SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission Registrant; State of Incorporation IRS Employer
File Number Address; and Telephone Number Identification No.
----------- --------------------------------- ------------------
1-9057 WISCONSIN ENERGY CORPORATION 39-1391525
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2949
Milwaukee, WI 53201
(414) 221-2345
1-1245 WISCONSIN ELECTRIC POWER COMPANY 39-0476280
(A Wisconsin Corporation)
231 West Michigan Street
P.O. Box 2046
Milwaukee, WI 53201
(414) 221-2345
Indicate by check mark whether each Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that each
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date (August 2, 1999):
Wisconsin Energy Corporation Common Stock, $.01 Par Value,
117,174,724 shares outstanding.
Wisconsin Electric Power Company Common Stock, $10 Par Value,
33,289,327 shares outstanding.
Wisconsin Energy Corporation is
the sole holder of Wisconsin
Electric Power Company Common
Stock.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Item Page
- ---- ----
Introduction
Part I - Financial Information
------------------------------
1. Financial Statements
Wisconsin Energy
Consolidated Condensed Income Statement
Consolidated Condensed Balance Sheet
Consolidated Statement of Cash Flows
Wisconsin Electric
Condensed Income Statement
Condensed Balance Sheet
Statement of Cash Flows
Notes to Financial Statements of
Wisconsin Energy and Wisconsin Electric
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for Wisconsin Energy and Wisconsin Electric
3. Quantitative and Qualitative Disclosures About Market Risk.
Part II - Other Information
---------------------------
1. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
5. Other Information
6. Exhibits and Reports on Form 8-K
Signatures
INTRODUCTION
Wisconsin Energy Corporation ("Wisconsin Energy" or the "Company") is a holding
company whose principal subsidiary is Wisconsin Electric Power Company
("Wisconsin Electric"), an electric, gas and steam utility. Unless qualified by
its context when used in this combined Form 10-Q, Wisconsin Energy refers to the
holding company and all of its subsidiaries. The unaudited interim financial
statements presented in this combined Form 10-Q report include the consolidated
statements of Wisconsin Energy as well as separate statements for Wisconsin
Electric. The unaudited statements have been prepared by Wisconsin Energy and
Wisconsin Electric pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Wisconsin Energy and Wisconsin Electric financial statements
should be read in conjunction with the financial statements and notes thereto
included in the companies' combined Annual Report on Form 10-K for the year
ended December 31, 1998. This combined Form 10-Q is separately filed by
Wisconsin Energy and Wisconsin Electric. Information contained herein relating
to any individual registrant is filed by such registrant on its own behalf.
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ---------------
1999 1998 1999 1998
---- ---- ---- ----
Thousands of Dollars,
(Except Per Share Amounts)
Operating Revenues $539,008 $475,576 $1,095,725 $991,253
Operating Expenses
Fuel 94,209 80,207 164,944 154,108
Purchased power 53,041 41,463 102,701 79,283
Cost of gas sold 27,746 31,105 96,606 103,406
Other operation and maintenance 178,389 181,041 360,855 340,792
Depreciation and amortization 64,443 58,817 131,399 122,021
Property and revenue tax 19,149 15,160 36,873 31,276
------- ------- -------- -------
Total Operating Expenses 436,977 407,793 893,378 830,886
------- ------- -------- -------
Pretax Operating Income 102,031 67,783 202,347 160,367
Other Income and Deductions
Interest income 8,202 6,332 16,551 13,067
Allowance for other funds used
during construction 1,461 877 2,445 1,592
Other (8) (3,045) 4,438 1,165
------- ------- -------- -------
Total Other Income and Deductions 9,655 4,164 23,434 15,824
Interest Charges and Other
Interest expense 35,999 31,430 69,565 62,318
Allowance for borrowed funds used
during construction (2,405) (1,957) (4,305) (3,955)
Distributions on preferred securities
of subsidiary trust 3,425 - 3,653 -
Preferred dividend requirement
of subsidiary 300 300 601 601
------- ------- -------- -------
Total Interest Charges and Other 37,319 29,773 69,514 58,964
