SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934 (Amendment No. )
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WISCONSIN ELECTRIC POWER COMPANY
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Wisconsin Electric Power Company
231 W. Michigan, P.O. Box 2046, Milwaukee, WI 53201-2046
April 14, 1998
Dear Wisconsin Electric Stockholder:
Wisconsin Electric Power Company will hold its annual meeting of stockholders
at 10:30 a.m. on Tuesday, May 12, 1998 in Conference Room P140a at the Public
Service Building, 231 West Michigan Street, Milwaukee, Wisconsin. We are not
soliciting proxies for this meeting, as over 99% of the voting stock is owned,
and will be voted, by Wisconsin Electric's parent company, Wisconsin Energy
Corporation. If you wish, you may attend the meeting and vote your shares of
preferred stock; however, it will be a very short business meeting only.
On behalf of the directors and officers of Wisconsin Energy, I invite you to
attend Wisconsin Energy's annual meeting to be held Tuesday, May 19, 1998 at
10:00 a.m. The Wisconsin Energy meeting will be held at the Paper Valley
Hotel & Conference Center, 333 West College Avenue, Appleton, Wisconsin. By
attending this meeting, you will have the opportunity to meet many of the
Wisconsin Electric officers and directors. Although you cannot vote your
shares of Wisconsin Electric preferred stock at the Wisconsin Energy meeting,
you should find the activities to be worthwhile. You will be asked to
register before entering the meeting.
The annual report to stockholders accompanies this information statement. If
you have any questions about the material presented or would like a copy of
the Wisconsin Energy Corporation summary annual report, please call our toll-
free Stockholder Hotline at 1-800-558-9663.
Sincerely,
/s/Richard A. Abdoo
Chairman of the Board
and Chief Executive Officer
NOTICE
OF
ANNUAL MEETING OF STOCKHOLDERS
April 14, 1998
To the Stockholders of Wisconsin Electric Power Company:
The Annual Meeting of Stockholders of Wisconsin Electric Power Company will be
held at 10:30 a.m. on Tuesday, May 12, 1998 in Conference Room P140a at the
Public Service Building, 231 West Michigan Street, Milwaukee, Wisconsin, for
the following purposes:
1. To elect a Board of Directors to hold office until the 1999 Annual
Meeting of Stockholders; and
2. To consider any other matters which may properly come before the meeting.
Stockholders of record at the close of business on March 12, 1998 will be
entitled to vote at the meeting.
By Order of the Board of Directors
/s/Thomas H. Fehring
Thomas H. Fehring
Corporate Secretary
WISCONSIN ELECTRIC POWER COMPANY
231 West Michigan Street
P.O. Box 2046
Milwaukee, Wisconsin 53201
INFORMATION STATEMENT
and
ANNUAL REPORT TO STOCKHOLDERS
-----------------------------
INFORMATION STATEMENT
This information statement is being furnished to stockholders beginning on or
about April 14, 1998 in connection with the annual meeting of stockholders of
Wisconsin Electric Power Company ("Wisconsin Electric" or "WE") to be held on
May 12, 1998, at WE's Public Service Building, 231 West Michigan Street,
Milwaukee, Wisconsin, and all adjournments of the meeting, for the purposes
listed in the Notice of Annual Meeting of Stockholders. The WE annual report
to stockholders accompanies this information statement.
We are not asking you for a proxy and you are requested not to send us a
proxy. However, you may vote your shares of preferred stock at the meeting.
VOTING SECURITIES
As of March 12, 1998, WE had outstanding 44,498 shares of Six Per Cent.
Preferred Stock; 260,000 shares of $100 par value 3.60% Serial Preferred
Stock; and 33,289,327 shares of common stock. Each outstanding share of each
class is entitled to one vote. Stockholders of record at the close of
business on March 12, 1998 will be entitled to vote at the meeting. A
majority of the votes entitled to be cast by the shares entitled to vote shall
constitute a quorum.
All of WE's outstanding common stock, representing over 99% of its voting
securities, is owned by its parent company, Wisconsin Energy Corporation
("Wisconsin Energy" or "WEC"). A list of stockholders of record entitled to
vote at the meeting will be available for inspection by stockholders at WE's
principal business office at 231 West Michigan Street, Milwaukee, Wisconsin,
prior to and at the meeting.
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANT
Price Waterhouse LLP has acted as independent public accountant for WE or its
predecessor continuously since 1932, and was appointed by Wisconsin Energy's
board of directors to serve as independent public accountant of WEC and its
subsidiaries, including WE, during the current year. Representatives of the
firm will not attend the annual meeting, but will be present at Wisconsin
Energy's annual meeting on May 19, 1998 to make any statement they may
consider appropriate and to respond to questions which may be directed to
them.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors is responsible for overseeing the performance of WE.
In 1997, the Board held 12 meetings. The average attendance of all directors
for Board and committee meetings was 98%.
