the Transaction as if it
had occurred at January 1, 1995. The following information is not necessarily
indicative of the financial position or operating results that would have
occurred had the Transaction been consummated on the date or at the beginning
of the period for which the Transaction is being given effect nor is it
necessarily indicative of future operating results or financial position.
==============================================================================
Wisconsin Energy Company: * Unaudited
WE NSP-WI Pro Forma
(As Reported) (As Reported) Combined**
------------- ------------- -------------
(Millions of Dollars)
As of December 31, 1995:
Utility plant-net $ 2,911 $ 652 $ 3,544
Current assets 518 86 620
Other assets 890 53 807
----------- ----------- -----------
Total Assets $ 4,319 $ 791 $ 4,971
=========== =========== ===========
Common stockholder's equity $ 1,697 $ 318 $ 2,015
Preferred stock and premium 30 - 30
Long-term debt 1,325 214 1,539
----------- ----------- -----------
Total Capitalization 3,052 532 3,584
Current liabilities 425 102 527
Other liabilities 842 157 860
----------- ----------- -----------
Total Equity & Liabilities $ 4,319 $ 791 $ 4,971
=========== =========== ===========
==============================================================================
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33
NOTES TO FINANCIAL STATEMENTS - (cont'd)
B - Mergers - (cont'd)
==============================================================================
Wisconsin Energy Company: * Unaudited
(cont'd) WE NSP-WI Pro Forma
(As Reported) (As Reported) Combined**
------------- ------------- -------------
(Millions of Dollars)
For the Year Ended
December 31, 1995:
Utility Operating Revenues $ 1,770 $ 459 $ 2,229
Utility Operating Income $ 329 $ 56 $ 385
Net Income, after Preferred
Dividend Requirements $ 239 $ 39 $ 278
==============================================================================
* In connection with the Merger Agreement, WE will be renamed Wisconsin
Energy Company.
** Includes a pro forma adjustment for the transfer of selected gas assets
from NSP-WI to New NSP and a $136.6 million pro forma adjustment to conform
the presentation of noncurrent deferred taxes as a net liability.
Note: Earnings per share of common stock are not applicable because all of
the Wisconsin Energy Company common stock will be owned by Primergy.
C - Depreciation
Depreciation expense is accrued at straight line rates over the estimated
useful lives of the assets. These rates are certified by the PSCW and include
estimates for salvage and removal costs. Depreciation as a percent of average
depreciable utility plant was 3.8% in 1995 and 3.9% in 1994 and 1993. Nuclear
plant decommissioning is accrued as depreciation expense (see Note F).
D - 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.
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:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Current tax expense $149,249 $131,574 $ 92,657
Investment tax credit-net (4,482) (4,625) (4,626)
Deferred tax expense (2,833) (25,095) 13,096
-------- -------- --------
Total Tax Expense $141,934 $101,854 $101,127
======== ======== ========
==============================================================================
A-33
34
NOTES TO FINANCIAL STATEMENTS - (cont'd)
D - Income Taxes - (cont'd)
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Income Before Income Taxes
and Preferred Dividend $382,602 $283,608 $293,207
======== ======== ========
Expected tax at federal
statutory rate $133,911 $ 99,263 $102,622
State income tax net of
federal tax reduction 18,943 14,087 12,078
Investment tax credit
restored (4,482) (4,625) (5,241)
Other (no item over
5% of expected tax) (6,438) (6,871) (8,332)
-------- -------- --------
Total Tax Expense $141,934 $101,854 $101,127
======== ======== ========
==============================================================================
FAS 109 requires the recording of deferred assets and liabilities to recognize
the expected future tax consequences of events that have been reflected in the
Company's financial statements or tax returns and the adjustment of deferred
tax balances to reflect tax rate changes. Following is a summary of deferred
income taxes under FAS 109:
==============================================================================
December 31
1995 1994
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 43,759 $ 42,685
Construction advances 43,052 40,839
Other 49,770 54,407
-------- --------
Total Deferred Income Tax Assets $136,581 $137,931
======== ========
Deferred Income Tax Liabilities
Property related $445,878 $428,044
Conservation investments 25,775 27,564
Other 8,175 17,138
-------- --------
Total Deferred Income Tax Liabilities $479,828 $472,746
======== ========
==============================================================================
A-34
35
NOTES TO FINANCIAL STATEMENTS - (cont'd)
D - Income Taxes - (cont'd)
WE also has recorded the following deferred regulatory assets and liabilities
representing the future expected impact of deferred taxes on utility revenues:
==============================================================================
December 31
1995 1994
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets $155,944 $158,912
Deferred Regulatory Liabilities 163,676 171,599
==============================================================================
E - 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
1995, 1994 and 1993, as approved by the PSCW.