Income Taxes 25,464 13,320 53,853 39,325
------- ------- -------- -------
Net Income $48,903 $28,854 $102,414 $77,902
======= ======= ======== =======
Average Number of Shares of Common
Stock Outstanding (Thousands) 116,614 113,687 116,272 113,279
Earnings Per Share of Common Stock
(Basic and Diluted) $0.42 $0.25 $0.88 $ 0.69
Dividends Per Share of Common Stock $0.39 $0.39 $0.78 $0.775
The accompanying notes as they relate to Wisconsin Energy Corporation are an
integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
June 30, December 31,
1999 1998
-------- ------------
(Thousands of Dollars)
Assets
------
Property, Plant and Equipment
Electric utility $5,019,760 $4,900,836
Gas utility 532,298 523,187
Steam utility 62,934 62,832
Common utility 386,885 420,750
Non-utility plant 219,928 -
Other property 293,838 256,912
Accumulated provision for depreciation (3,111,319) (3,021,548)
---------- ----------
3,404,324 3,142,969
Construction work in progress 170,121 135,544
Leased facilities - net 130,167 133,007
Nuclear fuel - net 94,373 87,660
---------- ----------
Net Property, Plant and Equipment 3,798,985 3,499,180
Investments 864,800 795,676
Current Assets
Cash and cash equivalents 35,369 16,603
Accounts receivable 213,783 190,103
Accrued utility revenues 92,099 130,518
Materials, supplies and fossil fuel 209,852 199,052
Prepayments and other assets 79,988 71,843
---------- ----------
Total Current Assets 631,091 608,119
Deferred Charges and Other Assets
Accumulated deferred income taxes 206,010 199,372
Other 315,691 259,410
---------- ----------
Total Deferred Charges and Other Assets 521,701 458,782
---------- ----------
Total Assets $5,816,577 $5,361,757
========== ==========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $797,199 $760,351
Retained earnings 1,155,903 1,144,092
Unearned compensation - restricted stock award (1,195) (1,338)
----------- ----------
Total Common Stock Equity 1,951,907 1,903,105
Preferred stock 30,450 30,450
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the Company 200,000 -
Long-term debt 1,979,368 1,749,024
----------- ----------
Total Capitalization 4,161,725 3,682,579
Current Liabilities
Long-term debt due currently 129,989 119,140
Short-term debt 273,853 286,859
Accounts payable 162,182 187,452
Accrued liabilities 87,720 88,510
Other 64,802 53,219
---------- ----------
Total Current Liabilities 718,546 735,180
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 582,080 570,750
Other 354,226 373,248
---------- ----------
Total Deferred Credits and Other
Liabilities 936,306 943,998
---------- ----------
Total Capitalization and Liabilities $5,816,577 $5,361,757
========== ==========
The accompanying notes as they relate to Wisconsin Energy Corporation
are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
------------------------
1999 1998
---- ----
(Thousands of Dollars)
Operating Activities
Net income $102,414 $77,902
Reconciliation to cash
Depreciation and amortization 131,399 122,021
Nuclear fuel expense - amortization 11,843 6,465
Conservation expense - amortization 11,249 11,249
Debt premium, discount &
expense - amortization 1,702 2,266
Deferred income taxes - net (4,741) 4,341
Investment tax credit - net (2,296) (2,350)
Allowance for other funds used
during construction (2,445) (1,592)
Change in - Accounts receivable (23,680) (8,085)
Inventories 14,920 10,819
Accounts payable (25,270) (7,193)
Other current assets 30,274 26,837
Other current liabilities 10,793 1,395
Other (27,415) 10,611
--------- ---------
Cash Provided by Operating Activities 228,747 254,686
Investing Activities
Construction expenditures (237,256) (170,703)
Acquisition of power plants (276,792) -
Allowance for borrowed funds used
during construction (4,305) (3,955)
Nuclear fuel (10,945) 20,283
Nuclear decommissioning trust (18,718) (17,912)
Other (24,685) (2,634)
--------- ---------
Cash Used in Investing Activities (572,701) (174,921)
Financing Activities
Sale of - Common stock 36,848 61
Long-term debt 254,207 184,687
Mandatorily redeemable trust
preferred securities - net 193,700 -
Retirement of long-term debt (18,427) (16,198)
Change in short-term debt (13,006) (166,349)
Dividends on stock - Common (90,602) (87,471)
--------- ---------
Cash Provided by (Used in) Financing Activities 362,720 (85,270)
--------- ---------
