SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
---------------------------------
Indicate by check mark whether each Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that each
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock of Wisconsin Energy Corporation
held by non-affiliates is approximately $3,073,128,000 based upon the reported
last sale price of such securities as of February 27, 1998. All of the common
stock of Wisconsin Electric Power Company is held by Wisconsin Energy
Corporation.
Name of Each Exchange
Registrant/Title of Each Class on Which Registered
- ------------------------------ ---------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Wisconsin Energy Corporation
Common Stock, $.01 Par Value New York Stock Exchange
Wisconsin Electric Power Company
None N/A
Securities Registered Pursuant to Section 12(g) of the Act:
Wisconsin Energy Corporation
None N/A
Wisconsin Electric Power Company
Serial Preferred Stock, 3.60% Series, $100 Par Value N/A
Six Per Cent. Preferred Stock, $100 Par Value N/A
--------------------------------
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date (March 30, 1998):
Wisconsin Energy Corporation Common Stock, $.01 Par Value,
112,865,844 shares outstanding.
Wisconsin Electric Power Company Common Stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is the
sole holder of Wisconsin Electric
Power Company Common Stock.
--------------------------------
Documents Incorporated by Reference
-----------------------------------
Portions of Wisconsin Energy Corporation's definitive Proxy Statement for its
Annual Meeting of Stockholders, to be held on May 19, 1998, are incorporated
by reference into Part III hereof.
Portions of Wisconsin Electric Power Company's definitive Information
Statement for its Annual Meeting of Stockholders, to be held on May 12, 1998,
are incorporated by reference into Part III hereof.
--------------------------------
This combined Form 10-K is separately filed by Wisconsin Energy Corporation
and by Wisconsin Electric Power Company. Information contained herein
relating to any individual Registrant is filed by such Registrant on its own
behalf.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
----------------------------------------
FORM 10-K REPORT FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 26
4. Submission of Matters to a Vote of Security Holders . . . . . . . . 29
Executive Officers of the Registrants . . . . . . . . . . . . . . . 29
PART II
5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . 31
6. Selected Financial Data
Wisconsin Energy Corporation. . . . . . . . . . . . . . . . . . . 32
Wisconsin Electric Power Company. . . . . . . . . . . . . . . . . 33
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 34
7A. Quantitiative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . 61
8. Financial Statements and Supplementary Data
Index to 1997 Financial Statements. . . . . . . . . . . . . . . . 61
Wisconsin Energy Corporation. . . . . . . . . . . . . . . . . . . 62
Report of Independent Accountants . . . . . . . . . . . . . . . 84
Wisconsin Electric Power Company. . . . . . . . . . . . . . . . . 85
Report of Independent Accountants . . . . . . . . . . . . . . .105
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . .106
PART III
10. Directors and Executive Officers of the Registrant. . . . . . . . .106
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . .106
12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . .106
13. Certain Relationships and Related Transactions. . . . . . . . . . .106
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .107
Consents of Independent Accountants . . . . . . . . . . . . . . . .112
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . .114
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . .EI-1
DEFINITIONS
Abbreviations and acronyms used in the text are defined below.
Abbreviations and Acronyms Term
Act. . . . . . . . . . . . . . . . . . Price-Anderson Act
Agreement. . . . . . . . . . . . . . . May 13, 1997 Agreement and Plan of Reorganization
setting forth the terms of the proposed acquisition
of ESELCo, Inc. by WEC
ACAP . . . . . . . . . . . . . . . . . Alliance for Constructive Air Policy
AFUDC. . . . . . . . . . . . . . . . . Allowance for Funds Used During Construction
AP8. . . . . . . . . . . . . . . . . . Advance Plan 8
Benefit Trusts . . . . . . . . . . . . Employees' Benefit Trusts used to fund a major portion
of postretirement benefits
Board. . . . . . . . . . . . . . . . . Public Benefits Board
BTU. . . . . . . . . . . . . . . . . . British Thermal Unit
Cogentrix. . . . . . . . . . . . . . . Cogentrix Energy Inc. (an unaffiliated IPP)
Commonwealth Edison. . . . . . . . . . Commonwealth Edison Company (an unaffiliated utility)
Concord. . . . . . . . . . . . . . . . Concord Generating Station
CCBs . . . . . . . . . . . . . . . . . Combustion byproducts
CPCN . . . . . . . . . . . . . . . . . Certificate of Public Convenience and Necessity
CWIP . . . . . . . . . . . . . . . . . Construction work in progress
D.C. Appeals Court . . . . . . . . . . United States Court of Appeals for the District of
Columbia circuit
D&D Fund . . . . . . . . . . . . . . . Uranium Enrichment Decontamination and
Decommissioning Fund
D&P. . . . . . . . . . . . . . . . . . Duff & Phelps Inc.
DOE. . . . . . . . . . . . . . . . . . United States Department of Energy
Dth. . . . . . . . . . . . . . . . . . Dekatherm
Edison Sault . . . . . . . . . . . . . Edison Sault Electric Company
EMFs . . . . . . . . . . . . . . . . . Electromagnetic Fields
Energy Act . . . . . . . . . . . . . . Energy Policy Act of 1992
EPA. . . . . . . . . . . . . . . . . . United States Environmental Protection Agency
Equipment. . . . . . . . . . . . . . . Kimberly Cogeneration Facility Project equipment
EWGs . . . . . . . . . . . . . . . . . Exempt Wholesale Generators
FAS. . . . . . . . . . . . . . . . . . Statement of Financial Accounting Standards
FASB . . . . . . . . . . . . . . . . . Financial Accounting Standards Board
FAS 87 . . . . . . . . . . . . . . . . FAS No. 87, Employers' Accounting for Pensions
FAS 106. . . . . . . . . . . . . . . . FAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions
FAS 109. . . . . . . . . . . . . . . . FAS No. 109, Accounting for Income Taxes
FAS 121. . . . . . . . . . . . . . . . FAS No. 121, Accounting for the Impairment of Long-
Lived Assets
FAS 123. . . . . . . . . . . . . . . . FAS No. 123, Accounting for Stock-Based Compensation
FAS 128. . . . . . . . . . . . . . . . FAS No. 128, Earnings Per Share
FAS 129. . . . . . . . . . . . . . . . FAS No. 129, Disclosure of Information about Capital
Structure
FAS 130. . . . . . . . . . . . . . . . FAS No. 130, Reporting Comprehensive Income
FAS 131. . . . . . . . . . . . . . . . FAS No. 131, Disclosure about Segments of an Enterprise
and Related Information
FAS 132. . . . . . . . . . . . . . . . FAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits
FERC . . . . . . . . . . . . . . . . . Federal Energy Regulatory Commission
FERC 636 . . . . . . . . . . . . . . . FERC Order 636; issued in 1993
Fitch. . . . . . . . . . . . . . . . . Fitch Investors Service Inc.
Fund . . . . . . . . . . . . . . . . . Nuclear Decommissioning Trust Fund
GCRM . . . . . . . . . . . . . . . . . Gas Cost Recovery Mechanism
GRI. . . . . . . . . . . . . . . . . . Gas Research Institute
IPP. . . . . . . . . . . . . . . . . . Independent Power Producer
ISFSI. . . . . . . . . . . . . . . . . Independent Spent Fuel Storage Installation (nuclear)
ISO. . . . . . . . . . . . . . . . . . Independent System Operator
LS Power . . . . . . . . . . . . . . . LSP-Whitewater, Limited Partnership (an unaffiliated
IPP)
MAIN . . . . . . . . . . . . . . . . . Mid-America Interconnected Network
MCPP . . . . . . . . . . . . . . . . . Milwaukee County Power Plant
MDEQ . . . . . . . . . . . . . . . . . Michigan Department of Environmental Quality
MDNR . . . . . . . . . . . . . . . . . Michigan Department of Natural Resources
MGP. . . . . . . . . . . . . . . . . . Manufactured Gas Plant
Midwest ISO. . . . . . . . . . . . . . Midwest Independent System Operator
Minergy. . . . . . . . . . . . . . . . Minergy Corp.
Mines. . . . . . . . . . . . . . . . . Empire and Tilden iron ore mines located in the Upper
Peninsula of Michigan
Moody's. . . . . . . . . . . . . . . . Moody's Investors Service
MPSC . . . . . . . . . . . . . . . . . Michigan Public Service Commission
MW . . . . . . . . . . . . . . . . . . Megawatt
Mwh. . . . . . . . . . . . . . . . . . Megawatt-hour
NAAQS. . . . . . . . . . . . . . . . . National Ambient Air Quality Standards issued by the
EPA on July 18, 1997
NEIL . . . . . . . . . . . . . . . . . Nuclear Electric Insurance Limited
NOX. . . . . . . . . . . . . . . . . . Nitrogen Oxide
NRC. . . . . . . . . . . . . . . . . . United States Nuclear Regulatory Commission
NSP. . . . . . . . . . . . . . . . . . Northern States Power Company, a Minnesota
corporation
Oak Creek. . . . . . . . . . . . . . . Oak Creek Power Plant
Paris. . . . . . . . . . . . . . . . . Paris Generating Station
Plan . . . . . . . . . . . . . . . . . Omnibus Stock Incentive Plan
Pleasant Prairie . . . . . . . . . . . Pleasant Prairie Power Plant
Point Beach. . . . . . . . . . . . . . Point Beach Nuclear Plant
Proposed FAS . . . . . . . . . . . . . Proposed FAS, Accounting for Certain Liabilities Related
to Closure or Removal of Long-Lived Assets
PRP. . . . . . . . . . . . . . . . . . Potentially Responsible Party
PSCW . . . . . . . . . . . . . . . . . Public Service Commission of Wisconsin
PUHCA. . . . . . . . . . . . . . . . . Public Utility Holding Company Act of 1935, as
amended
SARs . . . . . . . . . . . . . . . . . Stock appreciation rights
SEC. . . . . . . . . . . . . . . . . . United States Securities and Exchange Commission
S&P. . . . . . . . . . . . . . . . . . Standard & Poor's Corporation
SO2. . . . . . . . . . . . . . . . . . Sulfur Dioxide
Trust. . . . . . . . . . . . . . . . . Wisconsin Electric Fuel Trust (nuclear)
UP . . . . . . . . . . . . . . . . . . Union Pacific Railroad
UPPCo. . . . . . . . . . . . . . . . . Upper Peninsula Power Company (an unaffiliated utility)
USEC . . . . . . . . . . . . . . . . . U.S. Enrichment Corporation
Waste Act. . . . . . . . . . . . . . . Nuclear Waste Policy Act of 1982, as amended in 1987
Waste Fund . . . . . . . . . . . . . . Nuclear Waste Fund
Waukesha . . . . . . . . . . . . . . . City of Waukesha, Wisconsin
WDNR . . . . . . . . . . . . . . . . . Wisconsin Department of Natural Resources
WE or Wisconsin Electric . . . . . . . Wisconsin Electric Power Company
WEC, Wisconsin Energy or the Company . Wisconsin Energy Corporation and subsidiaries
WIEP . . . . . . . . . . . . . . . . . Wisconsin International Electric Power, Ltd. (an
unaffiliated entity)
WISPARK. . . . . . . . . . . . . . . . WISPARK Corporation
WISVEST. . . . . . . . . . . . . . . . WISVEST Corporation
WITECH . . . . . . . . . . . . . . . . WITECH Corporation
WN . . . . . . . . . . . . . . . . . . Wisconsin Natural Gas Company
WMIC . . . . . . . . . . . . . . . . . Wisconsin Michigan Investment Corporation
WP&L . . . . . . . . . . . . . . . . . Wisconsin Power and Light Company (an unaffiliated
utility)
WPPI . . . . . . . . . . . . . . . . . Wisconsin Public Power Inc.
WS . . . . . . . . . . . . . . . . . . Wisconsin Southern Gas Company, Inc. (acquired by
WE on January 1, 1994)
WSSA . . . . . . . . . . . . . . . . . Wilderness Shores Settlement Agreement
Yankee Atomic. . . . . . . . . . . . . Yankee Atomic Electric Company v. The United States
Yellowcake . . . . . . . . . . . . . . Uranium Concentrates
PART I
------
ITEM 1. BUSINESS
Wisconsin Energy Corporation ("WEC", "Wisconsin Energy" or the "Company") was
incorporated in the State of Wisconsin in 1981 and became a holding company in
1986. WEC's principal subsidiary at December 31, 1997 was Wisconsin Electric
Power Company ("WE" or "Wisconsin Electric"), an electric, gas and steam
utility. WE was incorporated in the State of Wisconsin in 1896. The
following discussion includes both WEC and WE unless otherwise stated.
Effective January 1, 1996, WEC merged its wholly owned 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. WEC also has certain subsidiaries engaged in various
non-utility businesses. The operations of WEC and its subsidiaries are
conducted in the following four business segments.
ELECTRIC OPERATIONS: The WE electric operations generate, transmit,
distribute and sell electric energy in a territory of approximately 12,000
square miles with a population estimated at 2,300,000 in southeastern
(including the metropolitan Milwaukee area), east central and northern
Wisconsin and in the Upper Peninsula of Michigan.
GAS OPERATIONS: The WE gas operations purchase, distribute and sell
natural gas to retail customers and transport customer-owned gas in three
distinct service areas of about 2,800 square miles 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
approximately 1,200,000, is largely within WE's electric service area.
STEAM OPERATIONS: The WE steam operations generate, distribute and sell
steam supplied by its Valley and Milwaukee County Power Plants. Steam is used
by customers for space heating and processing in the metropolitan Milwaukee
area.
NON-UTILITY OPERATIONS: WEC's non-utility subsidiaries are devoted
primarily to stimulating economic growth in the WE service area and to
capitalizing on diversified investment opportunities for stockholders. For
information about the non-utility subsidiaries, see Item 1. Business -
"Non-Utility Operations."
For additional financial information about WEC's and WE's business segments,
see "Note L - Information by Segments of Business" in WEC's and WE's Notes to
Financial Statements (the "Notes to Financial Statements") in Item 8.
Financial Statements and Supplementary Data.
CAUTIONARY FACTORS: A number of forward-looking statements are included in
this document. When used, the terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "project" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are
subject to certain risks, uncertainties and assumptions which could cause
actual results to differ materially from those that are described, including
the items described in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and Northern States Power Company, a Minnesota Corporation ("NSP"), agreed
to terminate the Agreement and Plan of Merger which provided for a business
combination of WEC and NSP to form Primergy Corporation. For additional
information, see "Note B - Mergers" in the Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data.
PROPOSED ACQUISITION OF ESELCO, INC.: On May 13, 1997, WEC and ESELCO,
Inc., parent company of Edison Sault Electric Company ("Edison Sault"),
entered into an Agreement and Plan of Reorganization setting forth the terms
of the proposed acquisition of ESELCO, Inc. by WEC. On October 7, 1997, the
shareholders of ESELCO, Inc. voted to approve the proposed transaction. WEC
expects to complete the proposed acquisition as soon as practicable during
1998 upon receipt of all appropriate regulatory approvals and upon fulfillment
of other customary conditions. For additional information, see "Note B -
Mergers" in WEC's Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data. Unless otherwise noted, information and
descriptions contained in this document do not consider the impact of the
proposed acquisition of ESELCO, Inc.
ELECTRIC OPERATIONS
ELECTRIC SALES
WE is authorized to provide retail electric service in designated territories
in the State of Wisconsin, as established by indeterminate permits,
certificates of public convenience and necessity, or boundary agreements with
other utilities, and in certain territories in the State of Michigan pursuant
to franchises granted by municipalities. WE also provides wholesale electric
service under contracts with various municipal and utility customers.
Electric energy sales by WE in 1997, to all classes of customers, totaled
approximately 27.7 billion kilowatt-hours, a 0.4% increase over 1996. There
were 978,835 electric customers at December 31, 1997, an increase of 1.0%
since December 31, 1996.
Electric energy sales are impacted by seasonal factors and varying weather
conditions from year-to-year. WE, a summer peaking utility as a result of
cooling load, reached its all-time electric peak demand of 5,368 megawatts
("MW") on July 31, 1995 during a period of unusually hot and humid weather.
During the years 1998 through 2002, WE currently estimates that electric peak
demand will grow at an annualized rate of 2.3% to 5,483 MW by the year 2002.
For further operating information by customer class, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Results of Operations - Electric Revenues, Gross Margins and Sales."
SALES TO LARGE RETAIL ELECTRIC CUSTOMERS: WE provides electric utility
service to a diversified base of industrial customers. Major industries
served by WE include the iron ore mining industry, the paper industry, the
machinery production industry, the foundry industry and the food products
industry. The Empire and Tilden iron ore mines located in the Upper Peninsula
of Michigan ("Mines"), the two largest retail electric customers of WE,
accounted for 4.5% and 3.7%, respectively, of total electric kilowatt-hour
sales in 1997. Sales to the Mines were 5.4% lower in 1997 compared to 1996
due to a two month outage during 1997 at one of the Mines.
SALES TO WHOLESALE CUSTOMERS: During 1997, WE sold wholesale electric
energy to five municipally owned systems, three rural cooperatives and two
municipal joint action agencies, located in the States of Wisconsin, Michigan
and Illinois. Wholesale electric energy sales were also made to 37 other
public utilities and power marketers throughout the region under rates
approved by the Federal Energy Regulatory Commission ("FERC"). Wholesale
sales accounted for approximately 7.9% of total electric energy sales and
approximately 4.8% of total electric operating revenues in 1997 compared to
8.7% of total electric energy sales and 5.0% of total electric operating
revenues in 1996.
Upper Peninsula Power Company, an independent investor-owned utility
("UPPCo"), ceased taking power from WE for its isolated Iron River System in
March 1997. At December 31, 1997, a 65 MW demand contract expired between WE
and UPPCo. WE and UPPCo entered into a capacity exchange agreement for 30 MW
to 65 MW of power beginning in January 1998 and running through December 2007.
UPPCo nominated (elected to receive) 55 MW for calendar year 1998.
WE and Wisconsin Public Power Inc. ("WPPI") entered into a new three year
contract beginning in May 1998. This contract allows WPPI to nominate
additional power demand in amounts up to 100 MW by the year 2000.
WE's existing FERC tariffs also provide for transmission service to its
wholesale customers. During 1997, WE had 21 customers taking transmission
service.
COMPETITION: Driven by a combination of market forces, regulatory and
legislative initiatives and technological changes, the electric utility
industry continues a trend towards restructuring and increased competition.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Industry
Restructuring and Competition" for a description of competition issues and
electric industry restructuring initiatives that are underway in regulatory
jurisdictions where WE currently does business.
ENERGY POLICY ACT OF 1992: In October 1992, the Energy Policy Act ("Energy
Act") was signed into law. Passage of this law established open access to
electric transmission systems thereby facilitating the entry of power
producers and power marketers into the bulk power market. Notable among its
provisions was the creation of a new class of energy producer called Exempt
Wholesale Generators ("EWGs"), who are exempt from the requirements of the
Public Utility Holding Company Act of 1935, as amended ("PUHCA"), as well as
the rights that the Energy Act provides them and utilities to request a FERC
order directing the provision of transmission service if denied transmission
access from utilities. The transmission aspects of this law are expected to
have little impact on WE since it has had an open access transmission tariff
on file with the FERC since 1980.
Municipal utilities are approaching alternative suppliers in a search for
lower energy prices. Additionally, some large industrial customers are
seeking regulatory changes that could permit retail wheeling to allow them to
seek proposals for energy from alternate suppliers. Independent power
producers ("IPP") are also exploring cogeneration projects which would provide
process steam to customers in WE's service territory and sell electricity to
WE. Consequently, electric wholesale customers of WE or other non-affiliated
utilities may determine, from time to time, to switch energy suppliers,
purchase interests in existing power plants or build new generating capacity,
either directly or through joint ventures with third parties. The advent of
EWGs can be expected to accelerate this practice.
FERC OPEN ACCESS TRANSMISSION RULING: As a result of the Energy Act, the
FERC issued two orders in April 1996 and March 1997 relating to open access
transmission service, stranded costs, standards of conduct and open access
same-time information systems. On November 25, 1997, these orders were
reaffirmed with little change by the FERC on rehearing. The ruling is
intended to create a more competitive wholesale electric power market. See
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Industry
Restructuring and Competition" for additional information.
ELECTRIC UTILITY INDUSTRY INVESTIGATIONS: See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Industry Restructuring and
Competition" for information regarding the Public Service Commission of
Wisconsin's ("PSCW") and the Michigan Public Service Commission's ("MPSC")
separate investigations into the structure of the electric utility industry in
the States of Wisconsin and Michigan, respectively.
ELECTRIC SYSTEM RELIABILITY MATTERS: WE experienced electricity supply
shortages on four separate occasions during the summer of 1997. WE does not
expect the circumstances on its system that contributed to these shortages to
occur again during this year. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors Affecting
Results of Operations - Electric System Reliability Matters" for information
concerning ongoing actions in which WE is currently involved to improve
electric reliability in the region.
SOURCES OF ELECTRIC ENERGY
The table below indicates WE's sources of energy supply for its control area,
including net generation by fuel type, for the following years ended
December 31.
==============================================================================
1995 1996 1997* 1998**
------ ------ ------ ------
Coal 64.8% 67.2% 71.9% 64.9%
Nuclear 24.9 23.9 5.6 21.9
Hydro-electric 1.4 1.6 1.5 1.4
Natural Gas 1.0 1.0 1.9 1.8
Oil 0.1 0.3 0.2 0.1
------ ------ ------ ------
Net Generation 92.2 94.0 81.1 90.1
Power Purchases 7.8 6.0 18.9 9.9
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
==============================================================================
* The mix of electric energy supply during 1997 reflects extended outages
of Units 1 and 2 at Point Beach Nuclear Plant ("Point Beach"). See Item 1.
Business - "Electric Operations - Nuclear Generation" and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations - Nuclear Matters"
for discussion of matters related to Point Beach.
** Estimated assuming that there are no unforeseen contingencies such as
unscheduled maintenance or repairs. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - "Cautionary
Factors."
Primarily due to extended outages at Point Beach during 1997, WE's 1997 net
generation amounted to 23.6 million megawatt-hours ("Mwh") compared to
approximately 27.4 million Mwh during 1996 and approximately 26.7 million Mwh
during 1995. For its control area, WE's generation was supplemented with
5.5 million Mwh of power purchases from neighboring utilities; from
LSP-Whitewater, Limited Partnership ("LS Power"), an independent power
producer with whom WE has a long-term power purchase contract; and, to a minor
extent, from other sources. WE purchased a total of approximately 1.8 million
Mwh during 1996 and approximately 2.3 million Mwh during 1995 to supply its
control area. Including Point Beach, the dependable capability of WE's
generating stations was 5,652 MW in August 1997 as more fully described in
Item 2. Properties.
WE's average total fuel costs per million BTU's by fuel type for the years
ended December 31 are shown below.
==============================================================================
1995 1996 1997
------ ------ ------
Coal $ 1.28 $ 1.16 $ 1.22
Nuclear 0.43 0.46 0.49
Natural Gas 2.21 3.60 2.79
Oil 5.32 4.22 4.70
==============================================================================
PSCW ADVANCE PLANS: In November 1997, the PSCW issued their Advance Plan 8
("AP8") Phase 1 Order regarding ten-year forecasts and supply modeling
parameters that Wisconsin utilities should use to prepare ten-year supply
plans. The PSCW ordered the utilities to use a 2.0% annual growth rate for
demand and energy sales. The PSCW also ordered the utilities to use an 18%
planning reserve margin.
In January 1998, WE, along with the other utilities in Wisconsin, filed their
AP8 Phase 2 supply plans with the PSCW. WE filed five generation supply plans
that range from including no additional generation to adding 1,150 MW of new
generating capacity. The range in plans corresponds to a range in assumptions
from using WE's demand and energy forecasts and minimal capacity purchases
from WE by WPPI on the low end to using the PSCW's demand and energy forecast
and maximum capacity purchases from WE by WPPI on the high end. All
generation additions are expected to be either simple cycle or combined cycle
gas-fired combustion turbine based units. WE does not anticipate needing
additional base load generation until after the year 2010. WE currently
expects the PSCW to issue an order in AP8 Phase 2 in late summer 1998.
Transmission plans under AP8 were filed with the PSCW in February 1998. See
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Electric
System Reliability Matters" for additional information concerning anticipated
electric transmission projects.
Investments in energy efficiency programs have reduced and delayed the need to
add new generating capacity but have not eliminated the need entirely.
Purchases of power from other utilities and transmission system upgrades will
also combine to help delay the need to install some new generating capacity in
the future. WE expects that investments in energy efficiency will likely be
shifted from utilities to a state run Public Benefits Board. For additional
information, see Item 1. Business - "Energy Efficiency" below.
For information regarding estimated costs of WE's construction program for the
five years ending December 31, 2002, see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Liquidity and
Capital Resources - Capital Requirements 1998-2002." All estimates of
construction expenditures exclude Allowance For Funds Used During
Construction. For additional information regarding matters related to
Allowance for Funds Used During Construction, see "Note E - Allowance for
Funds Used During Construction" in the Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data.
COAL-FIRED GENERATION
WE diversifies its coal sources by purchasing from Northern Appalachia, the
Southern Powder River Basin (Wyoming), the Uinta Region (Colorado) and the
Raton Basin (New Mexico) mining districts for the power plants in Wisconsin,
and from Colorado, central Appalachia and western mines for the Presque Isle
Power Plant in Michigan.
Following are the periods and annual tonnage amounts for WE's principal coal
contracts.
==============================================================================
Contract Period Annual Tonnage
--------------- --------------
Jan. 1980 to Dec. 2006 2,000,000
Jul. 1983 to Dec. 2002 1,000,000
Jan. 1992 to Dec. 2005 2,200,000
Oct. 1992 to Sep. 2007 800,000
Sep. 1994 to Aug. 1999 600,000
Sep. 1995 to Dec. 1999 600,000
Jan. 1996 to Dec. 1999 100,000
==============================================================================
For information regarding emission restrictions, see Item 1. Business -
"Environmental Compliance."
Approximately 75% of WE's 1998 coal requirements are expected to be delivered
by WE-owned unit trains. The unit trains will transport coal for the Oak
Creek and Pleasant Prairie Power Plants from Colorado, Pennsylvania, New
Mexico and Wyoming mines. Coal from Pennsylvania and Colorado mines is also
transported via rail to Lake Erie or Lake Michigan transfer docks and
delivered to the Valley and Port Washington Power Plants by lake vessels.
Montana and Wyoming coal for Presque Isle is transported via rail to Superior,
Wisconsin, placed in dock storage and reloaded into lake vessels for plant
delivery. The Presque Isle central Appalachian origin and Colorado origin
coal is shipped via rail to Lake Erie and Lake Michigan (Chicago) coal
transfer docks, respectively, for lake vessel delivery to the plant. WE's
1998 coal requirements, projected to be 11.3 million tons, will be 89% under
contract. WE does not anticipate any problem in procuring its remaining 1998
requirements through short-term or spot purchases and inventory adjustments.
For information concerning coal delivery problems during 1997 related to the
Union Pacific Railroad, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results of
Operations - Coal Transportation Matters."
PLEASANT PRAIRIE POWER PLANT: All of the estimated 1998 coal requirements
at this plant are presently covered by three long-term contracts.
OAK CREEK POWER PLANT: All of the estimated 1998 coal requirements for
this plant are covered by one long-term contract and two medium-term
contracts.
PRESQUE ISLE POWER PLANT: This plant has six generating units designed to
burn bituminous coal and three other units designed to burn sub-bituminous
coal. The units burning sub-bituminous coal are expected to be supplied by
one medium-term contract, the annual volumes of which are anticipated to be
adequate to cover coal requirements for 1998. Bituminous coal is generally
purchased through one-year contracts from central Appalachia and under a five-
year contract for the Colorado origin coal.
EDGEWATER 5 GENERATING UNIT: Coal for this unit, in which WE has a 25%
interest, is purchased by Wisconsin Power and Light Company, a non-affiliated
investor owned utility, which is the majority owner of the facility.
VALLEY AND PORT WASHINGTON POWER PLANTS: These plants are both supplied in
1998 by three one-year contracts.
NUCLEAR GENERATION
WE purchases uranium concentrates ("Yellowcake") and contracts for its
conversion, enrichment and fabrication. WE maintains title to the nuclear
fuel until the fabricated fuel assemblies are delivered to Point Beach,
whereupon it is sold to and leased back from the Wisconsin Electric Fuel Trust
("Trust"). See "Note H - Long-Term Debt" in the Notes to Financial Statements
in Item 8. Financial Statements and Supplementary Data.
URANIUM REQUIREMENTS: WE requires approximately 400,000 pounds to 500,000
pounds of Yellowcake on an annual basis for Point Beach. The supply is
currently provided through one long-term contract, which provides
approximately 80% to 100% of annual requirements. WE may exercise
flexibilities available in this contract and purchase certain quantities of
uranium on the spot market, should the market conditions prove favorable.
Negotiations for the supply of the quantity of uranium not covered by the
long-term contract beyond 1998 will be ongoing during 1998.
CONVERSION: WE has a long-term contract with a provider of uranium
conversion services to supply 100% of the conversion requirements for the
Point Beach reactors from 1996 through 1999. From the years 2000 through
2004, this same contract will provide 75% of WE's annual conversion
requirements. During 1997, an additional long-term conversion contract was
executed to supply the additional 25% of WE's annual conversion requirements.
ENRICHMENT: WE currently has two long-term contracts for the supply of
enrichment services. The combination of the contracts provides for the
required enrichment services for the Point Beach reactors through the year
2001. One of the contracts is a Utility Services Contract with the United
States Department of Energy ("DOE"). The contract can provide enrichment
services for the entire operating life of each unit. For a discussion of
litigation involving the Utility Services Contract, see Item 3. Legal
Proceedings - "Other Matters." Responsibility for administering this contract
and for enrichment services was transferred from the DOE to the U.S.
Enrichment Corporation ("USEC") under the Energy Act. WE is currently
negotiating for enrichment services beyond the year 2001.
FABRICATION: Fabrication of fuel assemblies from enriched uranium for
Point Beach is covered under a contract with Westinghouse Electric Corporation
for the balance of the plant's current operating license. During 1995, an
agreement was reached between WE and Westinghouse to supply WE with a new fuel
design beginning in the fall of 1997. The 1995 agreement was modified in
November 1996 due to delayed licensing of a new analysis method desired for
the use of the new fuel design. Current plans now assume initial use of the
new fuel design in the spring of the year 2000. The new fuel design is
expected to provide additional safety margin and cost savings and to reduce
the number of discharged spent fuel assemblies over the remaining operating
license.
SPENT FUEL STORAGE AND DISPOSAL: WE currently has the capacity to store
certain amounts of spent nuclear fuel in the spent fuel pool at Point Beach.
In addition, WE completed construction of an Independent Spent Fuel Storage
Installation ("ISFSI") in 1995 for the temporary dry storage of spent fuel at
Point Beach. For information concerning the status of Point Beach's spent
fuel pool, the ISFSI and spent fuel disposal issues, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Nuclear Matters."
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 MW electric
generating units at Point Beach. During the summer of 1997, WE replaced two
low pressure turbines in Unit 1 which increased its dependable generating
capability from 500 to 510 MW. Due to extended outages, Point Beach provided
approximately 6% of WE's net electric energy supply during 1997 compared to
24% and 25% during 1996 and 1995, respectively. The United States Nuclear
Regulatory Commission ("NRC") licenses for Point Beach expire in October 2010
for Unit 1 and in March 2013 for Unit 2.
For additional information concerning Point Beach, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Nuclear Matters" and "Note F -
Nuclear Operations" in the Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data.
DECOMMISSIONING FUND: Pursuant to a 1985 PSCW order, amended in 1994, WE
provides for costs associated with the eventual decommissioning of Point Beach
through the use of an external trust fund. Payments to this fund, together
with investment earnings, brought the balance in the trust fund on
December 31, 1997 to $404 million. For additional information regarding
decommissioning, see "Note F - Nuclear Operations" in the Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data.
NUCLEAR PLANT INSURANCE: For information regarding matters pertaining to
nuclear plant insurance, see "Note F - Nuclear Operations" in the Notes to
Financial Statements in Item 8. Financial Statements and Supplementary Data.
HYDROELECTRIC GENERATION
WE has eight licenses from the FERC for its hydroelectric generating
facilities that expire during the period 1998 to 2001. The key issues
concerning licensing of these eight projects are covered by the Wilderness
Shores Settlement Agreement ("WSSA"). The WSSA is the culmination of more
than two years of negotiations, which began in July 1994, between WE and
representatives of the Wisconsin Department of Natural Resources ("WDNR"), the
Michigan Department of Environmental Quality ("MDEQ"), the Michigan Department
of Natural Resources ("MDNR"), the U.S Fish and Wildlife Service, the
Wisconsin Department of Administration, the National Park Service and two
river/recreational organizations: the Michigan Hydro Relicensing Coalition and
the River Alliance of Wisconsin. The WSSA assures continued profitable
operation of WE's hydroelectric system in the Upper Menominee River Basin and
the protection of associated land and water resources for the next 40 years.
The WSSA was signed at a ceremony on February 10, 1997.
The hydroelectric facilities covered by this agreement are the Big Quinnesec
Falls, Kingsford, Michigamme Falls, Twin Falls, Lower Paint Dam, Peavy Falls,
Hemlock Falls and Way Dam Projects, representing a total of 59.1 MW of
installed capacity. WE is in the process of completing an applicant prepared
environmental assessment and the license application. These, along with the
WSSA, will be filed with the FERC by October 1999. As a result of the WSSA,
the Sturgeon dam, a project with a 1993 license expiration, will be removed.
The Sturgeon dam, with a total of 0.8 MW of installed capacity, was not
relicensed due to plant economics.