WE has an Executive Committee, Compensation Committee and a Finance Committee;
it does not have audit or nominating committees. The Executive Committee,
which did not meet in 1997, may exercise all of the powers vested in the Board
during periods between Board meetings except action regarding dividends or
other distributions to stockholders, the filling of vacancies on the Board and
other powers which by law may not be delegated to a committee. Directors
Abdoo, Ahearne, Cornog, Grigg, Johnson and Stratton are regular members of the
Executive Committee; Mr. Bergstrom and Mr. Porter are alternate members. The
Compensation Committee, which met twice in 1997, considers succession planning
issues and provides a competitive, performance-based executive and director
compensation program that enables WE to attract and retain key individuals and
to motivate them to achieve WE's short and long-term goals. Directors
Ahearne, Bergstrom and Cornog are members of the Compensation Committee. The
Finance Committee, which met once in 1997, may take or authorize all necessary
actions to effect financings, refinancings and refundings pursuant to
financing plans approved by the Board of Directors, thus enhancing WE's
ability to act quickly with respect to certain financing matters when market
conditions warrant. Directors Bergstrom, Grigg and Porter are members of the
Finance Committee.
ELECTION OF DIRECTORS
At the 1998 annual meeting, there will be an election of nine directors. The
eight incumbent directors have been nominated by the Board to serve one-year
terms or until they are reelected or until their respective successors are
duly elected and qualified. The Board also identified an additional,
qualified director nominee. John N. MacDonough, Chairman and CEO of Miller
Brewing Company, was nominated by the Board to serve as a director for one
year or until he is reelected or his successor is duly elected and qualified.
Pursuant to authority granted to the Board under the Bylaws, the number of
directors constituting the whole Board was increased to nine effective May 12,
1998 contingent upon the election of Mr. MacDonough.
Directors are elected by a plurality of the votes cast by the shares entitled
to vote in the election at a meeting at which a quorum is present.
"Plurality" means that the individuals who receive the largest number of votes
are elected as directors up to the maximum number of directors to be chosen in
the election. Therefore, any shares not voted, whether by withheld authority,
broker non-vote or otherwise, have no effect in the election of directors.
The nominees named below have consented to being nominated and to serve if
elected. The Board of Directors does not expect that any of the nominees will
become unavailable for any reason. If that should occur before the meeting,
another nominee or nominees may be selected by the WE Board of Directors.
Biographical information regarding each nominee is shown below. Ages are
shown as of December 31, 1997.
INFORMATION CONCERNING NOMINEES (FOR TERMS EXPIRING IN 1999)
RICHARD A. ABDOO. Age 53. Chairman of the Board, President and Chief
Executive Officer of WEC since 1991. Chairman of the Board and Chief
Executive Officer of Wisconsin Electric, WEC's principal subsidiary, since
1990. Director of WEC since 1988. Director of Wisconsin Electric since 1989.
Chairman of the Board and Chief Executive Officer of Wisconsin Natural Gas
Company ("Wisconsin Natural" or "WN") from 1990 to 1995. Wisconsin Natural,
which was WEC's gas utility subsidiary, merged into Wisconsin Electric
effective January 1, 1996. Director of Wisconsin Natural from 1989 to 1995.
Director of Marshall & Ilsley Corporation, Sundstrand Corporation and United
Wisconsin Services, Inc.
JOHN F. AHEARNE. Age 63. Director of the Sigma Xi Center for Sigma Xi, The
Scientific Research Society, an organization that publishes AMERICAN
SCIENTIST, provides grants to graduate students and conducts national meetings
on major scientific issues, since 1989. Adjunct Scholar of Resources for the
Future, an economic research, non-profit institute, since 1993. Lecturer and
Adjunct Professor, Duke University, since 1995. Vice President and Senior
Fellow of Resources for the Future from 1984 to 1993. Commissioner of the
United States Nuclear Regulatory Commission from 1978 to 1983, serving as its
Chairman from 1979 to 1981. Member, National Academy of Engineering.
Director of WEC and Wisconsin Electric since 1994.
JOHN F. BERGSTROM. Age 51. Chairman and Chief Executive Officer of Bergstrom
Corporation since January 1997; President and Chief Executive Officer of
Bergstrom Corporation from 1974 to 1996. Bergstrom Corporation owns and
operates numerous automobile sales and leasing businesses. Director of WEC
since 1987. Director of Wisconsin Electric since 1985. Director of Bergstrom
Corporation, First National Bank-Fox Valley, Kimberly-Clark Corporation,
Midwest Express Holdings, Inc., Universal Foods Corporation and The Green Bay
Packers.
ROBERT A. CORNOG. Age 57. Chairman of the Board, President and Chief
Executive Officer of Snap-on Incorporated since 1991. Snap-on Incorporated is
a developer, manufacturer and distributor of professional hand and power
tools, diagnostic and shop equipment, and tool storage products. Director of
WEC since 1993. Director of Wisconsin Electric since 1994. Director of Snap-
on Incorporated and Johnson Controls, Inc.
RICHARD R. GRIGG. Age 49. Vice President of WEC and President and Chief
Operating Officer of Wisconsin Electric since January 1995; Chief Nuclear
Officer of Wisconsin Electric from December 1996 to March 1998. President and
Chief Operating Officer of Wisconsin Natural during 1995. Group Executive and
Vice President of Wisconsin Electric from June to December 1994. Vice
President of Wisconsin Electric from 1990 to 1994. Director of WEC since
1995. Director of Wisconsin Electric since 1994. Director of Wisconsin
Natural during 1995.