F - Nuclear Operations
Point Beach Nuclear Plant: WE operates two 500 megawatt generating units at
its Point Beach Nuclear Plant ("Point Beach"). During 1995, Point Beach
accounted for 26.9% of WE's net electric generation. The current operating
licenses for the two units at Point Beach expire in 2010 and 2013 for Units 1
and 2, respectively.
WE has filed an application with the PSCW for replacement of the Point Beach
Unit 2 steam generators. As a result of degradation of some of the tubes
within the Unit 2 steam generators, the unit has been operating at
approximately 90% of its capacity since its return to service after its annual
refueling outage in the fall of 1995. Considering the rate of tube
degradation in the steam generators, there is a likelihood that WE would not
be able to restart Unit 2 following the fall 1996 outage without replacement
of the steam generators.
In a related matter, WE completed construction of an Independent Spent Fuel
Storage Installation ("ISFSI") in June 1995. The ISFSI will provide interim
dry cask storage of spent fuel from Point Beach, which is necessary because
the spent fuel pool inside the plant is nearly full. WE loaded the first cask
with spent fuel in December 1995. On December 22, 1995, the Dane County
Circuit Court ("Court") issued a decision vacating and remanding the February
1995 PSCW approval of the ISFSI on procedural grounds, stating that the
A-35
36
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
Environmental Impact Statement prepared by the PSCW for this project was
inadequate in two respects. Transfer of additional spent fuel to the ISFSI
has been temporarily suspended by WE pending the PSCW's further action.
The PSCW has issued two Supplemental Environmental Impact Statements which
address steam generator issues and the inadequacies found by the Court with
the original Environmental Impact Statement for the ISFSI project. The PSCW
held related hearings on these matters in February and March 1996. WE
anticipates that the PSCW will issue a combined final order on the replacement
of the Unit 2 steam generators and the remanded dry cask storage matters in
May 1996. Failure by the PSCW to approve steam generator replacement and
resolve the remanded issues could jeopardize the continued operation of Point
Beach and materially affect WE's financial position and results of operations.
WE would likely seek regulatory relief to minimize the replacement power costs
resulting from lost generating capacity.
Nuclear Fuel: WE 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 WE or
the Trust terminates the lease, the Trust would recover its unamortized cost
of nuclear fuel from WE. Under the lease terms, WE 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 for the respective years on the nuclear fuel lease:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 89,840 $ 89,705
Accumulated provision for amortization (50,532) (50,983)
In process/stock 19,952 17,884
-------- --------
Total Nuclear Fuel $ 59,260 $ 56,606
======== ========
Interest Expense on Nuclear Fuel Lease $ 2,401 $ 1,896 $ 1,697
==============================================================================
A-36
37
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
The future minimum lease payments under the capital lease and the present
value of the net minimum lease payments as of December 31, 1995 are as
follows:
============================================================================
(Thousands of Dollars)
1996 $ 22,446
1997 14,747
1998 6,960
1999 2,443
2000 490
--------
Total Minimum Lease Payments 47,086
Less: Interest (3,162)
--------
Present Value of Net Minimum Lease Payments $ 43,924
========
==============================================================================
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 ("D&D Fund") for the DOE's nuclear fuel enrichment
facilities. Deposits to the D&D Fund are derived in part from special
assessments to utilities. As of December 31, 1995, WE has on its books a
remaining estimated liability equal to the projected special assessments of
$29.5 million. A corresponding deferred regulatory asset will be amortized to
nuclear fuel expense and included in utility rates over the next 12 years.