Change in Cash and Cash Equivalents 18,766 (5,505)
Cash and Cash Equivalents at Beginning of Period 16,603 19,607
--------- ---------
Cash and Cash Equivalents at End of Period $35,369 $14,102
======= =======
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $72,389 $64,778
Income taxes 66,796 49,213
The accompanying notes as they relate to Wisconsin Energy Corporation
are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
----------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Thousands of Dollars)
Operating Revenues $469,906 $461,771 $997,745 $972,452
Operating Expenses
Fuel 75,305 80,201 146,040 154,102
Purchased power 33,964 35,799 65,017 72,390
Cost of gas sold 27,746 31,105 96,606 103,406
Other operation and maintenance 163,182 174,489 336,634 330,285
Depreciation and amortization 60,167 56,970 124,617 119,243
Property and revenue tax 16,779 14,607 33,610 30,383
-------- -------- -------- --------
Total Operating Expenses 377,143 393,171 802,524 809,809
-------- -------- -------- --------
Pretax Operating Income 92,763 68,600 195,221 162,643
Other Income and Deductions
Interest income 5,559 5,562 11,231 11,020
Allowance for other funds used
during construction 1,461 877 2,445 1,592
Other 1,945 (1,245) 7,469 4,133
-------- -------- -------- --------
Total Other Income and Deductions 8,965 5,194 21,145 16,745
Interest Charges
Interest expense 28,452 27,840 56,849 55,952
Allowance for borrowed funds used
during construction (718) (446) (1,199) (821)
-------- -------- -------- --------
Total Interest Charges 27,734 27,394 55,650 55,131
Income Taxes 25,562 15,029 56,323 42,590
-------- -------- -------- --------
Net Income 48,432 31,371 104,393 81,667
Preferred Stock Dividend Requirement 300 300 601 601
-------- -------- -------- --------
Earnings Available for Common
Stockholder $48,132 $31,071 $103,792 $81,066
======= ======= ======== =======
Note: Earnings and dividends per share of common stock are not applicable
because all of Wisconsin Electric Power Company's common stock is
owned by Wisconsin Energy Corporation.
The accompanying notes as they relate to Wisconsin Electric Power Company are
an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
June 30, December 31,
1999 1998
-------- ------------
(Thousands of dollars)
Assets
------
Property, Plant and Equipment
Electric utility $4,939,126 $4,820,239
Gas utility 532,298 523,187
Steam utility 62,934 62,832
Common utility 386,885 420,750
Other property 7,376 7,511
Accumulated provision for depreciation (3,059,402) (2,975,749)
---------- ----------
2,869,217 2,858,770
Construction work in progress 129,834 109,412
Leased facilities - net 130,167 133,007
Nuclear fuel - net 94,373 87,660
---------- ----------
Net Property, Plant and Equipment 3,223,591 3,188,849
Investments 616,489 573,859
Current Assets
Cash and cash equivalents 11,528 14,183
Accounts receivable 165,807 166,648
Accrued utility revenues 91,134 129,463
Materials, supplies and fossil fuel 180,325 198,015
Prepayments and other assets 62,726 59,813
---------- ----------
Total Current Assets 511,520 568,122
Deferred Charges and Other Assets
Accumulated deferred income taxes 196,400 190,114
Other 257,087 247,998
---------- ----------
Total Deferred Charges and Other Assets 453,487 438,112
---------- ----------
Total Assets $4,805,087 $4,768,942
========== ==========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock $713,582 $713,582
Retained earnings 998,903 984,896
---------- ----------
Total Common Stock Equity 1,712,485 1,698,478
Preferred stock 30,450 30,450
Long-term debt 1,525,250 1,512,531
---------- ----------
Total Capitalization 3,268,185 3,241,459
Current Liabilities
Long-term debt due currently 119,253 112,454
Short-term debt 240,215 219,289
Accounts payable 141,967 169,503
Accrued liabilities 83,313 80,908
Other 60,403 46,574
---------- ----------
Total Current Liabilities 645,151 628,728
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 570,847 559,574
Other 320,904 339,181
---------- ----------
Total Deferred Credits and Other
Liabilities 891,751 898,755
---------- ----------
Total Capitalization and Liabilities $4,805,087 $4,768,942
========== ==========
The accompanying notes as they relate to Wisconsin Electric Power Company
are an integral part of these financial statements.