GENEVA B. JOHNSON. Age 68. Corporate Director. Former President and Chief
Executive Officer of Family Service America, an organization representing
private agencies in the United States and Canada that provide human service
programs, from 1983 to 1994. Director of WEC and Wisconsin Electric since
1988. Director of Firstar Bank Milwaukee, N.A.
JOHN N. MACDONOUGH. Age 54. Chairman and Chief Executive Officer of the
Miller Brewing Company, a manufacturer and brewer of malt beverages, since
1993. Director of M&I Marshall & Ilsley Bank, The Milwaukee Brewers, The
Green Bay Packers and Ugly Duckling Corporation of Phoenix, Arizona.
DAVID K. PORTER. Age 54. Senior Vice President of WE since 1989. Vice
President of Wisconsin Natural from 1989 to 1995. Director of WE since 1989.
Director of Wisconsin Natural from 1988 to 1995.
FREDERICK P. STRATTON, JR. Age 58. Chairman and Chief Executive Officer of
Briggs & Stratton Corporation, a manufacturer of small gasoline engines.
Director of WEC since 1987. Director of Wisconsin Electric since 1986.
Director of Briggs & Stratton Corporation, Banc One Corporation, Midwest
Express Holdings, Inc. and Weyco Group, Inc.
OTHER MATTERS
The Board of Directors is not aware of any other matters which may properly
come before the meeting. The WE Bylaws set forth the requirements that must
be followed should a stockholder wish to propose any floor nominations for
director or floor proposals at annual or special meetings of stockholders. In
the case of annual meetings, the Bylaws state, among other things, that notice
and certain other documentation must be provided to WE at least 70 days and
not more than 100 days before the scheduled date of the annual meeting. No
such notices have been received by WE.
COMPENSATION
DIRECTORS' COMPENSATION
In order to further align the Board's interests with stockholders, a portion
of directors' fees is paid in WEC common stock. Directors can elect to
receive the fee in common stock or defer the fee in the WEC phantom common
stock account under the Directors' Deferred Compensation Plan.
During 1997, each nonemployee director received an annual retainer fee of
$18,000 (one-half in WEC common stock and the other half in cash) plus an
attendance fee of $1,250 for each Board or committee meeting attended. In
addition, a per diem fee of $1,000 for travel on company business is paid for
each day on which a Board or committee meeting is not also held. Nonemployee
directors are also paid $300 for each signed, written unanimous consent in
lieu of a meeting. Non-employee chairs of the committees of the Board
received a quarterly committee chair retainer of $1,250. Employee directors
receive no directors' fees. Although certain WE directors also serve on WEC's
board and compensation committee, only single fees are paid for meetings held
by both boards or committees on the same day. In these cases, fees are
allocated between WE and WEC based on services rendered.
Nonemployee directors may defer fees so long as they serve on the Board of WE
and/or its affiliates pursuant to the Directors' Deferred Compensation Plan.
Under the plan, fees may be deferred into an account which accrues interest
semiannually at the prime rate or into a WEC phantom common stock account, the
value of which will appreciate or depreciate based on the market performance
of WEC stock, as well as through the accumulation of any reinvested dividends.
Deferral amounts are credited to accounts in the name of each participating
director on the books of WE, are unsecured and are payable only in cash
following termination of the director's service to WE. The deferred amounts
will be paid out of the general corporate assets or the trust described under
"Retirement Plans" in this information statement.
EXECUTIVE OFFICERS' COMPENSATION
The following table shows, for the last three fiscal years, compensation
awarded to, earned by or paid to WE's Chief Executive Officer and each of WE's
other four most highly-compensated executive officers for services in all
capacities to WEC and its subsidiaries, including WE. The amounts shown in
this and all subsequent tables in this information statement are WEC
consolidated compensation data. The portion of time devoted by each officer
to WE in 1997, as determined by the percent of compensation paid by WE to each
officer versus paid by the other affiliated companies, is as follows: Mr.
Abdoo (80%), Mr. Grigg (95%), Ms. Krause (100%), Mr. Baker (85%) and Mr.
Porter (100%).