Licenses for the White Rapids and Chalk Hill Hydroelectric Projects were
issued by the FERC during 1997. These were the final two license renewals for
projects with 1993 expiration dates.
During 1997, the FERC issued licenses for the Oconto Falls and Weyauwega
Hydroelectric Projects to N.E.W. Hydro, an independent organization. WE did
not relicense Oconto Falls nor Weyauwega, with a total of 1.9 MW of installed
capacity, due to plant economics.
During 1997, hydroelectric facilities provided approximately 1.6% of WE's
total electric energy supply.
NATURAL GAS-FIRED GENERATION
The Concord and Paris Combustion Turbine Power Plants ("Concord" and "Paris")
and the Oak Creek combustion turbine use natural gas as their primary fuel,
with Number 2 fuel oil as backup. Gas for these plants is purchased on the
spot market from gas marketers and/or producers and delivered on the WE gas
operations' local distribution system.
A balancing and storage agreement with ANR Pipeline facilitates the variable
gas usage pattern of the combustion turbine plants.
Natural gas for boiler ignition and flame stabilization purposes for the
Pleasant Prairie, Oak Creek and Valley Power Plants is purchased under an
agency agreement with a gas marketing company. The agent purchases natural
gas and arranges for interstate pipeline transportation to the local gas
distribution utility. The local gas distribution utilities then transport
WE's gas to each plant under interruptible tariffs. WE's gas operations is
the distribution utility for Pleasant Prairie and Oak Creek. Wisconsin Gas
Company, a non-affiliated company, is the distribution utility for the Valley
Power Plant.
OIL-FIRED GENERATION
Fuel oil is used for the combustion turbines at the Point Beach, Germantown
and Port Washington Power Plants. It is also used for boiler ignition and
flame stabilization at the Presque Isle Power Plant and as backup for ignition
for Pleasant Prairie Power Plant and as a backup fuel for the natural gas-
fired gas turbines, as discussed above. Fuel oil requirements are purchased
under partnering agreements with suppliers that assist WE with inventory
tracking and oil market price trends.
PURCHASE POWER COMMITMENTS
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with
LS Power, an unaffiliated independent power producer. The contract, for
236 MW of firm capacity from LS Power's gas-fired cogeneration facility
located in Whitewater, Wisconsin, includes no minimum energy purchase
requirements. WE treats this power purchase contract as a capital lease. See
"Note H - Long-Term Debt" in the Notes to Financial Statements for additional
information about WE's long-term power purchase agreement with LS Power.
In March 1998, LS Power signed an agreement with Cogentrix Energy Inc.
("Cogentrix"), an independent power producer unrelated to LS Power or WE, to
sell LS Power's majority interest in the Whitewater Cogeneration Facility to
Cogentrix. WE's long-term purchase power contract with LS Power is expected
to remain effective with Cogentrix.
In the normal course of business, WE utilizes contracts of various durations
for the forward purchase of electricity to meet load requirements in an
economic manner and when the anticipated market price for electric energy is
below WE's expected incremental cost of generation. Contracts of this nature
are insignificant.
INTERCONNECTIONS WITH OTHER UTILITIES
WE's system is interconnected at various locations with the systems of
Commonwealth Edison Company ("Commonwealth Edison"), Madison Gas and Electric
Company, Northern States Power Company, Upper Peninsula Power Company,
Wisconsin Power and Light Company ("WP&L") and Wisconsin Public Service
Corporation. These interconnections provide for interchange of power to
assure system reliability as well as facilitating access to generating
capacity and the transfer of energy for economic purposes.
WE is a member of Mid-America Interconnected Network ("MAIN"), which is one of
ten regional members of the North American Electric Reliability Council.
Membership in these groups permits better utilization of reserve generating
capacity and coordination of long-range system planning and day-to-day
operations.
In February 1996, WE and five other Midwest utilities announced that they had
agreed to pursue the development of an independent organization, the Midwest
Independent System Operator ("Midwest ISO"), which would be responsible for
ensuring nondiscriminatory open transmission access and the planning and
security of the combined bulk transmission systems of the utilities. The
group has grown to include ten utilities. The other transmission owners of
the East Central Area Reliability Council and MAIN have participated in the
development of the Midwest ISO. An application seeking approval of the
Midwest ISO was filed with the FERC on January 15, 1998.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Electric
System Reliability Matters" for additional information regarding certain
electric transmission projects and the Midwest ISO.
GAS OPERATIONS
GAS SALES
WE is authorized to provide gas service in designated territories in the State
of Wisconsin, as established by indeterminate permits, certificates of public
convenience and necessity, or boundary agreements with other utilities.
Total gas therms delivered by WE, including customer-owned transported gas,
were approximately 984 million therms in 1997, a 5% increase compared to 1996.
WE transports gas for customers who choose to purchase gas directly from other
suppliers. Transported gas accounted for approximately 40% of total therms
delivered during 1997, 31% of total therms delivered during 1996 and
approximately 32% during 1995. There were 376,732 natural gas customers at
December 31, 1997, an increase of approximately 2.6% since December 31, 1996.
WE's maximum daily send-out during 1997 was 641,130 Dths on January 28, 1997.
A dekatherm ("Dth") is equivalent to ten therms or one million British Thermal
Units ("BTU"). Sales of gas fluctuate with the heating cycle of the year and
are also impacted by varying weather conditions from year-to-year.
For further operating information by customer class, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Results of Operations - Gas Revenues, Gross Margins and Therm Deliveries."
WE's gas operations delivers natural gas to Concord and Paris as well as to
Oak Creek Power Plant. Deliveries to these power plants are at rates approved
by the PSCW. See Item 1. Business -"Electric Operations - Natural Gas-Fired
Generation" above.
In 1995, the PSCW issued a certificate to WE for construction of a gas
pipeline to provide gas transportation service to LS Power's Whitewater
Cogeneration Facility. During 1997, WE began delivering gas to this facility
prior to when it went into commercial operation in September. For additional
information concerning LS Power's Whitewater Cogeneration Facility, see
Item 1. Business -"Electric Operations -Purchase Power Commitments" above.
For information concerning WE's expansion of natural gas service to more than
4,500 potential customers in northeastern Wisconsin, see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Electric Sales and Gas Deliveries
Outlook."
SALES TO LARGE GAS CUSTOMERS: WE provides gas utility service to a
diversified base of industrial customers, largely within the service territory
of the electric utility. Major industries served by WE's gas operations
include the paper industry, the food products industry and the fabricated
metal products industry. During 1997, WE's electric operations was the
largest gas consumer using 8.8% of total therm deliveries compared to 3.5%
during 1996. Interdepartmental therm deliveries were higher during 1997
primarily due to the substitution of generation from WE's gas-fired peaking
plants for lost generating capacity at Point Beach. Interdepartmental therm
deliveries are not expected to be as significant in the future. See "Sources
of Electric Energy" above in Item 1. Business - "Electric Operations" for
information about anticipated gas-fired electric generation by WE during 1998.
No single retail customer of the gas utility accounted for more than 3.9% of
total gas therms sold and transported during 1997.
COMPETITION: Competition in the natural gas industry is increasing, driven
by a combination of market forces and regulatory initiatives. Natural gas
companies are now operating in a competitive environment at the wholesale
level, and regulators in Wisconsin are evaluating a competitive environment at
the retail level.
FERC ORDER 636: In 1993, FERC Order 636 ("FERC 636") went into effect,
unbundling the interstate pipeline services. Prior to FERC 636, the WE gas
operations purchased gas, transportation and storage services from the
pipeline companies and supplied all customers in its service territory.
Following FERC 636, WE buys gas directly from suppliers and arranges for its
own transportation and storage. Also under FERC 636, gas customers have the
option to purchase, transport and store their own gas directly from suppliers
and pipeline companies, respectively. WE transports customer-owned gas at
tariff rates for customers who arrange for their own gas supply. See Item 3.
Legal Proceedings - "Rate Matters - FERC Order 636 Transition Costs" for
related information.
PSCW NATURAL GAS UTILITY INDUSTRY INVESTIGATION: See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Industry Restructuring and
Competition" for information regarding the PSCW's ongoing generic
investigation into the structure of the natural gas industry in the State of
Wisconsin.
GAS SUPPLY
The WE gas operations have entered into more than 50 gas service contracts for
supply, pipeline capacity, underground storage and balancing services.
Contracts vary in term from less than one year to ten years. Gas supply
contracts contain pricing options that allow pricing at market rates or the
ability to fix future prices for varying terms which WE can exercise to
mitigate substantial market price fluctuations. The gas from these contracts
is used to meet customer requirements on a daily basis and to fill storage
during the warm months to be withdrawn from storage during the heating season
in order to meet system gas demands.
The use of storage increases the load factor of supply contracts and allows WE
to take advantage of seasonal price differentials. The WE gas operations has
five firm gas storage agreements with pipelines that allow daily withdrawals
of 310,363 Dths and an annual capacity of 18.5 million Dths. The initial
terms of these contracts vary with the last one expiring in March 2004. This
storage effectively replaces storage used by the pipeline companies to provide
gas sales service to the WE gas operations in the pre-FERC 636 environment.
Gas stored at these facilities is purchased by WE from a number of suppliers.
WE has 16 transportation contracts, the last of which expires in 2004, that it
uses to meet daily customer requirements and to inject and withdraw from gas
storage. In each case, subject to certain provisions, the WE gas operations
can extend the terms of these contracts at the time the agreements would
otherwise expire.
WE also has three contracts for salt dome storage that provide seasonal gas
supply backup in the event of well freeze-off or other loss of supply.
STEAM OPERATIONS
WE operates a district steam system in Downtown Milwaukee and the near
southside of Downtown Milwaukee. Steam is supplied to the system from WE's
Valley Power Plant, a coal-fired cogeneration facility. In November 1996, WE
acquired from Milwaukee County the steam production and distribution
facilities of the Milwaukee County Power Plant ("MCPP"), located on the
Milwaukee County Grounds in Wauwatosa, Wisconsin. WE is also operating these
facilities as part of its steam utility operations. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Liquidity and Capital resources - Investing Activities" for further
information concerning the acquisition of the MCPP.
Annual sales of steam fluctuate from year to year based upon system growth and
variations in normalized weather conditions. Steam sales increased
approximately 17% during 1997 primarily due to the addition of the MCPP steam
operations. At December 31, 1997, steam was used by approximately 500
customers for processing, space heating, domestic hot water and
humidification.
NON-UTILITY OPERATIONS
See "Note L - Information By Segments of Business" in WEC's Notes to Financial
Statements in Item 8. Financial Statements and Supplementary Data for
information concerning non-utility net income and net identifiable assets.
NON-UTILITY SUBSIDIARIES
WEC's non-utility subsidiaries include:
WISPARK CORPORATION: WISPARK Corporation ("WISPARK") develops and invests
in real estate. While WISPARK's core geographic area is southeastern
Wisconsin, it is currently developing properties in metropolitan Minneapolis/
St. Paul, Minnesota; metropolitan Chicago, Illinois; and Sacramento,
California. WISPARK is presently involved in four industrial/business parks
in southeastern Wisconsin and two each in metropolitan Minneapolis/St. Paul
and metropolitan Chicago. WISPARK's initial development, LakeView Corporate
Park, a 1,500-acre business park located near Kenosha, Wisconsin, has
developed 600 acres for a total of 54 companies during its first nine years.
WISPARK has also developed business parks in the following locations:
* Westridge Business Park - New Berlin, Wisconsin;
* RidgeView Corporate Park - Pewaukee, Wisconsin;
* GrandView Business Park - Racine, Wisconsin; and
* Business Park of Kenosha - Kenosha, Wisconsin.
In addition to developing business parks, WISPARK Corporation has established
itself as southeastern Wisconsin's largest industrial building developer. In
the last four years, WISPARK has developed 2,700,000 square feet of buildings
on a build-to-suit basis, and just over 800,000 square feet of other building
space. WISPARK has also developed mixed-use projects such as Gaslight Pointe
in Racine, Wisconsin. Recently, WISPARK completed a 120-room Radisson Hotel
and Conference Center and Chancery Pub and Restaurant in LakeView Corporate
Park.
WITECH CORPORATION: WITECH Corporation ("WITECH") is a venture capital
company operating in Wisconsin and the Upper Peninsula of Michigan. At
December 31, 1997, WITECH had investments in 14 companies and 3 funds totaling
more than $35 million. The companies include, among others, an operator of a
nationwide data communications network for the agriculture industry, a
specialty printing firm and a manufacturer of motor drives.
WISCONSIN MICHIGAN INVESTMENT CORPORATION: Wisconsin Michigan Investment
Corporation ("WMIC") engages in investing and financing activities.
Activities include advances to affiliated companies and investments in
financial instruments and in partnerships developing low- and moderate-income
housing projects. Other investments may be made from time to time. WMIC's
subsidiary, WMF Corp., engages in financing activities. Any funds obtained by
WMF Corp. through financing arrangements are advanced to WMIC.
BADGER SERVICE COMPANY: Badger Service Company holds coal rights in
Indiana. Estimates indicate that 40 million tons of coal could be recovered
from this property with conventional mining techniques. However, there are no
current plans to develop the property. Badger Service Company may sell or
develop these rights in the future as conditions warrant.
MINERGY CORP.: Minergy Corp. ("Minergy") is engaged in the business of
developing and marketing proprietary technologies designed to convert high
volume industrial and municipal wastes into value-added products. Minergy is
building a $45 million facility in Neenah, Wisconsin that will recycle paper
sludge from area paper mills into two usable and salable products: glass
aggregate and steam. The plant will also provide substantial environmental
and economic benefits to the area by providing a beneficial alternative to
landfilling paper sludge. For additional information concerning the Minergy
glass aggregate plant, see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Liquidity and Capital
Resources - Investing Activities."
WEC INTERNATIONAL, INC.: WEC International Inc. is the surviving entity
after the merger of Minergy Netherlands into WEC Generation, Inc. WEC
International Inc. serves as WEC's international investment vehicle. In 1997,
WEC International entered into two joint ventures in the Netherlands. One
joint venture owns and operates a by-product utilization plant. The other
joint venture is in the process of renovating a waste treatment facility.
WISVEST CORPORATION: WISVEST Corporation ("WISVEST") invests in energy-
related entities. WISVEST owns and manages the chilled water production and
distribution facilities that are part of the MCPP on the Milwaukee County
Grounds in Wauwatosa, Wisconsin. WISVEST is also an investor in other energy-
related entities such as a strategic energy management services company with a
focus on natural gas management, a natural gas marketer and a company that
designs, builds and operates landfill gas recovery systems. In addition,
WISVEST formed Griffin Energy LLC in July 1997 to begin marketing energy
related services and electricity in 1998. See "Liquidity and Capital
Resources - Investing Activities" and "Factors Affecting Results of
Operations - Market Risks" in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations for further information
concerning the acquisition of the MCPP and the formation of Griffin Energy
LLC, respectively.
CUSTOMETRICS, LLC: Custometrics, LLC is a company which provides
consulting services to the utility industry. Areas of specialty include
supply chain, distribution services, customer service and customer billing.
NON-UTILITY RESTRICTIONS
WEC is subject to certain restrictions which limit diversification in non-
utility activities. Under Wisconsin law, the sum of the assets of all non-
utility affiliates in a holding company system of any holding company formed
on or after November 28, 1985, may not exceed the sum of the following:
* 25% of the assets of all public utility affiliates in the holding company
system engaged in the generation, transmission or distribution of electric
power;
* A percentage of the assets, as determined by the PSCW, which may be more,
but may not be less, than 25% of all public utility affiliates in the
holding company system engaged in providing utility service other than the
generation, transmission or distribution of electric power; and
* For any public utility affiliate which is in the holding company system and
which engages in the provision of more than one type of utility service, a
percentage of assets equal to the amount of the public utility affiliate's
assets devoted to public utility service, other than the generation,
transmission and distribution of electric power, multiplied by a
percentage, as determined by the PSCW, which may be more, but may not be
less, than 25%, plus 25% of all remaining assets of the public utility
affiliate.
For information concerning restrictions on the ability of WE to transfer funds
to WEC, see "Note A - Summary of Significant Accounting Policies" in WEC's
Notes to Financial Statements in Item 8. Financial Statements and
Supplementary Data.
REGULATION
WE is subject to the regulation of the PSCW as to retail electric, gas and
steam rates in Wisconsin, standards of service, issuance of securities,
construction of new facilities, transactions with affiliates, levels of short-
term debt obligations, billing practices and various other matters. WE is
also subject to the regulation of the MPSC as to the various matters
associated with retail electric service in Michigan as noted above except as
to issuance of securities, construction of certain new facilities, levels of
short-term debt obligations and advance approval of transactions with
affiliates. WE, with respect to hydro-electric facilities, wholesale power
service, electric transmission, gas transportation and accounting, is subject
to FERC regulation. Operation and construction relating to WE's Point Beach
facilities are subject to regulation by the NRC. WE's operations are also
subject to regulations of the United States Environmental Protection Agency
("EPA"), the WDNR, the MDNR and the MDEQ.
The PSCW is authorized to direct expenditures for promoting conservation if it
determines that the programs are in the public interest. Rate orders have
consistently included provisions for substantial conservation programs
initiated by WE. For additional information, see "Note A - Summary of
Significant Accounting Policies" in the Notes to Financial Statements in
Item 8. Financial Statements and Supplementary Data.
WEC is an exempt holding company by order of the United States Securities and
Exchange Commission ("SEC") under Section 3(a)(1) of PUHCA and, accordingly,
is exempt from the provisions of PUHCA, other than with respect to certain
acquisitions of securities of a public utility.
WE is subject to a power plant siting law in Wisconsin which requires that
electric utilities file updated long-term forecasts and plans (called "Advance
Plans") for the location, size and type of future large generating plants and
high voltage transmission lines about every two years for PSCW approval after
public hearings. Generally, the law provides that the PSCW may not authorize
the construction of any large generating plants or high voltage transmission
lines unless they are in substantial compliance with the most recently
approved plan. The law also prohibits WE from acquiring any interest in land
for such plants or transmission lines by condemnation until construction
authorization has been received. Advance Plan orders are based upon a review
of the utilities' long-term planning options. However, separate project-
specific PSCW approval is required for the construction of generating
facilities and transmission lines. For additional information regarding
Advance Plans, see Item 1. Business - "Electric Operations - Sources of
Electric Energy" above.
In 1994, the PSCW ordered the state's utilities to competitively bid all new
generation needs in excess of 12 MW to be built in Wisconsin. The two-stage
process established by the PSCW consists of (1) an all-parties (including
utilities) bidding procedure for fossil-fueled and renewable generation
projects; and (2) the conventional Certificate of Public Convenience and
Necessity ("CPCN") procedure for the winner or winners. In the first quarter
of 1997, the PSCW extended this to include repowering or upgrades of existing
generation in excess of 12 MW.
RATE MATTERS
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Rates and
Regulatory Matters" for a discussion of rate matters, including recent rate
changes and a discussion of the tariffs and procedures with respect to
recovery of changes in the costs of fuel, purchased power and gas purchased
for resale.
ENERGY EFFICIENCY
Utility involvement in energy efficiency is changing significantly. The PSCW
is continuing to shift responsibility for energy efficiency from utilities to
competitive market forces. In WE's rate order in docket 6630-UR-109, dated
February 13, 1997, the PSCW eliminated WE electric and natural gas energy
efficiency goals for WE's largest customers, and removed the dollars
associated with obtaining these goals from WE rates. Energy efficiency goals
continue for residential, small commercial and industrial and low income
customers. During 1997, WE filed a two year transition plan with the PSCW
showing how it will move the accomplishment of small customer energy
efficiency goals from WE to non-utility providers by obtaining the greatest
portion of these goals from contractors through a bidding process. A number
of contractors have already been hired through this process and have begun
work which will continue through 1998.
WE supports the move away from mandated utility energy efficiency goals by the
PSCW. However, WE will continue to provide its customers information on how
to control their energy costs.
In a related matter, the PSCW issued an order in December 1997 in Docket
05-BU-100 which stated its policy and principles regarding the formation of a
Public Benefits Board ("Board"). Such a Board would be set up through
legislative action. Among other things, the Board would have responsibility
to undertake efforts to help develop the competitive market for energy
efficiency in the state of Wisconsin. As utilities move away from being
responsible for the accomplishment of energy efficiency goals, the Board would
take over some of these responsibilities. Eventually such efforts would
completely transition to the competitive marketplace. It is likely that
legislation creating such a Board will be submitted in the current legislative
session. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of
Operations - Industry Restructuring and Competition."
WE will continue to offer programs which provide customers the incentive to
use energy when WE facilities are less utilized. Interruptible and
curtailable rates, along with an energy cooperative-managed load curtailment
program, are offered to certain industrial customers to control peak demand.
Direct load control of central air conditioners is offered to most residential
customers. Time-of-use rates continue to be available to most customers.
Real-time pricing programs are also being offered to some customers.
ENVIRONMENTAL COMPLIANCE
Compliance with federal, state and local environmental protection requirements
resulted in capital expenditures by WE of approximately $18.3 million in 1997.
Expenditures incurred during 1997 included costs associated with the
installation of pollution abatement facilities at WE's power plants. Such
expenditures are budgeted at approximately $15.2 million for 1998.
Operation, maintenance and depreciation expenses of WE's fly ash removal
equipment and other environmental protection systems are estimated to have
been $29.7 million in 1997.
For discussion of additional environmental issues, see Item 3. Legal
Proceedings - "Environmental Matters."
SOLID WASTE LANDFILLS
WE provides for the disposal of non-ash related solid wastes and hazardous
wastes through licensed independent contractors, but federal statutory
provisions impose joint and several liability on the generators of waste for
certain cleanup costs. Remediation-related activity pertaining to specific
sites is discussed below.
MANISTIQUE RIVER/HARBOR AREA: WE received a request for information, or
PRP letter, from the EPA on March 12, 1993. The letter states that the
river/harbor has PCB contamination. The EPA has requested information
regarding company PCB and oil filled equipment management in the Manistique
River drainage basin. WE responded to this request on April 22, 1993. An
additional information request from the EPA was responded to on January 4,
1995. WE has no reason to believe that the company is responsible in total or
in part for the PCB contamination in the Manistique River/Harbor area. WE has
learned through newspaper articles that the EPA announced a preliminary plan
to dredge most of the PCB contaminated sediments, with some limited capping
along the breakwater. The EPA has signed a settlement agreement with two
identified PRPs, Manistique Papers and Edison Sault. This does not foreclose
the EPA from taking action against WE for some of the remediation cost,
although WE has not heard anything from the EPA regarding this site since
1995.
MARINA CLIFFS BARREL DUMP SITE: WE received a special notice letter and
information request on March 25, 1994 from the WDNR. The letter described a
release of hazardous substances at a former barrel reclamation facility and
landfill site, and requested information on any business dealings WE may have
had with this former operation. This request for information was responded to
on April 26, 1994. An additional request for information, or PRP letter, was
received on March 24, 1995. This request was responded to by WE in April
1995. Since that time a number of follow-up contacts have been made with the
EPA. WE has no reason to believe that it is responsible for the contamination
problems at this site, but the EPA has identified WE as a De Minimis Party.
The EPA has undertaken remediation activities at the site. The first phase of
such remediation has been substantially completed. Recently, local residents
have voiced concern regarding use of the site. This publicity has led to
additional fencing at the site and may affect the remediation time table.
A buyout agreement, under which alleged major contributors of material to the
site would finance remediation and provide indemnity to other parties has been
circulated and orally agreed to. The cost to WE for its participation in the
agreement, if it is finalized, will be approximately $30,000.
LAKE GENEVA SERVICE CENTER: The property, in Lake Geneva, Wisconsin, was
acquired as part of the acquisition of Wisconsin Southern Gas Company, Inc.
("WS") in January 1994. WS had identified a groundwater problem reportedly
caused by past disposal practices. In 1995, the extent of contamination was
defined, and a remediation system was designed and installed. Approximately
$200,000 was spent in 1995, $33,000 in 1996 and $15,000 in 1997. Remaining
remediation costs are estimated to be approximately $50,000.
ETSM PROPERTY/CITY OF WEST ALLIS: See Item 3. Legal Proceedings -
"Environmental Matters" for information concerning iron cyanide-bearing wastes
found at two sites in West Allis, Wisconsin.
WEST AVENUE LANDFILL: WE has been informed by the City of Waukesha
("Waukesha") that WE has been identified as a "responsible party" at a former
Waukesha landfill which Waukesha will be remediating under Wisconsin state
law. Waukesha has further indicated it intends to invoke a new statutory
negotiation procedure to attempt to obtain consensual agreement regarding
responsible parties and cost sharing for the remediation. Negotiations under
the statutory procedure have not yet commenced.
ASH LANDFILLS
WE aggressively seeks environmentally acceptable, beneficial uses for its
combustion byproducts ("CCBs"). However, CCBs have been, and to some degree
continue to be, disposed of in company-owned, licensed landfills. Some
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 for WE.
Sites currently undergoing remediation include:
PRESQUE ISLE LANDFILL: WE entered into a consent order with the MDEQ
regarding existing conditions at an ash landfill site acquired by WE when it
purchased the Presque Isle Power Plant at the end of 1987. Changing Michigan
regulations have significantly decreased the expenditures required by WE for
compliance with the consent order. Remediation of the site is essentially
complete with minimal future expenses expected.
HIGHWAY 59 LANDFILL: In 1989, a sulfate plume was detected in the
groundwater beneath a WE-owned former ash landfill located in the Town of
Waukesha, Wisconsin. After notifying the WDNR, WE initiated a five-year
expanded monitoring program. In response to a request from the WDNR, WE
prepared an environmental contamination assessment of the landfill and
submitted the report to the WDNR in July 1995. Laboratory testing of an ash
stabilization remedial option is ongoing. WE believes that any remediation
plan developed, approved and implemented for this site would not have a
material adverse effect on its financial condition.
CEDAR-SAUK LANDFILL: During 1997, WE completed installation of an upgraded
cover to the closed Cedar-Sauk landfill, located in the Town of Cedarburg,
Wisconsin. In addition to a new cover, the existing groundwater pumping
system was removed from service. The project was completed below the
projected cost estimate of $4.5 million. Future expenses at the site are
expected to be minimal.
KANSAS AVE. LANDFILL: The Kansas Ave. site, located in the City of St.
Francis, Wisconsin, was a small fill area used to support the operations of
WE's old Lakeside Power Plant. WE has entered into an agreement with the WDNR
to place a cover over the old ash land site. Expenses associated with a cover
installation are expected to be minimal. No groundwater treatment is planned
at this time.
OAK CREEK NORTH LANDFILL: Groundwater impacts at this landfill, located in
the City of Oak Creek, Wisconsin, have prompted WE to investigate the
condition of the existing cover and other conditions at the site. A cover
inspection will be performed during 1998. Cover upgrades, if required, will
most likely take place in 1999 or the year 2000. Work is not expected to be
significant.
PLEASANT PRAIRIE LANDFILL: A groundwater investigation was completed in
1997, and WE is designing an alternative system for surface water drainage and
implementing modification to the operation of the landfill, located in the
Village of Pleasant Prairie, Wisconsin, to address an isolated area of
groundwater contamination. Financial impacts to WE are projected to be
minimal.
MANUFACTURED GAS PLANT SITES
WE is reviewing and addressing environmental conditions at a number of former
manufactured gas plant ("MGP") sites. See "Note M - Commitments and
Contingencies" in the Notes to Financial Statements in Item 8. Financial
Statements and Supplementary Data for additional information.
AIR QUALITY
The 1990 amendments to the Federal Clean Air Act mandate significant
nationwide reductions in air emissions. Most significant to the country's
electric utility companies are the acid rain provisions of the amendments
which are scheduled to limit sulphur dioxide ("SO2") and nitrogen oxide
("NOX") emissions in phases. Phase I became effective in 1995 and Phase II
will take effect in the year 2000. Phase I requirements had minimal impact on
the Company because of actions taken previously. Phase II requirements,
together with separate ozone nonattainment provisions of the Federal Clean Air
Act which may call for additional NOX reductions, however, will necessitate
the implementation of a compliance strategy which is not expected to
materially impact rates. Since regulations by the EPA on NOx reductions
needed to address the ozone nonattainment problem are not yet final, the rate
impact is subject to change and will be reevaluated as needed.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations -
Environmental Matters" for additional information regarding the Clean Air Act
Amendments, including estimates of the cost of compliance, and for information
concerning National Ambient Air Quality Standards established during 1997 by
the EPA.
OTHER
YEAR 2000 COMPUTER SOFTWARE AND HARDWARE ISSUES: See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Year 2000 Computer Software and
Hardware Issues" for information concerning efforts to examine and modify
existing software application and operational programs and hardware that are
date sensitive and may not be year 2000 compliant.
RESEARCH AND DEVELOPMENT: Research and development expenditures by WE
amounted to $8,540,000 in 1997, $5,667,000 in 1996 and $7,460,000 in 1995.
Such expenditures were primarily for improvement of service and abatement of
air and water pollution. Research and development activities include work
done by employees, consultants and contractors, plus sponsorship of research
by industry associations. Included in the foregoing amounts, the WE gas
operations paid approximately $932,000 in 1997, $1,045,000 in 1996 and
$1,033,000 in 1995 for support of the Gas Research Institute ("GRI"). The GRI
surcharge, currently assessed on all gas deliveries, is calculated on pipeline
utilization.
EMPLOYEES: At December 31, 1997, the following number of individuals were
employed by WEC and its subsidiaries.
==============================================================================
Full Time Part Time Total
--------- --------- -----
Utility (WE) 4,510 156 4,666
Non-Utility 78 3 81
----- --- -----
Total Employees (WEC) 4,588 159 4,747
===== === =====
==============================================================================
For information concerning expected employee additions at WE during 1998, see
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - "Factors Affecting Results of Operations - Rates and
Regulatory Matters."
ITEM 2. PROPERTIES
The principal properties of WEC and its subsidiaries are owned in fee except
that the major portion of electric transmission and distribution lines and
steam distribution mains and gas distribution mains and services are located,
for the most part, on or in streets and highways and on land owned by others.
Substantially all utility plant is subject to the first mortgage lien.
UTILITY: WE owns the following generating stations with 1997 capabilities
as indicated.
==============================================================================
Dependable
No. of Capability In
Generating Megawatts (1)
Units at -----------------------
December August December
Name Fuel 1997 1997 1997
---- ---- ---------- -------- --------
Steam Plants
Point Beach (2) Nuclear 2 1,000 1,010
Oak Creek Coal 4 1,135 1,139
Presque Isle (3) Coal 9 617 617
Pleasant Prairie Coal 2 1,200 1,210
Port Washington Coal 4 326 327
Valley Coal 2 267 227
Edgewater (4) Coal 1 100 100
Milwaukee County Coal 3 9 9
-- ----- -----
Total Steam Plants 27 4,654 4,639
Hydro Plants (15 in number)(5) 37 63 67
Germantown Combustion
Turbines Oil 4 212 252
Concord Combustion
Turbines Gas/Oil 4 332 376
Paris Combustion
Turbines Gas/Oil 4 332 376
Other Combustion
Turbines & Diesel Gas/Oil 6 59 75
-- ----- -----
Total System 82 5,652 5,785
== ===== =====
==============================================================================
(1) Dependable capability is the net power output under average operating
conditions with equipment in an average state of repair as of a given
month in a given year. Changing seasonal conditions are responsible for
the different capabilities reported for the winter and summer periods in
the above table. The values were established by test and may change
slightly from year to year.
(2) Due to extended outages during 1997, Point Beach Units 1 and 2 were not
in service during much of the summer of 1997. During the summer of 1997,
WE replaced two low pressure turbines in Unit 1 which increased its
dependable capability from 500 to 510 MW. See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
"Factors Affecting Results of Operations - Nuclear Matters."
(3) WE did not extend an existing operating agreement with UPPCo, a non-
affiliated utility which had staffed and operated the Presque Isle Power
Plant since WE acquired the plant at the end of 1987, when the agreement
expired on December 31, 1997. See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Rates and Regulatory Matters" for
additional information.
(4) WE has a 25% interest in Edgewater 5 Generating Unit, which is operated
by WP&L, a non-affiliated utility.
(5) During 1997, WE sold the Weyauwega Hydroelectric Project.
At December 31, 1997, the electric transmission and distribution system had
2,855 miles of transmission circuits, of which 639 miles were operating at
345 kilovolts, 123 miles at 230 kilovolts, 1,699 miles at 138 kilovolts, and
394 miles at voltage levels less than 138 kilovolts. At December 31, 1997, WE
was operating 21,875 pole miles of overhead distribution lines and 15,578
miles of underground distribution cable, as well as 354 distribution
substations and 227,984 line transformers.
As of December 31, 1997, the gas distribution system includes approximately
7,410 miles of mains connected at 18 gate stations to the pipeline
transmission systems of ANR Pipeline Company, Natural Gas Pipeline Company of
America and Northern Natural Pipeline Company. WE has a liquefied natural gas
storage plant which converts and stores in liquefied form natural gas received
during periods of low consumption. The liquefied natural gas storage plant
has a send-out capability of 70,000 Dths per day. WE also has propane tanks
for peaking purposes. These tanks will provide approximately 7,000 Dths of
supply to the system.
At December 31, 1997, the combined steam system supplied by the Valley and
Milwaukee County Power Plants consists of approximately 43 miles of both high
pressure and low pressure steam piping, 8.8 miles of walkable tunnels and
other pressure regulating equipment.
WE owns various office buildings and service centers throughout its service
area.
NON-UTILITY: WISPARK properties include the following commercial and
industrial parks in Wisconsin: LakeView, located near Kenosha; Grandview, in
Racine County; RidgeView, in Pewaukee; and the industrial development of
Westridge, in New Berlin. WISPARK also owns Gaslight Pointe, a residential
and commercial complex located in Racine, Wisconsin and other properties
located in WE's service territories that are held for future development.