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. WE 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
(WE 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, WE
could be assessed a maximum of approximately $3.0 million per reactor.
WE has property damage, decontamination and decommissioning insurance totaling
$1.5 billion for loss from damage at Point Beach with Nuclear Mutual Limited
("NML") and Nuclear Electric Insurance Limited ("NEIL"). Under the NML and
NEIL policies, WE has a potential maximum retrospective premium liability per
loss of $5.6 million and $9.8 million, respectively.
WE also maintains additional insurance with NEIL covering extra expenses of
obtaining replacement power during a prolonged accidental outage (in excess of
21 weeks) at Point Beach. 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, WE's
maximum retrospective premium liability is approximately $7.7 million.
A-37
38
NOTES TO FINANCIAL STATEMENTS - (cont'd)
F - Nuclear Operations - (cont'd)
It should not be assumed that, in the event of a major nuclear incident, any
insurance or statutory limitation of liability would protect WE from material
adverse impact.
Nuclear Decommissioning: Subject to approval by the PSCW of the Point Beach
Unit 2 steam generator replacements and resolution of the remanded ISFSI
matters described above, WE expects to operate the two units at Point Beach to
the expiration of their current operating licenses. The estimated cost to
decommission the plant in 1995 dollars is $356 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. In 1996, WE has increased its funding levels based on a site specific
estimate as required by the PSCW. 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. WE
believes it is probable that any shortfall in funding would be recoverable in
utility rates.
As required by Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("FAS 115"), WE'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. The Fund balance is stated at fair value:
==============================================================================
1995 1994 1993
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 3,456 $ 3,456 $ 3,456
Earnings 7,405 6,682 7,915
-------- -------- --------
Depreciation Expense $ 10,861 $ 10,138 $ 11,371
======== ======== ========
Total costs accrued to date $235,420 $224,559
Unrealized gain 39,705 2,246
-------- --------
Accumulated Provision for Depreciation $275,125 $226,805
======== ========
==============================================================================
A-38
39
NOTES TO FINANCIAL STATEMENTS - (cont'd)
G - 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, no dividends or
other distributions may be paid on the Company's common stock.
The 3.60% Series Preferred Stock is redeemable in whole or in part at the
option of WE at $101 per share plus any accrued dividends.
In 1994, WE called for redemption all of its 52,500 outstanding shares of
6.75% Series Preferred Stock at a redemption price of par. In 1993, WE called
for redemption 626,500 shares at a purchase price of $104.05 per share plus
accrued dividends to the redemption date.
H - Long-Term Debt
The maturities and sinking fund requirements through 2000 for the aggregate
amount of long-term debt outstanding (excluding obligations under capital
lease, see Note F) at December 31, 1995 are shown below:
==============================================================================
(Thousands of Dollars)
1996 $ 30,000
1997 165,700
1998 60,700
1999 91,700
2000 700
==============================================================================
Sinking fund requirements for the years 1996 through 2000, included in the
table above, are $2.8 million. 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.
The fair value of the Company's long-term debt was $1.5 billion and $1.2
billion at December 31, 1995 and 1994, respectively. The fair value of the
first mortgage bonds and debentures is estimated based upon the market value
of the same or similar issues. Book value approximates fair value for the
Company's unsecured notes. The fair value of WE's obligations under capital
lease is the market value of the Wisconsin Electric Fuel Trust's commercial
paper.
In September and October 1995, WE issued $98.35 million of unsecured variable
rate promissory notes maturing between March 1, 2006 and September 1, 2030.