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------
Annual Compensation Awards
--------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position at WE Year Salary Bonus Compensation Options/SARs Compensation
$ $ $ (#)(1) ($)(2)
- -------------------------------- ---- -------- -------- ------------ ------------ -------------
RICHARD A. ABDOO
Chairman of the Board 1997 585,000 0 9,974 0 70,312
and Chief Executive Officer 1996 560,000 306,472 8,953 38,000 113,297
1995 496,000 232,000 8,321 38,000 83,858
- -------------------------------- ---- -------- -------- ------------ --------- --------
RICHARD R. GRIGG
President, Chief Operating Officer 1997 320,000 137,927(3) 6,176 0 33,881
and Chief Nuclear Officer 1996 295,000 62,835 5,206 19,000 43,412
1995 237,500 63,788 3,084 19,000 42,125
- -------------------------------- ---- -------- -------- ------------ --------- --------
KRISTINE M. KRAUSE
Vice President-Fossil Operations 1997 205,000 26,454 0 0 19,770
1996 190,000 68,750 0 9,500 23,239
1995 160,000 48,904 0 9,500 16,532
- -------------------------------- ---- -------- -------- ------------ --------- --------
CALVIN H. BAKER
Vice President-Finance and 1997 190,000 32,666 1,889 0 16,046
Chief Financial Officer 1996 170,000 70,298 1,420 9,500 21,996
1995 145,000 35,235 1,286 7,600 16,249
- -------------------------------- ---- -------- -------- ----------- -------- --------
DAVID K. PORTER
Senior Vice President 1997 190,000 29,871 0 0 14,801
1996 190,000 63,449 0 7,600 23,994
1995 190,000 46,170 0 7,600 21,766
- -------------------------------- ---- -------- -------- ----------- -------- --------
(1) 1996 and 1995 grants of options were in combination with contingent
dividend awards. These awards will be paid if total shareholder return
(appreciation in the value of WEC common stock plus reinvested dividends) over
a four-year period beginning on the grant date equals or exceeds the median
return earned by the companies included in the Peer Group Index in the
"Performance Graph" section of WEC's proxy statement for the 1998 Annual
Meeting. There will be no payout if WEC's total shareholder return is
negative over the course of such period. If payable, each participant shall
receive an amount equal to the actual dividends paid on WEC common stock for
the four-year period multiplied by the number of performance units awarded to
such participant. No stock appreciation rights ("SARs") were awarded during
any of the fiscal years indicated.
(2) All Other Compensation for 1997 for Mr. Abdoo, Mr. Grigg, Ms. Krause,
Mr. Baker and Mr. Porter, respectively, includes: (i) employer matching of
contributions by each named executive into the 401(k) plan in the amount of
$4,750 for each named executive officer, (ii) "make whole" payments under the
Executive Deferred Compensation Plan with respect to matching in the 401(k)
plan on deferred salary or salary received but not otherwise eligible for
matching in the amounts of $21,994, $7,535, $5,362, $3,348 and $2,853,
respectively, and (iii) $43,568, $21,596, $9,658, $7,948 and $7,198,
respectively, which represents the present value of interest projected to
accrue for the executive's benefit on the current year's insurance premiums
paid by the company under a split-dollar life insurance program. For 1997,
the method of reporting insurance premiums was changed from reporting the full
dollar value of premiums to more accurately reflect the benefit received.
(3) The majority of Mr. Grigg's bonus award reflects his performance in
connection with overseeing the company's nuclear operations.
No stock options were exercised by the named executive officers in 1997. This
table shows the number and value of exercisable and unexercisable options at
fiscal year-end. Value is calculated using the difference between the
exercise price and the year-end market price multiplied by the number of
shares underlying the option.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION SAR VALUES
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options/SARs Options/SARs
at Fiscal Year-End at Fiscal Year-End
(#) ($)
Name Exercisable Unexercisable Exercisable Unexercisable
------------------- ----------- ------------- ----------- -------------
Richard A. Abdoo 22,500 101,000 30,938 122,031
Richard R. Grigg 6,500 44,500 8,938 49,394
Kristine M. Krause 1,250 25,500 1,719 30,992
Calvin H. Baker 3,000 20,100 4,125 24,213
David K. Porter 6,500 18,200 8,938 20,532
SEVERANCE POLICY. In connection with the Agreement and Plan of Merger between
WEC and Northern States Power Company (approved by WEC's stockholders on
September 13, 1995) the WEC board adopted a Senior Executive Severance Policy
("Severance Policy"). The Severance Policy was adopted to encourage certain
executive officers and other key employees, whose expertise has been critical
to WE's success, to remain with WE. Although the merger agreement has been
terminated, the Severance Policy provides for payment of severance to
participants whose employment is terminated under certain circumstances (e.g.,
terminations by WE that are other than for cause, disability or retirement;
terminations resulting from certain sales of a business by WE; and
terminations resulting from reductions in participants' salaries,
responsibilities or benefits) at any time before April 28, 2000.
The severance benefits under the Severance Policy consist of: (i) three years'
salary and annual incentive compensation; (ii) payment of the actuarial
equivalent of the additional retirement benefits the participant would have
earned if he or she had remained employed for three more years; (iii)
continued medical, dental and life insurance coverage for three years; (iv)
outplacement services or the use of office space and support; and (v)
financial planning counseling.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY AND OBJECTIVES. The Compensation Committee, which is
comprised entirely of independent non-employee directors, is responsible for
making decisions regarding succession planning and executive compensation.
The committee, which functions as a combined Compensation Committee for WE and
WEC, seeks to provide a competitive, performance-based executive compensation
program that enables WE to attract and retain key individuals and motivate
them to achieve WE's short- and long-term goals.
The committee believes that a substantial portion of overall executive
compensation should be at risk. Compensation plans for executives have been
designed so that compensation will vary from year to year dependent on
achievement of individual and corporate goals that are aligned with the
interests of WE's and WEC's stockholders and customers.
The committee employs a nationally recognized compensation consultant, Towers
Perrin, to advise it on matters relating to the administration and design of
the executive compensation program. The consultant provides the committee
with information regarding competitive compensation levels, practices and
trends.