WISPARK also owns certain real estate property located outside of the State of
Wisconsin.
WISVEST owns a chilled water production and distribution facility located in
Milwaukee County, Wisconsin.
Minergy owns a glass aggregate facility being constructed in Neenah,
Wisconsin.
Badger Service Company holds rights to coal in an area of 8,568 acres in Knox
County, Indiana.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
WE is subject to federal, state and certain local laws and regulations
governing the environmental aspects of its operations. WE believes that, with
immaterial exceptions, its existing facilities are in compliance with
applicable environmental requirements.
See Item 1. Business - "Environmental Compliance", which is incorporated by
reference herein, for a discussion of matters related to certain solid waste
and ash landfills, MGP sites, and air quality.
STEPHENSON BUILDING: On September 21, 1994, Crown Life Insurance Company
sued WE in the United States District Court for the Eastern District of
Wisconsin, seeking contribution and damages from WE under various federal and
state claims for the costs of removing asbestos from boilers and piping in a
building in downtown Milwaukee owned by Crown Life. WE sold that equipment
and piping to a former building owner in 1970. In January 1998, WE and Crown
Life Insurance Company settled this suit. Settlement of this suit was not
significant.
ETSM PROPERTY/CITY OF WEST ALLIS: Iron cyanide-bearing wastes, believed to
be MGP process wastes were found at two sites in West Allis, Wisconsin. One
site is on property formerly owned by Kearney and Trecker, which was sold to
others (including WE) prior to the discovery of wastes, and the other is the
"Greenfield Avenue" site, owned by the City of West Allis. Several years ago,
materials were removed from the "Kearney & Trecker" site, with WE and the
other current owners paying for disposal of materials found on their
respective portions of the site. Iron cyanide bearing wastes still remain on
the "Greenfield Avenue" site.
On July 25, 1996, Giddings & Lewis, Kearney & Trecker and the City of West
Allis filed an action for damages in the Milwaukee County Circuit Court
against WE, alleging that WE was responsible for the deposition of the
material and liable to the plaintiffs. Investigations into the potential
source of the waste lead WE to believe that it is not the source of this waste
nor did WE place the material at these sites for others. The actual source of
this material may be determined by the plaintiffs through their continuing
investigative efforts.
WE has been named a defendant in a second action relating to the waste
material at the Kearney and Trecker site. That action is a contract action
brought by an environmental remediation contractor for payment for
investigative work for Giddings and Lewis. Giddings and Lewis counterclaimed
because of the nondiscovery of the material. The contractor has joined WE on
a contribution theory.
RATE MATTERS
WISCONSIN RETAIL JURISDICTION: See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors Affecting
Results of Operations - Rates and Regulatory Matters" for information
concerning (1) rate orders issued by the PSCW for the 1996 and 1997 test
years, (2) an interim rate order issued for the 1998 test year,
(3) Wisconsin's fuel cost adjustment procedure, (4) an interim fuel surcharge
approved by the PSCW during 1997, (5) approval by the PSCW during 1997 for WE
to defer certain excess non-fuel nuclear operation and maintenance costs, and
(6) Wisconsin's purchase gas adjustment mechanism.
MICHIGAN RETAIL ELECTRIC JURISDICTION: See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - "Factors
Affecting Results of Operations - Rates and Regulatory Matters" for
information concerning a rate order issued by the MPSC for the 1996 test year
and Michigan's Power Supply Cost Recovery Clause.
WHOLESALE ELECTRIC JURISDICTION: Some customers served under WE's
wholesale rates are subject to an automatic fuel adjustment provision to
reflect varying fuel and purchased power costs.
FERC ORDER 636 TRANSITION COSTS: As a result of FERC 636, pipeline
companies are no longer in the merchant business and are billing transition
costs, such as gas supply realignment and stranded capacity costs, to their
customers. The net remaining transition costs to be billed to WE are
currently estimated to be less than $2.0 million for 1998 and decreasing
thereafter. The PSCW is allowing local gas distribution companies to pass
these costs on to their customers through the purchased gas adjustment
mechanism. See Item 1. Business - "Gas Operations - Gas Sales" for related
information.
OTHER MATTERS
POINT BEACH NUCLEAR PLANT: See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - "Factors Affecting
Results of Operations - Nuclear Matters" for information concerning the DOE's
breach of a contract with WE for failing to begin permanently removing spent
nuclear fuel from Point Beach Nuclear Plant.
PITTSBURG & MIDWAY CASE: In a matter brought before the FERC, WE filed an
initial brief in July 1993 supporting its right to retain coal reclamation
costs collected through the wholesale fuel adjustment clause in 1986 that it
believes were prudently incurred in a settlement with the Pittsburg & Midway
Coal Mining Company. Of the total costs involved, the portion recovered
through the wholesale fuel clause amounts to approximately $750,000. This
filing was made in response to a FERC audit staff determination that WE should
have applied for a waiver of the FERC's fuel clause regulations in order to
attempt to pass through the wholesale portion of the settlement costs. On
December 13, 1995, the administrative law judge issued an initial decision
that WE was required to refund the portion of such costs collected from its
wholesale customers. The administrative law judge's initial decision found in
favor of WE with respect to the prudence of the administration of the coal
contracts. The matter is pending before the full commission.
In November 1993, the FERC rejected WE's request to be allowed to recover, in
wholesale rates in the future, the amount which may have to be refunded to
customers in the event of an unfavorable ruling in the pending fuel adjustment
clause proceeding concerning the Pittsburg & Midway reclamation charges. In
January 1994, WE filed an appeal with the U.S. Court of Appeals for the
District of Columbia Circuit regarding this rejection. The matter is pending.
URANIUM ENRICHMENT CHARGES: On February 9, 1995, WE and ten other
utilities filed an action in the U.S. Court of Federal Claims appealing the
final decision of the USEC contracting officer in November 1994 which denied
claims of the utilities for damages by reason of overcharges for uranium
enrichment services provided under Utility Services Contracts between July 1,
1993 and September 30, 1994. The damages sought by WE totaled $3.3 million.
On August 9, 1996, the U.S. Court of Federal Claims issued a decision
dismissing the complaint in a companion case involving the same issues. On
July 31, 1997, that decision was affirmed by the U.S. Court of Appeals for the
Federal Circuit. On December 17, 1997, the Court of Federal Claims granted
the government's motion for summary judgment and dismissed the utilities'
complaint.
In a related matter, WE and six other utilities filed an action in the U.S.
Court of Federal Claims on October 11, 1996 appealing the final decision of
the DOE contracting officer in October 1995, which denied claims of the
utilities for damages by reason of overcharges for uranium enrichment services
provided under Utility Services Contracts between October 1, 1992 and June 30,
1993. The damages sought by WE total $1.3 million. On December 1, 1997, the
government filed a motion for judgment on the pleadings based upon the
decision of the Court of Appeals as discussed above. The matter is pending.
PERSONAL INJURY SUIT: On October 1, 1994, a jury returned a $2.85 million
verdict against WN in a case in the Circuit Court for Milwaukee County,
involving a gas pipe fire which injured the plaintiff. On December 23, 1994,
WN resolved the litigation between itself and plaintiff with a payment of
$2.55 million to plaintiff, of which $550,000 was covered by WN's general
liability insurer. The contract with the construction company that installed
the gas pipe provides for indemnification of WN. On September 8, 1995, WN
commenced an action for such indemnification in Milwaukee County Circuit
Court, against the construction company and its insurers. On October 7, 1996,
the Circuit Court for Milwaukee County granted WN's motion for summary
judgment requiring such indemnification in the amount of $2.55 million plus
costs. The defendants have appealed this decision to the Wisconsin Court of
Appeals. The matter is pending.
THOR TECHNOLOGY LITIGATION: In 1995, PSI Sales Inc. and Process Solutions,
Inc. brought suit against WITECH and one of its portfolio investment
companies, Thor Technology Corporation, in Federal District Court for the
Southern District of Alabama seeking compensatory damages of $3 million under
a contract involving Thor Technology Corporation and an unspecified amount of
punitive damages. In May 1996, the Complaint was amended to include WEC. The
matter is scheduled for trial in April 1998.
WISCONSIN INTERNATIONAL ELECTRIC POWER LITIGATION: On March 25, 1998,
Wisconsin International Electric Power, Ltd. ("WIEP") filed an action against
WE in Milwaukee County Circuit Court alleging that WIEP and WE were parties to
a joint venture to develop, build, operate and maintain an electric generating
plant at Subic Bay in the Philippines involving certain equipment originally
purchased by WE for a proposed cogeneration plant at Kimberly, Wisconsin. The
complaint in the action alleges that WE breached duties allegedly owed to
WIEP, causing damages to WIEP in an amount claimed to be at least $100
million. The matter is pending. WE intends to file an answer to the
complaint denying liability and to present a vigorous defense.
STRAY VOLTAGE: On July 11, 1996, the PSCW issued its final order regarding
the stray voltage policies of Wisconsin's investor owned utilities. The PSCW
order clarifies the definition of stray voltage, affirms the level at which
utility action is required, and appropriately places some of the
responsibility for this issue in the hands of the customer. Additionally, the
order requires the establishment of a uniform stray voltage tariff which, when
approved, will delineate utility responsibility and provide for the recovery
of costs associated with unnecessary customer demanded services. It is
anticipated that this action will be beneficial in WE's efforts to manage this
controversial issue, and it is unlikely to have a significant impact on its
financial position or results of operation.
In recent years, several actions have been commenced or claims made against WE
for loss of milk production and other damages to their livestock allegedly
caused by stray voltage resulting from the operation of its primary
distribution system. At the present time, three such actions are pending. WE
does not believe, however, that these or any other claims thus far made or
threatened against WE by reason of stray voltage will result in any
substantial liability on its part.
ELECTROMAGNETIC FIELDS: Claims have been made or threatened against
electric utilities across the country for bodily injury, disease or other
damages allegedly caused or aggravated by exposure to electromagnetic fields
("EMFs") associated with electric transmission and distribution lines.
Results of scientific studies conducted to date do not establish the existence
of a causal connection between EMFs and any adverse health effects. WE
believes that its facilities are constructed and operated in accordance with
all applicable legal requirements and standards. Currently, there are no
cases pending or threatened against WE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of WEC's nor WE's security holders during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANTS
The names, ages at December 31, 1997 and positions of the executive officers
of WEC and of WE are listed below along with their business experience during
the past five years. All officers are appointed until they resign, die or are
removed pursuant to the Bylaws. There are no family relationships among these
officers, nor is there any agreement or understanding between any officer and
any other person pursuant to which the officer was selected.
Richard A. Abdoo (53): Chairman of the Board, President and Chief
Executive Officer of WEC since 1991; Director of
WEC since 1988. Chairman of the Board and Chief
Executive Officer of WE, a subsidiary of WEC,
since 1990; Director of WE since 1989. Chairman
of the Board and Chief Executive Officer of WN,
a former subsidiary of WEC that was merged into
WE on January 1, 1996, from 1990 through 1995;
Director of WN from 1989 through 1995.
Richard R. Grigg (49): Vice President of WEC since 1995; Director of
WEC since 1995. President and Chief Operating
Officer of WE since 1995; Chief Nuclear Officer,
December 1996 to March 1998; Group Executive and
Vice President, June to December 1994; Vice
President, 1990 to June 1994; Director of WE
since 1994. President and Chief Operating
Officer of WN during 1995; Director of WN during
1995.
Calvin H. Baker (54): Treasurer and Chief Financial Officer of WEC
since 1996. Chief Financial Officer of WE since
1996; Vice President-Finance of WE since 1994;
Vice President-Marketing, 1992 through 1993.
Charles T. Govin, Jr. (51): Vice President - Electric & Gas Operations of WE
since December 1996; Vice President - Gas
Operations from January to December 1996. Vice
President of WN, September 1994 to December
1995; General Manager of WN during 1994 and
1995; Director of Administrative Services of WN,
1991 to 1993; Director of WN, June to December
1995.
Anne K. Klisurich (50): Controller of WEC since 1995; Accounting Manager
of WEC, 1987 to 1994. Controller of WE since
1994. Assistant Corporate Secretary of WEC and
WE from July 1997 to March 1998. Controller of
WN from 1994 through 1995.
Kristine M. Krause (43): Vice President - Fossil Operations of WE since
1994; Manager of Valley Power Plant and Steam
Services, 1992 to 1994.
David K. Porter (54): Senior Vice President of WE since 1989; Director
of WE since 1989. Vice President of WN from
1989 through 1995; Director of WN from 1988
through 1995.
Kristine A. Rappe (41): Vice President - Customer Services of WE since
1994; Regional Manager of Customer Operations -
Fox Valley Region, 1991 to 1994.
Michael B. Sellman (50): Senior Vice President - Nuclear Power Business
Unit and Chief Nuclear Officer of WE since March
1998. President, Maine Yankee Atomic Power
Company from February 1997 to March 1998; Vice
President - Waterford Nuclear Plant, Entergy
Arkansas, Inc. from February 1996 to February
1997; General Manager - River Bend Nuclear
Plant, Entergy Gulf States, Inc. from September
1993 to February 1996; General Manager -
Arkansas Nuclear One, Entergy Arkansas, Inc.
from February 1993 to September 1993.
Certain executive officers also hold offices in WEC's non-utility
subsidiaries.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NUMBER OF COMMON STOCKHOLDERS
As of year-end 1997, based on the number of Wisconsin Energy Corporation
stockholder accounts, there were 96,289 registered stockholders.
COMMON STOCK LISTING AND TRADING
Wisconsin Energy Corporation common stock is listed on the New York Stock
Exchange. The ticker symbol is WEC. Daily trading prices and volume can be
found in the "NYSE Composite" section of most major newspapers, usually
abbreviated as WiscEn or WiscEngy.
DIVIDENDS AND COMMON STOCK PRICES
DIVIDEND POLICY OF WEC: Cash dividends on WEC common stock, as declared by
the Board of Directors, are normally paid on or about the first day of March,
June, September and December.
RANGE OF WEC COMMON STOCK PRICES AND DIVIDENDS:
============================================================================
1997 | 1996
- ------------------------------------------|---------------------------------
Quarter High Low Dividend | High Low Dividend
- ------------------------------------------|---------------------------------
First $27-7/8 $23-1/4 $ .38 | $32 $27-1/4 $ .3675
Second 25-5/8 23 .385 | 28-7/8 26 .38
Third 26-1/4 23-1/2 .385 | 29-1/8 26-3/8 .38
Fourth 29-1/16 24-1/8 .385 | 28-3/8 26-1/8 .38
------ | -------
Year $29-1/16 $23 $1.535 | $32 $26 $1.5075
====== | =======
============================================================================
WE COMMON STOCK DIVIDENDS: Cash dividends declared on Wisconsin Electric
Power Company'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
------- ----------------------------------
1997 1996
------------ ------------
First $ 80,726,000 $ 40,455,444
Second 44,322,000 42,478,000
Third 44,322,000 42,478,000
Fourth 44,322,000 42,478,000
------------ ------------
Total $213,692,000 $167,889,444
============ ============
==============================================================================
ITEM 6. SELECTED FINANCIAL DATA
WISCONSIN ENERGY CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
===============================================================================================
Financial (Thousands of Dollars except for per share amounts)
----------------------------- ------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
---------------------- ---------- ---------- ---------- ---------- ----------
Net income $ 60,716* $ 218,135 $ 234,034 $ 180,868** $ 190,135
Earnings per share of common
stock ($; basic and diluted) 0.54* 1.97 2.13 1.67** 1.80
Dividends per share
of common stock ($) 1.535 1.5075 1.455 1.39625 1.34125
Operating revenues
Electric $1,412,115 $1,393,270 $1,437,480 $1,403,562 $1,347,844
Gas 355,172 364,875 318,262 324,349 331,301
Steam 22,315 15,675 14,742 14,281 14,090
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,789,602 $1,773,820 $1,770,484 $1,742,192 $1,693,235
========== ========== ========== ========== ==========
At December 31
Total assets $5,037,684 $4,810,838 $4,560,735 $4,408,259 $4,270,592
Long-term debt and preferred
stock - redemption required $1,532,405 $1,416,067 $1,367,644 $1,283,686 $1,300,781
-----------------------------------------------------------------------------------------------
Sales and Customers - Utility 1997 1996 1995 1994 1993
----------------------------- ---------- ---------- ---------- ---------- ----------
Electric
Megawatt-hours sold 27,671,946 27,560,428 27,283,869 26,911,363 25,685,436
Customers (end of year) 978,835 968,735 955,616 944,855 932,285
Gas
Therms delivered (Thousands) 983,676 936,894 886,729 811,219 809,348
Customers (end of year) 376,732 367,275 357,030 347,080 336,571
Steam
Pounds sold (Millions) 3,161 2,705 2,532 2,395 2,376
Customers (end of year) 474 465 473 471 459
===============================================================================================
CONSOLIDATED QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars except for per share amounts)
---------------------------------------------------
March June
Three Months Ended 1997 1996 1997* 1996
------------------ --------- --------- --------- ---------
Total operating revenues $ 510,383 $ 495,457 $ 403,214 $ 401,686
Operating income 65,637 85,145 31,716 68,382
Net income 45,069 62,804 (10,632) 45,554
Earnings per share of common
stock ($; basic and diluted) 0.40 0.57 (0.09) 0.41
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
September December
Three Months Ended 1997 1996 1997* 1996
------------------ --------- --------- --------- ---------
Total operating revenues $ 400,614 $ 398,801 $ 475,391 $ 477,876
Operating income 46,441 76,693 55,665 75,624
Net income 23,975 53,430 2,304 56,347
Earnings per share of common
stock ($; basic and diluted) 0.21 0.48 0.02 0.51
===============================================================================================
<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.
* Includes May 1997 nonrecurring $30.7 million charge ($18.8 million net of tax or $.17 per share)
to write-off deferred merger costs related to the terminated merger agreement with Northern States
Power Company and December 1997 $30.0 million write-down ($.16 per share) of equipment purchased
for the Kimberly Cogeneration Project.
** Includes 1994 nonrecurring $73.9 million charge ($45 million net of tax or $.42 per share) for Wisconsin
Electric Power Company's restructuring program.
ITEM 6. SELECTED FINANCIAL DATA - (cont'd)
WISCONSIN ELECTRIC POWER COMPANY *
SELECTED FINANCIAL DATA
================================================================================================
Financial (Thousands of Dollars)
- ----------------------------- --------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
- ---------------------- ---------- ---------- ---------- ---------- ----------
Earnings available
for common stockholder $ 69,412** $ 210,112 $ 239,465 $ 180,403*** $ 187,703
Operating revenues
Electric $1,412,115 $1,393,270 $1,437,480 $1,403,562 $1,347,844
Gas 355,172 364,875 318,262 324,349 331,301
Steam 22,315 15,675 14,742 14,281 14,090
---------- ---------- ---------- ---------- ----------
Total operating revenues $1,789,602 $1,773,820 $1,770,484 $1,742,192 $1,693,235
========== ========== ========== ========== ==========
At December 31
Total assets $4,667,840 $4,507,160 $4,318,924 $4,202,193 $4,078,973
Long-term debt and preferred
stock - redemption required $1,448,558 $1,371,446 $1,325,169 $1,257,776 $1,274,476
================================================================================================
QUARTERLY FINANCIAL DATA
===============================================================================================
(Thousands of Dollars)
-----------------------------------------------
March June
Three Months Ended 1997 1996 1997** 1996
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 510,383 $ 495,457 $ 403,214 $ 401,686
Operating income 65,637 85,145 31,716 68,382
Earnings available
for common stockholder 43,386 61,703 (6,353) 44,906
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
September December
Three Months Ended 1997 1996 1997** 1996
- ------------------ --------- --------- --------- ---------
Total operating revenues $ 400,614 $ 398,801 $ 475,391 $ 477,876
Operating income 46,441 76,693 55,665 75,624
Earnings available
for common stockholder 22,321 52,392 10,058 51,111
===============================================================================================
<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 Wisconsin Electric Power Company's
common stock is held by Wisconsin Energy Corporation.
* Where applicable, prior year financial and statistical information has been restated to
include Wisconsin Natural Gas Company at historical values.
** Includes May 1997 nonrecurring $21.9 million charge ($13.2 million net of tax) to write-off
deferred merger costs related to the terminated merger agreement with Northern States Power
Company and December 1997 $30.0 million write-down of equipment purchased for the Kimberly
Cogeneration Project.
*** Includes 1994 nonrecurring $73.9 million charge ($45 million net of tax) for Wisconsin Electric
Power Company's restructuring program.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation ("WEC" or the "Company") is a holding company
whose principal subsidiary is Wisconsin Electric Power Company ("WE"), an
electric, gas and steam utility. As of December 31, 1997, approximately 93%
of WEC's consolidated total assets were attributable to WE. The following
discussion and analysis of financial condition and results of operations
includes both WEC and WE unless otherwise stated.
WISCONSIN NATURAL GAS COMPANY: On January 1, 1996, WEC merged its natural
gas utility subsidiary, Wisconsin Natural Gas Company ("WN"), into WE to form
a single combined utility subsidiary. The accounting treatment for this
merger was similar to that which would result from a pooling of interests.
Where applicable, references to WE include WN's gas operations prior to the
merger.
CAUTIONARY FACTORS: A number of forward-looking statements are included in
this document. When used, the terms "anticipate", "believe", "estimate",
"expect", "objective", "plan", "project" and similar expressions are intended
to identify forward-looking statements. Forward-looking statements are
subject to certain risks, uncertainties and assumptions which could cause
actual results to differ materially from those that are described, including
the items described below under "Factors Affecting Results of Operations" and
under "Cautionary Factors."
RESULTS OF OPERATIONS
See "Note L - Information By Segments of Business" in the Notes To Financial
Statements for additional information related to WEC's and WE's results of
operations.
EARNINGS
1997 COMPARED TO 1996: Compared to 1996's consolidated net income of
$218 million and earnings per share of $1.97, WEC's consolidated net income
and earnings per share were $61 million and $0.54 per share, respectively,
during 1997. WE's earnings decreased from $210 million in 1996 to $69 million
in 1997. As described below, 1997 earnings decreased primarily due to
(1) significantly higher fuel and purchased power expenses, (2) increased
other operation and maintenance expenses, (3) higher depreciation expense,
(4) a write-off in the second quarter of 1997 of deferred costs related to
WEC's terminated merger agreement with Northern States Power Company, a
Minnesota corporation ("NSP"), (5) an impairment charge in the fourth quarter
of 1997 for the write-down to fair value of WE's Kimberly cogeneration
equipment, and (6) retail electric and gas rate decreases that became
effective in February 1997.
1996 COMPARED TO 1995: WEC's consolidated net income and earnings per
share of common stock decreased in 1996 compared to 1995. WEC's consolidated
net income and earnings per share were $234 million and $2.13 per share,
respectively, during 1995. During 1996, WE's earnings decreased $29 million
from $239 million in 1995. As described below, WEC's and WE's 1996 earnings
decreased primarily because 1996 retail electric and gas rate decreases more
than offset the favorable impact of increases in electric sales and gas
deliveries and decreases in certain operating expenses.
ELECTRIC REVENUES, GROSS MARGINS AND SALES
The table that follows summarizes electric operating revenues, gross margins,
megawatt-hour sales and average electric customers for each of the three years
ended December 31, 1997.
=========================================================================================================
% Change % Change
1996 1995
Electric Operations 1997 1996 to 1997 1995 to 1996
------------------------------ ---------- ---------- --------- ---------- ---------
Electric Gross Margin ($000's)
Operating Revenues
Residential $ 487,219 $ 494,142 (1.4%) $ 507,416 (2.6%)
Small Commercial/Industrial 430,193 421,511 2.1% 423,039 (0.4%)
Large Commercial/Industrial 402,684 383,047 5.1% 401,794 (4.7%)
Other-Retail/Municipal 55,246 56,318 (1.9%) 69,318 (18.8%)
Resale-Utilities 24,538 26,372 (7.0%) 24,811 6.3%
Other Operating Revenues 12,235 11,880 3.0% 11,102 7.0%
---------- ---------- ----------
Total Operating Revenues 1,412,115 1,393,270 1.4% 1,437,480 (3.1%)
Fuel & Purchased Power
Fuel 311,966 295,651 5.5% 303,553 (2.6%)
Purchased Power 132,689 36,216 266.4% 41,834 (13.4%)
---------- ---------- ----------
Total Fuel & Purchased Power 444,655 331,867 34.0% 345,387 (3.9%)
---------- ---------- ----------
Gross Margin $ 967,460 $1,061,403 (8.9%) $1,092,093 (2.8%)
========== ========== ==========
Sales (Mwh)
Residential 6,863,569 6,998,769 (1.9%) 7,042,691 (0.6%)
Small Commercial/Industrial 7,433,087 7,204,694 3.2% 7,047,277 2.2%
Large Commercial/Industrial 11,021,476 10,785,505 2.2% 10,639,782 1.4%
Other-Retail/Municipal 1,412,623 1,476,999 (4.4%) 1,550,937 (4.8%)
Resale-Utilities 941,191 1,094,461 (14.0%) 1,003,182 9.1%
---------- ---------- ----------
Total Electric Sales 27,671,946 27,560,428 0.4% 27,283,869 1.0%
========== ========== ==========
Average Customers
Residential 876,776 867,917 1.0% 857,924 1.2%
Small Commercial/Industrial 93,259 91,565 1.9% 90,386 1.3%
Large Commercial/Industrial 714 706 1.1% 679 4.0%
Other-Retail/Municipal 1,811 1,812 0.0% 1,809 0.2%
Resale-Utilities 33 20 65.0% 12 66.7%
---------- ---------- ----------
Total Average Customers 972,593 962,020 1.1% 950,810 1.2%
========== ========== ==========
=========================================================================================================
1997 COMPARED TO 1996: Primarily due to a fuel surcharge in WE's Wisconsin
electric retail jurisdiction, effective May 24, 1997, total electric operating
revenues increased by $18.8 million during 1997 compared to 1996. Revenues
from the fuel surcharge offset the impact on electric operating revenues of a
Wisconsin retail electric rate decrease, effective February 18, 1997, of
$7.4 million or 0.6% on an annualized basis.
The gross margin on electric operating revenues (total electric operating
revenues less fuel and purchased power expenses) decreased by $93.9 million
primarily due to significantly higher fuel and purchased power expenses during
1997. Fuel and purchased power expenses increased by $112.8 million during
1997 compared to 1996 as a result of (1) ongoing extended outages at Point
Beach Nuclear Plant ("Point Beach"), (2) an extended maintenance outage at Oak
Creek Power Plant ("Oak Creek") that was concluded in June 1997, (3) delayed
commercial operation of contractual generating capacity from LSP-Whitewater
Limited Partnership ("LS Power"), and (4) higher costs per megawatt-hour of
power purchases due to regional generation outages. During 1997, WE replaced
its lost generating capacity with higher cost generation and with a 218%
increase in megawatt-hours of power purchases. Partially offsetting the
increased 1997 fuel and purchased power expenses, WE recorded $24.1 million of
revenues as a result of the fuel surcharge: $15.1 million of 1997 collections
and an additional $9.3 million accrued in December 1997 that are expected to
be recovered during the first quarter of 1998. For further information
concerning the 1997 fuel surcharge and the extended outages at Point Beach,
see "Rates and Regulatory Matters" and "Nuclear Matters," respectively, below
under "Factors Affecting Results of Operations."
Total electric sales increased by 111,000 megawatt-hours ("Mwh") during 1997
compared to 1996. Increased 1997 sales to small commercial/industrial and to
large commercial/industrial customers were offset by decreased sales to
customers in the residential, the other-retail/municipal and the resale-
utilities customer classes.
Total 1997 electric sales were positively impacted by growth in the number of
customers in the residential, the small commercial/industrial and especially
in the large commercial/industrial customer classes and by increased use per
customer by small and by large commercial/industrial customers. Cooler
weather during the summer of 1997 compared to the summer of 1996, however,
primarily contributed to lower use per residential customer and to the
decrease in 1997 residential electric sales. Electric energy sales to the
Empire and Tilden ore mines ("Mines"), WE's two largest retail electric
customers, decreased by 5.4% to 2,242,000 Mwh in 1997 compared to
2,369,000 Mwh in 1996. Excluding the Mines, total electric sales increased
1.0% and sales to the remaining large commercial/industrial customers
increased 4.3% between the comparative periods.
1997 sales in the other-retail/municipal customer class decreased compared to
1996 primarily due to the continued phase out in 1997 of firm requirements
contracts totaling 12.5 megawatts ("MW") with two wholesale customers and a
reduction of 30 MW in contractual requirements nominations during 1997 by
Wisconsin Public Power Inc. ("WPPI"), WE's largest municipal wholesale
customer. This customer has been reducing its purchases from WE over the past
few years subsequent to acquiring generating capacity and expanding use of its
existing generating facilities. Sales for resale to other utilities, the
resale-utilities customer class, decreased primarily as a result of reduced
opportunity sales caused by the Point Beach and Oak Creek outages mentioned
above.
1996 COMPARED TO 1995: Primarily as a result of annualized retail electric
rate decreases, effective January 1, 1996, of $33.4 million or 2.8% in
Wisconsin and $1.1 million or 3.3% in Michigan, total electric operating
revenues decreased by $44.2 million during 1996 compared to 1995. Also
contributing to the 1996 decrease in electric operating revenues were the
effects of renegotiated contracts with various wholesale customers and with
the Mines, as well as continued reductions in sales to WE's largest municipal
and utility wholesale customers. The renegotiated wholesale and mine
contracts contain discounts from previous rates charged to these customers in
exchange for contract extensions. An increase in total 1996 electric
kilowatt-hour sales was not sufficient to offset the impact on electric
operating revenues of the rate decreases, the renegotiated contracts and the
reduced sales to the wholesale customers.
Between the comparative periods, the gross margin on electric operating
revenues decreased by $30.7 million. The lower 1996 electric operating
revenues more than offset lower net 1996 fuel and purchased power expenses.
Fuel expenses declined in 1996 primarily due to lower average coal costs per
ton consumed. Between the comparative periods, purchased power expense
decreased as WE substituted lower cost generation for power purchases.
Residential sales declined during 1996 compared to 1995 because an increase in
the average number of residential customers during 1996 was more than offset
by a decrease in the average electric usage per residential customer as a
result of cooler weather during the summer of 1996. Small commercial/
industrial sales increased during 1996 compared to 1995 as a result of a 1996
increase in the average number of small commercial/industrial customers.
Electric energy sales to the Mines increased by 3.2% or 73,000 Mwh in 1996
from 2,296,000 Mwh in 1995. Excluding the Mines, total electric sales
increased 0.8% and sales to the remaining large commercial/industrial
customers increased 0.9% between the comparative periods.
Sales to the other-retail/municipal customer class decreased in 1996 compared
to 1995 largely due to ongoing reductions in sales to WPPI as noted above.
Sales of electric energy to other utilities (the resale-utilities customer
class), representing 4.0% of total 1996 electric energy sales, increased in
1996 in part due to increased availability during 1996 of WE's lowest cost
generating units and in part due to greater native load demand as a result of
the hot weather during the summer of 1995. These factors allowed for higher
comparative opportunity sales by WE to other utilities in 1996. During 1996,
a continued reduction in purchases of electricity by Upper Peninsula Power
Company, an independent investor-owned utility, somewhat offset the increase
in resale sales to other utilities during 1996. WE expects this customer to
significantly reduce its purchases of electric energy from WE when a 65 MW
agreement with WE expires at the end of 1997.
GAS REVENUES, GROSS MARGINS AND THERM DELIVERIES
The table that follows summarizes gas operating revenues, gross margins, therm
deliveries and average gas customers for each of the three years ended
December 31, 1997.
=========================================================================================================
% Change % Change
1996 1995
Gas Operations 1997 1996 to 1997 1995 to 1996
------------------------------ ---------- ---------- --------- ---------- ---------
Gas Gross Margin ($000's)
Operating Revenues
Residential $ 221,968 $ 218,811 1.4% $ 194,226 12.7%
Commercial/Industrial 113,609 108,100 5.1% 94,482 14.4%
Interruptible 8,970 11,531 (22.2%) 7,712 49.5%
Interdepartmental 3,096 3,050 1.5% 5,052 (39.6%)
---------- ---------- ----------
Total Gas Sales 347,643 341,492 1.8% 301,472 13.3%
Transported Customer Owned Gas 11,295 11,006 2.6% 12,161 (9.5%)
Transported - Interdepartmental 2,105 725 190.3% 782 (7.3%)
Other Operating Revenues (5,871) 11,652 (150.4%) 3,847 202.9%
---------- ---------- ----------
Total Operating Revenues 355,172 364,875 (2.7%) 318,262 14.6%
Cost of Gas Sold 233,877 234,254 (0.2%) 188,764 24.1%
---------- ---------- ----------
Gross Margin $ 121,295 $ 130,621 (7.1%) $ 129,498 0.9%
========== ========== ==========
Therms Delivered (000's)
Residential 347,859 371,990 (6.5%) 345,140 7.8%
Commercial/Industrial 211,453 225,169 (6.1%) 207,358 8.6%
Interruptible 24,532 35,869 (31.6%) 29,397 22.0%
Interdepartmental 9,696 11,280 (14.0%) 21,250 (46.9%)
---------- ---------- ----------
Total Gas Sales 593,540 644,308 (7.9%) 603,145 6.8%
Transported Customer Owned Gas 313,466 268,163 16.9% 261,361 2.6%
Transported - Interdepartmental 76,670 24,423 213.9% 22,223 9.9%
---------- ---------- ----------
Total Gas Delivered 983,676 936,894 5.0% 886,729 5.7%
========== ========== ==========
Average Customers
Residential 339,002 330,153 2.7% 321,643 2.7%
Commercial/Industrial 30,594 29,936 2.2% 29,230 2.4%
Interruptible 170 190 (10.5%) 203 (6.4%)
Interdepartmental 2 4 (50.0%) - -
---------- ---------- ----------
Total Sales Customers 369,768 360,283 2.6% 351,076 2.6%
Transportation 254 230 10.4% 209 10.1%
Transportation - Interdepartmental 5 4 25.0% 6 (33.3%)
---------- ---------- ----------
Total Average Customers 370,027 360,517 2.6% 351,291 2.6%
========== ========== ==========
=========================================================================================================
1997 COMPARED TO 1996: Total gas operating revenues decreased by
$9.7 million during 1997 compared to 1996. The gross margin on gas operating
revenues (total gas operating revenues less cost of gas sold) decreased by
$9.3 million between the comparative periods. Total gas operating revenues
and gross margin declined primarily due to an annualized gas retail rate
decrease, effective February 18, 1997, of $6.4 million or 2.0% and to
decreased therm deliveries to residential and commercial/industrial customers.