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30
------------------------
1999 1998
---- ----
(Thousands of Dollars)
Operating Activities
Net income $104,393 $81,667
Reconciliation to cash
Depreciation and amortization 124,617 119,243
Nuclear fuel expense - amortization 11,843 6,465
Conservation expense - amortization 11,249 11,249
Debt premium, discount &
expense - amortization 1,340 2,066
Deferred income taxes - net (4,757) 4,359
Investment tax credit - net (2,263) (2,345)
Allowance for other funds used
during construction (2,445) (1,592)
Change in - Accounts receivable 841 (4,561)
Inventories 17,690 10,854
Accounts payable (27,536) (5,624)
Other current assets 35,416 34,337
Other current liabilities 16,234 2,889
Other (17,477) 40,087
--------- ---------
Cash Provided by Operating Activities 269,145 299,094
Investing Activities
Construction expenditures (183,234) (148,058)
Allowance for borrowed funds used
during construction (1,199) (821)
Nuclear fuel (10,945) 20,283
Nuclear decommissioning trust (18,718) (17,912)
Other (5,604) (180)
--------- ---------
Cash Used in Investing Activities (219,700) (146,688)
Financing Activities
Sale of long-term debt 29,444 147,903
Retirement of long-term debt (12,083) (7,145)
Change in short-term debt 20,926 (205,161)
Dividends on stock - Common (89,786) (89,215)
Preferred (601) (601)
--------- ---------
Cash Used in Financing Activities (52,100) (154,219)
--------- ---------
Change in Cash and Cash Equivalents (2,655) (1,813)
Cash and Cash Equivalents at Beginning of Period 14,183 10,100
------- ------
Cash and Cash Equivalents at End of Period $11,528 $8,287
======= ======
Supplemental Information - Cash Paid For
Interest (net of amount capitalized) $64,046 $61,716
Income taxes 62,136 48,273
The accompanying notes as they relate to Wisconsin Electric Power
Company are an integral part of these financial statements.
WISCONSIN ENERGY CORPORATION
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements for Wisconsin
Energy Corporation and the unaudited financial statements for Wisconsin
Electric Power Company should be read in conjunction with the companies'
combined 1998 Annual Report on Form 10-K. In the opinion of management,
all adjustments, normal and recurring in nature, necessary to a fair
statement of the results of operations and financial position of Wisconsin
Energy and Wisconsin Electric, have been included in the accompanying
income statements and balance sheets. The results of operations for the
six months ended June 30, 1999 are not, however, necessarily indicative of
the results which may be expected for the year 1999 because of seasonal and
other factors.
2. Due to recent acquisitions by Wisconsin Energy, described below in Note 4,
that have increased the size of Wisconsin Energy's non-utility operations
and assets, Wisconsin Energy has modified its income statement and balance
sheet presentations. The primary income statement modification includes
reclassifying the results of non-utility operations from Other Income and
Deductions to the various lines within operating income. This modification
does not change net income. The primary balance sheet modification
includes reclassifying non-utility property, plant and equipment and
related accumulated provision for depreciation from Investments to
inclusion with utility Property, Plant and Equipment. Prior year financial
statements have been reclassified to the current year presentation of non-
utility results of operations and financial position.
3. Effective May 31, 1998, Wisconsin Energy acquired ESELCO, Inc. ("ESELCO") in
a tax-free reorganization accounted for as a pooling of interests. Due to
the immaterial nature of the transaction, Wisconsin Energy has not restated
any historical financial or statistical information. Instead, Wisconsin
Energy combined ESELCO's May 31, 1998 balance sheet with Wisconsin
Energy's. For additional information, see Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations in Part I of
this report.
4. In April 1999, Wisvest-Connecticut, LLC, a wholly owned subsidiary of
Wisvest Corporation which is in turn a wholly owned subsidiary of Wisconsin
Energy, acquired two fossil-fueled power plants in the State of Connecticut
for $277 million from The United Illuminating Company, an unaffiliated
investor-owned utility in New Haven, Connecticut. Pursuant to the
agreement, Wisvest-Connecticut, LLC purchased the Bridgeport Harbor
Station, which has an active generating capacity of 590 megawatts, as well
as the New Haven Harbor Station, which has an active generating capacity of
466 megawatts. Wisvest-Connecticut, LLC financed the acquisition through
the issuance of $195 million of long-term, nonrecourse notes; an equity
contribution of $105 million from Wisconsin Energy; $30 million of working
capital arrangements and a $25 million letter of credit facility.