These notes were issued as a revenue and collateral source for an equal
principal amount of tax exempt Refunding Revenue Bonds issued on WE's behalf
to refund $98.35 million of previously issued tax exempt bonds called for
optional redemption that were secured by WE's First Mortgage Bonds.
A-39
40
NOTES TO FINANCIAL STATEMENTS - (cont'd)
H - Long-Term Debt - (cont'd)
In December 1995, WE issued $100 million of unsecured One Hundred Year 6 7/8%
Debentures due 2095. Proceeds of the issue were added to WE's general funds
and were applied to the repayment of short-term borrowings.
At December 31, 1995, the interest rate for the $67 million variable rate note
due 2016 was 5.00% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 5.10%.
I - Notes Payable
Short-term notes payable balances and their corresponding weighted average
interest rates consist of:
==============================================================================
December 31
1995 1994
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $100,885 5.78% $ 87,399 6.03%
Commercial paper 49,809 5.88% 155,106 6.04%
-------- --------
$150,694 $242,505
======== ========
==============================================================================
Unused lines of credit for short-term borrowing amounted to $108.6 million at
December 31, 1995. 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.
J - Pension Plans
Effective in 1993, the PSCW adopted Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions ("FAS 87"), for
ratemaking.
WE has several defined benefit 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.
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.
A-40
41
NOTES TO FINANCIAL STATEMENTS - (cont'd)
J - Pension Plans - (cont'd)
==============================================================================
Pension Cost calculated per FAS 87 1995 1994 1993
- ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31 -
Cost of pension benefits earned by
employees $ 8,985 $ 10,933 $ 10,842
Interest cost on projected benefit
obligation 41,586 38,736 36,335
Actual (return) loss on plan assets (136,243) 7,634 (43,226)
Net amortization and deferral 88,493 (52,180) 1,067
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 2,821 $ 5,123 $ 5,018
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31 -
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $543,371 $427,847
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 12,651 9,963
-------- --------
Total obligation $556,022 $437,810
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31 -
Pension assets at fair market value $637,529 $527,182
Projected benefit obligation
at present value (584,785) (513,166)
Unrecognized transition asset (22,034) (24,628)
Unrecognized prior service cost 23,194 19,567
Unrecognized net gain (54,780) (17,569)
-------- --------
Projected status of plans $ (876) $ (8,614)
======== ========
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.25 8.25 7.5
Assumed rate of increase in
compensation levels 4.75 5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
==============================================================================
K - 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
A-41
42
NOTES TO FINANCIAL STATEMENTS - (cont'd)
K - Benefits Other Than Pensions - (cont'd)
postretirement benefit obligation. The PSCW has issued an order recognizing
FAS 106 for ratemaking; therefore adoption has no material impact on net
income.
WE 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.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1995 1994 1993
- ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31 -
Cost of postretirement benefits
earned by employees $ 2,276 $ 2,653 $ 3,105
Interest cost on projected
benefit obligation 10,458 10,148 10,395
Actual return on plan assets (12,598) (3,893) (2,388)
Net amortization and deferral 13,951 5,648 5,082
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 14,087 $ 14,556 $ 16,194
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31 -
Accumulated Postretirement Benefit
Obligation at December 31 -
Retirees $(92,746) $(83,670)
Fully eligible active plan participants (10,304) (7,223)
Other active plan participants (41,732) (37,255)
-------- --------
Total obligation (144,782) (128,148)
Postretirement assets at
fair market value 45,086 37,919
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (99,696) (90,229)
Unrecognized transition obligation 83,268 90,302
Unrecognized prior service cost (1,279) (1,169)
Unrecognized net gain (6,102) (16,484)
-------- --------
Accrued Postretirement Benefit Obligation $(23,809) $(17,580)
======== ========
==============================================================================
A-42
43
NOTES TO FINANCIAL STATEMENTS - (cont'd)
K - Benefits Other Than Pensions - (cont'd)
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 (cont'd) 1995 1994 1993
- ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Rates used for calculations (%) -
Discount rate-interest rate used to
adjust for the time value of money 7.25 8.25 7.5
Assumed rate of increase in
compensation levels 4.75 5.0 5.0
Expected long-term rate of return
on postretirement assets 9.0 9.0 9.0
Health care cost trend rate 11.0 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, 1995 by $9.5 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by $1 million.