These customers are more sensitive to weather variations as a result of
heating requirements and contribute higher margins to earnings than other
customer classes. Other operating revenues reflect adjustments for over and
under collection of gas costs included in operating revenues from gas sales.
Cost of gas sold was unchanged between the comparative periods. An 8.4%
increase in 1997 in the per unit cost of purchased gas was offset by a 7.9%
decrease in total gas purchases during 1997. WE arranges for its own gas
supply contracts with terms of various lengths. Changes in the cost of
natural gas purchased at market prices are included in customer rates through
the purchased gas adjustment mechanism and do not affect gross margin. See
"Rates and Regulatory Matters" below in "Factors Affecting Results of
Operations" for additional information concerning the purchased gas adjustment
mechanism.
Total natural gas therm deliveries increased by 46,782,000 therms in 1997
compared to 1996. Decreased deliveries to the residential, the commercial/
industrial and the interruptible customer classes during 1997 were more than
offset by increased interdepartmental deliveries to WE-owned gas-fired
generating facilities and increased deliveries of transported - customer owned
gas.
Despite an increase in the average number of residential and commercial/
industrial customers during 1997 compared to 1996, deliveries to these two
customer classes decreased between the comparative periods primarily due to
warmer weather during the 1997 heating seasons compared to the same periods
during 1996. Therm deliveries to interruptible customers decreased during
1997 compared to 1996 due to a decrease in the average number of interruptible
customers and in the average therm use per interruptible customer during 1997.
Deliveries of transported - customer owned gas increased by 45,303,000 therms
during 1997 compared to 1996 due to an increase in the average number of
transport customers and to an increase in the average therm use per transport
customer. During 1997, a number of sales customers switched to become
transportation customers. Also, increased deliveries of transported -
customer owned gas in 1997 reflect start-up of commercial operations of LS
Power's gas-fired cogeneration facility, located within WE's gas service
territory, in September 1997.
WE delivers natural gas to WE generating facilities, including the Concord and
Paris Generating Stations ("Concord" and "Paris"), at rates approved by the
Public Service Commission of Wisconsin ("PSCW"). Due to the Point Beach and
Oak Creek outages noted above, WE substituted generation at Concord and Paris,
natural gas-fired peak generating plants, resulting in a 142% or 50,663,000
therm increase in total 1997 interdepartmental deliveries compared to 1996.
Excluding interdepartmental deliveries, total 1997 therm deliveries decreased
0.8% compared to 1996.
1996 COMPARED TO 1995: Despite an annualized $8.3 million or 2.6%
Wisconsin retail gas rate decrease, effective January 1, 1996, total gas
operating revenues increased by $46.6 million and the gross margin on gas
operating revenues increased by $1.1 million during 1996 compared to 1995. An
increase in total therm deliveries during 1996 more than offset the impact of
the rate decrease on gas operating revenues and on gross margin.
Gross margin was higher in 1996 because the increased therm deliveries were
primarily to residential and commercial customers, who contribute higher
margins to earnings than other customer classes. The cost of gas sold
increased in 1996 compared to 1995 due to a higher 1996 per unit cost of
purchased gas and to a higher volume of gas purchases in 1996. Changes in the
cost of natural gas do not affect gross margin.
Total natural gas therm deliveries increased by 50,165,000 therms in 1996
compared to 1995. Residential and commercial/industrial sales increased in
1996 in part due to colder weather during the 1996 heating seasons and in part
due to an increase in 1996 in the average number of customers in these two
customer classes.
Total interdepartmental therm deliveries decreased 17.9% or by 7,770,000
therms during 1996 compared to 1995. These therm deliveries to WE electric
generating facilities, primarily Concord and Paris, decreased in 1996 as a
result of the significantly cooler summer weather in 1996 compared to 1995
discussed above in "Electric Revenues, Gross Margins and Sales." Excluding
interdepartmental deliveries, total 1996 therm deliveries increased 6.9%
compared to 1995.
For further information concerning WE's 1996 and 1997 rate orders, see "Rates
and Regulatory Matters" below under "Factors Affecting Results of Operations."
OPERATING EXPENSES
1997 COMPARED TO 1996: During 1997, other operation and maintenance
expenses increased 9.6% or by $47.6 million compared to 1996, including a
$33.3 million increase in non-fuel nuclear expenses, an $8.1 million increase
in transmission system expenses and a $10.8 million increase in administrative
and general expenses. Non-fuel nuclear expenses increased during 1997 due to
extended and unscheduled generating unit outages at Point Beach and due to
efforts by WE's nuclear operations to strengthen plant performance and address
concerns identified by the United States Nuclear Regulatory Commission
("NRC"). During 1997, transmission expenses increased due to significantly
higher 1997 power purchases, and administrative and general expenses increased
primarily due to higher salaries and outside services employed. An
$11.3 million decrease in customer service expenses during 1997, primarily due
to reduced conservation expenses, partially offset the higher 1997 other
operation and maintenance expenses. Depreciation expense increased 17.2% or
by $35.0 million between the comparative periods primarily due to higher
depreciable plant balances in 1997 and to higher depreciation rates included
in the PSCW's 1997 rate order. Total operating income taxes decreased 54.4%
or by $68.8 million in 1997 as a result of lower taxable income.
As of December 31, 1997, WE has deferred $18 million of nuclear non-fuel
operation and maintenance costs under authority granted by the PSCW in July
1997. The PSCW has not yet decided how these costs will be treated for rate
making purposes. For further information concerning WE's deferred nuclear
non-fuel operation and maintenance costs, see "Note F - Nuclear Operations" in
the Notes to Financial Statements.
1996 COMPARED TO 1995: During 1996, other operation expenses decreased
0.9% or by $3.7 million compared to 1995, primarily due to lower capitalized
conservation, property insurance and pension and benefit expenses, partially
offset by increased uncollectible expenses. Maintenance expense decreased
8.3% or by $9.4 million in 1996 compared to 1995, primarily as a result of a
decrease in costs associated with maintenance of WE's fossil power plants. WE
attributes the decrease in maintenance to an extended outage at WE's Pleasant
Prairie Power Plant ("Pleasant Prairie") in 1995 as well as to continued
efforts to reduce operating and maintenance costs. Depreciation expense
increased 10.3% or by $18.9 million between the same comparative periods
primarily due to increased nuclear decommissioning expenses and to a lesser
extent to higher depreciable plant balances in 1996. During 1996, operating
taxes other than income taxes increased 4.1% or by $3.1 million compared to
1995 due to tax adjustments related to prior periods. Total operating income
taxes decreased 10.2% or by $14.4 million in 1996 compared to 1995 as a result
of lower taxable income.
OTHER ITEMS
1997 COMPARED TO 1996: In the second quarter of 1997, WEC recorded a
$30.7 million charge ($18.8 million net of tax or approximately 17 cents per
share) to write off deferred merger costs related to the terminated merger
agreement with NSP, of which approximately $21.9 million was attributable to
WE. During 1997, WEC also recorded $1.3 million of merger expenses related to
the pending acquisition by WEC of ESELCO, Inc. For further information
concerning the terminated merger with NSP and the pending acquisition of
ESELCO, Inc., see "Note B - Mergers" in the Notes to Financial Statements.
Compared to 1996, WEC's miscellaneous net other income and deductions
decreased $45 million during 1997 of which $33.9 million was attributable to
WE. Based upon the results of a discounted cash flow analysis for a pending
project that would utilize WE's Kimberly cogeneration equipment, WE recorded a
$30.0 million impairment charge ($18.4 million net of tax or 16 cents per
share) in December 1997 for the equipment. For further information concerning
the Kimberly cogeneration equipment, see "Note M -Commitments and
Contingencies" in the Notes to Financial Statements. During 1997,
miscellaneous net other income and deductions also decreased due to increased
1997 charitable contributions by WE and due to fair market valuation
adjustments of non-utility investments.
Interest income increased 34.8% or by $6.3 million during 1997 compared to
1996 primarily due to increased earnings on WE's decommissioning trust fund.
Interest charges on long-term debt increased 6.9% or by $7.1 million between
the comparative periods as a result of increased average outstanding long-term
debt, primarily at WE, during 1997.
1996 COMPARED TO 1995: Excluding the annual $10.9 million impact of a 1996
change in accounting for capitalized conservation expenditures at WE,
miscellaneous net other income and deductions increased $14.9 million in 1996
compared to 1995. The change in accounting more than offset a 1996 increase
in non-utility miscellaneous net other income and deductions of $13.4 million
compared to 1995. This $13.4 million increase was primarily due to fair
market valuation adjustments of non-utility investments and the gain recorded
on sales of non-utility property and investments.
Other interest charges decreased by $5.0 million in 1996 compared to 1995 due
to lower average outstanding short-term debt balances during 1996, primarily
at WE.
FACTORS AFFECTING RESULTS OF OPERATIONS
MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and NSP agreed to terminate the Agreement and Plan of Merger which
provided for a business combination of WEC and NSP to form Primergy
Corporation. As a result, WEC recorded a $30.7 million charge in the second
quarter of 1997 ($18.8 million net of tax or approximately 17 cents per share)
to write off deferred transaction costs and costs to achieve the merger, of
which approximately $21.9 million was attributable to WE.
ESELCO, INC.: On May 13, 1997, WEC and ESELCO, Inc., parent company of
Edison Sault Electric Company ("Edison Sault"), entered into an Agreement and
Plan of Reorganization setting forth the terms of the proposed acquisition of
ESELCO, Inc. by WEC. On October 7, 1997, the shareholders of ESELCO, Inc.
voted to approve the proposed transaction. During 1997, WEC recorded
$1.3 million of related merger expenses. WEC expects to complete the proposed
acquisition as soon as practicable during 1998 upon receipt of all appropriate
regulatory approvals and upon fulfillment of other customary conditions. For
additional information concerning the proposed acquisition, see "Electric
Sales and Gas Deliveries Outlook" below. Unless otherwise noted, information
and descriptions contained in this document do not consider the impact of the
proposed acquisition of ESELCO, Inc.
For further information concerning the terminated merger with NSP and the
pending acquisition of ESELCO, Inc., see "Note B - Mergers" in the Notes to
Financial Statements.
NUCLEAR MATTERS
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 megawatt
electric generating units at Point Beach. During 1997, 1996 and 1995, Point
Beach provided 6%, 24% and 25% of WE's net electric energy supply,
respectively. The NRC licenses for Point Beach expire in October 2010 for
Unit 1 and in March 2013 for Unit 2.
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. The NRC issues trend letters to provide early notification of
declining performance and to allow a utility, under the watchfulness of the
NRC, to take early corrective actions. During 1997, WE undertook a
comprehensive effort to address NRC concerns and to take advantage of industry
best practices to further strengthen performance at the plant. On January 21,
1998, the NRC rescinded its declining trend letter and informed WE "that the
corrective actions [being taken by WE] have been effective in addressing [the
NRC's] concerns and that the adverse trends in performance at Point Beach have
been arrested."
WE returned Point Beach Unit 2 to service in August 1997 following an extended
outage that began in October 1996 to replace the unit's steam generators.
Unit 2 was taken out of service from mid-November 1997 through early February
1998 and has experienced several other unplanned shutdowns in the past six
months to address various equipment issues. WE plans to begin its first
18-month fuel cycle with Unit 2's September 1998 refueling outage. For
additional information concerning the Unit 2 steam generator replacement, see
"Investing Activities" below in "Liquidity and Capital Resources."
Point Beach Unit 1 was taken out of service in February 1997 due to equipment
problems. WE decided to keep Unit 1 out of service to allow Point Beach staff
to focus their attention on the work necessary to bring Unit 2 back to
service. During the summer of 1997, WE replaced two low pressure turbines in
Unit 1 which increased its dependable generating capability from 500 to 510
megawatts. WE returned Unit 1 to service from December 1997 through
mid-February 1998, when it began a scheduled refueling outage that is expected
to be completed in May 1998.
Additional unplanned shutdowns of Units 1 or 2 may be necessary as WE
continues to thoroughly review facility design, to improve adherence to NRC
requirements, and to complete regulatory commitments. WE expects the
reliability of the units to improve toward historical levels as these efforts
progress. Projected fuel costs, filed by WE with the PSCW as part of the 1998
Test Year data, reflect anticipated lower availability of Point Beach during
this period of time. For additional information concerning the 1998 Test
Year, see "Rates and Regulatory Matters" below.
In early October 1996, the NRC requested all nuclear reactor licensees in the
United States to describe the processes used to ensure the adequacy and
integrity of the licensees' design bases for their plants and to ensure the
plants continue to be operated and maintained in accordance with the design
bases. WE responded to the NRC in February 1997. Currently, the NRC is
performing engineering inspections of various nuclear generating stations in
the United States, with a focus on design and design basis. The NRC may
perform such an inspection of Point Beach in the future but has not scheduled
one to date.
See "Note F - Nuclear Operations" in the Notes to Financial Statements for
information concerning WE's deferral during 1997 of approximately $18 million
of nuclear non-fuel O&M costs in excess of those included in 1997 rates.
SPENT FUEL STORAGE AND DISPOSAL: WE currently has sufficient space in the
spent fuel pool at Point Beach to complete the fall 1998 Unit 2 and spring
1999 Unit 1 refueling outages before the pool is full in its current
configuration. In response to reduced spent fuel pool storage capacity, WE
completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for the temporary dry storage of spent fuel at Point Beach.
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to the ISFSI. To date, WE has loaded two such casks and currently
has two additional casks available for loading at Point Beach. WE estimates
that, with implementation of 18-month fuel cycles, the remaining 10 authorized
casks, and the remaining space in the spent fuel pool in its current
configuration, it has sufficient temporary storage to complete the scheduled
fall 2003 Unit 1 refueling outage.
As a result of the ignition of hydrogen gas during welding operations
associated with loading a third cask at Point Beach in May 1996, WE
discontinued cask loading until plans to prevent recurrence of such an event
were developed and accepted by the NRC and until such plans are implemented.
In September 1997, the NRC formally accepted WE's corrective actions and
closed a confirmatory action letter concerning the hydrogen gas ignition which
had halted cask loading.
In May 1997, the NRC sent WE another confirmatory action letter regarding
concerns about the welding process for the casks being used at Point Beach as
well as at two unaffiliated utilities. The letter prohibits the loading of
additional casks until modified welding procedures are accepted by the NRC.
In August 1997, WE submitted a response to the NRC describing modifications to
the welding procedures which address the NRC's concerns and documenting the
conclusion that the two casks already loaded with spent fuel at Point Beach
have not experienced weld problems. The NRC has since required that WE and
the other users develop an ultrasonic inspection technique for the lid welds
prior to lifting the May 1997 confirmatory action letter. WE expects to
qualify this inspection technique by May 1998. WE hopes to be able to resume
cask loading and to load two additional casks with spent fuel during the
summer of 1998. WE is also evaluating alternative on-site temporary spent
fuel storage options.
Temporary spent fuel storage alternatives are necessary at Point Beach until
the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel under a contract with WE mandated by the
Nuclear Waste Policy Act of 1982, as amended in 1987 ("Waste Act"). The DOE
has indicated that it does not expect a permanent spent fuel repository to be
available until at least 2010. In July 1996, the United States Court of
Appeals for the District of Colombia circuit ("D.C. Appeals Court") ruled that
the DOE had an unconditional obligation under the Waste Act to begin accepting
spent fuel by January 31, 1998. However, in December 1996, the DOE notified
owners of commercial nuclear plants that it would not be able to meet its
statutory obligation. In November 1997, the D.C. Appeals Court ruled that
utilities should seek damages per the provisions of the standard contract.
The DOE has indicated that it intends to pay such damages out of the Nuclear
Waste Fund ("Waste Fund") and then simply offset such payments by increasing
fees paid into the Waste Fund by the contracting utilities for construction of
a permanent spent fuel repository. In January 1998, the DOE denied a petition
of 27 utilities, including WE, to suspend and place in escrow future payments
to the Waste Fund until the DOE complies with its reciprocal obligation to
dispose of spent fuel. On January 31, 1998, the DOE breached its contract
with WE by failing to begin removing spent fuel from Point Beach. In February
1998, WE joined other utilities in a motion to enforce the mandate of the D.C.
Appeals Court in which the utilities seek an order (1) compelling the DOE to
submit a detailed program for disposing of spent fuel from utilities,
(2) declaring that the utilities are relieved of their obligation to pay fees
into the Waste Fund and are authorized to place such fees into escrow until
the DOE commences with disposing of the spent fuel pursuant to its obligations
under the Waste Act, and (3) precluding the DOE from using any fees paid into
the Waste Fund to reimburse the utilities for any damages they have incurred
as a result of DOE's breach of its obligations under the Waste Act. At this
time, WE is unable to predict when the DOE will actually begin accepting spent
nuclear fuel.
During 1997, the United States Senate and the United States House of
Representatives each passed the Nuclear Waste Policy Act of 1997. The
legislation would require the DOE to establish a temporary spent fuel
repository in the State of Nevada until the permanent repository is available
and to begin taking ownership from utilities and removing spent fuel as
required by the Waste Act. Reconciliation of Senate and House versions of the
bill are not yet resolved. President Clinton has threatened to veto any
legislation that reaches his desk. The matter is pending.
ELECTRIC SYSTEM RELIABILITY MATTERS
WE experienced electricity supply shortages during the summer of 1997. While
the circumstances on its system that contributed to these shortages are not
expected to occur again during this year, WE is currently involved in the
following actions to mitigate the risk of recurrence and to improve electric
reliability in the region.
ADDITIONAL 250 MW OF CAPACITY: In the fourth quarter of 1997, WE issued a
request for proposal for contracts for 250 MW of generation capacity to be
built in eastern Wisconsin with an in-service date of June 1, 1999, if
possible, but no later than June 1, 2000. In the request, WE proposed
contracting for the power for three to eight years but will not own or operate
the facility. WE anticipates that capacity proposed in the bidding process
will largely be in the form of natural gas-fired facilities, but other types
of facilities are also being considered. This new generation capacity, to be
built in eastern Wisconsin, is expected to economically improve reliability in
eastern Wisconsin. WE has received significant interest in the proposal.
COMBUSTION TURBINE INLET COOLERS: On February 18, 1998, the PSCW approved
WE's application for authority to install inlet coolers at Concord and gave
conditional approval for Paris subject to approval by the WDNR. WE
anticipates WDNR approval in April 1998. WE expects that the inlet coolers,
which are planned to be operational by the summer of 1999 or sooner, will
boost generating capacity of these two WE plants by a combined total of
approximately 110 MW. WE estimates that the inlet coolers for the two plants
will cost a total of approximately $24 million during the 1998-1999 biennial
period. The costs of these projects are included in anticipated construction
expenditures described below in "Capital Requirements 1998-2002" under
"Liquidity and Capital Resources."
ELECTRIC TRANSMISSION PROJECTS: In October 1997, WE announced three
projects designed to increase the electric import capability into eastern
Wisconsin and to improve electric system reliability. If approved by the
PSCW, the Plains-Morgan 345 kV upgrade project would allow for an additional
80 MW of generating capacity in the Upper Peninsula of Michigan to be
available to eastern Wisconsin, the Southern Interface project would increase
the transfer capability between northern Illinois and eastern Wisconsin by
1,000 MW and the Oak Creek-KK Substation project would improve reliability in
the metropolitan Milwaukee area. Applications for the three projects are
scheduled to be filed with the PSCW in 1998. WE anticipates that these
projects will cost a combined total of approximately $81 million over the next
several years. The costs of these projects are included in anticipated
construction expenditures described below in "Capital Requirements 1998-2002"
under "Liquidity and Capital Resources."
MIDWEST ISO: WE is currently participating in the formation of a regional
independent system operator ("ISO") to promote reliability in the Midwest (the
"Midwest ISO"). WE, along with eight other utilities, filed a proposal with
the Federal Energy Regulatory Commission ("FERC") to establish the Midwest ISO
on January 15, 1998. Since the filing with FERC, a tenth utility has joined
the Midwest ISO group. The Midwest ISO would operate member electric
transmission systems within the region as a single system. Regional oversight
is required to maintain reliability because the system is being used
increasingly for broad, regional transactions. In addition to reliability
benefits, a regional ISO helps to ensure open and equal access to the electric
transmission system and broadens the energy market by eliminating redundant
transmission fees. As a net buyer of electric energy, WE expects the Midwest
ISO to result in lower energy costs for its customers as well as in improved
regional reliability.
REPORT TO THE GOVERNOR OF WISCONSIN: The first three of WE's actions
outlined above are part of a joint plan, addressing electric system
reliability within the state and region, which was submitted to the Governor
of the State of Wisconsin during 1997 by WE along with ten other
organizations. The recommendations in this plan included a combination of
improved regional electric transmission, increased generating capacity and a
streamlined regulatory process for construction of new electric generation and
transmission facilities. The report emphasized that unexpected events such as
power plant outages in the upper midwest, significant regional transmission
limitations or very hot weather dictate the need to reevaluate regional system
reliability. In the report, WE and three other investor owned utilities from
Wisconsin outlined a plan to allow the development of merchant plants,
including plants built by utility affiliates, as an accelerated and cost-
effective way to obtain new electric generation after the year 2000. The plan
also identified the necessity to have a regional transmission operator.
On March 12, 1998, the Governor of the State of Wisconsin announced that
specific electric industry reliability legislation will be submitted to the
Legislature for consideration in the spring 1998 session. The Governor's
proposal (1) includes provisions for regulatory streamlining, (2) supports a
regional ISO with a date certain of June 2000, after which a State ISO could
be developed or transmission divestiture could be required, (3) allows
merchant plants to be built, (4) allows utility affiliates to build merchant
plants if the PSCW finds this is not anti-competitive, and (5) if such
non-utility plants are built in the midwest, provides that they would not
count towards the Wisconsin public utility holding company asset cap. The
Governor's proposal also will require that 50 MW of renewable energy sources
be constructed or procured by Wisconsin investor-owned utilities by
December 31, 2000.
INDUSTRY RESTRUCTURING AND COMPETITION
Driven by a combination of market forces, regulatory and legislative
initiatives, and technological changes, the electric industry continues a
trend towards restructuring and increased competition. To date, competitive
forces have been most prominent in the wholesale power market but are expected
to continue to develop in the electric retail markets. Present regulatory
restructuring initiatives in various midwestern states target electric retail
customer choice by the years 2000 through 2005. Also, there are currently
pilot electric retail customer choice programs occurring in the States of
Illinois and Michigan, and Illinois has passed legislation introducing retail
electric choice for large customers in 1999 and for all customers by May 2002.
While the Company cannot predict the ultimate timing or impact of a
restructured electric industry, WE has been advocating restructuring of the
electric utility industry and believes that, as a low-cost energy provider, it
is well positioned to compete in a deregulated and competitive market. Among
others, the following electric and gas industry restructuring initiatives are
underway in regulatory jurisdictions where WE currently does business.
PSCW INVESTIGATION INTO THE STRUCTURE OF THE ELECTRIC UTILITY INDUSTRY: In
December 1995, the PSCW announced a process to transform the electric industry
in Wisconsin to a competitive model supportive of retail choice by the year
2001. During 1997, Wisconsin retail customers under PSCW jurisdiction
accounted for 87.9% and 81.4% of WE's total electric operating revenues and
sales, respectively. Progress on the workplan was slow, and the PSCW
concluded that electric power shortages experienced during the summer of 1997
highlighted the need to address infrastructure issues.
In October 1997, the PSCW expressed a desire to work on infrastructure issues
and to develop a robust competitive electric wholesale market. The PSCW also
expressed its belief that the question of whether to implement electric retail
competition in Wisconsin ultimately should be decided by the Wisconsin
Legislature rather than by the PSCW. The PSCW agreed to pursue the following
priority infrastructure issues as prerequisites to other restructuring work:
* Improvements to existing and addition of new electric transmission lines in
the State of Wisconsin.
* Additions of new generating capacity in the State of Wisconsin.
* Modifications to State of Wisconsin statutes to allow merchant generating
plants to be built in Wisconsin without prior PSCW determination of need as
one means of ensuring adequate generation.
* Development of an ISO for either the electric transmission system in the
State of Wisconsin or in the region.
The PSCW reopened its docket on ISOs with a prehearing conference in
mid-December 1997. The schedule calls for hearings in March and April 1998
with a decision expected in May 1998.
With an order issued in December 1997, the PSCW completed work on its
recommended "Public Benefits" plan to protect low-income utility customers,
conservation programs and the environment under a deregulated electric
industry. To implement and fund this plan, legislative approval is required.
On March 2, 1998, Wisconsin State Representative Antonio Riley introduced
legislation that would create a low-income Public Benefits Board with annual
funding of $105 million. WE has supported the development of such an approach
to public benefits to ensure that WE is not competitively disadvantaged by
being required to continue to provide these benefits.
The PSCW plan would shift funding and administration of the benefits currently
provided under bundled utility service. All electricity and natural gas
providers would be assessed a fee, based upon the volume of their sales, to
collect the necessary funds. Based upon a British Thermal Unit equivalency
between natural gas and electricity, the plan is fuel neutral. The majority
of funds would be collected by reallocating existing charges. The PSCW
determined that the effort will call for a combined annual budget of
approximately $150 million. The Wisconsin Legislature has not acted on the
PSCW proposal to date.
MPSC ELECTRIC UTILITY INDUSTRY INVESTIGATION: In the State of Michigan,
restructuring proposals are being considered by policy makers on several
fronts. The Michigan Public Service Commission ("MPSC") has issued several
orders that phase in competition through the year 2002. The Michigan
Legislature is also working on a plan to restructure the electric industry.
In June 1997, the MPSC issued an order that initiated the framework for
electric industry restructuring and would phase in competition for all
Michigan retail electric customers by the year 2002. In response to the June
1997 order, WE sent a proposal to the MPSC in July 1997 to conduct a one time
bidding for customer choice in its service territory for 12.5% of its Michigan
load on September 1, 1999, followed by full customer choice in the year 2002.
The MPSC has not acted on WE's proposal.
In October 1997 and January 1998, the MPSC issued additional orders that
continued the process of establishing the framework to introduce competition
into the Michigan electric market. The October 1997 orders dealt with
determination of the rates and conditions of service for those customers
choosing direct access and suspended the direct access bidding schedule
included in the June 1997 order. In the January 1998 orders, the MPSC
concluded that statewide uniform timing was not necessary for direct access
and established a schedule for customers of Consumers Energy and Detroit
Edison, the two major investor owned utilities with service territories in
Michigan's Lower Peninsula. Several parties, including Consumers Energy and
Detroit Edison, have petitioned for rehearing of the MPSC's orders.
The MPSC established no customer choice schedule for other utilities who
provide electric service in Michigan. During 1998, WE anticipates that the
MPSC will move forward on developing a schedule for introducing full customer
choice in Michigan's Upper Peninsula by the year 2002.
FERC OPEN ACCESS TRANSMISSION PROCEEDINGS: As a result of the Energy
Policy Act of 1992, the FERC issued two orders in April 1996 relating to open
access transmission service, stranded costs, standards of conduct and open
access same-time information systems. The ruling is intended to create a more
competitive wholesale electric power market.
The first order, Order No. 888, required public utilities owning, controlling
or operating transmission lines to file non-discriminatory open access tariffs
that offer others the same transmission service provided to themselves and
requires the use of the tariffs for their own wholesale energy sales and
purchases. Order No. 888 also provides for the recovery of "stranded costs"
that were prudently incurred to serve power customers and that could go
unrecovered if wholesale customers use open access to move to another electric
energy supplier. In its open access ruling, the FERC encouraged utilities to
consider ISOs such as the Midwest ISO noted above as a tool to meet the
demands of a competitive market for electric energy.
The second order, Order No. 889, works to ensure that transmission owners and
their affiliates do not have an unfair competitive advantage in using
transmission to sell power. Order No. 889 establishes Standards of Conduct
and requires that a public utility's merchant function rely on the same
electronic information network that its transmission customers rely on to
obtain information about its transmission system when buying or selling power.
FERC reaffirmed and clarified these orders with the issuance of Orders No.
888-A and 889-A in March 1997 and Orders No. 888-B and 889-B in November 1997.
In April 1997, WE submitted a revised transmission tariff in compliance with
FERC's orders on rehearing of its Order No. 888. In compliance with a further
rehearing, WE filed a similar revision in December 1997 in compliance with
Order No. 888-B. To date, FERC has not acted upon either submittal. On
January 16, 1998, WE submitted revised Standards of Conduct for functional
unbundling as directed by the FERC order addressing an earlier WE filing of
such Standards of Conduct. The FERC has not yet acted on WE's latest filing.
Order Nos. 888 and 889 have been appealed by many parties to the U.S. Court of
Appeals for the Second Circuit.
WE has long advocated open access to electric transmission facilities as a
necessary step in the competitive restructuring of the electric utility
industry. WE does not believe that the FERC rulings or judicial review of
these orders will have a detrimental effect on its liquidity, financial
position or results of operations.
WHOLESALE COMPETITION: Wholesale sales of electric energy accounted for
4.8%, 5.0% and 5.6% of WE's total electric operating revenues in 1997, 1996
and 1995, respectively. WE attributes the decrease over this three year
period in part to the increasingly competitive market for electric wholesale
customers, to renegotiated power sales contracts with municipal and rural
electric wholesale customers in 1995 and 1996, and to the unbundling of
transmission services for some customers. The renegotiated contracts
contained discounts from previous rates charged to these customers. In
addition, certain customers have chosen to obtain their power supplies from
other suppliers.
One wholesale customer, with a partial requirements demand of 9 MW in 1997,
will cease being WE's customer effective in May 1998 but will continue to
receive transmission service until new transmission lines are constructed to
connect the customer with its new supplier. A contract with a second 105 MW
wholesale customer during 1997 includes minimum takes of 75 MW as of May 1998
and 90 MW, 60 MW and 30 MW in each subsequent contract year. A third
wholesale customer with a 50 MW demand may become a partial requirements
customer beginning in October 2000. WE expects to continue to provide
transmission service to these customers.
PSCW NATURAL GAS UTILITY INDUSTRY INVESTIGATION: The PSCW continued a
generic investigation of the natural gas industry in the State of Wisconsin
and addressed the extent to which traditional regulation should be replaced
with a different approach. On July 1, 1997, WE filed a modified dollar for
dollar gas cost recovery mechanism ("GCRM") in accordance with a November 1996
PSCW order. Purchased gas adjustment mechanisms have been evaluated by the
PSCW as a part of the PSCW's generic investigation. The GCRM will include
after the fact prudence reviews by the PSCW. WE will be able to assess its
level of gas price risk once the PSCW approves the GCRM. The matter is
pending with anticipated implementation in the fourth quarter of 1998. WE
does not expect that a major portion of gas costs that are currently passed
through to customers will be subject to price risk under this GCRM.
The PSCW has also issued Standards of Conduct applicable to opportunity sales.
Opportunity sales are described as the sales of underutilized capacity and
supply entitlements that become periodically available because of the variable
daily and seasonal needs of customers. These Standards of Conduct are
intended to ensure that all interested market participants have an opportunity
to purchase released capacity and supply and that the releasing utility
receives the highest price for the sale, given the specific circumstances.
Additional restrictions become applicable if a gas utility has a marketing
affiliate.
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 upon the sales projections utilized by
those commissions in setting rates. The PSCW regulates Wisconsin retail
electric, steam and natural gas rates in the State of Wisconsin, while the
FERC regulates wholesale power and electric transmission and gas
transportation service rates. The MPSC regulates retail electric rates in the
State of 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. WE did not seek an increase in
rates for 1995. Discussion of rate changes for the 1998, 1997 and 1996 test
years follow.
==============================================================================
Revenue Percent
Increase Change in Effective
Service (Decrease) Rates Date
- ------------------------- ------------ --------- ---------
(Millions) (%)
Retail electric, WI * $ 134.9 10.7 01/01/98
Retail gas * 18.5 5.5 01/01/98
Steam heating * 0.8 6.3 01/01/98
Retail electric, WI ** 27.2 2.2 05/23/97
Retail electric, WI (7.4) (0.6) 02/18/97
Retail gas (6.4) (2.0) 02/18/97
Steam heating 0.1 .5 02/18/97
Retail electric, WI (33.4) (2.8) 01/01/96
Retail electric, MI (1.1) (3.3) 01/01/96
Retail gas (8.3) (2.6) 01/01/96
Steam heating (0.8) (5.1) 01/01/96
==============================================================================
* Interim PSCW order subject to refund.
** Fuel surcharge which ends April 30, 1998 or when an order is issued for the
1998 test year, whichever comes first. Reflecting the combined effect of
two PSCW orders, this surcharge was initially ordered on May 23, 1997 and
was amended by the PSCW on December 23, 1997.