Wisvest-Connecticut, LLC has entered into an interest rate swap agreement to
exchange fixed rate payment obligations for variable rate receipt rights
without exchanging the underlying notional amounts. This agreement, which
expires on December 31, 2005, serves to convert variable rate debt under
Wisvest-Connecticut, LLC's long-term nonrecourse notes to fixed rate debt
to reduce the impact of interest rate fluctuations. See Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations" in Part I of this
report for further information.
5. Wisconsin Energy, a holding company with subsidiaries in utility and non-
utility businesses, has two reportable operating segments. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly in deciding
how to allocate resources or in assessing performance. Wisconsin Energy's
reportable operating segments include a utility segment and a non-utility
segment. Wisconsin Energy has changed its reportable operating segments as
of June 30, 1999 as a result of a material increase in non-utility energy
assets and revenues. This increase is due to the acquisition of generating
assets from The United Illuminating Company as described in Note 4 above.
The reportable utility segment includes Wisconsin Energy's two utility
subsidiaries, Wisconsin Electric Power Company and Edison Sault Electric
Company. This segment derives its revenues from electric, gas and steam
operations. Electric operations engage in the generation, transmission,
distribution and sale of electric energy in southeastern (including
Metropolitan Milwaukee), east central and northern Wisconsin and in the
Upper Peninsula of Michigan. Gas operations engage in the purchase,
distribution and sale of natural gas to retail customers and the
transportation of customer-owned gas in four service areas in southeastern,
east central, western and northern Wisconsin. Steam operations engage in
the production, distribution and sale of steam to space heating and
processing customers in the Milwaukee area.
The reportable non-utility segment derives its revenues from energy
activities including independent power production and energy marketing,
services and trading.
The following table summarizes the reportable operating segments of Wisconsin
Energy.
Energy
------------------------------
Wisconsin Energy Utility Non-Utility Subtotal Other (a) Total
---------------- ------- ----------- -------- --------- -----
(Thousands of Dollars)
Three Months Ended June 30, 1999
Operating Revenues $477,899 $55,750 $533,649 $5,359 $539,008
Pretax Operating Income (Loss) (b) 94,669 8,305 102,974 (943) 102,031
Six Months Ended June 30, 1999
Operating Revenues $1,014,619 $69,789 $1,084,408 $11,317 $1,095,725
Pretax Operating Income (Loss) (b) 198,985 4,324 203,309 (962) 202,347
Segment Assets at June 30, 1999 $4,877,513 $529,009 $5,406,522 $331,568 $5,738,090
Three Months Ended June 30, 1998
Operating Revenues $464,967 $6,244 $471,211 $4,365 $475,576
Pretax Operating Income (Loss) (b) 69,169 (272) 68,897 (1,114) 67,783
Six Months Ended June 30, 1998
Operating Revenues $975,649 $7,569 $983,218 $8,035 $991,253
Pretax Operating Income (Loss) (b) 163,212 (1,441) 161,771 (1,404) 160,367
Segment Assets at June 30, 1998 $4,670,435 $105,639 $4,776,074 $268,787 $5,044,861
(a) Other includes non-utility real estate investment and development and
non-utility investments in recycling technology.
(b) Income tax expense, interest income and interest expense are not
included in segment pretax operating income.
Wisconsin Electric, Wisconsin Energy's principal subsidiary, has organized
its operating segments according to how it is currently regulated. Wisconsin
Electric's reportable operating segments include electric, gas and steam
utility segments.
The following table summarizes the reportable operating segments of Wisconsin
Electric.