To be fully informed of competitive compensation for WE's executive officer
positions, the committee relies on (i) an analysis of compensation practices
for the companies included in the industry peer group historically used to
compare investment performance in WEC's proxy statement for the 1998 Annual
Meeting, (ii) a broader analysis of compensation data from a survey of
approximately 85 utilities conducted by the Edison Electric Institute, a
consortium of utilities, and (iii) a survey of compensation practices in
general industry. The committee does not mathematically average the data from
these analyses but, rather, considers them three separate views of the
external market.
The committee also applies subjective judgment in evaluating the relative
importance of the many factors that are the basis for determining the various
elements of compensation.
ELEMENTS OF COMPENSATION. The executive compensation program primarily
consists of three elements: base salary, annual incentive compensation and
long-term incentive compensation.
OVERVIEW OF COMPENSATION IN 1997. As noted above, the committee seeks to tie
its compensation program to performance. Although there were numerous
operational accomplishments during 1997, WE's performance in a number of
important areas fell significantly short of expectations. As a result, annual
incentive awards to most executive officers for 1997 were lower than in
previous years. Specific values of 1997 compensation for the Chief Executive
Officer and the four other most highly compensated officers are included in
the Summary Compensation Table. The committee's basis for determining
appropriate levels of executive compensation for 1997 base salary, annual
incentive compensation and long-term incentive compensation is described
below.
BASE SALARY. To determine appropriate executive base salaries, the committee
considered factors such as individual experience, performance and potential,
changes in duties and responsibilities, customer satisfaction, the reputation
of WE's utility operations, competitiveness of utility service rates and
impact of cost-control achievements. In addition, the committee reviewed
executive compensation practices for comparable positions at industry peer
group companies. In general, base salaries are targeted at or near the 50th
percentile of the industry peer group.
Base salaries for a calendar year are generally determined in advance of the
calendar year. The base salaries for 1997 as listed in the Summary
Compensation Table were determined in November 1996 and were effective as of
January 1, 1997.
ANNUAL INCENTIVE COMPENSATION. The committee administers WEC's Short-Term
Performance Plan, which provides annual cash incentive opportunities to
executive officers and other key employees. This annual incentive plan is
designed to promote the achievement of shareholder- and customer-focused
objectives of WEC and its subsidiaries, including WE, while recognizing
individual and team performance of participants.
Annual incentive compensation awards are targeted at approximately the 50th
percentile of general industry pay practices. In 1997, target incentive
awards were set for participants that ranged from 15% to 55% of base salary.
Each participant is eligible to receive an award if pre-established corporate
performance goals are met. Awards may be increased by up to 100% of targeted
amounts or reduced to zero based on individual and team performance.
Performance goals for 1997 for most executives were weighted as 50% financial,
40% operational, and 10% related to improving customer satisfaction.
Financial goals focused on achievement of target earnings per share.
Operational goals were specific to the corporation's business processes and,
among other things, related to development of new energy services, employee
training and development, environmental stewardship, safety of operations,
power plant availability, and corporate strategic planning. Customer
satisfaction was measured by surveys to determine the perceived value of the
company's products and services relative to those provided by competitors.
The performance goals for WE Chairman and Chief Executive Officer Abdoo were
weighted as 80% financial, 12.5% operational and 7.5% toward improving
customer satisfaction. The performance goals for WE President, Chief
Operating Officer and Chief Nuclear Officer Grigg were weighted as 20%
financial, 75% operational and 5% related to improving customer satisfaction.
Although the corporation did well in achieving a number of operational goals
during 1997, it did not meet its financial and customer satisfaction goals.
As a result, the committee provided participants with an award solely based on
operational performance. Operational accomplishments included, among others:
* progress made toward the turnaround of the company's nuclear operations,
* the interim rate relief obtained for 1998,
* record generation at the company's fossil plants in support of increased
system requirements, and
* the recognition received for diversity initiatives and customer call
center operations.
Additional awards were provided to Mr. Grigg to recognize significant
improvement in nuclear operations in 1997 as part of the company's efforts to
achieve a high level of nuclear operational excellence. In 1996, the annual
incentive awards for Mr. Grigg and certain other employees in WE's Nuclear
Power Business Unit were reduced to reflect poor nuclear performance results.
The committee retained the right to provide these individuals with an award of
up to 150% of the amount that was withheld as an incentive to achieve certain
critical nuclear performance goals. As WE's Chief Nuclear Officer, Mr. Grigg
was successful in leading the effort to improve nuclear operations during the
year. This effort, which included a conservative decision-making philosophy
with a focus on operational safety, culminated in the Nuclear Regulatory
Commission removing a "declining trend letter" in January 1998. The
commission specifically noted Mr. Grigg's role in this turnaround. The
committee granted Mr. Grigg and the other nuclear employees an award of 125%
of the amount withheld. The committee also approved a bonus of $50,000 in
recognition of Mr. Grigg's outstanding overall performance in leading WE's
nuclear operations. Mr. Grigg's total annual incentive award is shown in the
Summary Compensation Table.