1998 TEST YEAR: On September 22, 1997, WE filed testimony and exhibits
with the PSCW related to the 1998 test year showing a $220.4 million revenue
deficiency for its Wisconsin utility operations based upon a regulatory return
on equity of 12.5%, up from 11.8% authorized since February 13, 1997. The
dollar impacts and percentage increases on an annualized basis requested for
Wisconsin retail services were $192.7 million or 15.3% for electric
operations, $26.5 million or 7.9% for gas operations and $1.2 million or 9.0%
for City of Milwaukee steam operations. WE asked the PSCW for an interim
increase in the amount of $200 million, effective January 1, 1998 and subject
to refund, in the event that the PSCW was unable to issue a final order by
that date.
On December 23, 1997, the PSCW issued an order authorizing interim rate
increases, effective January 1, 1998 and subject to refund pending a final
order, in the amount of $154 million. The dollar impacts and percentage
increases of the interim order on an annualized basis for Wisconsin retail
services are $134.9 million or 10.7% for electric operations, $18.5 million or
5.5% for gas operations and $827,000 or 6.3% for the City of Milwaukee steam
operations. The PSCW held additional public hearings on WE's September 22,
1997 filing during the first quarter of 1998. WE expects the PSCW to issue a
final order during the second quarter of 1998.
The primary factors influencing the requested rate increases for 1998 include:
* Increased costs related to the construction, operation and maintenance of
generation, transmission and distribution facilities to assure reliability
of electric service.
* Increased costs associated with the need to implement technological
solutions to make computer systems compatible with the year 2000 and to
meet customer expectations.
* Increased payroll and benefits due to (1) additional personnel to fill
vacant positions that occurred while WEC and NSP were pursuing the Primergy
merger and (2) increased staff to support key areas such as nuclear
operations, customer service and information services.
* Increased fuel and purchased power costs.
* Increased cost of capital.
See "Year 2000 Computer Software and Hardware Issues" below for further
information concerning the estimated costs to examine and modify existing
software application and operational programs and hardware that is date
sensitive and may not be Year 2000 compliant.
WE expects to add approximately 640 additional employees during 1998 compared
to 4,666 total employees at year-end 1997. Approximately half of these new
employees will replace contract employees working at WE during 1997, including
210 from Upper Peninsula Power Company ("UPPCo"), an unaffiliated investor
owned utility, who operated Presque Isle Power Plant under contract since WE
acquired the plant from UPPCo in 1987.
1997 TEST YEAR: In an order dated February 13, 1997, the PSCW directed WE
to implement rate decreases for Wisconsin retail electric and gas customers of
$7.4 million or 0.6% and $6.4 million or 2.0%, respectively, on an annualized
basis, and a steam rate increase of $0.1 million or 0.5% on an annualized
basis. The order was effective February 18, 1997 and was based upon a
regulatory return on common equity of 11.8%. The 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.
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 $33.4 million or 2.8%, $8.3 million or 2.6% and
$0.8 million or 5.1%, respectively, on an annualized basis effective
January 1, 1996. Also effective January 1, 1996, the MPSC authorized WE to
implement a rate decrease for Michigan non-mine retail electric customers of
$1.1 million or 3.3% on an annualized basis. The Mines are separately
regulated by the MPSC.
FUEL COST ADJUSTMENT PROCEDURE: 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 the
authorized annual range of 3%.
Extended outages at Point Beach, an extended maintenance outage at Oak Creek
that was concluded in June 1997, delayed commercial operation of LS Power's
cogeneration facility, and higher than projected costs per Mwh of power
purchases due to regional generation outages resulted in increased fuel and
purchased power costs at WE during 1997. WE estimates that such costs were
approximately $116.5 million higher than those included in 1997 base electric
rates in all jurisdictions.
On December 23, 1997, the PSCW issued a combined final order on two 1997 WE
filings under Wisconsin's fuel cost adjustment procedure, authorizing WE to
recover $27.2 million of additional 1997 fuel and purchased power costs from
Wisconsin retail electric customers during the 1997-1998 biennial period. WE
estimates that of the $116.5 million of additional 1997 fuel and purchased
power costs, it will recover a total of $28.6 million in all jurisdictions,
leaving $87.9 million unrecovered.
In December 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.
NUCLEAR OPERATION AND MAINTENANCE COST DEFERRAL: See "Note F - Nuclear
Operations" in the Notes to Financial Statements for information regarding
approval by the PSCW during 1997 for WE to defer certain excess non-fuel
nuclear operation and maintenance costs. The PSCW has not yet decided how the
deferred costs will be treated for rate making purposes.
PURCHASED GAS ADJUSTMENT MECHANISM: 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. See
"Industry Restructuring and Competition" above for information concerning a
PSCW order changing the purchased gas adjustment mechanism in 1998.
YEAR 2000 COMPUTER SOFTWARE AND HARDWARE ISSUES
Like many other companies, the Company expects to incur significant costs to
examine and modify existing software application and operational programs as
well as hardware that is date sensitive and may not be Year 2000 compliant.
These programs and hardware use two-character digits such as '00' to define
the applicable year rather than four-character digits such as '2000'. As a
result, the programs and systems may not properly recognize calendar dates
beginning in the year 2000, and the computers may either process data
incorrectly or shut down altogether. During 1997, WE developed a plan,
currently estimated to cost a total of approximately $30 million during 1998
and 1999, to address its Year 2000 compliance issues. If not addressed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company. In its 1998 Test Year data filed with the PSCW, WE
has requested recovery in rates in the Wisconsin jurisdiction during the 1998-
1999 biennial period of approximately $13 million per year for Year 2000
compliance examination and modification costs attributable to the Wisconsin
retail jurisdiction. WEC is still evaluating its non-utility subsidiaries for
Year 2000 compliance issues and is currently unable to quantify related costs.
ENVIRONMENTAL MATTERS
CLEAN AIR ACT: The 1990 Amendments to the Clean Air Act mandate
significant nation-wide reductions in sulphur dioxide ("SO2") and nitrogen
oxide ("NOx") emissions to address acid rain and ground level ozone control
requirements.
WE has completed the installation of continuous emission monitors at all of
its facilities and installed low NOx burners on boilers at Oak Creek Power
Plant Units 7 and 8 and at Valley Power Plant. These actions, along with the
burning of low sulfur coal meet the requirements that became effective
January 1, 1995.
WE elected to voluntarily bring the Valley and Port Washington Power Plants
under jurisdiction of the NOx requirements of the Clean Air Act amendments of
1990, five years earlier than mandated. This was possible because these units
already meet the current NOx emissions standards.
WE projects a surplus of SO2 emission allowances during Phase I and a small
shortfall during Phase II, which begins in the year 2000. WE has received
additional allowances 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.
Combustion tuning for NOx reductions at various power plants will be required
to meet the second phase of reduction requirements that become effective
January 1, 2000. Costs for combustion tuning work are expected to be minimal.
NATIONAL AMBIENT AIR QUALITY STANDARDS: On July 18, 1997, the United
States Environmental Protection Agency ("EPA") issued final regulations
significantly tightening the National Ambient Air Quality Standards ("NAAQS")
for ozone and particulate matter. Although specific emission control
requirements are still in the process of development, WE believes that the
revised standards may require significant reductions in SO2 and NOx emissions
from coal-fired generating facilities. WE expects that compliance with the
ozone attainment standards will be implemented in stages from the year 2004
through the year 2012 and that compliance with the particulate matter
attainment standards will be implemented in stages beginning after the year
2010 and extending into the year 2017. WE is currently unable to determine
the impact of the revised air quality standards on its future liquidity,
financial condition or results of operation.
In November 1997, the EPA proposed strict uniform NOx emission reductions by
the year 2002 for the State of Wisconsin and 21 other eastern and midwestern
states as part of a regional effort to reduce the amount of ozone forming
chemicals that cross state lines. The EPA proposed NOx emission reductions of
85% below 1990 levels. WE estimates that it would cost a total of
$250 million to $500 million or $30 to $50 million per year beginning as early
as the year 2000 to comply with the EPA's ozone transport proposal. In
February 1998, WE joined the Alliance for Constructive Air Policy ("ACAP")
which is developing a cost effective, equitable alternative to the EPA's
proposal for reducing ozone pollution in key regions of the country. WE
currently expects ACAP and other supporters of an alternative to submit a
proposal to the EPA by the summer of 1998 that includes an initial guaranteed
reduction in NOx emissions by the year 2004 with further reductions required
no later than the year 2007 at levels based upon additional modeling and
analysis. WE expects that total costs under ACAP's anticipated proposal will
be significantly less than costs to comply with the EPA's ozone transport
proposal. WE believes that compliance with the NOx emission reductions
included in the EPA's November 1997 ozone transport proposal may mitigate
costs to comply with the EPA's July 1997 NAAQS.
MANUFACTURED GAS PLANT SITES: WE is reviewing and addressing environmental
conditions at a number of former manufactured gas plant sites. See "Note M -
Commitments and Contingencies" in the Notes to Financial Statements for
additional information.
ASH LANDFILL SITES: WE aggressively seeks environmentally acceptable,
beneficial uses for 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.
LS POWER GENERATION FACILITY
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with an
unaffiliated independent power producer, LS Power. The contract, for 236
megawatts of firm capacity from LS Power's gas-fired cogeneration facility
located in Whitewater, Wisconsin, includes no minimum energy purchase
requirements. WE treats this power purchase contract as a capital lease. See
"Note H - Long-Term Debt" in the Notes to Financial Statements for additional
information about WE's long-term power purchase agreement with LS Power. The
LS Power facility is a gas transport customer in WE's service territory.
COAL TRANSPORTATION MATTERS
During 1997, coal deliveries to certain WE electric generating facilities, as
well as to the electric generating facilities of many other utilities, had
been impaired by massive congestion problems on the Union Pacific Railroad
("UP"). As a result of the merger of UP with the Southern Pacific Railroad, a
backlog of coal deliveries had caused stockpiles to decline at some of WE's
power plants and forced WE to seek alternative coal delivery routes. WE's
coal inventories have now returned to acceptable levels, but UP is still
struggling to maintain deliveries. During the fall of 1997, WE completed
construction of a rail spur at Pleasant Prairie, which burns over 40% of WE's
annual coal requirements. The new rail spur, connecting to the rail line of a
UP competitor, provides WE with another means of delivery to Pleasant Prairie
and significantly reduces WE's risk of future impaired coal delivery due to
problems at UP.
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 2.2% over the five-year period ending
December 31, 2002. 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 among
others the economy, weather and the restructuring of the electric and gas
utility industries, which may affect the actual growth in sales. See
"Cautionary Factors" below.
PROPOSED ACQUISITION OF ESELCO, INC.: See "Mergers" above in "Factors
Affecting Results of Operations" for information concerning the proposed
acquisition by WEC of ESELCO, Inc. ESELCO, Inc. is parent company of Edison
Sault, an electric utility which serves approximately 22,000 residential,
commercial and industrial customers located in Michigan's eastern Upper
Peninsula.
NEW GAS SERVICE PROPOSAL: In July 1997, the PSCW approved WE's application
to expand natural gas service to more than 4,500 potential customers in
northeastern Wisconsin. The project will involve the installation of more
than 350 miles of new gas main. Approval of a portion of the project by the
FERC is pending. WE expects to connect the first applicable customers in
1998. The cost of this project is included in anticipated construction
expenditures shown below under "Capital Requirements 1998-2002" in "Liquidity
and Capital Resources."
EFFECTS OF WEATHER
By the nature of its utility business segments, WEC's and WE's earnings are
sensitive to weather variations from period to period. Variations in winter
weather affect heating load for both the gas and electric utility. Variations
in summer weather affect cooling load for the electric utility as well as
therm deliveries to gas-fired electric generating customers. The table below
summarizes weather in WE's service territory as measured by degree days for
each of the three years ended December 31, 1997.
==============================================================================
% Change % Change
1996 1995
Degree Days 1997 1996 to 1997 1995 to 1996
---------------------- ------ ------ -------- ------ --------
Heating (7,014 Normal) 7,101 7,469 (4.9%) 6,833 9.3%
Cooling (665 Normal) 407 608 (33.1%) 952 (36.1%)
==============================================================================
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.
MARKET RISKS
The Company is potentially exposed to market risk due to changes in interest
rates, the return on marketable securities and the market price of electricity
as well as to changes in fuel costs incurred to generate electricity and the
cost of gas for its gas operations. Exposure to interest rate changes relates
to WEC's and WE's long-term debt and preferred equity obligations, while
exposure to fluctuations in the return on marketable securities relates to
WE's debt and equity security investments in the Nuclear Decommissioning Trust
Fund ("Fund"). Exposure to electricity market price risk relates to forward
activities taken to manage the supply of and demand for electric energy, and
exposure to fuel and gas cost variations relates to the supply of and demand
for coal, uranium, natural gas and fuel oil. WEC and WE do not utilize
derivative financial instruments for trading or speculative purposes.
However, WISVEST Corporation recently formed Griffin Energy LLC, which began
marketing energy related services and limited trading of electricity in 1998,
and WE is currently evaluating its commodity risk management process. For
both entities, the Company is evaluating to what extent they will use
derivative financial and commodity instruments in the normal course of their
future business.
For additional information concerning risk factors, including market risks, at
WE and WEC, see "Cautionary Factors" below.
INTEREST RATE RISK: The table that follows provides information about
financial instruments that are held by the Company at December 31, 1997 and
that are sensitive to changes in interest rates. For the debt, the table
presents principal cash flows that exist by maturity date and the related
average interest rate. The average interest rate on the variable rate long-
term debt was estimated based upon a weighted average interest rate during a
recent 52 week period.
==========================================================================================================================
Expected Maturity Date Fair Value
------------------------------------------------------------- as of
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
---- ---- ---- ---- ---- ---------- ----- --------
(Millions of Dollars)
Fixed Rate Long-Term Debt
WE $61.9 $92.9 $1.9 $1.9 $1.9 $1,045.1 $1,205.6 $1,245.2
Average Interest Rate 7.2% 7.3% 7.3% 7.3% 7.3% 7.3%
WEC * $70.5 $94.6 $30.6 $18.7 $15.0 $1,070.0 $1,299.4 $1,339.0
Average Interest Rate 7.2% 7.2% 7.3% 7.3% 7.3% 7.3%
Variable Rate Long-Term Debt
WEC * and WE - - - - - $165.4 $165.4 $165.4
Average Interest Rate 3.7%
Preferred Stock Not Subject
to Mandatory Redemption
WEC * and WE - - - - - $30.4 $30.4 $17.8
Average Dividend Rate 4.0%
==========================================================================================================================
* WEC includes the holding company as well as all subsidiaries.
For additional information concerning the Company's long-term debt and
preferred stock, see "Note H -Long-Term Debt" and "Note G - Preferred Stock",
respectively, in the Notes to Financial Statements.
MARKETABLE SECURITIES RETURN RISK: At December 31, 1997, WE had $404
million of available for sale debt and equity security investments in the Fund
at fair value. For additional information concerning the Fund, see "Note F -
Nuclear Operations" in the Notes to Financial Statements.
COMMODITY PRICE RISK: In the normal course of business, WE utilizes
contracts of various durations for the forward sale and purchase of
electricity to effectively manage utilization of its available generating
capacity. Such contracts include forward contracts for wholesale sales of
generating capacity and energy during periods when WE's available power
resources are expected to exceed the requirements of its native load customers
and may also include forward contracts for the purchase of power during
periods when the anticipated market price of electric energy is below WE's
expected incremental power production cost. WE manages its fuel and gas
supply costs through a portfolio of short and long-term procurement contracts
with various suppliers. To a certain extent, the Wisconsin electric retail
fuel cost adjustment procedure may mitigate some of the risk of fuel cost
price fluctuations. Currently, the purchased gas adjustment mechanism in
Wisconsin mitigates the risk of gas cost variations. For additional
information concerning the fuel cost adjustment procedure and the purchased
gas adjustment mechanism, see "Rates and Regulatory Matters" above in "Factors
Affecting Results of Operations."
NEW ACCOUNTING PRONOUNCEMENTS
See "Note A - Summary of Significant Accounting Policies" in the Notes to
Financial Statements for information concerning new pronouncements adopted
during 1997.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("FAS 128") and Statement of Financial Accounting Standards No. 129,
Disclosure of Information about Capital Structure ("FAS 129"). FAS 128
establishes standards for computing and presenting earnings per share. FAS
129 establishes disclosure standards about an entity's capital structure. The
Company adopted both standards in 1997. Adoption did not have an effect on
the Company's liquidity, net income or financial position.
In February 1996, FASB released for comment an exposure draft of a Proposed
Statement of Financial Accounting Standards, Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets ("Proposed
FAS"). 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. During 1997, FASB began redeliberating the
Proposed FAS, but has not yet determined when or whether the proposed
statement would become effective.
This Proposed FAS would apply to decommissioning costs for 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 upon 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.
REGULATORY ACCOUNTING: WEC's principal subsidiary, 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, the Company 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 for additional information.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING ACTIVITIES
WEC invested a net total of $1.1 billion in its businesses during the three
years ended December 31, 1997 of which $943 million was at WE. Investments
during this three-year period included $1 billion for construction of or
investment in new or improved facilities or projects. During the three years
ended December 31, 1997, $829 million of construction expenditures was for
utility projects and $177 million was for non-utility projects. Additional
investments during this three-year period included $56 million for the
acquisition of nuclear fuel and $64 million for the eventual decommissioning
of Point Beach. WEC's non-utility subsidiaries received net proceeds of
$31 million during this three-year period on the disposition of various
investments as part of other investing activities.
POINT BEACH UNIT 2 STEAM GENERATORS: In October 1992, WE filed an
application with the PSCW for replacement of the Point Beach Unit 2 steam
generators, allowing for the unit's operation until the expiration of its
operating license in 2013. In an Interim Order in February 1995, the PSCW
deferred the decision on steam generator replacement but directed WE to make
suitable arrangements with the fabricator of the new steam generators to allow
the fabrication, delivery and replacement to proceed promptly if authorized by
the PSCW. In May 1996, WE received a written order from the PSCW approving
replacement of the steam generators at an estimated cost of $96 million.
Replacement of the Unit 2 steam generators was completed in January 1997.
Capital expenditures of $6.5 million, $47.6 million and $23.1 million were
made during 1997, 1996 and 1995, respectively, for replacement of the Unit 2
steam generators.
PARIS GENERATING STATION: During 1995, WE placed in service four units, or
approximately 300 megawatts of capacity, at Paris. This natural gas-fired
combustion turbine facility, located near Union Grove, Wisconsin, is designed
to meet peak demand requirements. Capital expenditures of $6 million and
$10 million were made during 1996 and 1995, respectively. Capital costs for
the Paris facility totaled approximately $102 million.
CONCORD GENERATING STATION: During 1994, WE placed in service the last two
units, or approximately 150 megawatts of capacity, at Concord. 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 were
made during 1995 for construction of this facility. Total capital costs for
the Concord facility were approximately $100 million.
MILWAUKEE COUNTY POWER PLANT: The Company's 11 MW Milwaukee County Power
Plant supplies electricity, steam and chilled water to the hospitals and other
member institutions of the Milwaukee Regional Medical Center, as well as to
other large customers located on land known as the Milwaukee County Grounds.
In December 1995, WE acquired the electric generation and distribution
facilities in the first phase of the acquisition. The capital cost for the
electric facilities was $7 million. These facilities and the new customers
associated with them were integrated into WE's current electric utility
operations. In December 1996, WEC acquired the steam and chilled water
production and distribution facilities to complete the second phase of the
purchase. Two outstanding contingencies were met prior to closing the
purchase. The PSCW approved the purchase of the steam facilities, and the
five largest customers signed steam and chilled water service agreements which
obligate them to purchase their present and future heating and cooling
requirements from WEC for a period of ten years. The capital cost for the
steam facilities was approximately $21 million. WE has integrated these
facilities and the associated customers into its steam utility operations.
The capital cost for the chilled water facilities was approximately
$19 million. A separate subsidiary of WEC operates the chilled water
facilities as a non-regulated business.
NON-UTILITY INVESTMENTS: WEC's net non-utility assets amounted to
approximately $370 million at December 31, 1997. Primary additions during
1997 included $26 million of investments in land and buildings by WISPARK
Corporation, $27 million of construction expenditures by Minergy Corp.
("Minergy") for a glass aggregate plant and $35 million of energy related
investments by WISVEST Corporation. WEC currently anticipates making
additional non-utility investments from time to time. For additional
information, see "Capital Requirements 1998-2002" below and "Note L -
Information by Segments of Business" in WEC's Notes to Financial Statements.
MINERGY GLASS AGGREGATE PLANT: Minergy, a non-utility WEC subsidiary,
plans to place into operation a $45 million facility in Neenah, Wisconsin that
would recycle paper sludge from area paper mills into two usable products:
glass aggregate and steam. The glass aggregate will be sold into existing
construction and aggregate markets and the steam will be sold to a local paper
mill. The plant will result in substantial environmental and economic
benefits to the area by providing an alternative to landfilling paper sludge.
Minergy commenced construction in July 1996, with commercial operation
scheduled for April 1998. The project is being financed during construction
through short-term borrowings. Capital expenditures of $27.1 million and
$14.6 million were made during 1997 and 1996, respectively, for this facility.
CASH PROVIDED BY OPERATING AND FINANCING ACTIVITIES
During the three years ended December 31, 1997, total cash provided by
operating activities at both WEC and WE were $1.3 billion. During this
period, internal sources of funds, after the payment of dividends, provided
71% of WEC's and 77% of WE's capital requirements.
Financing activities during the three-year period ended December 31, 1997
included the issuance of $520 million of long-term debt by WEC of which
$448 million was issued by WE. The proceeds of these new debt issues were
used to retire or refinance higher coupon debt in the amount of $366 million
at WEC and $358 million at WE and for other general corporate purposes. WEC
increased its short-term debt by $68 million and added $105 million of common
equity from the issuance of new shares through the Company's stock plans
during the three years ended December 31, 1997. No preferred stock was
issued. Dividends on WEC's common stock were $173 million, $167 million and
$160 million during 1997, 1996 and 1995, respectively. WE paid dividends to
WEC of $214 million, $168 million and $160 million during 1997, 1996 and 1995,
respectively, and received a total of $130 million in capital contributions
from WEC during this three-year period.
In October 1997, Wisconsin Michigan Investment Corporation ("WMIC"), a
non-utility subsidiary of WEC, issued $15 million of 6.40% medium-term notes
due 2001 and $12 million of 6.33% medium-term notes due 2002. In November
1997, WMIC issued $20 million of 6.22% medium-term notes due 2000. Proceeds
were added to WMIC's general funds and will be used to finance various non-
utility projects.
In December 1996, WE and WISVEST Corporation, another non-utility subsidiary
of WEC, issued promissory notes in the amount of $12.05 and $10.95 million,
respectively, due 2006. The notes were issued as part of the transaction to
acquire the steam and chilled water facilities from Milwaukee County. The
notes have been discounted to reflect the difference between the effective
interest rate of 6.36% and the stated rate of 1.93%.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. In December 1995, WE issued $100 million of unsecured One Hundred Year
6 7/8% Debentures due 2095. Proceeds of both issues 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.
See "Note A - Summary of Significant Accounting Policies" in WEC's Notes to
Financial Statements for a discussion of various limitations on the ability of
WE to transfer funds to WEC.
CAPITAL STRUCTURE
WEC's and WE's capitalization at December 31 were:
==============================================================================
WEC WE
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
Common Equity 48.6% 53.3% 48.5% 51.6%
Preferred Stock 0.8 0.8 0.9 0.9
Long-Term Debt
(including current maturities) 42.3 44.0 43.7 46.1
Short-Term Debt 8.3 1.9 6.9 1.4
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
==============================================================================
Primarily due to decreased earnings during 1997 compared to 1996 and to the
maturity in 1997 of $140 million of WE First Mortgage Bonds, the Company
increased its short-term debt during 1997 to finance the payment of dividends
and the maturity of the long-term debt. As a result, common equity as a
percent of total capitalization decreased in 1997 while short-term debt as a
percent of total capitalization increased. Long-term debt as a percent of
total capitalization was relatively unchanged between the comparative periods
primarily due to a long-term power purchase contract that was recorded as a
capital lease obligation in 1997.
Compared to the utility industry in general, the Company has historically
maintained an above average ratio of common equity to total capitalization and
low debt and preferred stock ratios. This conservative capital structure,
along with strong bond ratings, 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") and Duff
& Phelps Inc. ("D&P") and Aa2 by Moody's Investors Service ("Moody's"). In
addition, WE currently has unsecured debt ratings of AA by S&P and D&P and Aa3
by Moody's. In October 1997, Fitch Investors Service ("Fitch") lowered their
ratings on WE's approximately $900 million of outstanding first mortgage bonds
from AA+ to AA and their ratings on WE's $31 million of outstanding preferred
stock from AA to AA-. Fitch's report stated, however, that despite the
downgrade, WE's quality and competitive position remain superior to most
electric utilities.
At year-end 1997, WEC had $199.5 million of unused lines of bank credit and
approximately $19.6 million of cash and cash equivalents of which WE had
$134.3 million of unused lines of bank credit and $10.1 million of cash and
cash equivalents.
CAPITAL REQUIREMENTS 1998-2002
CONSTRUCTION EXPENDITURES: The Company's construction expenditures for the
period 1998-2002 are estimated to be $1.9 billion. Of this amount,
approximately $1.6 billion represents utility construction expenditures.
Utility construction expenditures during 1998 are estimated to be
$367 million, including recurring additions and/or improvements of generation,
transmission and distribution facilities to assure reliability of electric
service; anticipated expenditures associated with the installation of more
than 350 miles of new gas main which will expand gas service to more than
4,500 potential gas customers; as well as costs associated with technological
solutions to make computer systems Year 2000 compliant and to meet customer
expectations. For information concerning anticipated electric reliability
projects, the new gas service proposal and Year 2000 compliance issues, see
"Electric System Reliability Matters", "Electric Sales and Gas Deliveries
Outlook", and "Year 2000 Computer Software and Hardware Issues", respectively,
above in "Factors Affecting Results of Operations."
Estimated property additions for the Company's principal non-utility lines of
business are estimated to be $325 million during the period 1998-2002, with
$112 million anticipated during 1998. Principal non-utility lines of business
in which these property additions are expected include real estate investment
and development and investments in recycling technology and energy related
entities.
RETIREMENT OF LONG-TERM DEBT SECURITIES: The Company's capital
requirements for maturing long-term debt and sinking funds total $71 million
in 1998 and $230 million for the period 1998-2002. Included in the above
amounts are WE's requirements of $62 million and $161 million, respectively.
See "Note H - Long-Term Debt" in the Notes to Financial Statements for
additional information.
DECOMMISSIONING TRUST PAYMENTS: Based upon a site specific decommissioning
study completed in 1994, WE's estimated contributions to the Nuclear
Decommissioning Trust Fund for the period 1998-2002 are $192 million of which
$34 million is for 1998. Contributions to the Fund include both the annual
payments to external trust funds and the income earned on the external trust
funds. WE expects to complete a new site specific decommissioning study
during 1998, which could result in changes to future contributions to the
Fund. See "Note F - Nuclear Operations" in the Notes to Financial Statements
for additional information.
CAPITAL RESOURCES
The Company expects internal sources of funds from operations to provide
approximately 60% of the capital requirements for 1998, with internal sources
of funds from operations providing 75% of the capital requirements at WE.
Remaining cash requirements at WEC and at WE during 1998 are expected to be
met through short-term borrowings and/or the issuance of intermediate or long-
term debt. Beyond 1998, capital requirements will be met principally through
internally generated funds supplemented, when required, by debt and equity
financing. The specific form, amount and timing of securities which may be
issued have not yet been determined and will depend, to a large extent, on
market conditions and other factors.
On July 1, 1997, WEC resumed the purchase of existing shares on the open
market for the Company's stock plans. Prior to July 1, 1997, WEC had issued
1,187,050 new shares of common stock during 1997 which were purchased by
participants in the Company's stock plans with cash investments and reinvested
dividends aggregating approximately $30 million. During the fourth quarter of
1997, WE received a $100 million capital contribution from WEC.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of WEC or WE. Such statements
are based upon management's current expectations and are subject to risks and
uncertainties that could cause WEC's or WE's actual results to differ
materially from those contemplated in the statements. Readers are cautioned
not to place undue reliance on these forward-looking statements. When used in
written documents or oral presentations, the terms "anticipate", "believe",
"estimate", "expect", "objective", "plan", "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause WEC's or WE's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of WE's generating
facilities including Point Beach; unscheduled generation outages,
maintenance or repairs; unanticipated changes in fossil fuel, nuclear fuel,
purchased power or gas supply costs or availability due to higher demand,
shortages, transportation problems or other developments; nonperformance by
electric energy or natural gas suppliers under existing power purchase or
gas supply contracts; nuclear or environmental incidents; resolution of
spent nuclear fuel storage and disposal issues; electric transmission or
gas pipeline system constraints; unanticipated organizational structure or
key personnel changes; collective bargaining agreements with union
employees or work stoppages; inflation rates; or demographic and economic
factors affecting utility service territories or operating environment.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Consolidation of the industry as a result of the combination and
acquisition of utilities in the midwest, nationally and globally.
* Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their products
and services.
* Regulatory factors such as unanticipated changes in rate-setting policies
or procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system
operation and/or administration initiatives; recovery of costs of previous
investments made under traditional regulation; required approvals for new
construction; the Nuclear Regulatory Commission's evolving regulations
related to Point Beach Nuclear Plant; or the siting approval process for
new generating and transmission facilities.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and
regulations; electric and gas industry restructuring initiatives; or
changes in environmental laws and regulations.
* Certain restrictions imposed by various financing arrangements and
regulatory requirements on the ability of WE to transfer funds to WEC in
the form of cash dividends, loans or advances.
* Authoritative generally accepted accounting principle or policy changes
from such standard setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Unanticipated developments while implementing the modifications necessary
to mitigate Year 2000 compliance problems, including the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the indirect impacts of third parties with
whom the company does business and who do not mitigate their Year 2000
compliance problems, and similar uncertainties.
* Changes in social attitudes regarding the utility and power industries.
* Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; or environmental and energy regulations.
* Other business or investment considerations that may be disclosed from time
to time in WEC's or WE's SEC filings or in other publicly disseminated
written documents.
WEC and WE undertake no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events or
otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Factors Affecting Results of Operations - Market Risks" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for information concerning potential market risks to which WEC and
WE are exposed due to changes in interest rates, the return on marketable
equity securities and the market price of electricity, fuel to generate
electricity and gas to supply WE's gas operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The "Consolidated Quarterly Financial Data" in WEC's and WE's Selected
Financial Data in Item 6 is incorporated herein by reference.