Revitalization: In the first quarter of 1994, WE recorded a $73.9 million
charge related to its revitalization program. This charge included $37.5
million for Early Retirement Incentive Packages ("ERIP") and $25 million for
Severance Packages ("SP"). These plans were used to reduce employee staffing
levels. ERIP provided for a monthly income supplement ("ERIP 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 WE and the
bargaining units. These plans were available to most management employees but
not to elected officers.
Under ERIP, 403 employees elected to retire in 1994. Under SP, 651 and 75
employees enrolled in 1994 and 1995, respectively. ERIP supplement costs are
paid from pension plan trusts and medical/dental benefits from employee
benefit trusts. Remaining ERIP and SP costs are paid from general corporate
funds. The ultimate timing of cash flows for ERIP supplement costs depends
upon the funding limitations of WE's pension plans. With the exception of
ERIP supplement costs, approximately $35.4 million have been paid against the
revitalization liability through December 31, 1995, and a liability of $0.9
million remains outstanding at December 31, 1995.
L - Information By Segments of Business
WE is a public utility incorporated in the State of Wisconsin. The Company's
principal business segments include electric, gas and steam utility
operations. The electric utility generates, transmits, distributes and sells
electric energy in southeastern (including metropolitan Milwaukee), east
central and northern Wisconsin and in the Upper Peninsula of Michigan. The
gas utility purchases, distributes and sells natural gas to retail customers
and transports customer-owned gas in three service areas in southeastern, east
A-43
44
NOTES TO FINANCIAL STATEMENTS - (cont'd)
L - Information By Segments of Business - (cont'd)
central and western Wisconsin that are largely within the electric service
area. The steam utility produces, distributes and sells steam to space
heating and processing customers in downtown and the near south side of
Milwaukee. The following summarizes the business segments of the Company:
==============================================================================
Year ended December 31 1995 1994 1993
- ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,437,480 $1,403,562 $1,347,844
Operating income before income taxes 419,271 329,216 329,727
Depreciation 164,789 159,414 149,646
Construction expenditures 223,723 244,718 305,467
Gas Operations
Operating revenues 318,262 324,349 331,301
Operating income before income taxes 47,022 30,993 31,025
Depreciation 17,722 16,856 16,235
Construction expenditures 24,851 25,481 24,419
Steam Operations
Operating revenues 14,742 14,281 14,090
Operating income before income taxes 3,757 2,825 3,147
Depreciation 1,365 1,344 1,185
Construction expenditures 206 1,213 4,940
Total
Operating revenues 1,770,484 1,742,192 1,693,235
Operating income before income taxes 470,050 363,034 363,899
Depreciation 183,876 177,614 167,066
Construction expenditures
(including non-utility) 248,867 271,448 334,932
At December 31
- --------------
Net Identifiable Assets
Electric $3,901,611 $3,797,755 $3,665,493
Gas 386,864 376,344 385,390
Steam 25,214 25,315 25,119
Non-utility 5,235 2,779 2,971
---------- ---------- ----------
Total Assets $4,318,924 $4,202,193 $4,078,973
========== ========== ==========
==============================================================================
M - 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. The Company received from WEC
stockholder capital contributions of $30 million in 1995 and 1994, and $10
million in 1993.