LONG-TERM INCENTIVE COMPENSATION. The committee administers WEC's 1993
Omnibus Stock Incentive Plan, a long-term incentive plan designed to link the
interests of executives and other key employees to long-term shareholder
value. The long-term incentive plan allows the company to grant stock
options, stock appreciation rights, stock awards and performance units to
participants. Equity interests in WEC common stock provide an incentive to
improve the performance and value of the company in exchange for a share in
the appreciation of the value of WEC common stock. Long-term incentive awards
are targeted at the 50th percentile of general industry grant practices.
The committee is presently reviewing the long-term incentive program to ensure
that it is effective in focusing executives to achieve the corporation's long-
term objectives. Action with respect to long-term incentive plan awards has
been deferred. No awards were granted to executive officers, including the
CEO, during fiscal year 1997.
The committee believes that an important adjunct to the long-term incentive
program is significant WEC common stock ownership by participants.
Accordingly, as a condition of participating in the long-term incentive plan,
the committee has implemented stock ownership guidelines for participants.
Guidelines for executive officers range from 100% to 300% of base salary.
CHIEF EXECUTIVE OFFICER COMPENSATION. Performance and compensation of the
Chief Executive Officer are of particular importance to the committee. Mr.
Abdoo's performance was evaluated by the committee and compensation was
determined in accordance with the executive compensation policies described
above.
As part of a procedure instituted in 1995, the Compensation Committee chair
requested that non-employee directors provide a written evaluation of the
CEO's performance. The directors' written feedback was discussed by committee
members as part of its compensation determinations and has been shared with
the CEO.
Mr. Abdoo's base salary of $585,000, which approximates the 50th percentile of
the data reviewed by the committee, was determined in November 1996 and was
effective as of January 1, 1997. In determining this salary, the committee
considered many factors including, among others:
* an analysis of his current salary compared to the competitive median for
this position,
* his responsibilities and how he has discharged them,
* his overall performance and leadership in guiding an organization that is
able to provide quality services to its customers at competitive prices,
* the regional competitiveness of utility rates for 1996 and the outlook of
electric and gas rates for 1997,
* the impact of reengineering and cost control achievements of the companies
during 1996,
* his vision in positioning the company to take advantage of a deregulated
utility environment,
* his reputation among CEO's in the utility industry, and
* his efforts relating to labor/management relations.
The committee, as is customary, reviewed Mr. Abdoo's base salary in January
1998. Since Mr. Abdoo's base salary continues to approximate the 50th
percentile of the data reviewed by the committee, his salary was determined to
be appropriate.
With respect to annual incentive compensation for 1997, the Compensation
Committee reviewed Mr. Abdoo's performance against 1997 objectives. Although
financial and customer satisfaction objectives, which constitute 87.5% of
Mr. Abdoo's performance goals, were not met, Mr. Abdoo led the company to
achieve numerous operational goals in a particularly challenging year. The
committee specifically noted the role of the CEO in several operational
accomplishments, including:
* his frequent dialogue with nuclear regulators on the company's progress to
turn around its nuclear operations,
* the successful operation of the company's fossil plants to meet increased
regional demands,
* continued growth in the organization's customer base,
* improved quality in key customer service areas as evidenced by receipt of
the Utility Call Center of the Year award,
* expanded environmental initiatives,
* his support of the use of state-of-the-art technologies, and
* his consistent support of equal opportunity, diversity, cross-cultural
sensitivity and strong labor-management relationships; an award was
received from the Human Resource Management Association in recognition of
diversity initiatives.
The committee believes that the leadership provided and decisions made by
Mr. Abdoo in 1997 have set the stage for improved 1998 performance. Although
the CEO earned a 1997 annual incentive award for achievement of operational
performance goals, the committee accepted Mr. Abdoo's request that his award
be reduced to zero in light of the company's overall performance in 1997.
COMPLIANCE WITH TAX REGULATIONS REGARDING EXECUTIVE COMPENSATION. Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
chief executive officer and the other executive officers named in the Summary
Compensation Table. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The committee
will continue to review these tax regulations as they apply to WE's executive
compensation program. It is the committee's intent to preserve the
deductibility of executive compensation to the extent reasonably practicable
and to the extent consistent with its other compensation objectives.
Respectfully submitted to WE's stockholders by the Compensation Committee of
the Board of Directors.
Robert A. Cornog, Committee Chair
John F. Ahearne
John F. Bergstrom
STOCK OWNERSHIP OF DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
WE directors, nominees and executive officers as a group (14 persons) do not
own any of WE's stock, but do own 99,455 shares of common stock of its parent
company, Wisconsin Energy (less than 1% of total WEC common stock
outstanding). The following table lists the beneficial ownership of WEC
common stock (including phantom common stock) of each director, nominee and
executive officer named in the Summary Compensation Table below, as of
February 27, 1998. Included are shares owned by each individual's spouse,
minor children or any other relative sharing the same residence, as well as
shares held in a fiduciary capacity or held in WEC's Stock Plus Investment
Plan and Wisconsin Electric's Employee Retirement Savings Plan ("ERSP").