INDEX TO 1997 FINANCIAL STATEMENTS
Page
WISCONSIN ENERGY CORPORATION
Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . 62
Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . 63
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . . 64
Consolidated Capitalization Statement . . . . . . . . . . . . . . . . 66
Consolidated Common Stock Equity Statement. . . . . . . . . . . . . . 67
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 68
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 84
WISCONSIN ELECTRIC POWER COMPANY
Income Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . 86
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Capitalization Statement. . . . . . . . . . . . . . . . . . . . . . . 89
Common Stock Equity Statement . . . . . . . . . . . . . . . . . . . . 90
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 91
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 105
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd)
WISCONSIN ENERGY CORPORATION
CONSOLIDATED INCOME STATEMENT
Year Ended December 31
1997 1996 1995
---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues
Electric $1,412,115 $1,393,270 $1,437,480
Gas 355,172 364,875 318,262
Steam 22,315 15,675 14,742
---------- ---------- ----------
Total Operating Revenues 1,789,602 1,773,820 1,770,484
Operating Expenses
Fuel (Note H) 311,966 295,651 303,553
Purchased power (Note H) 132,689 36,216 41,834
Cost of gas sold 233,877 234,254 188,764
Other operation expenses 407,114 391,520 395,242
Maintenance 135,096 103,046 112,400
Depreciation (Note C) 237,698 202,796 183,876
Taxes other than income taxes 73,914 77,866 74,765
Federal income tax (Note D) 40,221 105,656 119,939
State income tax (Note D) 10,558 24,976 28,405
Deferred income taxes - net (Note D) 7,937 (1,575) (2,833)
Investment tax credit - net (Note D) (927) (2,430) (4,482)
---------- ---------- ----------
Total Operating Expenses 1,590,143 1,467,976 1,441,463
Operating Income 199,459 305,844 329,021
Other Income and Deductions
Interest income 24,497 18,177 17,143
Allowance for other funds used during
construction (Note E) 3,349 3,036 3,650
Merger expenses (Note B) (31,934) - -
Miscellaneous - net (Note M) (47,507) (2,468) (6,497)
Federal income tax (Note D) 23,773 1,939 2,882
State income tax (Note D) 3,011 (642) (357)
---------- ---------- ----------
Total Other Income and Deductions (24,811) 20,042 16,821
Income Before Interest Charges
and Preferred Dividend 174,648 325,886 345,842
Interest Charges
Long-term debt 110,138 103,045 101,806
Other interest 9,552 9,032 14,002
Allowance for borrowed funds used
during construction (Note E) (6,961) (5,529) (5,203)
---------- ---------- ----------
Total Interest Charges 112,729 106,548 110,605
Preferred Dividend Requirement
of Subsidiary 1,203 1,203 1,203
---------- ---------- ----------
Net Income $ 60,716 $ 218,135 $ 234,034
========== ========== ==========
Average Number of Shares of
Common Stock Outstanding (Thousands) 112,570 110,983 109,850
========== ========== ==========
Earnings Per Share of Common Stock
(Basic and Diluted) $0.54 $1.97 $2.13
========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Operating Activities
Net income $ 60,716 $218,135 $234,034
Reconciliation to cash
Depreciation 237,698 202,796 183,876
Nuclear fuel expense - amortization 5,426 21,887 22,324
Conservation expense - amortization 22,498 22,498 21,870
Debt premium, discount & expense - amortization 7,930 9,809 12,690
Deferred income taxes - net 7,937 (1,575) (2,833)
Investment tax credit - net (927) (2,430) (4,482)
Allowance for other funds used
during construction (3,349) (3,036) (3,650)
Write-off of merger costs 30,684 - -
Write-down of equipment 30,000 - -
Change in - Accounts receivable 5,736 (1,324) (35,492)
Inventories (12,788) (30,703) 5,233
Accounts payable 159 39,921 16,713
Other current assets 8,452 (15,190) (7,652)
Other current liabilities 31,933 295 20,769
Other (39,143) 3,716 (36,508)
-------- -------- --------
Cash Provided by Operating Activities 392,962 464,799 426,892
Investing Activities
Construction expenditures (345,908) (389,194) (271,688)
Allowance for borrowed funds used
during construction (6,961) (5,529) (5,203)
Nuclear fuel (6,352) (26,053) (23,454)
Nuclear decommissioning trust (27,248) (26,309) (10,861)
Conservation investments - net 696 319 2,130
Other 24,835 15,347 (581)
-------- -------- --------
Cash Used in Investing Activities (360,938) (431,419) (309,657)
Financing Activities
Sale of - Common stock 29,586 23,180 52,353
Long-term debt 47,000 238,809 234,453
Retirement of - Preferred stock - (1) -
Long-term debt (177,725) (53,356) (134,567)
Change in short-term debt 250,688 (87,654) (95,136)
Dividends on stock - Common (172,714) (167,236) (159,688)
-------- -------- --------
Cash Used in Financing Activities (23,165) (46,258) (102,585)
-------- -------- --------
Change in Cash and Cash Equivalents $ 8,859 ($12,878) $ 14,650
======== ======== ========
Supplemental Information
Cash Paid For
Interest (net of amount capitalized) $111,383 $ 94,964 $ 99,924
Income taxes 42,859 103,916 146,979
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
ASSETS
1997 1996
---------- ----------
(Thousands of Dollars)
Utility Plant
Electric $4,991,330 $4,725,832
Gas 521,814 503,041
Steam 62,156 60,480
---------- ----------
5,575,300 5,289,353
Accumulated provision for depreciation (2,700,839) (2,441,950)
---------- ----------
2,874,461 2,847,403
Leased facilities - net (Note H) 138,687 -
Construction work in progress 81,612 135,040
Nuclear fuel - net (Note H) 90,219 75,476
---------- ----------
Net Utility Plant 3,184,979 3,057,919
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 404,240 322,085
Conservation investments (Note A) 69,510 92,705
Non-utility property - net 222,035 173,525
Other 129,572 127,908
---------- ----------
Total Other Property and Investments 825,357 716,223
Current Assets
Cash and cash equivalents 19,607 10,748
Accounts receivable, net of allowance for
doubtful accounts - $15,641 and $13,264 145,737 151,473
Accrued utility revenues 141,273 155,838
Fossil fuel (at average cost) 124,045 113,516
Materials and supplies (at average cost) 73,159 70,900
Prepayments 62,479 59,624
Other 7,017 3,759
---------- ----------
Total Current Assets 573,317 565,858
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 172,546 153,806
Deferred regulatory assets (Note A) 215,200 193,756
Other 66,285 123,276
---------- ----------
Total Deferred Charges and Other Assets 454,031 470,838
---------- ----------
Total Assets $5,037,684 $4,810,838
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
1997 1996
---------- ----------
(Thousands of Dollars)
Capitalization (See Capitalization Statement)
Common stock equity $1,862,932 $1,945,344
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,532,405 1,416,067
---------- ----------
Total Capitalization 3,425,787 3,391,861
Current Liabilities
Long-term debt due currently (Note H) 90,004 190,204
Notes payable (Note I) 319,953 69,265
Accounts payable 148,588 148,429
Payroll and vacation accrued 25,392 24,007
Taxes accrued - income and other 41,495 37,362
Interest accrued 20,334 22,828
Other 63,832 34,923
---------- ----------
Total Current Liabilities 709,598 527,018
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 525,666 511,399
Accumulated deferred investment tax credits 86,871 87,798
Deferred regulatory liabilities (Note A) 173,688 175,943
Other 116,074 116,819
---------- ----------
Total Deferred Credits and Other
Liabilities 902,299 891,959
Commitments and Contingencies (Note M)
---------- ----------
Total Capitalization and Liabilities $5,037,684 $4,810,838
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CAPITALIZATION STATEMENT
December 31
1997 1996
---------- ----------
(Thousands of Dollars)
Common Stock Equity (See Common Stock Equity Statement)
Common stock - $.01 par value; authorized 325,000,000 shares;
outstanding - 112,865,844 and 111,678,795 shares $ 1,129 $ 1,117
Other paid in capital 729,654 700,080
Retained earnings 1,132,149 1,244,147
---------- ----------
Total Common Stock Equity 1,862,932 1,945,344
Preferred Stock - Wisconsin Electric Power Company, Cumulative
Six Per Cent. Preferred Stock - $100 par value;
authorized 45,000 shares; outstanding - 44,498 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds
Series Due 1997 1996 Series Due 1997 1996
------ --- -------- -------- ------ --- -------- --------
Wisconsin Electric Power Company
5-7/8% 1997 $ - $130,000 6.85 % 2021 9,000 9,000
6-5/8% 1997 - 10,000 7-3/4% 2023 100,000 100,000
5-1/8% 1998 60,000 60,000 7.05 % 2024 60,000 60,000
6-1/2% 1999 40,000 40,000 9-1/8% 2024 3,443 3,443
6-5/8% 1999 51,000 51,000 8-3/8% 2026 100,000 100,000
7-1/4% 2004 140,000 140,000 7.70 % 2027 200,000 200,000
7-1/8% 2016 100,000 100,000 -------- --------
863,443 1,003,443
Debentures (unsecured)
Wisconsin Electric Power Company - 6-1/8% Series due 1997 - 25,000
6-5/8% Series due 2006 200,000 200,000
9.47 % Series due 2006 6,300 7,000
8-1/4% Series due 2022 25,000 25,000
6-7/8% Series due 2095 100,000 100,000
Notes (secured)
Wisvest Corporation - Due 2006 (Note H) 9,853 10,948
Notes (unsecured)
Wisconsin Electric Power Company - Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
Due 2006 (Note H) 10,847 12,052
Wisconsin Michigan Investment Corporation - 6.83% due 1997 - 5,000
5.80% due 1998 7,000 7,000
6.49% due 2000 7,000 7,000
6.22% due 2000 20,000 -
6.40% due 2001 15,000 -
6.33% due 2002 12,000 -
6.66% due 2003 10,600 10,600
6.85% due 2005 10,000 10,000
WMF Corp. - 9.1% due 2001 2,400 2,875
Obligations under capital leases - Wisconsin Electric Power Company 182,450 42,962
Unamortized discount - net (24,834) (27,959)
Long-term debt due currently (90,004) (190,204)
---------- ----------
Total Long-Term Debt (Note H) 1,532,405 1,416,067
---------- ----------
Total Capitalization $3,425,787 $3,391,861
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED COMMON STOCK EQUITY STATEMENT
Common Stock
-------------------------
$.01 Par Other Paid Retained
Shares Value In Capital Earnings Total
------ -----------------------------------------------------
(Thousands of Dollars)
Balance - December 31, 1994 108,939,769 $1,089 $624,568 $1,118,909 $1,744,566
Net income 234,034 234,034
Common stock cash dividends
$1.455 per share (159,688) (159,688)
Sale of common stock 1,879,568 19 52,341 (7) 52,353
----------- -------- ---------- ----------- -----------
Balance - December 31, 1995 110,819,337 1,108 676,909 1,193,248 1,871,265
Net income 218,135 218,135
Common stock cash dividends
$1.5075 per share (167,236) (167,236)
Sale of common stock 859,458 9 23,171 23,180
----------- -------- ---------- ----------- -----------
Balance - December 31, 1996 111,678,795 1,117 700,080 1,244,147 1,945,344
Net income 60,716 60,716
Common stock cash dividends
$1.535 per share (172,714) (172,714)
Sale of common stock 1,187,049 12 29,574 29,586
----------- -------- ---------- ----------- -----------
Balance - December 31, 1997 112,865,844 $1,129 $729,654 $1,132,149 $1,862,932
=========== ======== ========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd)
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The consolidated financial statements include the accounts of
Wisconsin Energy Corporation ("WEC" or the "Company"); its utility subsidiary,
Wisconsin Electric Power Company ("WE"); and its non-utility subsidiaries,
Wisconsin Michigan Investment Corporation ("WMIC"); Badger Service Company;
WISPARK Corporation; WISVEST Corporation; WITECH Corporation; Minergy Corp.;
Custometrics, LLC; WEC International Inc.; and other non-utility companies.
The accounting records of the Company's utility subsidiary 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.
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 regulatory assets, incurred costs which are
expected to be recovered in future utility rates. WE also records, as
regulatory liabilities, the current recovery in utility rates of costs which
are expected to be paid in the future.
The following deferred regulatory assets and liabilities are reflected in the
Consolidated Balance Sheet.
==============================================================================
December 31
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $151,157 $154,532
Department of Energy assessments 28,575 29,022
Deferred nuclear costs 17,681 -
Other 17,787 10,202
-------- --------
Total Deferred Regulatory Assets $215,200 $193,756
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $148,292 $155,720
Tax and interest refunds 13,943 14,080
Other 11,453 6,143
-------- --------
Total Deferred Regulatory Liabilities $173,688 $175,943
======== ========
==============================================================================
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. As
of December 31, 1997 and 1996, there were $69.5 million and $92.7 million of
conservation investments, respectively, on the Consolidated Balance Sheet in
other property and investments. Through 1995, conservation investments were
charged to operating expense over a ten-year amortization period. Beginning
in 1996, the capitalized conservation balance is charged to operating expense
on a straight line basis over a five-year amortization period.
As a result of a December 1997 combined final order by the PSCW on two 1997 WE
fuel filings, WE recorded approximately $9.3 million of accrued utility
revenues in December 1997 for the anticipated 1998 recovery of 1997 fuel and
purchased power costs through a temporary fuel surcharge. The exact amount
that will be recovered through the temporary fuel surcharge depends upon the
timing of issuance of the PSCW's 1998 Rate Order.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity. During 1997, WE
recorded a $140 million non-cash capital lease transaction for a long-term
power purchase contract (see Note H).
RESTRICTIONS: Various financing arrangements and regulatory requirements
impose certain restrictions on the ability of WEC's utility subsidiary to
transfer funds to WEC in the form of cash dividends, loans or advances. Under
Wisconsin law, WE is prohibited from loaning funds, either directly or
indirectly, to WEC. The Company does not believe that such restrictions will
affect its operations.
NEW PRONOUNCEMENTS: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("FAS") No. 130, Reporting
Comprehensive Income ("FAS 130"), FAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("FAS 131") and FAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits ("FAS 132").
FAS 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. FAS 131 requires that public business enterprises report in
complete sets of financial statements and condensed financial statements of
interim periods certain information about operating segments, their products
and services, the geographic areas in which they operate, and their major
customers. FAS 132 revises the disclosure requirements for pensions and other
postretirement benefit plans. The Company will adopt all three disclosure-
only pronouncements in 1998.
B - MERGERS
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and Northern States Power Company, a Minnesota corporation ("NSP"), agreed
to terminate by mutual written consent an Agreement and Plan of Merger which
provided for a business combination of WEC and NSP to form Primergy
Corporation. The Board of Directors of WEC concluded that continuing the
proposed business combination, given the current regulatory climate, was not
in the best interest of WEC's shareholders, customers and employees. As a
result, WEC recorded a $30.7 million charge in the second quarter of 1997
($18.8 million net of tax or approximately 17 cents per share) to write off
deferred transaction costs and costs to achieve the merger.
ESELCO, INC.: On May 13, 1997, WEC and ESELCO, Inc., parent company of
Edison Sault Electric Company ("Edison Sault"), entered into an Agreement and
Plan of Reorganization setting forth the terms of the proposed acquisition of
ESELCO, Inc. by WEC ("Agreement"). All outstanding shares of ESELCO, Inc.
common stock would be converted into shares of WEC common stock based upon a
value of $44.50 for each share of ESELCO, Inc. common stock in a transaction
proposed to be structured as a tax-free reorganization and accounted for as a
pooling of interests. The total purchase price would be approximately
$71 million. The exact number of shares of WEC common stock to be issued for
each ESELCO, Inc. share would be determined by dividing $44.50 by the average
closing price of WEC common stock during the ten business days prior to
closing. On October 7, 1997, the shareholders of ESELCO, Inc. voted to
approve the proposed transaction. During 1997, WEC recorded approximately
$1.3 million of related merger expenses. WEC expects to complete the proposed
acquisition as soon as practicable during 1998 upon receipt of all appropriate
regulatory approvals and upon fulfillment of other customary conditions.
Edison Sault is an electric utility which serves approximately 22,000
residential, commercial and industrial customers in Michigan's eastern Upper
Peninsula. WEC expects to operate Edison Sault as a separate utility
subsidiary. ESELCO, Inc. is traded under the symbol EDSE on the NASDAQ
National Market.
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 4.5% in 1997, 4.1% in 1996 and 3.8% in 1995.
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.
The following table is a summary of income tax expense and a reconciliation of
total income tax expense with the tax expected at the federal statutory rate.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Current tax expense $ 23,995 $129,335 $145,819
Investment tax credit-net (927) (2,430) (4,482)
Deferred tax expense 7,937 (1,575) (2,833)
-------- -------- --------
Total Tax Expense $ 31,005 $125,330 $138,504
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $ 92,924 $344,668 $373,741
======== ======== ========
Expected tax at federal
statutory rate $ 32,523 $120,634 $130,809
State income tax net of
federal tax benefit 6,176 17,671 18,934
Investment tax credit
restored (4,487) (4,509) (4,482)
Low-income housing credits (2,831) (2,930) (2,606)
Other (no item over
5% of expected tax) (376) (5,536) (4,151)
-------- -------- --------
Total Tax Expense $ 31,005 $125,330 $138,504
======== ======== ========
==============================================================================
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("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
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 43,405 $ 41,066
Construction advances 49,202 45,906
Other 79,939 66,834
-------- --------
Total Deferred Income Tax Assets $172,546 $153,806
======== ========
Deferred Income Tax Liabilities
Property related $514,792 $484,199
Conservation investments 7,878 16,827
Other 2,996 10,373
-------- --------
Total Deferred Income Tax Liabilities $525,666 $511,399
======== ========
==============================================================================
As detailed in Note A, WE has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues.
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. Allowance for borrowed funds also
includes interest capitalized on qualifying assets of non-utility
subsidiaries. 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.
As approved by the PSCW, AFUDC was capitalized during the following periods on
50% of construction work in progress ("CWIP") at the following rates:
* February 18, 1997 - December 31, 1997 10.29%
* January 1, 1996 - February 17, 1997 10.17%
Prior to 1996, utility rates approved by the PSCW provided for a current
return on investment for selected long-term projects included in CWIP. AFUDC
was capitalized on the remaining CWIP at a rate of 10.83% in 1995.
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 megawatt
electric generating units at Point Beach Nuclear Plant ("Point Beach").
During 1997, 1996 and 1995, Point Beach provided 6%, 24% and 25% of WE's net
electric energy supply, respectively. Point Beach's Nuclear Regulatory
Commission ("NRC") licenses expire in October 2010 for Unit 1 and March 2013
for Unit 2.
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. The NRC issues trend letters to provide early notification of
declining performance and to allow a utility, under the watchfulness of the
NRC, to take early corrective actions. During 1997, WE undertook a
comprehensive effort to address NRC concerns and to take advantage of industry
best practices to further strengthen performance at the plant. On January 21,
1998, the NRC rescinded its declining trend letter and informed WE "that
corrective actions [being taken by WE] have been effective in addressing [the
NRC's] concerns and that the adverse trends in performance at Point Beach have
been arrested."
WE returned Point Beach Unit 2 to service in August 1997 following an extended
outage that began in October 1996 to replace the unit's steam generators.
Unit 2 was taken out of service from mid-November 1997 through early February
1998 and has experienced several other unplanned shutdowns in the past six
months to address various equipment issues. Point Beach Unit 1 was taken out
of service in February 1997 due to equipment problems. WE decided to keep
Unit 1 out of service to allow Point Beach staff to focus their attention on
the work necessary to bring Unit 2 back to service. During the summer of
1997, WE replaced two low pressure turbines in Unit 1 which increased its
dependable generating capability from 500 to 510 megawatts. WE returned Unit
1 to service from December 1997 through mid-February 1998, when it began a
scheduled refueling outage that is expected to be completed in May 1998.
WE requested that the PSCW allow deferred accounting treatment for certain
nuclear non-fuel operation and maintenance costs in excess of those included
in 1997 rates. In July 1997, the PSCW approved WE's request but has not yet
decided how the deferrable costs will be treated for rate making purposes.
During 1997, WE incurred $40 million of deferrable nuclear costs of which
$35 million was attributable to the Wisconsin electric retail jurisdiction.
WE has argued in its 1998 Test Year rate proceedings to recover all
$35 million over a five year period beginning in 1998. However, PSCW staff
testimony in the 1998 Wisconsin retail rate proceeding recommends recovery of
approximately $18 million of these costs over a five year period. As a
result, WE has deferred $18 million as of December 31, 1997 in Deferred
Charges and Other Assets - Deferred Regulatory Assets (See Note A).
SPENT FUEL STORAGE AND DISPOSAL: WE currently has sufficient space in the
spent fuel pool at Point Beach to complete the fall 1998 Unit 2 and spring
1999 Unit 1 refueling outages before the pool is full in its current
configuration. In response to reduced spent fuel pool storage capacity, WE
completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for the temporary dry storage of spent fuel at Point Beach.
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to the ISFSI. To date, WE has loaded two such casks. WE estimates
that with implementation of 18-month fuel cycles, the remaining 10 authorized
casks and the remaining space in the spent fuel pool in its current
configuration, it has sufficient temporary storage to complete the scheduled
fall 2003 Unit 1 refueling outage. WE is presently evaluating other dry
storage alternatives and future storage cask needs and expects to initiate
authorization requests with the PSCW as required to address such future needs.
In May 1997, the NRC sent WE a confirmatory action letter regarding concerns
about the welding process for the casks being used at Point Beach as well as
at two unaffiliated utilities. The letter prohibits the loading of additional
casks until modified welding procedures are accepted by the NRC. The NRC has
required that WE and the other users develop an ultrasonic inspection
technique for the lid welds prior to lifting the May 1997 confirmatory action
letter. WE expects to qualify this inspection technique by May 1998 and hopes
to be able to resume cask loading during the summer of 1998.
Temporary spent fuel storage alternatives are necessary at Point Beach until
the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel under a contract with WE mandated by the
Nuclear Waste Policy Act of 1982, as amended in 1987 ("Waste Act"). The
estimated cost of disposal of spent fuel, based on the contract with the DOE,
is included in nuclear fuel expense. The DOE has indicated that it does not
expect a permanent spent fuel repository to be available until at least 2010.
In July 1996, the United States Court of Appeals for the District of Colombia
circuit ruled that the DOE had an unconditional obligation under the Waste Act
to begin accepting spent fuel by January 31, 1998. However, in December 1996,
the DOE notified owners of commercial nuclear plants that it would not be able
to meet its statutory obligation. On January 31, 1998, the DOE breached its
contract with WE by failing to begin removing spent fuel from Point Beach. At
this time, WE is unable to predict when the DOE will actually begin accepting
spent nuclear fuel.
NUCLEAR INSURANCE: The Price-Anderson Act (the "Act") as amended and
extended to August 1, 2002, currently limits the total public liability for
damages arising from a nuclear incident at a nuclear power plant to
approximately $8.9 billion, of which $200 million is covered by liability
insurance purchased from private sources, and $8.7 billion is covered by an
industry retrospective loss sharing plan whereby in the event of a nuclear
incident resulting in damages exceeding the private insurance coverage, each
owner of a nuclear plant would be assessed a deferred premium of up to
$79.3 million per reactor (WE owns two) with a limit of $10 million per
reactor within one calendar year. As the owner of Point Beach Nuclear Plant,
WE would be obligated to pay its proportionate share of any such assessment.
WE participated in an industry-wide insurance program, with an aggregate limit
of $200 million which covered radiation injury claims of nuclear workers first
employed after 1987. This program was replaced with a new program (which has
no retrospective assessment provisions) at the end of 1997. However, the
discovery period for claims covered under the former program remains open
until the end of 2007 for those few former insureds who no longer need to
participate in the new, replacement program. If claims in excess of the funds
available under the old program develop, WE would be assessed up to a maximum
of approximately $3.1 million per reactor.
WE, through its membership in Nuclear Electric Insurance Limited ("NEIL"),
carries decontamination, property damage and decommissioning shortfall
insurance covering losses of up to $1.5 billion (subject to a $1 million
deductible for each loss) at WE's Point Beach Nuclear Plant. Under policies
issued by NEIL, the insured member is liable for a retrospective premium
adjustment in the event of catastrophic losses exceeding the full financial
resources of NEIL. WE's maximum retrospective liability under its policies is
$12.6 million.
WE also maintains insurance with NEIL covering business interruption and extra
expenses during any prolonged accidental outage (in excess of 23 weeks) at the
Point Beach plant, where such outage is caused by accidental property damage
from radioactive contamination or other risks of direct physical loss. WE's
maximum retrospective liability under this policy is $4.9 million.
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: 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 1997 dollars is $404 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 $1.7 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 following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund will
provide sufficient funds at the time of decommissioning. 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, 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.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 11,402 $ 15,418 $ 3,456
Earnings 15,846 10,891 7,405
-------- -------- --------
Depreciation Expense $ 27,248 $ 26,309 $ 10,861
======== ======== ========
Total costs accrued to date $288,977 $261,729
Unrealized gain 115,263 60,356
-------- --------
Accumulated Provision for Depreciation $404,240 $322,085
======== ========
==============================================================================
DECONTAMINATION AND DECOMMISSIONING FUND: 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 on utilities using
enrichment services. As of December 31, 1997, WE has on its books a remaining
estimated liability equal to the projected special assessments of
$24.1 million. A corresponding deferred regulatory asset is detailed in
Note A.
Effective in 1997, the PSCW had disallowed the recovery of D&D Fund
assessments in Wisconsin utility retail rates as a result of a decision by the
U.S. Court of Federal Claims in a case involving Yankee Atomic Electric
Company ("Yankee Atomic") in which the court ruled that the assessments were
unlawful. The PSCW had stated that it would be appropriate that WE be
reimbursed if the Yankee Atomic decision was overturned or modified. On
May 6, 1997, the U.S. Court of Appeals for the Federal Circuit issued a
decision reversing the decision of the Court of Federal Claims and upheld the
assessments. The amount of the assessments related to the PSCW's rate
jurisdiction were approximately 85% of the assessments or $2.6 million in 1997
and will remain as a deferred regulatory asset pending the outcome of the 1998
Rate Order in which WE submitted the assessments for amortization and rate
recovery. The portion of allowable costs will be amortized to nuclear fuel
expense and included in utility rates over the next 10 years.
G - PREFERRED STOCK
Preferred stock authorized but unissued is: WEC, $.01 par value, 15,000,000
shares and WE, cumulative, $25 par value, 5,000,000 shares.
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.
The fair value of WE's preferred stock was $17.8 million and $16.1 million at
December 31, 1997 and 1996, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking
fund requirements through 2002 for the aggregate amount of long-term debt
outstanding (excluding obligations under capital lease) at December 31, 1997
are shown below.
==============================================================================
(Thousands of Dollars)
1998 $ 70,520
1999 94,570
2000 30,625
2001 18,685
2002 15,000
==============================================================================
Sinking fund requirements for the years 1998 through 2002, included in the
table above, are $17.4 million. Substantially all utility plant is subject to
the 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.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. Proceeds of the issue were added to WE's general funds and were applied
to the repayment of short-term borrowings.
In December 1996, WE and WISVEST Corporation issued promissory notes in the
amount of $12.05 million and $10.95 million, respectively, due 2006. The
notes were issued as part of the transaction to acquire the steam and chilled
water facilities from Milwaukee County. The notes have been discounted to
reflect the difference between the effective interest rate of 6.36% and the
stated rate of 1.93%. This discount will be amortized over the life of the
notes using the effective interest method.
In October 1997, WMIC issued $15 million of 6.40% medium-term notes due 2001
and $12 million of 6.33% medium-term notes due 2002. In November 1997, WMIC
issued $20 million of 6.22% medium-term notes due 2000. Proceeds of the
issues were added to WMIC's general funds and will be used to finance non-
utility projects.
At December 31, 1997, the interest rate for the $67 million variable rate note
due 2016 was 3.70% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 4.20%.
OBLIGATIONS UNDER CAPITAL LEASE: 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 and amortized to fuel expense 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 management fees. 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.
Interest expense on the nuclear fuel lease, included in fuel expense, were
$868,000, $2,332,000 and $2,401,000 during 1997, 1996 and 1995, respectively.
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with an
unaffiliated independent power producer, LSP-Whitewater Limited Partnership
("LS Power"). The contract, for 236 megawatts of firm capacity from
LS Power's gas-fired cogeneration facility located in Whitewater, Wisconsin,
includes no minimum energy purchase requirements. The contract expires in
2022, at which time WE may renew for another ten years or purchase the
generating facility at fair value. WE treats this contract as a capital
lease. The leased facility and corresponding obligation under capital lease
were recorded at the estimated fair value of the plant's electric generating
facilities. The leased facility is being amortized on a straight line basis
over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September 1997,
imputed interest costs on the purchase power obligation were approximately
$6.5 million and total amortization costs of Utility Plant Under Capital
Leases was $1.6 million. The long-term power purchase contract is treated as
an operating lease for rate-making purposes. As a result, the difference
between the minimum lease payments and the sum of the imputed interest and
amortization costs are recorded as a deferred regulatory asset. Due to the
timing of the minimum lease payments, WE expects the regulatory asset to
increase to approximately $78 million by the year 2009 and the total
obligation under capital lease to increase to $160 million by the year 2005
before each begins to unwind over the remaining life of the contract. The
minimum lease payments are classified as purchased power expense on the income
statement. Interest expense on the purchase power obligation, included in
purchased power expense, was $5,614,000 during 1997.
Provided below is a summary of WE's nuclear fuel and property under capital
leases at December 31.
==============================================================================
1997 1996
-------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 95,464 $100,952
Accumulated provision for amortization (59,783) (61,408)
In process/stock 54,538 35,932
-------- --------
Total Nuclear Fuel $ 90,219 $ 75,476
======== ========
Utility Plant Under Capital Leases
Long-term purchase power commitments $140,312 $ -
Accumulated provision for amortization (1,625) -
-------- --------
Net Utility Plant - Leased Facilities $138,687 $ -
======== ========
==============================================================================
Future minimum lease payments under the capital leases and the present value
of the net minimum lease payments as of December 31, 1997 are as follows:
==============================================================================
Nuclear Purchase Power
Fuel Lease Commitment Total
------------- -------------- -------------
(Thousands of Dollars)
1998 $ 18,315 $ 23,272 $ 41,587
1999 12,655 24,123 36,778
2000 8,311 25,031 33,342
2001 2,302 25,968 28,270
2002 150 26,961 27,111
Later Years - 588,145 588,145
-------- -------- --------
Total Minimum Lease Payments 41,733 713,500 755,233
Less: Estimated Executory Costs - (142,930) (142,930)
-------- -------- --------
Net Minimum Lease Payments 41,733 570,570 612,303
Less: Interest (3,020) (426,833) (429,853)
-------- -------- --------
Present Value of
Net Minimum Lease Payments 38,713 143,737 182,450
Less: Due Currently (19,484) - (19,484)
-------- -------- --------
$ 19,229 $143,737 $162,966
======== ======== ========
==============================================================================
FAIR VALUE: The fair value of the Company's long-term debt was
$1.7 billion and $1.6 billion at December 31, 1997 and 1996, respectively.
The fair value of WE's 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 nuclear
fuel and long-term purchase power commitment capital leases are the market
value of the Trust's commercial paper and the estimated fair value of the
lessor's related electric generating facilities, respectively.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
==============================================================================
1997 1996
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $127,815 6.40% $ 34,370 6.30%
Commercial paper 192,138 5.84% 34,895 5.59%
-------- --------
$319,953 $ 69,265
======== ========
==============================================================================
Unused lines of credit for short-term borrowing amounted to $199.5 million at
December 31, 1997. In support of various informal lines of credit from banks,
WEC subsidiaries have agreed to maintain unrestricted compensating balances or
to pay commitment fees; neither the compensating balances nor the commitment
fees are significant.
J - PENSION PLANS
Prior to 1996, WE had several defined benefit noncontributory pension plans
covering all eligible employees. Pension benefits were based on years of
service and the employee's compensation. Effective January 1, 1996, plans
covering all employees were converted to a single defined benefit
noncontributory cash balance plan. Under the cash balance plan, pension
benefits are determined by a combination of annual plan wages, a credit based
upon WE's annual financial performance and individual account-based interest
credits. Lump sum payout at termination of employment or retirement is
available. Each employee's opening account balance was based on accrued
pension benefits as of December 31, 1994 and converted to a lump-sum amount
determined under the prior plan's provisions. The lump-sum amount was
credited for an additional transition credit based on age and/or years of
service. The cash balance plan includes a grandfather clause, where employees
who retire during the 15 years following January 1, 1996 receive the greater
of pension benefits calculated under their original pension plan or under the
cash balance plan.
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
pension payment obligations to current and future retirees.
==============================================================================
Pension Cost calculated per FAS 87 * 1997 1996 1995
- ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31
Cost of pension benefits earned by
employees $ 9,216 $ 9,912 $ 8,985
Interest cost on projected benefit
obligation 45,613 41,454 41,586
Actual return on plan assets (114,294) (85,141) (136,243)
Net amortization and deferral 63,347 34,600 88,493
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 3,882 $ 825 $ 2,821
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $611,796 $560,801
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 10,897 14,741
-------- --------
Total obligation $622,693 $575,542
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31
Pension assets at fair market value $761,881 $687,482
Projected benefit obligation
at present value (649,256) (601,213)
Unrecognized transition asset (17,150) (19,566)
Unrecognized prior service cost 34,344 36,027
Unrecognized net gain (123,094) (96,344)
-------- --------
Projected status of plans $ 6,725 $ 6,386
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 4.75
5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
==============================================================================
* Statement of Financial Accounting Standards No. 87, Employers' Accounting
for Pensions ("FAS 87").
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 postretirement benefit obligation.
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
service. The postretirement medical plan provides coverage to retirees and
their dependents. Retirees contribute to the medical plan. The group life
insurance benefit is reduced upon retirement.
Employees' Benefit Trusts ("Benefit Trusts") are used to fund a major portion
of postretirement benefits. The funding policy for the Benefit Trusts is to
maximize tax deductibility. The majority of the Benefit Trusts' assets are
mutual funds.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1997 1996 1995
- ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31
Cost of postretirement benefits
earned by employees $ 1,911 $ 2,436 $ 2,276
Interest cost on projected
benefit obligation 10,343 10,456 10,458
Actual return on plan assets (10,786) (5,938) (12,598)
Net amortization and deferral 10,952 6,745 13,951
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 12,420 $ 13,699 $ 14,087
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31
Accumulated Postretirement
Benefit Obligation
Retirees ($94,011) ($92,417)
Fully eligible active plan participants (11,654) (9,938)
Other active plan participants (42,516) (40,428)
-------- --------
Total obligation (148,181) (142,783)
Postretirement assets at
fair market value 59,841 49,424
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (88,340) (93,359)
Unrecognized transition obligation 68,825 78,239
Unrecognized prior service cost (938) (1,038)
Unrecognized net gain (14,458) (14,583)
-------- --------
Accrued Postretirement Benefit Obligation ($34,911) ($30,741)
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 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 7.5 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, 1997 by $9.7 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by approximately $0.9 million.
OMNIBUS STOCK INCENTIVE PLAN: A stockholder-approved Omnibus Stock
Incentive Plan ("Plan") enables the Company to provide a long-term incentive,
through equity interests in WEC, to selected officers and key employees. The
Plan provides for the granting of stock options, stock appreciation rights
("SARs"), stock awards and performance units over a period of no more than ten
years. Awards under the Plan may be paid in common stock, cash or a
combination thereof. Four million shares of common stock have been reserved
under the Plan. The exercise price of a stock option will not be less than
100% of the common stock's fair market value on the grant date and options may
not be exercised within six months of the grant date.
Effective for 1996, WEC has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation ("FAS 123"), and will continue to apply the intrinsic value
method of accounting for awards under the Plan as required by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. If
WEC had adopted the optional FAS 123 accounting method for Plan awards as of
the beginning of 1995, the effect on net income and earnings per share for
1997, 1996 and 1995 would have been immaterial.
The following is a summary of stock options issued through December 31, 1997
under the Plan.
=========================================================================================================
1997 1996 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
--------- -------- --------- -------- --------- --------
Outstanding at January 1 523,900 $28.038 335,500 $28.832 145,500 $27.061
Granted 40,000 $27.653 210,900 $26.813 190,000 $30.188
Forfeited (32,900) $28.085 (22,500) $28.400 - -
--------- --------- ---------
Outstanding at December 31 531,000 $28.006 523,900 $28.038 335,500 $28.832
========= ========= =========
=========================================================================================================
As of December 31, 1997, the 531,000 options outstanding under the Plan are
exercisable at per share prices of between $26.813 and $30.188 with a weighted
average remaining contractual life of 8.2 years. These options are
exercisable four years after the grant date with an exercise period of ten
years from the grant date.