Wisconsin Electric Electric Gas Steam Total
------------------ -------- --- ----- -----
(Thousands of Dollars)
Three Months Ended June 30, 1999
Operating Revenues (a) $416,437 $49,496 $3,973 $469,906
Pretax Operating Income (Loss) (b) 95,034 (2,062) (209) 92,763
Six Months Ended June 30, 1999
Operating Revenues (a) $814,111 $171,479 $12,155 $997,745
Pretax Operating Income (b) 167,554 25,208 2,459 195,221
Three Months Ended June 30, 1998
Operating Revenues (a) $405,540 $52,414 $3,817 $461,771
Pretax Operating Income (Loss) (b) 72,156 (3,175) (381) 68,600
Six Months Ended June 30, 1998
Operating Revenues (a) $789,180 $171,825 $11,447 $972,452
Pretax Operating Income (b) 139,258 20,579 2,806 162,643
(a) Wisconsin Electric accounts for intersegment revenues at a tariff rate
established by the Public Service Commission of Wisconsin ("PSCW").
Intersegment revenues are not material.
(b) Income tax expense, interest income and interest expense are not
recorded by segment to determine segment pretax operating income.
6. In March 1999, WEC Capital Trust I, a Delaware business trust of which
Wisconsin Energy owns all of the outstanding common securities, issued
$200 million of 6.85% trust preferred securities to the public. The sole
asset of WEC Capital Trust I is $206 million of 6.85% junior subordinated
debentures due March 31, 2039, issued by Wisconsin Energy. The terms and
interest payments on these debentures correspond to the terms and
distributions on the trust preferred securities. Wisconsin Energy used the
proceeds from the sale of its junior subordinated debentures to fund a
capital contribution of approximately $105 million to Wisvest-Connecticut,
LLC for acquisition in mid-April 1999 of two fossil-fueled power plants
from The United Illuminating Company (see Note 4 above) and for repayment
of short-term borrowings. WEC Capital Trust I has been consolidated into
Wisconsin Energy's financial statements.
The interest payments, which are tax deductible by Wisconsin Energy, are
reflected as distributions on preferred securities of the subsidiary trust
in Wisconsin Energy's Consolidated Condensed Income Statement. Wisconsin
Energy may elect to defer interest payments on the debentures for up to 20
consecutive quarters, causing corresponding distributions on the trust
preferred securities to also be deferred. In case of a deferral, interest
and distributions will continue to accrue, along with quarterly compounding
interest on the deferred amounts.
Wisconsin Energy may redeem all or a portion of the debentures after
March 25, 2004, requiring an equal amount of trust preferred securities to
be redeemed at face value plus accrued and unpaid distributions. Wisconsin
Energy has entered into a limited guarantee of payment of distributions,
redemption payments and payments in liquidation with respect to the trust
preferred securities. This guarantee, when considered together with
Wisconsin Energy's obligations under the related debentures and indenture
and the applicable declaration of trust, provide a full and unconditional
guarantee by Wisconsin Energy of amounts due on the outstanding trust
preferred securities.
7. In July 1999, a jury decided against Wisconsin Electric and awarded the
plaintiffs $4.5 million as actual damages and $100 million in punitive
damages in a lawsuit alleging that Wisconsin Electric had placed
contaminated wastes at two sites in the City of West Allis, Wisconsin.
Wisconsin Electric is preparing to file post trial motions in August 1999
on the grounds that the jury verdict is not supported by the evidence or
the law and that the award of punitive damages was unwarranted and, in the
opinion of management based in part on the advice of legal counsel, should
be reversed. As such, Wisconsin Electric has recorded no reserve for
potential damages from this suit. Post trial motions are scheduled to be
heard in October 1999. For further information, see Item 1. Legal
Proceedings - "Environmental Matters" in Part II of this report.
8. On June 27, 1999, Wisconsin Energy and WICOR, Inc., a Wisconsin corporation
("WICOR"), entered into an Agreement and Plan of Merger providing for a
strategic business combination of Wisconsin Energy and WICOR. The
transaction is intended to qualify as a tax-free reorganization to the
extent that shares of Wisconsin Energy Common Stock are issued in the
merger and will be accounted for as a purchase transaction. The merger
agreement has been approved by the boards of directors of Wisconsin Energy
and WICOR. Consummation of the merger is subject to the satisfaction of
certain closing conditions including approval by the shareholders of
Wisconsin Energy and WICOR and by federal and state regulators. The
regulatory approval process is expected to be completed in time for the
transaction to be consummated by the Spring of 2000.