A-44
45
NOTES TO FINANCIAL STATEMENTS - (cont'd)
N - Commitments and Contingencies
Kimberly Cogeneration Facility: In 1993, a competitive bidding process
conducted by the PSCW resulted in selection of a proposal submitted by an
unaffiliated independent power producer, LSP-Whitewater L.P. ("LS Power"), to
construct a generation facility to meet a portion of WE's anticipated increase
in system supply needs. WE 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-1997.
Prior to the 1993 selection of the LS Power generation facility by the PSCW,
WE 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-1994. In the PSCW Order, the WE
project was selected as the second place conditional project if the LS Power
project did not proceed. WE had made expenditures for the Kimberly facility
of approximately $65.8 million associated with the procurement of three
combustion turbines, one steam turbine and three heat recovery boilers in
order to achieve the in-service dates as agreed to in a steam service contract
with Repap.
The Company is currently reviewing other options for use or sale of its
Kimberly Cogeneration Facility equipment (the "Equipment"). The Equipment is
of a technology of natural gas-fired combined cycle generation equipment that
is marketed worldwide. The Company is investigating opportunities to sell the
Equipment or to use it in another power project and is currently evaluating
potential sales opportunities and/or power projects involving the Equipment.
At this time, the Company does not believe that disposition of the Equipment
will have a material adverse effect on its financial condition. However,
there is a possibility that WE may need to recognize an impairment of the
Equipment in the future should the projects noted above not occur and should
no other viable sales opportunities and/or power projects involving the
Equipment be identified.
Manufactured Gas Plant Sites: WE's natural gas business unit is investigating
the remediation of a number of former manufactured gas plant ("MGP") sites.
Operations at these MGP sites ceased over 40 years ago. Limited remediation
activities occurred at a number of these sites during the 1980's, with removal
of waste materials known to be present at that time. In 1995, WE presented a
plan to investigate and remediate sites to the Wisconsin Department of Natural
Resources ("DNR"). During 1995, WE conducted site investigations at four
sites and partial remediation activities were conducted at one site.
Approximately $1.6 million has been spent through December 31, 1995 for such
activities. Remediation costs to be incurred through the year 2000 have been
estimated to be $12 million, but the total costs are uncertain pending the
results of further site specific investigations and the selection of site
specific remedial actions. In a September 11, 1995 letter order, the PSCW
allowed WE to defer MGP site remediation costs with final rate treatment of
such costs to be determined in future rate cases. As of December 31, 1995, WE
has recorded an accrued liability of $1.6 million for MGP site remediation and
a related deferred regulatory asset of $3.2 million. WE expects to accrue
additional MGP site remediation liabilities during 1996 as site specific
investigations are completed and site specific remedial actions are
identified. WE will seek rate recovery for these costs and does not
anticipate that there will be a material adverse effect on its net income or
financial position.
A-45
46
NOTES TO FINANCIAL STATEMENTS - (cont'd)
N - Commitments and Contingencies - (cont'd)
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 - "LIQUIDITY AND CAPITAL
RESOURCES - Capital Requirements 1996-2000."
DIRECTORS
The information under "Election of Directors" in Wisconsin Electric's
definitive Information Statement dated April 26, 1996, 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, 1995.)
RICHARD A. ABDOO [51,20] CHARLES T. GOVIN, JR.[49,16]
Chairman of the Board Vice President-Gas Operations
& Chief Executive Officer
RICHARD R. GRIGG [47,25] KRISTINE M. KRAUSE [41,17]
President & Chief Operating Officer Vice President-Fossil Operations
DAVID K. PORTER [52,26] ROBERT E. LINK [44,21]
Senior Vice President Vice President-Nuclear Power
CALVIN H. BAKER [52,4] KRISTINE A. RAPPE [39,13]
Vice President-Finance Vice President-Customer Services
& Chief Financial Officer
ANN MARIE BRADY [43,7] ANNE. K. KLISURICH [48,23]
Secretary Controller
& Vice President-External Affairs
FRANCIS BRZEZINSKI [44,6]
Vice President-Business Development
A-46
47
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, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, 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
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 31, 1996
A-47