The earliest year in which any of the options could be exercised was 1997. As
of December 31, 1997, the 51,750 exercisable options outstanding under the
Plan are exercisable at a per share price of $27.375 with a weighted average
remaining contractual life of 6.0 years.
Each stock option includes performance units based on contingent dividends for
four years from the date of grant. Payment of these dividends depends on the
achievement of certain performance goals. No SARs or stock awards have been
granted and no performance units have been earned to date.
L - INFORMATION BY SEGMENTS OF BUSINESS
WEC is a holding company with subsidiaries in utility and non-utility
businesses. 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 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 the Milwaukee area.
Principal non-utility lines of business include real estate investment and
development, venture capital investments in Wisconsin and the Upper Peninsula
of Michigan, and investments in recycling technology and energy related
entities. The following summarizes the business segments of the Company.
==============================================================================
Year ended December 31 1997 1996 1995
- ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,412,115 $1,393,270 $1,437,480
Operating income before income taxes 219,010 380,376 419,271
Depreciation 213,785 183,159 164,789
Construction expenditures 236,384 272,838 223,723
Gas Operations
Operating revenues 355,172 364,875 318,262
Operating income before income taxes 32,978 47,720 47,022
Depreciation 21,421 18,246 17,722
Construction expenditures 22,977 22,851 24,851
Steam Operations
Operating revenues 22,315 15,675 14,742
Operating income before income taxes 5,260 4,375 3,757
Depreciation 2,492 1,391 1,365
Construction expenditures 1,006 21,651 206
Consolidated
Operating revenues 1,789,602 1,773,820 1,770,484
Operating income before income taxes 257,248 432,471 470,050
Depreciation 237,698 202,796 183,876
Construction expenditures
(including non-utility) 345,908 389,194 271,688
Other Information
Non-utility Net Income*
Real estate activities $ 6,966 $ 8,820 $ 3,583
Other** (8,692) (797) (9,013)
At December 31
- --------------
Net Identifiable Assets
Electric $3,900,889 $3,646,997 $3,449,822
Gas 392,865 400,582 376,536
Steam 45,131 46,499 25,214
Non-utility
Real estate activities 211,359 200,603 175,746
Other** 154,822 89,358 55,661
---------- ---------- ----------
Total Identifiable Assets 4,705,066 4,384,039 4,082,979
Other corporate assets *** 332,618 426,799 477,756
---------- ---------- ----------
Total Consolidated Assets $5,037,684 $4,810,838 $4,560,735
========== ========== ==========
==============================================================================
* Excludes merger expenses.
** Primarily venture capital, recycling technology and energy related
activities.
*** Primarily other property and investments, materials and supplies and
deferred charges.
M - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a 220 megawatt cogeneration facility in Kimberly, Wisconsin, WE
purchased three combustion turbines, three heat recovery boilers and a steam
turbine (the "Equipment"). Since 1994, WE has continued to carry the
Equipment at a cost of approximately $66.3 million and has entertained
numerous proposals and projects for which the Equipment could be used. During
1997, WE continued to review its options for use or sale of the Equipment. In
the fourth quarter of 1997, WE entered into the final phase of negotiating an
agreement for a joint independent power project involving the Equipment.
Under the provisions of FAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed, WE refined its cash flow
projection for the Equipment based upon the latest proposal. As measured by
expected gross cash flows to be earned under this project, WE determined that
an impairment existed. As a result, WE recorded a $30.0 million impairment
charge in the fourth quarter of 1997 which is included in the Miscellaneous -
Net Other Income and Deductions line of the income statement. Based upon the
estimated discounted cash flows of the project, WE determined that a net
current investment at fair value of $36.3 million should remain on its balance
sheet for the Equipment in Other Deferred Charges and Other Assets.
MANUFACTURED GAS PLANT SITES: WE continues a voluntary program to
investigate the remediation of 11 former manufactured gas plant ("MGP") sites.
WE currently estimates that future costs to be incurred for detailed site
investigation and remediation is $25 million to $40 million over the next ten
years. Actual costs are uncertain pending the results of further site
specific investigations and the selection of site specific remediation. In
WE's February 13, 1997 rate order, the PSCW amplified its position on the
recovery of MGP remediation costs. It reiterated its position that such costs
should be deferred and amortized and recovered, without carrying costs, in
future rate cases. Since the timing and recovery of MGP remediation costs
will be affected by the biennial rate case cycle, the timing and magnitude of
remediation expenditures, and their recovery may be affected.
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 1998-2002."
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
the Stockholders of Wisconsin Energy Corporation
In our opinion, the consolidated financial statements listed under
Item 14(a)(1) and (2) appearing in Item 14 of this report present fairly, in
all material respects, the financial position of Wisconsin Energy Corporation
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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 28, 1998
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd)
WISCONSIN ELECTRIC POWER COMPANY
INCOME STATEMENT
Year Ended December 31
1997 1996 1995
---------- ---------- ----------
(Thousands of Dollars)
Operating Revenues
Electric $1,412,115 $1,393,270 $1,437,480
Gas 355,172 364,875 318,262
Steam 22,315 15,675 14,742
---------- ---------- ----------
Total Operating Revenues 1,789,602 1,773,820 1,770,484
Operating Expenses
Fuel (Note H) 311,966 295,651 303,553
Purchased power (Note H) 132,689 36,216 41,834
Cost of gas sold 233,877 234,254 188,764
Other operation expenses 407,114 391,520 395,242
Maintenance 135,096 103,046 112,400
Depreciation (Note C) 237,698 202,796 183,876
Taxes other than income taxes 73,914 77,866 74,765
Federal income tax (Note D) 40,221 105,656 119,939
State income tax (Note D) 10,558 24,976 28,405
Deferred income taxes - net (Note D) 7,937 (1,575) (2,833)
Investment tax credit - net (Note D) (927) (2,430) (4,482)
---------- ---------- ----------
Total Operating Expenses 1,590,143 1,467,976 1,441,463
Operating Income 199,459 305,844 329,021
Other Income and Deductions
Interest income 17,974 13,553 12,850
Allowance for other funds used during
construction (Note E) 3,349 3,036 3,650
Merger expenses (Note B) (21,881) - -
Miscellaneous - net (Note M) (37,531) (3,642) 5,677
Federal income tax (Note D) 19,687 (631) (535)
State income tax (Note D) 3,090 (570) (370)
---------- ---------- ----------
Total Other Income and Deductions (15,312) 11,746 21,272
Income Before Interest Charges 184,147 317,590 350,293
Interest Charges
Long-term debt 106,573 100,133 99,727
Other interest 8,730 7,821 11,960
Allowance for borrowed funds used
during construction (Note E) (1,771) (1,679) (2,062)
---------- ---------- ----------
Total Interest Charges 113,532 106,275 109,625
---------- ---------- ----------
Net Income 70,615 211,315 240,668
Preferred Stock Dividend Requirement 1,203 1,203 1,203
---------- ---------- ----------
Earnings Available for Common
Stockholder $ 69,412 $ 210,112 $ 239,465
========== ========== ==========
<FN>
Note: Earnings and dividends per share of common stock are not applicable because all of Wisconsin
Electric Power Company's common stock is owned by Wisconsin Energy Corporation.
The accompanying notes are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
Year Ended December 31
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Operating Activities
Net income $ 70,615 $211,315 $240,668
Reconciliation to cash
Depreciation 237,698 202,796 183,876
Nuclear fuel expense - amortization 5,426 21,887 22,324
Conservation expense - amortization 22,498 22,498 21,870
Debt premium, discount & expense -
amortization 7,561 9,762 12,652
Deferred income taxes - net 7,937 (1,575) (2,833)
Investment tax credit - net (927) (2,430) (4,482)
Allowance for other funds used
during construction (3,349) (3,036) (3,650)
Write-off of merger costs 21,881 - -
Write-down of equipment 30,000 - -
Change in - Accounts receivable 145 4,220 (32,639)
Inventories (12,788) (30,703) 5,233
Accounts payable (3,097) 38,779 16,650
Other current assets 10,782 (14,297) (4,068)
Other current liabilities 29,074 (2,780) 17,097
Other (52,759) 4,874 (34,608)
-------- -------- --------
Cash Provided by Operating Activities 370,697 461,310 438,090
Investing Activities
Construction expenditures (260,649) (319,832) (248,867)
Allowance for borrowed funds used
during construction (1,771) (1,679) (2,062)
Nuclear fuel (6,352) (26,053) (23,454)
Nuclear decommissioning trust (27,248) (26,309) (10,861)
Conservation investments - net 696 319 2,130
Other 21,663 (8,211) (4,511)
-------- -------- --------
Cash Used in Investing Activities (273,661) (381,765) (287,625)
Financing Activities
Retirement of preferred stock - (1) -
Sale of long-term debt - 230,094 217,453
Retirement of long-term debt (171,155) (52,921) (134,172)
Change in short-term debt 197,243 (105,304) (91,811)
Stockholder capital contribution 100,000 - 30,000
Dividends on - Common stock (213,692) (167,889) (159,576)
- Preferred stock (1,203) (1,203) (1,203)
-------- -------- --------
Cash Used in Financing Activities (88,807) (97,224) (139,309)
-------- -------- --------
Change in Cash and Cash Equivalents $ 8,229 ($17,679) $ 11,156
======== ======== ========
Supplemental information - Cash Paid For
Interest (net of amount capitalized) $112,682 $ 94,845 $ 99,352
Income taxes 45,210 107,682 149,224
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
ASSETS
1997 1996
---------- ----------
(Thousands of Dollars)
Utility Plant
Electric $4,991,330 $4,725,832
Gas 521,814 503,041
Steam 62,156 60,480
---------- ----------
5,575,300 5,289,353
Accumulated provision for depreciation (2,700,839) (2,441,950)
---------- ----------
2,874,461 2,847,403
Leased facilities - net (Note H) 138,687 -
Construction work in progress 81,612 135,040
Nuclear fuel - net (Note H) 90,219 75,476
---------- ----------
Net Utility Plant 3,184,979 3,057,919
Other Property and Investments
Nuclear decommissioning trust fund (Note F) 404,240 322,085
Conservation investments (Note A) 69,510 92,705
Other 14,713 43,219
---------- ----------
Total Other Property and Investments 488,463 458,009
Current Assets
Cash and cash equivalents 10,100 1,871
Accounts receivable, net of allowance for
doubtful accounts - $15,641 and $13,264 140,111 140,256
Accrued utility revenues 141,273 155,838
Fossil fuel (at average cost) 124,045 113,516
Materials and supplies (at average cost) 73,159 70,900
Prepayments 56,192 55,176
Other 6,035 3,268
---------- ----------
Total Current Assets 550,915 540,825
Deferred Charges and Other Assets
Accumulated deferred income taxes (Note D) 169,306 150,269
Deferred regulatory assets (Note A) 215,200 193,756
Other 58,977 106,382
---------- ----------
Total Deferred Charges and Other Assets 443,483 450,407
---------- ----------
Total Assets $4,667,840 $4,507,160
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
BALANCE SHEET
December 31
CAPITALIZATION and LIABILITIES
1997 1996
---------- ----------
(Thousands of Dollars)
Capitalization (See Capitalization Statement)
Common stock equity $1,694,508 $1,738,788
Preferred stock 30,450 30,450
Long-term debt (Note H) 1,448,558 1,371,446
---------- ----------
Total Capitalization 3,173,516 3,140,684
Current Liabilities
Long-term debt due currently (Note H) 81,389 183,635
Notes payable (Note I) 242,633 45,390
Accounts payable 142,797 145,894
Payroll and vacation accrued 25,392 24,007
Taxes accrued - income and other 38,475 33,581
Interest accrued 20,012 22,500
Other 57,871 32,588
---------- ----------
Total Current Liabilities 608,569 487,595
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Note D) 521,429 507,845
Accumulated deferred investment tax credits 86,871 87,798
Deferred regulatory liabilities (Note A) 173,688 175,943
Other 103,767 107,295
---------- ----------
Total Deferred Credits and Other
Liabilities 885,755 878,881
Commitments and Contingencies (Note M)
---------- ----------
Total Capitalization and Liabilities $4,667,840 $4,507,160
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
CAPITALIZATION STATEMENT
December 31
1997 1996
---------- ----------
(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 380,689 280,689
Retained earnings 980,926 1,125,206
---------- ----------
Total Common Stock Equity 1,694,508 1,738,788
Preferred Stock - Cumulative
Six Per Cent. Preferred Stock - $100 par value; authorized
45,000 shares; outstanding - 44,498 shares 4,450 4,450
Serial preferred stock - $100 par value; authorized 2,286,500 shares;
outstanding - 3.60% Series - 260,000 shares 26,000 26,000
---------- ----------
Total Preferred Stock (Note G) 30,450 30,450
Long-Term Debt
First mortgage bonds
Series Due
------ ---
5-7/8% 1997 - 130,000
6-5/8% 1997 - 10,000
5-1/8% 1998 60,000 60,000
6-1/2% 1999 40,000 40,000
6-5/8% 1999 51,000 51,000
7-1/4% 2004 140,000 140,000
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
---------- ----------
863,443 1,003,443
Debentures (unsecured)
6-1/8% 1997 - 25,000
6-5/8% 2006 200,000 200,000
9.47% 2006 6,300 7,000
8-1/4% 2022 25,000 25,000
6-7/8% 2095 100,000 100,000
Notes (unsecured)
Variable rate due 2006 1,000 1,000
Variable rate due 2015 17,350 17,350
Variable rate due 2016 67,000 67,000
Variable rate due 2030 80,000 80,000
Due 2006 (Note H) 10,847 12,052
Obligations under capital leases 182,450 42,962
Unamortized discount - net (23,443) (25,726)
Long-term debt due currently (81,389) (183,635)
---------- ----------
Total Long-Term Debt (Note H) 1,448,558 1,371,446
---------- ----------
Total Capitalization $3,173,516 $3,140,684
========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
COMMON STOCK EQUITY STATEMENT
Common Stock
-------------------------
$10 Par Other Paid Retained
Shares Value In Capital Earnings Total
------ -----------------------------------------------------
(Thousands of Dollars)
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
Net income 211,315 211,315
Cash dividends
Common stock (167,889) (167,889)
Preferred stock (1,203) (1,203)
---------- -------- -------- ----------- -----------
Balance - December 31, 1996 33,289,327 332,893 280,689 1,125,206 1,738,788
Net income 70,615 70,615
Cash dividends
Common stock (213,692) (213,692)
Preferred stock (1,203) (1,203)
Stockholder capital contribution 100,000 100,000
---------- -------- -------- ----------- -----------
Balance - December 31, 1997 33,289,327 $332,893 $380,689 $ 980,926 $1,694,508
========== ======== ======== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - (cont'd)
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The accounting records of Wisconsin Electric Power Company ("WE")
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.
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 regulatory assets, incurred costs which are
expected to be recovered in future utility rates. WE also records, as
regulatory liabilities, the current recovery in utility rates of costs which
are expected to be paid in the future.
The following deferred regulatory assets and liabilities are reflected in the
Balance Sheet.
==============================================================================
December 31
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Regulatory Assets
Deferred income taxes $151,157 $154,532
Department of Energy assessments 28,575 29,022
Deferred nuclear costs 17,681 -
Other 17,787 10,202
-------- --------
Total Deferred Regulatory Assets $215,200 $193,756
======== ========
Deferred Regulatory Liabilities
Deferred income taxes $148,292 $155,720
Tax and interest refunds 13,943 14,080
Other 11,453 6,143
-------- --------
Total Deferred Regulatory Liabilities $173,688 $175,943
======== ========
==============================================================================
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. As
of December 31, 1997 and 1996, there were $69.5 million and $92.7 million of
conservation investments, respectively, on the Balance Sheet in other property
and investments. Through 1995, conservation investments were charged to
operating expense over a ten-year amortization period. Beginning in 1996, the
capitalized conservation balance is charged to operating expense on a straight
line basis over a five-year amortization period.
As a result of a December 1997 combined final order by the PSCW on two 1997 WE
fuel filings, WE recorded approximately $9.3 million of accrued utility
revenues in December 1997 for the anticipated 1998 recovery of 1997 fuel and
purchased power costs through a temporary fuel surcharge. The exact amount
that will be recovered through the temporary fuel surcharge depends upon the
timing of issuance of the PSCW's 1998 Rate Order.
STATEMENT OF CASH FLOWS: Cash and cash equivalents include marketable debt
securities acquired three months or less from maturity. During 1997, WE
recorded a $140 million non-cash capital lease transaction for a long-term
power purchase contract (see Note H).
NEW PRONOUNCEMENTS: In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("FAS") No. 130, Reporting
Comprehensive Income ("FAS 130"), FAS No. 131, Disclosures about Segments of
an Enterprise and Related Information ("FAS 131") and FAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits ("FAS 132").
FAS 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. FAS 131 requires that public business enterprises report in
complete sets of financial statements and condensed financial statements of
interim periods certain information about operating segments, their products
and services, the geographic areas in which they operate, and their major
customers. FAS 132 revises the disclosure requirements for pensions and other
postretirement benefit plans. WE will adopt all three disclosure-only
pronouncements in 1998.
B - MERGERS
WISCONSIN NATURAL GAS COMPANY: On 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. WE'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.
NORTHERN STATES POWER COMPANY: On May 16, 1997, the Boards of Directors of
WEC and Northern States Power Company, a Minnesota corporation ("NSP"), agreed
to terminate by mutual written consent an Agreement and Plan of Merger which
provided for a business combination of WEC and NSP to form Primergy
Corporation ("Primergy"). Primergy would have become the parent company of WE
under the proposed business combination. The Board of Directors of WEC
concluded that continuing the proposed business combination, given the current
regulatory climate, was not in the best interest of WEC's shareholders,
customers and employees. As a result, WEC recorded a $30.7 million charge in
the second quarter of 1997 ($18.8 million net of tax or approximately 17 cents
per share) to write off deferred transaction costs and costs to achieve the
merger, of which approximately $21.9 million was attributable to WE.
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 4.5% in 1997, 4.1% in 1996 and 3.8% in 1995.
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.
The following table is a summary of income tax expense and a reconciliation of
total income tax expense with the tax expected at the federal statutory rate.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Current tax expense $ 28,002 $131,833 $149,249
Investment tax credit-net (927) (2,430) (4,482)
Deferred tax expense 7,937 (1,575) (2,833)
-------- -------- --------
Total Tax Expense $ 35,012 $127,828 $141,934
======== ======== ========
Income Before Income Taxes
and Preferred Dividend $105,627 $339,143 $382,602
======== ======== ========
Expected tax at federal
statutory rate $ 36,969 $118,700 $133,911
State income tax net of
federal tax benefit 6,125 17,624 18,943
Investment tax credit
restored (4,487) (4,509) (4,482)
Other (no item over
5% of expected tax) (3,595) (3,987) (6,438)
-------- -------- --------
Total Tax Expense $ 35,012 $127,828 $141,934
======== ======== ========
==============================================================================
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes ("FAS 109"), requires the recording of deferred assets and liabilities
to recognize the expected future tax consequences of events that have been
reflected in WE'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
1997 1996
-------- --------
(Thousands of Dollars)
Deferred Income Tax Assets
Decommissioning trust $ 43,405 $ 41,066
Construction advances 49,202 45,906
Other 76,699 63,297
-------- --------
Total Deferred Income Tax Assets $169,306 $150,269
======== ========
Deferred Income Tax Liabilities
Property related $510,621 $480,788
Conservation investments 7,878 16,827
Other 2,930 10,230
-------- --------
Total Deferred Income Tax Liabilities $521,429 $507,845
======== ========
==============================================================================
As detailed in Note A, WE has also recorded deferred regulatory assets and
liabilities representing the future expected impact of deferred taxes on
utility revenues.
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.
As approved by the PSCW, AFUDC was capitalized during the following periods on
50% of construction work in progress ("CWIP") at the following rates:
* February 18, 1997 - December 31, 1997 10.29%
* January 1, 1996 - February 17, 1997 10.17%
Prior to 1996, utility rates approved by the PSCW provided for a current
return on investment for selected long-term projects included in CWIP. AFUDC
was capitalized on the remaining CWIP at a rate of 10.83% in 1995.
F - NUCLEAR OPERATIONS
POINT BEACH NUCLEAR PLANT: WE operates two approximately 500 megawatt
electric generating units at Point Beach Nuclear Plant ("Point Beach").
During 1997, 1996 and 1995, Point Beach provided 6%, 24% and 25% of WE's net
electric energy supply, respectively. Point Beach's Nuclear Regulatory
Commission ("NRC") licenses expire in October 2010 for Unit 1 and March 2013
for Unit 2.
On January 27, 1997, the NRC notified WE of a declining trend in performance
at Point Beach. The NRC issues trend letters to provide early notification of
declining performance and to allow a utility, under the watchfulness of the
NRC, to take early corrective actions. During 1997, WE undertook a
comprehensive effort to address NRC concerns and to take advantage of industry
best practices to further strengthen performance at the plant. On January 21,
1998, the NRC rescinded its declining trend letter and informed WE "that
corrective actions [being taken by WE] have been effective in addressing [the
NRC's] concerns and that the adverse trends in performance at Point Beach have
been arrested."
WE returned Point Beach Unit 2 to service in August 1997 following an extended
outage that began in October 1996 to replace the unit's steam generators.
Unit 2 was taken out of service from mid-November 1997 through February 1998
and has experienced several other unplanned shutdowns in the past six months
to address various equipment issues. Point Beach Unit 1 was taken out of
service in February 1997 due to equipment problems. WE decided to keep Unit 1
out of service to allow Point Beach staff to focus their attention on the work
necessary to bring Unit 2 back to service. During the summer of 1997, WE
replaced two low pressure turbines in Unit 1 which increased its dependable
generating capability from 500 to 510 megawatts. WE returned Unit 1 to
service from December 1997 through mid-February 1998, when it began a
scheduled refueling outage that is expected to be completed in May 1998.
WE requested that the PSCW allow deferred accounting treatment for certain
nuclear non-fuel operation and maintenance costs in excess of those included
in 1997 rates. In July 1997, the PSCW approved WE's request but has not yet
decided how the deferrable costs will be treated for rate making purposes.
During 1997, WE incurred $40 million of deferrable nuclear costs of which
$35 million was attributable to the Wisconsin electric retail jurisdiction.
WE has argued in its 1998 Test Year rate proceedings to recover all
$35 million over a five year period beginning in 1998. However, PSCW staff
testimony in the 1998 Wisconsin retail rate proceeding recommends recovery of
approximately $18 million of these costs over a five year period. As a
result, WE has deferred $18 million as of December 31, 1997 in Deferred
Charges and Other Assets - Deferred Regulatory Assets (See Note A).
SPENT FUEL STORAGE AND DISPOSAL: WE currently has sufficient space in the
spent fuel pool at Point Beach to complete the fall 1998 Unit 2 and spring
1999 Unit 1 refueling outages before the pool is full in its current
configuration. In response to reduced spent fuel pool storage capacity, WE
completed construction of an Independent Spent Fuel Storage Installation
("ISFSI") in 1995 for the temporary dry storage of spent fuel at Point Beach.
The PSCW has authorized WE to load up to 12 casks with spent fuel and transfer
the casks to the ISFSI. To date, WE has loaded two such casks. WE estimates
that with implementation of 18-month fuel cycles, the remaining 10 authorized
casks and the remaining space in the spent fuel pool in its current
configuration, it has sufficient temporary storage to complete the scheduled
fall 2003 Unit 1 refueling outage. WE is presently evaluating other dry
storage alternatives and future storage cask needs and expects to initiate
authorization requests with the PSCW as required to address such future needs.
In May 1997, the NRC sent WE a confirmatory action letter regarding concerns
about the welding process for the casks being used at Point Beach as well as
at two unaffiliated utilities. The letter prohibits the loading of additional
casks until modified welding procedures are accepted by the NRC. The NRC has
required that WE and the other users develop an ultrasonic inspection
technique for the lid welds prior to lifting the May 1997 confirmatory action
letter. WE expects to qualify this inspection technique by May 1998 and hopes
to be able to resume cask loading during the summer of 1998.
Temporary spent fuel storage alternatives are necessary at Point Beach until
the United States Department of Energy ("DOE") takes ownership of and
permanently removes the spent fuel under a contract with WE mandated by the
Nuclear Waste Policy Act of 1982, as amended in 1987 ("Waste Act"). The
estimated cost of disposal of spent fuel, based on the contract with the DOE,
is included in nuclear fuel expense. The DOE has indicated that it does not
expect a permanent spent fuel repository to be available until at least 2010.
In July 1996, the United States Court of Appeals for the District of Colombia
circuit ruled that the DOE had an unconditional obligation under the Waste Act
to begin accepting spent fuel by January 31, 1998. However, in December 1996,
the DOE notified owners of commercial nuclear plants that it would not be able
to meet its statutory obligation. On January 31, 1998, the DOE breached its
contract with WE by failing to begin removing spent fuel from Point Beach. At
this time, WE is unable to predict when the DOE will actually begin accepting
spent nuclear fuel.
NUCLEAR INSURANCE: The Price-Anderson Act (the "Act") as amended and
extended to August 1, 2002, currently limits the total public liability for
damages arising from a nuclear incident at a nuclear power plant to
approximately $8.9 billion, of which $200 million is covered by liability
insurance purchased from private sources, and $8.7 billion is covered by an
industry retrospective loss sharing plan whereby in the event of a nuclear
incident resulting in damages exceeding the private insurance coverage, each
owner of a nuclear plant would be assessed a deferred premium of up to
$79.3 million per reactor (WE owns two) with a limit of $10 million per
reactor within one calendar year. As the owner of Point Beach Nuclear Plant,
WE would be obligated to pay its proportionate share of any such assessment.
WE participated in an industry-wide insurance program, with an aggregate limit
of $200 million which covered radiation injury claims of nuclear workers first
employed after 1987. This program was replaced with a new program (which has
no retrospective assessment provisions) at the end of 1997. However, the
discovery period for claims covered under the former program remains open
until the end of 2007 for those few former insureds who no longer need to
participate in the new, replacement program. If claims in excess of the funds
available under the old program develop, WE would be assessed up to a maximum
of approximately $3.1 million per reactor.
WE, through its membership in Nuclear Electric Insurance Limited ("NEIL"),
carries decontamination, property damage and decommissioning shortfall
insurance covering losses of up to $1.5 billion (subject to a $1 million
deductible for each loss) at WE's Point Beach Nuclear Plant. Under policies
issued by NEIL, the insured member is liable for a retrospective premium
adjustment in the event of catastrophic losses exceeding the full financial
resources of NEIL. WE's maximum retrospective liability under its policies is
$12.6 million.
WE also maintains insurance with NEIL covering business interruption and extra
expenses during any prolonged accidental outage (in excess of 23 weeks) at the
Point Beach plant, where such outage is caused by accidental property damage
from radioactive contamination or other risks of direct physical loss. WE's
maximum retrospective liability under this policy is $4.9 million.
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: 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 1997 dollars is $404 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 $1.7 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 following an external sinking fund
method. It is expected that the annual payments to the Nuclear
Decommissioning Trust Fund ("Fund") along with the earnings on the Fund will
provide sufficient funds at the time of decommissioning. 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, 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.
==============================================================================
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Decommissioning costs $ 11,402 $ 15,418 $ 3,456
Earnings 15,846 10,891 7,405
-------- -------- --------
Depreciation Expense $ 27,248 $ 26,309 $ 10,861
======== ======== ========
Total costs accrued to date $288,977 $261,729
Unrealized gain 115,263 60,356
-------- --------
Accumulated Provision for Depreciation $404,240 $322,085
======== ========
==============================================================================
DECONTAMINATION AND DECOMMISSIONING FUND: 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 on utilities using
enrichment services. As of December 31, 1997, WE has on its books a remaining
estimated liability equal to the projected special assessments of
$24.1 million. A corresponding deferred regulatory asset is detailed in
Note A.
Effective in 1997, the PSCW had disallowed the recovery of D&D Fund
assessments in Wisconsin utility retail rates as a result of a decision by the
U.S. Court of Federal Claims in a case involving Yankee Atomic Electric
Company ("Yankee Atomic") in which the court ruled that the assessments were
unlawful. The PSCW had stated that it would be appropriate that WE be
reimbursed if the Yankee Atomic decision was overturned or modified. On
May 6, 1997, the U.S. Court of Appeals for the Federal Circuit issued a
decision reversing the decision of the Court of Federal Claims and upheld the
assessments. The amount of the assessments related to the PSCW's rate
jurisdiction were approximately 85% of the assessments or $2.6 million in 1997
and will remain as a deferred regulatory asset pending the outcome of the 1998
Rate Order in which WE submitted the assessments for amortization and rate
recovery. The portion of allowable costs will be amortized to nuclear fuel
expense and included in utility rates over the next 10 years.
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 WE'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.
The fair value of WE's preferred stock was $17.8 million and $16.1 million at
December 31, 1997 and 1996, respectively.
H - LONG-TERM DEBT
FIRST MORTGAGE BONDS, DEBENTURES AND NOTES: The maturities and sinking
fund requirements through 2002 for the aggregate amount of long-term debt
outstanding (excluding obligations under capital lease) at December 31, 1997
are shown below.
==============================================================================
(Thousands of Dollars)
1998 $ 61,905
1999 92,905
2000 1,905
2001 1,905
2002 1,905
==============================================================================
Sinking fund requirements for the years 1998 through 2002, included in the
table above, are $9.5 million. Substantially all utility plant is subject to
the 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.
In November 1996, WE issued $200 million of 6 5/8% unsecured debentures due
2006. Proceeds from the issue were added to WE's general funds and were
applied to the repayment of short-term borrowings.
In December 1996, WE issued a promissory note in the amount of $12.05 million
due 2006. The note was issued as part of the transaction to acquire the steam
facilities from Milwaukee County. The note has been discounted to reflect the
difference between the effective interest rate of 6.36% and the stated rate of
1.93%. This discount will be amortized over the life of the notes using the
effective interest method.
At December 31, 1997, the interest rate for the $67 million variable rate note
due 2016 was 3.70% and the interest rate for the $98.35 million variable rate
notes due 2006-2030 was 4.20%.
OBLIGATIONS UNDER CAPITAL LEASE: 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 and amortized to fuel expense 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 management fees. 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.
Interest expenses on the nuclear fuel lease, included in fuel expense, were
$868,000, $2,332,000 and $2,401,000 during 1997, 1996 and 1995, respectively.
To meet a portion of WE's anticipated increase in future electric energy
supply needs, WE entered into a long-term power purchase contract with an
unaffiliated independent power producer, LSP-Whitewater Limited Partnership
("LS Power"). The contract, for 236 megawatts of firm capacity from
LS Power's gas-fired cogeneration facility located in Whitewater, Wisconsin,
includes no minimum energy purchase requirements. The contract expires in
2022, at which time WE may renew for another ten years or purchase the
generating facility at fair value. WE treats this contract as a capital
lease. The leased facility and corresponding obligation under capital lease
were recorded at the estimated fair value of the plant's electric generating
facilities. The leased facility is being amortized on a straight line basis
over the original 25-year term of the contract.
Beginning with commercial operation of LS Power's facility in September 1997,
imputed interest costs on the purchase power obligation were approximately
$6.5 million and total amortization costs of Utility Plant Under Capital
Leases was $1.6 million. The long-term power purchase contract is treated as
an operating lease for rate-making purposes. As a result, the difference
between the minimum lease payments and the sum of the imputed interest and
amortization costs are recorded as a deferred regulatory asset. Due to the
timing of the minimum lease payments, WE expects the regulatory asset to
increase to approximately $78 million by the year 2009 and the total
obligation under capital lease to increase to $160 million by the year 2005
before each begins to unwind over the remaining life of the contract. The
minimum lease payments are classified as purchased power expense on the income
statement. Interest expense on the purchase power obligation, included in
purchased power expense, was $5,614,000 during 1997.
Provided below is a summary of WE's nuclear fuel and property under capital
leases at December 31.
==============================================================================
1997 1996
-------- --------
(Thousands of Dollars)
Nuclear Fuel
Under capital lease $ 95,464 $100,952
Accumulated provision for amortization (59,783) (61,408)
In process/stock 54,538 35,932
-------- --------
Total Nuclear Fuel $ 90,219 $ 75,476
======== ========
Utility Plant Under Capital Leases
Long-term purchase power commitments $140,312 $ -
Accumulated provision for amortization (1,625) -
-------- --------
Net Utility Plant - Leased Facilities $138,687 $ -
======== ========
==============================================================================
Future minimum lease payments under the capital leases and the present value
of the net minimum lease payments as of December 31, 1997 are as follows:
==============================================================================
Nuclear Purchase Power
Fuel Lease Commitment Total
------------- -------------- -------------
(Thousands of Dollars)
1998 $ 18,315 $ 23,272 $ 41,587
1999 12,655 24,123 36,778
2000 8,311 25,031 33,342
2001 2,302 25,968 28,270
2002 150 26,961 27,111
Later Years - 588,145 588,145
-------- -------- --------
Total Minimum Lease Payments 41,733 713,500 755,233
Less: Estimated Executory Costs - (142,930) (142,930)
-------- -------- --------
Net Minimum Lease Payments 41,733 570,570 612,303
Less: Interest (3,020) (426,833) (429,853)
-------- -------- --------
Present Value of
Net Minimum Lease Payments 38,713 143,737 182,450
Less: Due Currently (19,484) - (19,484)
-------- -------- --------
$ 19,229 $143,737 $162,966
======== ======== ========
==============================================================================
FAIR VALUE: The fair value of WE's long-term debt was $1.6 billion at
December 31, 1997 and 1996. 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 WE's unsecured notes. The
fair value of WE's nuclear fuel and long-term power purchase commitment
capital leases are the market value of the Trust's commercial paper and the
estimated fair value of the lessor's related electric generating facilities,
respectively.