Number of Number of
Name Shares (1) Name Shares (1)
- ------------------ ---------- -------------------------- ----------
Richard A. Abdoo 27,782 Geneva B. Johnson 3,548
John F. Ahearne 1,145 Kristine M. Krause 6,013
Calvin H. Baker 7,422 John N. MacDonough 100
John F. Bergstrom 5,999 David K. Porter 11,277
Robert A. Cornog 5,159 Frederick P. Stratton, Jr. 7,614
Richard R. Grigg 5,322
(1) Includes share units held in the WEC phantom common stock account under
WEC's Directors' Deferred Compensation Plan or Executive Deferred Compensation
Plan as follows: Mr. Abdoo (9,160), Mr. Baker (3,441), Mr. Bergstrom (2,999),
Mr. Cornog (1,782), Mr. Grigg (581), Mrs. Johnson (994), Ms. Krause (194),
Mr. Porter (354), and Mr. Stratton (2,214). Share units are intended to
reflect the performance of WEC common stock and are payable in cash.
Each person has sole voting and investment power as to all shares listed for
such person (other than phantom shares) except that the following persons have
shared voting and/or investment power as to the indicated number of shares so
listed: Mr. Baker (314), Mr. Cornog (150), Ms. Krause (2,098), Mr. Stratton
(3,000) and all above-named directors and officers and other executive
officers as a group (6,006).
Information on beneficially owned shares is based on data furnished by the
specified persons and is determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as required for purposes of this information
statement. It is not necessarily to be construed as an admission of
beneficial ownership for other purposes.
RETIREMENT PLANS
In 1997, WE maintained a defined benefit pension plan of the cash balance type
for most employees, including WE executive officers. The plan bases a
participant's defined benefit pension on the value of a hypothetical account
balance. For individuals participating in the plan as of December 31, 1995, a
starting account balance was created equal to the present value of the benefit
accrued as of December 31, 1994, under the plan benefit formula prior to the
change to a cash balance approach. That formula provided a retirement income
based on years of credited service and final average compensation for the 36
highest consecutive months, without any deduction for Social Security or other
offset, with a Social Security integrated benefit formula based on percentages
of final average compensation for up to 30 years of credited service and
additional (lower) percentages of compensation in excess of 30 years, up to a
maximum of 10 years. In addition, individuals participating in the plan as of
December 31, 1995 received a special one-time transition credit amount equal
to a specified percentage varying with age multiplied by credited service and
1994 base pay.
The present value of the accrued benefit as of December 31, 1994, plus the
transition credit were also credited with interest at a stated rate. For 1996
and thereafter, a participant receives annual credits to the account equal to
5% of base pay (including certain incentive payments, pre-tax deferrals and
other items), plus an interest credit on all prior accruals equal to 4% plus
75% of the annual time-weighted trust investment return for the year in excess
of 4%.
The life annuity payable under the plan is determined by converting the
hypothetical account balance credits into annuity form. Individuals who were
participants in the plan on December 31, 1995 are in no event to receive any
less than what would have been provided under the prior formula, had it
continued, if they terminate on or before January 1, 2011, and do not elect to
commence benefits before the earlier of age 55 and completion of 10 years'
service, or age 65.
All of the individuals listed in the Summary Compensation Table are
"grandfathered" under the prior plan benefit formula. Since their estimated
benefits under that formula are higher than under the cash balance plan
formula, utilizing current assumptions, their benefits would currently be
determined by the prior plan benefit formula. The following table shows
estimated annual benefits payable in life annuity form on normal retirement
for persons in various compensation and years of service classifications
during 1997, based on the grandfathered continuation of the prior plan formula
(including supplemental amounts providing additional benefits described below
in the "Other Retirement Benefits" section):
PENSION PLAN TABLE
Years of Service
--------------------------------------------------------------
Remuneration 15 20 25 30 35 40
- ---------- ------- ------- ------- ------- ------- -------
$ 50,000 $10,838 $14,450 $18,063 $21,676 $23,763 $25,850
100,000 23,774 31,699 39,624 47,549 52,073 56,598
150,000 36,713 48,950 61,188 73,426 80,388 87,350
200,000 49,649 66,199 82,749 99,299 108,698 118,098
250,000 62,586 83,448 104,310 125,172 137,009 148,847
300,000 75,524 100,699 125,874 151,049 165,323 179,598
400,000 101,399 135,199 168,999 202,799 221,948 241,098
500,000 127,274 169,699 212,124 254,549 278,573 302,598
600,000 153,149 204,199 255,249 306,299 335,198 364,098
700,000 179,024 238,699 298,374 358,049 391,823 425,598
800,000 204,899 273,199 341,499 409,799 448,448 487,098
900,000 230,774 307,699 384,624 461,549 505,073 548,598
1,000,000 256,649 342,199 427,749 513,299 561,698 610,098
1,100,000 282,524 376,699 470,874 565,049 618,323 671,598
1,200,000 308,399 411,199 513,999 616,799 674,948 733,098
The compensation for the individuals listed in the Summary Compensation Table
in the columns labeled "Salary" and "Bonus" is virtually equivalent to the
compensation considered for purposes of the retirement plans and the various
supplemental plans, with the exception of the $50,000 bonus for nuclear
performance awarded to Mr. Grigg. Mr. Abdoo, Mr. Grigg, Ms. Krause, Mr. Baker
and Mr. Porter currently have 22, 27, 19, 6 and 28 credited years of service,
respectively.