I - NOTES PAYABLE
Short-term notes payable balances and their corresponding weighted average
interest rates at December 31 consist of:
==============================================================================
1997 1996
-------------------- ----------------------
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
(Thousands of Dollars)
Banks $ 50,495 5.89% $ 10,495 5.80%
Commercial paper 192,138 5.84% 34,895 5.59%
-------- --------
$242,633 $ 45,390
======== ========
==============================================================================
Unused lines of credit for short-term borrowing amounted to $134.3 million at
December 31, 1997. In support of various informal lines of credit from banks,
WE 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
Prior to 1996, WE had several defined benefit noncontributory pension plans
covering all eligible employees. Pension benefits were based on years of
service and the employee's compensation. Effective January 1, 1996, plans
covering all employees were converted to a single defined benefit
noncontributory cash balance plan. Under the cash balance plan, pension
benefits are determined by a combination of annual plan wages, a credit based
upon WE's annual financial performance and individual account-based interest
credits. Lump sum payout at termination of employment or retirement is
available. Each employee's opening account balance was based on accrued
pension benefits as of December 31, 1994 and converted to a lump-sum amount
determined under the prior plan's provisions. The lump-sum amount was
credited for an additional transition credit based on age and/or years of
service. The cash balance plan includes a grandfather clause, where employees
who retire during the 15 years following January 1, 1996 receive the greater
of pension benefits calculated under their original pension plan or under the
cash balance plan.
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 WE, current pension trust assets and amounts which are
expected to be paid to the trusts in the future will be adequate to meet
pension payment obligations to current and future retirees.
==============================================================================
Pension Cost calculated per FAS 87* 1997 1996 1995
- ---------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Pension Cost,
Year Ended December 31
Cost of pension benefits earned by
employees $ 9,216 $ 9,912 $ 8,985
Interest cost on projected benefit
obligation 45,613 41,454 41,586
Actual return on plan assets (114,294) (85,141) (136,243)
Net amortization and deferral 63,347 34,600 88,493
-------- -------- --------
Total pension cost calculated
under FAS 87 $ 3,882 $ 825 $ 2,821
======== ======== ========
Actuarial Present Value of Accumulated
Benefit Obligation, at December 31
Vested benefits-employees' right to
receive benefit no longer contingent
upon continued employment $611,796 $560,801
Nonvested benefits-employees' right to
receive benefit contingent upon
continued employment 10,897 14,741
-------- --------
Total obligation $622,693 $575,542
======== ========
Funded Status of Plans: Pension Assets and
Obligations at December 31
Pension assets at fair market value $761,881 $687,482
Projected benefit obligation
at present value (649,256) (601,213)
Unrecognized transition asset (17,150) (19,566)
Unrecognized prior service cost 34,344 36,027
Unrecognized net gain (123,094) (96,344)
-------- --------
Projected status of plans $ 6,725 $ 6,386
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 4.75
5.0 5.0
Expected long-term rate of return
on pension assets 9.0 9.0 9.0
==============================================================================
* Statement of Financial Accounting Standards No. 87, Employers' Accounting
for Pensions ("FAS 87").
K - BENEFITS OTHER THAN PENSIONS
POSTRETIREMENT BENEFITS: Effective in 1993, WE adopted prospectively
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("FAS 106"), and elected the
20 year option for amortization of the previously unrecognized accumulated
postretirement benefit obligation.
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
service. The postretirement medical plan provides coverage to retirees and
their dependents. Retirees contribute to the medical plan. The group life
insurance benefit is reduced upon retirement.
Employees' Benefit Trusts ("Benefit Trusts") are used to fund a major portion
of postretirement benefits. The funding policy for the Benefit Trusts is to
maximize tax deductibility. The majority of the Benefit Trusts' assets are
mutual funds.
==============================================================================
Postretirement Benefit Cost
calculated per FAS 106 1997 1996 1995
- ------------------------------------------- -------- -------- --------
(Thousands of Dollars)
Components of Net Periodic Postretirement
Benefit Cost, Year Ended December 31
Cost of postretirement benefits
earned by employees $ 1,911 $ 2,436 $ 2,276
Interest cost on projected
benefit obligation 10,343 10,456 10,458
Actual return on plan assets (10,786) (5,938) (12,598)
Net amortization and deferral 10,952 6,745 13,951
-------- -------- --------
Total postretirement benefit cost
calculated under FAS 106 $ 12,420 $ 13,699 $ 14,087
======== ======== ========
Funded Status of Plans: Postretirement
Obligations and Assets at December 31
Accumulated Postretirement
Benefit Obligation
Retirees ($94,011) ($92,417)
Fully eligible active plan participants (11,654) (9,938)
Other active plan participants (42,516) (40,428)
-------- --------
Total obligation (148,181) (142,783)
Postretirement assets at
fair market value 59,841 49,424
-------- --------
Accumulated postretirement benefit
obligation in excess of plan assets (88,340) (93,359)
Unrecognized transition obligation 68,825 78,239
Unrecognized prior service cost (938) (1,038)
Unrecognized net gain (14,458) (14,583)
-------- --------
Accrued Postretirement Benefit Obligation ($34,911) ($30,741)
======== ========
Rates used for calculations (%)
Discount rate-interest rate used to
adjust for the time value of money 7.25 7.75 7.25
Assumed rate of increase in
compensation levels 4.75 to 4.75 to 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 7.5 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, 1997 by $9.7 million and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year then ended by approximately $0.9 million.
L - INFORMATION BY SEGMENTS OF BUSINESS
WE is a public utility incorporated in the State of Wisconsin. WE'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 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 the Milwaukee area. The following summarizes the business
segments of WE.
==============================================================================
Year ended December 31 1997 1996 1995
- ---------------------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operations
Operating revenues $1,412,115 $1,393,270 $1,437,480
Operating income before income taxes 219,010 380,376 419,271
Depreciation 213,785 183,159 164,789
Construction expenditures 236,384 272,838 223,723
Gas Operations
Operating revenues 355,172 364,875 318,262
Operating income before income taxes 32,978 47,720 47,022
Depreciation 21,421 18,246 17,722
Construction expenditures 22,977 22,851 24,851
Steam Operations
Operating revenues 22,315 15,675 14,742
Operating income before income taxes 5,260 4,375 3,757
Depreciation 2,492 1,391 1,365
Construction expenditures 1,006 21,651 206
Total
Operating revenues 1,789,602 1,773,820 1,770,484
Operating income before income taxes 257,248 432,471 470,050
Depreciation 237,698 202,796 183,876
Construction expenditures
(including non-utility) 260,649 319,832 248,867
At December 31
- --------------
Net Identifiable Assets
Electric $3,900,889 $3,646,997 $3,449,822
Gas 392,865 400,582 376,536
Steam 45,131 46,499 25,214
Non-utility 5,308 9,199 5,235
---------- ---------- ----------
Total Identifiable Assets 4,344,193 4,103,277 3,856,807
Other corporate assets * 323,647 403,883 462,117
---------- ---------- ----------
Total Assets $4,667,840 $4,507,160 $4,318,924
========== ========== ==========
==============================================================================
* Primarily other property and investments, materials and supplies and
deferred charges.
M - COMMITMENTS AND CONTINGENCIES
KIMBERLY COGENERATION EQUIPMENT: In conjunction with a proposal to
construct a 220 megawatt cogeneration facility in Kimberly, Wisconsin, WE
purchased three combustion turbines, three heat recovery boilers and a steam
turbine (the "Equipment"). Since 1994, WE has continued to carry the
Equipment at a cost of approximately $66.3 million and has entertained
numerous proposals and projects for which the Equipment could be used. During
1997, WE continued to review its options for use or sale of the Equipment. In
the fourth quarter of 1997, WE entered into the final phase of negotiating an
agreement for a joint independent power project involving the Equipment.
Under the provisions of FAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed, WE refined its cash flow
projection for the Equipment based upon the latest proposal. As measured by
expected gross cash flows to be earned under this project, WE determined that
an impairment existed. As a result, WE recorded a $30.0 million impairment
charge in the fourth quarter of 1997 which is included in the Miscellaneous -
Net Other Income and Deductions line of the income statement. Based upon the
estimated discounted cash flows of the project, WE determined that a net
current investment at fair value of $36.3 million should remain on its balance
sheet for the Equipment in Other Deferred Charges and Other Assets.
MANUFACTURED GAS PLANT SITES: WE continues a voluntary program to
investigate the remediation of 11 former manufactured gas plant ("MGP") sites.
WE currently estimates that future costs to be incurred for detailed site
investigation and remediation is $25 million to $40 million over the next ten
years. Actual costs are uncertain pending the results of further site
specific investigations and the selection of site specific remediation. In
WE's February 13, 1997 rate order, the PSCW amplified its position on the
recovery of MGP remediation costs. It reiterated its position that such costs
should be deferred and amortized and recovered, without carrying costs, in
future rate cases. Since the timing and recovery of MGP remediation costs
will be affected by the biennial rate case cycle, the timing and magnitude of
remediation expenditures, and their recovery may be affected.
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 1998-2002."
N - 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. WE received stockholder capital
contributions from WEC of $100 million in 1997 and $30 million in 1995.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Stockholder of Wisconsin Electric Power Company
In our opinion, the financial statements listed under Item 14(a)(1) appearing
in Item 14 of this report present fairly, in all material respects, the
financial position of Wisconsin Electric Power Company at December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, 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 28, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None for WEC nor for WE.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
WISCONSIN ENERGY CORPORATION: The information under "Proposal 1: Election
of Directors-Terms Expiring in Year 2001" and "Proposal 2: Election of
Directors - Term Expiring in Year 2000" in WEC's definitive Proxy Statement
for its Annual Meeting of Stockholders to be held May 19, 1998 (the "1998
Annual Meeting Proxy Statement") is incorporated herein by reference. Also
see "Executive Officers of the Registrant" in Part I of this report.
WISCONSIN ELECTRIC POWER COMPANY: The information under "Election of
Directors" in WE's definitive Information Statement for its Annual Meeting of
Stockholders to be held May 12, 1998 (the "1998 Annual Meeting Information
Statement") is incorporated herein by reference. Also see "Executive Officers
of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
WISCONSIN ENERGY CORPORATION: The information under "Corporate
Governance - Compensation of the Board of Directors", "Executive Officers'
Compensation" and "Retirement Plans" in the 1998 Annual Meeting Proxy
Statement is incorporated herein by reference.
WISCONSIN ELECTRIC POWER COMPANY: The information under "Compensation" and
"Retirement Plans" in the 1998 Annual Meeting Information Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
WISCONSIN ENERGY CORPORATION: The security ownership information under
"Stock Ownership of Directors, Nominees and Executive Officers" in the 1998
Annual Meeting Proxy Statement is incorporated herein by reference.
WISCONSIN ELECTRIC POWER COMPANY: All of WE's Common Stock (100% of such
class) is owned by the parent company, Wisconsin Energy Corporation, 231 West
Michigan Street, P.O. Box 2949, Milwaukee, Wisconsin 53201. The directors,
director nominees and executive officers of WE do not own any of the voting
securities of WE. The information concerning their beneficial ownership of
WEC stock set forth under "Stock Ownership of Directors, Nominees and
Executive Officers" in the 1998 Annual Meeting Information Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None for WEC nor for WE.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND REPORTS OF INDEPENDENT ACCOUNTANTS
INCLUDED IN PART II OF THIS REPORT
Wisconsin Energy Corporation ("WEC")
Consolidated Income Statement for the three years ended
December 31, 1997.
Consolidated Statement of Cash Flows for the three years ended
December 31, 1997.
Consolidated Balance Sheet at December 31, 1997 and 1996.
Consolidated Capitalization Statement at December 31, 1997 and
1996.
Consolidated Common Stock Equity Statement for the three years
ended December 31, 1997.
Notes to Financial Statements.
Report of Independent Accountants.
Wisconsin Electric Power Company ("WE")
Income Statement for the three years ended December 31, 1997.
Statement of Cash Flows for the three years ended December 31,
1997.
Balance Sheet at December 31, 1997 and 1996.
Capitalization Statement at December 31, 1997 and 1996.
Common Stock Equity Statement for the three years ended
December 31, 1997.
Notes to Financial Statements.
Report of Independent Accountants.
2. FINANCIAL STATEMENT SCHEDULES INCLUDED IN PART IV OF THIS REPORT
Wisconsin Energy Corporation
Schedule I Condensed Parent Company Financial Statements for the
three years ended December 31, 1997.
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the financial statements or notes thereto.
Wisconsin Electric Power Company
Financial statement schedules are omitted because of the absence
of conditions under which they are required or because the
required information is given in the financial statements or notes
thereto.
3. EXHIBITS AND EXHIBIT INDEX
See the Exhibit Index included as the last part of this report, which
is incorporated herein by reference. Each management contract and
compensatory plan or arrangement required to be filed as an exhibit
to this report is identified in the Exhibit Index by two asterisks
(**) following the description of the exhibit.
(b) REPORTS ON FORM 8-K
Current reports on Form 8-K dated as of December 23, 1997 were filed by
WEC and WE on January 8, 1998 to report the issuance by the PSCW of an
order authorizing interim rate increases, effective January 1, 1998.
No reports on Form 8-K were filed by WEC or WE during the quarter ended
December 31, 1997.
WISCONSIN ENERGY CORPORATION
INCOME STATEMENT
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
(Thousands of Dollars)
Miscellaneous Income $ 3,298 $ 1,576 $ 645
Nonoperating Expense 953 427 363
Merger Expense 9,968 - -
-------- -------- --------
(7,623) 1,149 282
Income Taxes (2,222) 303 122
-------- -------- --------
(5,401) 846 160
Equity in Subsidiaries' Earnings 66,117 217,289 233,874
-------- -------- --------
Net Income $ 60,716 $218,135 $234,034
======== ======== ========
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
STATEMENT OF CASH FLOWS
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
Year Ended December 31
---------------------------------
1997 1996 1995
--------- --------- ---------
(Thousands of Dollars)
Operating Activities
Net Income $ 60,716 $ 218,135 $ 234,034
Reconciliation to cash
Equity in subsidiaries' earnings (66,117) (217,289) (233,874)
Dividends from subsidiaries 213,692 167,889 159,576
Other 10,203 (3,794) (8,131)
--------- --------- ---------
Cash Provided by Operating Activities 218,494 164,941 151,605
Investing Activities
Equity investment in subsidiaries - net (133,000) (3,101) (36,641)
Change in notes receivable -
associated companies 42,000 (17,975) (6,490)
Other 75 195 (1,128)
--------- --------- ---------
Cash Used in Investing Activities (90,925) (20,881) (44,259)
Financing Activities
Sale of common stock 29,586 23,180 52,353
Dividends on common stock (172,714) (167,236) (159,688)
Change in notes payable -
associated companies 15,550 - -
--------- --------- ---------
Cash Used in Financing Activities (127,578) (144,056) (107,335)
--------- --------- ---------
Change in Cash and Cash Equivalents ($ 9) $ 4 $ 11
========= ========= =========
Cash Paid For
Interest $ - $ - $ -
Income taxes 345 (40) 246
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
BALANCE SHEET
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
December 31
----------------------------
1997 1996
---------- ----------
(Thousands of Dollars)
Assets
------
Current Assets
Cash and cash equivalents $ 9 $ 18
Accounts and notes receivable
from associated companies 641 42,613
Other 2,943 780
---------- ----------
Total Current Assets 3,593 43,411
Property and Investments
Investment in subsidiary companies 1,878,464 1,893,039
Other 681 773
---------- ----------
Total Property and Investments 1,879,145 1,893,812
Deferred Charges 9,375 19,905
---------- ----------
Total Assets $1,892,113 $1,957,128
========== ==========
Liabilities and Equity
----------------------
Current Liabilities
Accounts payable $ 324 $ 77
Accounts and notes payable
to associated companies 15,770 106
Other 536 169
---------- ----------
Total Current Liabilities 16,630 352
Deferred Credits 9,762 8,643
Stockholders' Equity
Common stock 733,573 703,987
Retained earnings 153,757 118,180
Undistributed subsidiaries' earnings 978,391 1,125,966
---------- ----------
Total Stockholders' Equity 1,865,721 1,948,133
---------- ----------
Total Liabilities and Equity $1,892,113 $1,957,128
========== ==========
See accompanying notes to condensed parent company financial statements.
(continued on next page)
WISCONSIN ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Parent Company Only)
SCHEDULE I - CONDENSED PARENT COMPANY
FINANCIAL STATEMENTS - (cont'd)
1. The condensed parent company financial statements and notes should be read
in conjunction with the consolidated financial statements and notes of WEC
appearing in this Annual Report on Form 10-K.
2. Various financing arrangements and regulatory requirements impose certain
restrictions on the ability of Wisconsin Energy Corporation's utility
subsidiary to transfer funds to Wisconsin Energy Corporation ("WEC") in
the form of cash dividends, loans, or advances. Under Wisconsin law,
Wisconsin Electric Power Company ("WE") is prohibited from loaning funds,
either directly or indirectly, to WEC. WEC does not believe that such
restrictions will affect its operations.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements and Prospectuses constituting part of the Registration Statements
listed below of Wisconsin Energy Corporation of our report dated January 28,
1998 appearing in this Form 10-K.
1. Registration Statement on Form S-3 (Registration No. 333-24277) - Stock
Plus Investment Plan.
2. Registration Statement on Form S-8 (Registration No. 33-62159) -
Represented Employee Savings Plan.
3. Registration Statement on Form S-8 (Registration No. 33-62157) -
Management Employee Savings Plan.
4. Registration Statement on Form S-8 (Registration No. 33-65225) - 1993
Omnibus Stock Incentive Plan.
/s/Price Waterhouse LLP
- -----------------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
March 30, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-51749,
33-64343 and 333-40319) of Wisconsin Electric Power Company of our report
dated January 28, 1998 appearing in this Form 10-K.
/s/Price Waterhouse LLP
- -------------------------------
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
March 30, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
By /s/R. A. Abdoo
---------------------------------------
Date March 30, 1998 R. A. Abdoo, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/R. A. Abdoo
- --------------------------------------------- March 30, 1998
R. A. Abdoo, Chairman of the Board, President
and Chief Executive Officer and Director
- - Principal Executive Officer
/s/R. R. Grigg
- --------------------------------------------- March 30, 1998
R. R. Grigg, Vice President and Director
/s/C. H. Baker
- --------------------------------------------- March 30, 1998
C. H. Baker, Treasurer and Chief Financial
Officer - Principal Financial Officer
/s/A. K. Klisurich
- --------------------------------------------- March 30, 1998
A. K. Klisurich, Controller - Principal
Accounting Officer
/s/J. F. Ahearne
- --------------------------------------------- March 30, 1998
J. F. Ahearne, Director
/s/J. F. Bergstrom
- --------------------------------------------- March 30, 1998
J. F. Bergstrom, Director
/s/R. A. Cornog
- --------------------------------------------- March 30, 1998
R. A. Cornog, Director
/s/G. B. Johnson
- --------------------------------------------- March 30, 1998
G. B. Johnson, Director
/s/F. P. Stratton, Jr.
- --------------------------------------------- March 30, 1998
F. P. Stratton, Jr., Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WISCONSIN ELECTRIC POWER COMPANY
By /s/R. A. Abdoo
--------------------------------
Date March 30, 1998 R. A. Abdoo, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/R. A. Abdoo
- --------------------------------------------- March 30, 1998
R. A. Abdoo, Chairman of the Board,
Chief Executive Officer and Director
- - Principal Executive Officer
/s/R. R. Grigg
- --------------------------------------------- March 30, 1998
R. R. Grigg, President, Chief Operating Officer
and Director
/s/D. K. Porter
- --------------------------------------------- March 30, 1998
D. K. Porter, Senior Vice President and Director
/s/C. H. Baker
- --------------------------------------------- March 30, 1998
C. H. Baker, Vice President - Finance, Chief
Financial Officer - Principal Financial Officer
/s/A. K. Klisurich
- --------------------------------------------- March 30, 1998
A. K. Klisurich, Controller - Principal
Accounting Officer
/s/J. F. Ahearne
- --------------------------------------------- March 30, 1998
J. F. Ahearne, Director
/s/J. F. Bergstrom
- --------------------------------------------- March 30, 1998
J. F. Bergstrom, Director
/s/R. A. Cornog
- --------------------------------------------- March 30, 1998
R. A. Cornog, Director
/s/G. B. Johnson
- --------------------------------------------- March 30, 1998
G. B. Johnson, Director
/s/F. P. Stratton, Jr.
- --------------------------------------------- March 30, 1998
F. P. Stratton, Jr., Director
WISCONSIN ENERGY CORPORATION ("WEC")
WISCONSIN ELECTRIC POWER COMPANY ("WE")
EXHIBIT INDEX
to
Annual Report on Form 10-K
For the Year Ended December 31, 1997
The following exhibits are filed with or incorporated by reference in this
report with respect to WEC and/or WE as denoted by an "X" in the last two
columns. (An asterisk (*) indicates incorporation by reference pursuant to
Exchange Act Rule 12b-32.)
Number Exhibit WEC WE
- ------ ---------------------------------------------------- --- --
3 Articles of Incorporation and By-laws
3.1 * Restated Articles of Incorporation of WEC, X
as amended and restated effective June 12, 1995.
(Exhibit (3)-1 to WEC's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995,
File No. 1-9057.)
3.2 Bylaws of WEC, as amended to December 17, 1997. X
3.3 * Restated Articles of Incorporation of WE, as X
amended and restated effective January 10, 1995.
(Exhibit (3)-1 to WE's Annual Report on Form
10-K for the year ended December 31, 1994,
File No. 1-1245.)
3.4 Bylaws of WE, as amended to December 17, 1997. X
4 Instruments defining the rights of security holders,
including indentures
4.1 * Reference is made to Article III of the X X
Restated Articles of Incorporation.
(Exhibits (3)-1 and (3)-3 herein.)
Mortgage, Indenture, Supplemental Indenture or
Securities Resolution:
4.2 * Mortgage and Deed of Trust of WE dated X X
October 28, 1938 (Exhibit B-1 under File
No. 2-4340.)
4.3 * Second Supplemental Indenture of WE, dated X X
June 1, 1946 (Exhibit 7-C under File
No. 2-6422.)
4.4 * Third Supplemental Indenture of WE, dated X X
March 1, 1949 (Exhibit 7-C under File
No. 2-8456.)
4.5 * Fourth Supplemental Indenture of WE, dated X X
June 1, 1950 (Exhibit 7-D under File
No. 2-8456.)
4.6 * Fifth Supplemental Indenture of WE, dated X X
May 1, 1952 (Exhibit 4-G under File
No. 2-9588.)
4.7 * Sixth Supplemental Indenture of WE, dated X X
May 1, 1954 (Exhibit 4-H under File
No. 2-10846.)
4.8 * Seventh Supplemental Indenture of WE, X X
dated April 15, 1956 (Exhibit 4-I under
File No. 2-12400.)
4.9 * Eighth Supplemental Indenture of WE, X X
dated April 1, 1958 (Exhibit 2-I under
File No. 2-13937.)
4.10 * Ninth Supplemental Indenture of WE, dated X X
November 15, 1960 (Exhibit 2-J under
File No. 2-17087.)
4.11 * Tenth Supplemental Indenture of WE, dated X X
November 1, 1966 (Exhibit 2-K under
File No. 2-25593.)
4.12 * Eleventh Supplemental Indenture of WE, X X
dated November 15, 1967 (Exhibit 2-L under
File No. 2-27504.)
4.13 * Twelfth Supplemental Indenture of WE, X X
dated May 15, 1968 (Exhibit 2-M under
File No. 2-28799.)
4.14 * Thirteenth Supplemental Indenture of WE, X X
dated May 15, 1969 (Exhibit 2-N under
File No. 2-32629.)
4.15 * Fourteenth Supplemental Indenture of WE, X X
dated November 1, 1969 (Exhibit 2-O under
File No. 2-34942.)
4.16 * Fifteenth Supplemental Indenture of WE, dated X X
July 15, 1976 (Exhibit 2-P under File
No. 2-54211.)
4.17 * Sixteenth Supplemental Indenture of WE, dated X X
January 1, 1978 (Exhibit 2-Q under File
No. 2-61220.)
4.18 * Seventeenth Supplemental Indenture of WE, X X
dated May 1, 1978 (Exhibit 2-R under File
No. 2-61220.)
4.19 * Eighteenth Supplemental Indenture of WE, X X
dated May 15, 1978 (Exhibit 2-S under
File No. 2-61220.)
4.20 * Nineteenth Supplemental Indenture of WE, X X
dated August 1, 1979 (Exhibit (a)2(a) under
File No. 1-1245, 9/30/79 WE Form 10-Q.)
4.21 * Twentieth Supplemental Indenture of WE, dated X X
November 15, 1979 (Exhibit (a)2(a) under
File No. 1-1245, 12/31/79 WE Form 10-K.)
4.22 * Twenty-First Supplemental Indenture of WE, X X
dated April 15, 1980 (Exhibit (4)-21 under
File No. 2-69488.)
4.23 * Twenty-Second Supplemental Indenture of WE, X X
dated December 1, 1980 (Exhibit (4)-1 under
File No. 1-1245, 12/31/80 WE Form 10-K.)
4.24 * Twenty-Third Supplemental Indenture of WE, X X
dated September 15, 1985 (Exhibit (4)-1 under
File No. 1-1245, 9/30/85 WE Form 10-Q.)
4.25 * Twenty-Fourth Supplemental Indenture of WE, X X
dated September 15, 1985 (Exhibit (4)-1 under
File No. 1-1245, 9/30/85 WE Form 10-Q.)
4.26 * Twenty-Fifth Supplemental Indenture of WE, X X
dated December 15, 1986 (Exhibit (4)-25
under File No. 1-1245, 12/31/86 WE Form 10-K.)
4.27 * Twenty-Sixth Supplemental Indenture of WE, X X
dated January 1, 1988 (Exhibit 4 under File
No. 1-1245, 1/26/88 Form 8-K.)
4.28 * Twenty-Seventh Supplemental Indenture of WE, X X
dated April 15, 1988 (Exhibit 4 under
File No. 1-1245, 3/31/88 Form 10-Q.)
4.29 * Twenty-Eighth Supplemental Indenture of WE, X X
dated September 1, 1989 (Exhibit 4 under
File No. 1-1245, 9/30/89 WE Form 10-Q.)
4.30 * Twenty-Ninth Supplemental Indenture of WE, X X
dated October 1, 1991 (Exhibit 4-1 under
File No. 1-1245, 12/31/91 WE Form 10-K.)
4.31 * Thirtieth Supplemental Indenture of WE, X X
dated December 1, 1991 (Exhibit 4-2 under
File No. 1-1245, 12/31/91 WE Form 10-K.)
4.32 * Thirty-First Supplemental Indenture of WE, X X
dated August 1, 1992 (Exhibit 4-1 under
File No. 1-1245, 6/30/92 WE Form 10-Q.)
4.33 * Thirty-Second Supplemental Indenture of WE, X X
dated August 1, 1992 (Exhibit 4-2 under
File No. 1-1245, 6/30/92 WE Form 10-Q.)
4.34 * Thirty-Third Supplemental Indenture of WE, X X
dated October 1, 1992 (Exhibit 4-1 under
File No. 1-1245, 9/30/92 WE Form 10-Q.)
4.35 * Thirty-Fourth Supplemental Indenture of WE, X X
dated November 1, 1992 (Exhibit 4-2 under
File No. 1-1245, 9/30/92 WE Form 10-Q.)
4.36 * Thirty-Fifth Supplemental Indenture of WE, X X
dated December 15, 1992 (Exhibit 4-1 under
File No. 1-1245, 12/31/92 WE Form 10-K.)
4.37 * Thirty-Sixth Supplemental Indenture of WE, X X
dated January 15, 1993 (Exhibit 4-2 under
File No. 1-1245, 12/31/92 WE Form 10-K.)
4.38 * Thirty-Seventh Supplemental Indenture of WE, X X
dated March 15, 1993 (Exhibit 4-3 under
File No. 1-1245, 12/31/92 WE Form 10-K.)
4.39 * Thirty-Eighth Supplemental Indenture of WE, X X
dated August 1, 1993 (Exhibit (4)-1 under
File No. 1-1245, 6/30/93 WE Form 10-Q.)
4.40 * Thirty-Ninth Supplemental Indenture of WE, X X
dated September 15, 1993 (Exhibit (4)-1
under File No. 1-1245, 9/30/93 WE Form 10-Q.)
4.41 * Fortieth Supplemental Indenture of WE, X X
dated January 1, 1996 (Exhibit (4)-1
under File No. 1-1245, 1/1/96 WE Form 8-K.)
4.42 * Indenture for Debt Securities of WE X X
(the "Indenture"), dated December 1, 1995
(Exhibit (4)-1 under File No. 1-1245,
12/31/95 WE Form 10-K.)
4.43 * Securities Resolution No. 1 of WE under X X
the Indenture, dated December 5, 1995
(Exhibit (4)-2 under File No. 1-1245,
12/31/95, WE Form 10-K.)
4.44 * Securities Resolution No. 2 of WE under X X
the Indenture, dated November 12, 1996.
(Exhibit 4.44 under File No. 1-9057,
12/31/96, WEC Form 10-K.)
All agreements and instruments with respect
to long-term debt not exceeding 10 percent of
the total assets of the Registrant and its
subsidiaries on a consolidated basis have been
omitted as permitted by related instructions.
The Registrant agrees pursuant to Item
601(b)(4) of Regulation S-K to furnish to the
Securities and Exchange Commission, upon request,
a copy of all such agreements and instruments.
10 Material Contracts
10.1 Employment arrangement between Michael B. X X
Sellman as Chief Nuclear Officer of WE,
effective March 2, 1998.** See Note.
10.2 * Supplemental Executive Retirement Plan of WEC X
(as amended and restated as of January 1, 1996).
(Exhibit (10)-1 to WEC's Annual Report on
Form 10-K for the year ended December 31,
1995, File No. 1-9057.)** See Note.
10.3 * Amended Non-Qualified Trust Agreement by X X
and between WEC and Firstar Trust Company
dated January 26, 1996, regarding trust
established to provide a source of funds
to assist in meeting of the liabilities
under various nonqualified deferred
compensation plans made between WEC or
its subsidiaries and various plan
participants. (Exhibit (10)-2 to WEC's
Annual Report on Form 10-K for the year
ended December 31, 1995, File No.
1-9057.)** See Note.
10.4 * Executive Deferred Compensation Plan of WEC, X
effective January 1, 1989, as amended and
restated as of January 1, 1996. (Exhibit
(10)-3 to WEC's Annual Report on Form 10-K
for the year ended December 31, 1995,
File No. 1-9057.)** See Note.
10.5 * Directors' Deferred Compensation Plan of X
WEC, effective January 1, 1987, and as
restated as of January 1, 1996. (Exhibit
(10)-4 to WEC's Annual Report on Form 10-K
for the year ended December 31, 1995,
File No. 1-9057.)** See Note.
10.6 * Forms of Stock Option Agreements under X
1993 Omnibus Stock Incentive Plan.
(Exhibit (10)-5 to WEC's Annual Report
on Form 10-K for the year ended
December 31, 1995, File No. 1-9057.)**
See Note.
10.7 * Supplemental Benefits Agreement between X X
WEC and Calvin H. Baker dated
November 21, 1994. (Exhibit (10)-7 to
WEC's Annual Report on Form 10-K for the
year ended December 31, 1995, File
No. 1-9057.)** See Note.
10.8 * Supplemental Benefits Agreement between WEC X X
and Richard A. Abdoo dated November 21, 1994,
and April 26, 1995 letter agreement.
(Exhibit (10)-1 to WEC's 6/30/95 10-Q.)**
See Note.
10.9 * WEC Senior Executive Severance Policy, as X X
adopted effective April 28, 1995 and amended
on July 26, 1995. (Exhibit (10)-3 to WEC's
6/30/95 10-Q.)** See Note.
10.10 * 1993 Omnibus Stock Incentive Plan adopted X
by the Board of Directors on December 15,
1993, approved by shareholders at the
Annual Meeting of Stockholders held on
May 11, 1994, offering performance-based
incentives and other equity interests in
WEC to officers and other key employees.
(Exhibit 10-1 to WEC's 1993 Form 10-K
in File No. 1-9057.)** See Note.
10.11 * Short-Term Performance Plan of WEC effective X
January 1, 1992. (Exhibit 10-3 to WEC's 1991
Form 10-K in File No. 1-9057.)** See Note.
10.12 * Service Agreement dated January 1, 1987, X X
between WE, WEC and other non-utility
affiliated companies. (Exhibit (10)-(a)
to WE's Current Report on Form 8-K dated
January 2, 1987 in File No. 1-1245.)
Note: Two asterisks (**) identify management
contracts and executive compensation plans
or arrangements required to be filed as
exhibits pursuant to Item 14(c) of Form 10-K.
Certain compensatory plans in which directors
or executive officers of WE are eligible
to participate are not filed as WE exhibits
in reliance on the exclusion in
Item 601(b)(10)(iii)(B)(6) of Regulation S-K.
21 Subsidiaries of the registrant
21.1 Subsidiaries of WEC X
23 Consents of experts and counsel
23.1 Price Waterhouse LLP - Milwaukee, WI X X
Consent of Independent Accountants
appearing in this Annual Report on
Form 10-K for the year ended December 31,
1997.
27 Financial data schedule
27.1 Financial Data Schedule for the fiscal X X
year ended December 31, 1997.
99 Additional Exhibits
99.1 Information furnished in lieu of the X
Form 11-K Annual Report for Employee
Retirement Savings Plan for the year
ended December 31, 1997. (To be filed
by amendment.)