OTHER RETIREMENT BENEFITS. Designated officers of WEC and WE participate in
the Supplemental Executive Retirement Plan ("SERP"). The SERP provides
monthly supplemental pension benefits to participants, which will be paid out
of unsecured corporate assets, or the grantor trust described below, as
follows: (a) an amount equal to the difference between the actual pension
benefit payable under the pension plan and what such pension benefit would be
if calculated without regard to any limitation imposed by the Internal Revenue
Code on pension benefits or covered compensation; (b) an amount calculated so
as to provide participants with a supplemental lifetime annuity, estimated to
amount to between 8% and 10% of final average compensation depending on which
pension payment option is selected; and (c) an amount for certain participants
equal to the difference between the actual pension benefit payable under the
pension retirement plan and what the pension benefit would be if calculated
under the prior benefit formula in effect on December 31, 1988. Except for a
"change in control" of WEC, as defined in the SERP, no payments are made until
after the participant's retirement or death.
WEC and WE have entered into agreements with Mr. Abdoo and Mr. Baker,
respectively, who cannot accumulate by normal retirement age the maximum
number of years of credited service under the pension plan formula in effect
immediately before the change to the cash balance formula. According to
Mr. Abdoo's agreement, Mr. Abdoo at retirement will receive supplemental
retirement payments which will make his total retirement benefits at age 58 or
older substantially the same as those payable to employees who are age 60 or
older, who are in the same compensation bracket and who became plan
participants at the age of 25. According to Mr. Baker's agreement, Mr. Baker
at retirement will receive supplemental retirement payments which will make
his total retirement benefits at age 60 or older substantially the same as
those payable to employees who are in the same compensation bracket and who
became plan participants at the age of 25.
The WEC Amended Non-Qualified Trust, a grantor trust, has been established to
fund the SERP, the Executive Deferred Compensation Plan and Mr. Abdoo's and
Mr. Baker's agreements. The plans and agreements provide for optional lump
sum payments and, in the instance of a change in control, mandatory lump sum
payouts without regard to whether the executive's employment has terminated.
In each case, the interest rate benchmark formula for calculating the lump sum
amount is the five-year U. S. Treasury Note yield as of the last business day
of the month prior to date of payment.
AVAILABILITY OF FORM 10-K
A copy (without exhibits) of the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 as filed with the Securities and Exchange
Commission is available without charge to any stockholder of record or
beneficial owner of WE common stock by writing to the Corporate Secretary,
Thomas H. Fehring, 231 West Michigan Street, P. O. Box 2046, Milwaukee,
Wisconsin 53201.
WISCONSIN ELECTRIC POWER COMPANY
1997 ANNUAL REPORT TO STOCKHOLDERS
ACCOMPANYING INFORMATION STATEMENT
TABLE OF CONTENTS
ITEM PAGE
Business A-2
Market for Common Equity and Related
Stockholder Matters A-2
Selected Financial Data A-3
Management's Discussion and Analysis of
Financial Condition and Results of Operations A-4
Income Statement A-30
Statement of Cash Flows A-31
Balance Sheet A-32
Capitalization Statement A-34
Common Stock Equity Statement A-35
Notes to Financial Statements A-36
Directors A-49
Executive Officers A-49
Report of Independent Accountants A-50
BUSINESS
Wisconsin Electric Power Company ("WE" or "Wisconsin Electric") is an
electric, gas and steam utility incorporated in the State of Wisconsin in
1896. Effective January 1, 1996, Wisconsin Energy Corporation ("WEC"), WE's
parent company, 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. WE's operations are conducted in the following three 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.
For additional financial information about WE's business segments, see "Note L
- - Information by Segments of Business" in WE's Notes to Financial Statements.
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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
============ ============
==============================================================================
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
================================================================================================
- -----------------------------------------------------------------------------------------------
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
===============================================================================================
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
===============================================================================================
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.
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.
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.
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.
DIRECTORS
The information under "Election of Directors" in Wisconsin Electric's
definitive Information Statement dated April 14, 1998, attached hereto, is
incorporated herein by reference.
EXECUTIVE OFFICERS
Figures in parenthesis indicate age and years of service with Wisconsin
Electric as of December 31, 1997.
Richard A. Abdoo (53;22) Charles T. Govin, Jr. (51;19)
Chairman of the Board and Vice President-Electric & Gas
Chief Executive Officer Operations
Richard R. Grigg (49;27) Kristine M. Krause (43;19)
President and Chief Operating Officer Vice President-Fossil Operations
David K. Porter (54;28) Kristine A. Rappe (41;15)
Senior Vice President Vice President-Customer Services
Calvin H. Baker (54;6) Anne K. Klisurich (50;25)
Vice President-Finance and Controller
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholder
of Wisconsin Electric Power Company
In our opinion, the accompanying balance sheet and capitalization statement
and the related statements of income, of common stock equity and of cash flows
present fairly, in all material respects, the financial position of Wisconsin
Electric Power Company at December 31, 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
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PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 28, 1998