Under the terms of the merger agreement, Wisconsin Energy will acquire all
of the outstanding shares of WICOR Common Stock for a fixed price of $31.50
for each WICOR share. At least 40% of the price will be paid in Wisconsin
Energy Common Stock, and Wisconsin Energy has the option to increase the
percentage to 60%; the balance will be paid in cash. The exchange ratio
for the Wisconsin Energy Common Stock will be set based upon the average
closing prices of Wisconsin Energy stock immediately prior to closing. If
the average is less than $22.00 per share, Wisconsin Energy may elect to
pay all cash. Each WICOR shareholder will be able to elect to receive
cash, stock, or a combination thereof, subject to proration.
For additional information, see Item 5. Other Information - "Merger
Agreement With WICOR, Inc." in Part II of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Wisconsin Energy Corporation is a holding company whose principal subsidiary is
Wisconsin Electric Power Company, an electric, gas and steam utility. Unless
qualified by their context, the terms "Wisconsin Energy" or the "Company", refer
to the holding company and all of its subsidiaries when used in this document.
During the first six months of 1999, approximately 91% of Wisconsin Energy's
consolidated operating revenues and 96% of Wisconsin Energy's consolidated
pretax operating income were attributable to Wisconsin Electric. As of June 30,
1999, approximately 83% of Wisconsin Energy's consolidated total assets were
attributable to Wisconsin Electric. The following discussion and analysis of
financial condition and results of operations includes both Wisconsin Energy and
Wisconsin Electric unless otherwise stated.
See Note 2 above in Item 1. Financial Statements - "Notes to Financial
Statements" for information concerning the reclassification of certain amounts
in Wisconsin Energy's prior year financial statements to the current year
presentation of non-utility operations.
CAUTIONARY FACTORS: A number of forward-looking statements are included in
this document. When used, the terms "anticipate," "believe," "estimate,"
"expect," "objective," "plan," "possible," "potential," "project" and similar
expressions are intended to identify forward-looking statements. Forward-
looking statements are subject to certain risks, uncertainties and assumptions
which could cause actual results to differ materially from those that are
described, including the factors that are noted in "Factors Affecting Results of
Operations" and "Cautionary Factors" below.
ACQUISITION OF ESELCO, INC.: Effective May 31, 1998, Wisconsin Energy acquired
ESELCO in a tax-free reorganization accounted for as a pooling of interests.
Due to the immaterial nature of the transaction, Wisconsin Energy has not
restated any historical financial or statistical information. For additional
information, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Factors Affecting Results of Operations"
in Part II of Wisconsin Energy's and Wisconsin Electric's combined Annual Report
on Form 10-K for the year ended December 31, 1998.
ESELCO was the parent company of Edison Sault Electric Company ("Edison Sault"),
an electric utility which serves approximately 21,000 residential, commercial
and industrial customers in Michigan's eastern Upper Peninsula. Where
appropriate, discussions as well as financial or statistical information of
Wisconsin Energy include Edison Sault's operations since June 1, 1998.
RESULTS OF OPERATIONS - 1999 SECOND QUARTER
EARNINGS
During the second quarter of 1999, Wisconsin Energy's consolidated net income
and earnings per share of common stock were $49 million and $0.42, respectively,
compared to $29 million and $0.25, respectively, during the second quarter of
1998. For the same periods, Wisconsin Electric's earnings increased to
$48 million during 1999 compared to $31 million during 1998. A summary of
contributions to Wisconsin Energy's earnings per share (basic and diluted) as
well as a review of operating results during the comparative periods by the
utility and non-utility business segments follows.
Three Months Ended June 30
--------------------------
Earnings Per Share - Wisconsin Energy 1999 1998 % Change
------------------------------------- ---- ---- --------
Utility Operations $0.421 $0.275 53.1%
Non-Utility Operations
Energy 0.022 (0.008) 375.0%
Other (0.024) (0.013) (84.6%)
------- -------
Total $0.419 $0.254 65.0%
======= =======
UTILITY OPERATING RESULTS
During the second quarter of 1999, Wisconsin Energy's pretax utility operating
income increased $26 million or 36.9% and Wisconsin Electric's pretax operating
income increased $24 million or 35.2%. An increase in electric utility gross
margin as well as lower other operation and maintenance expenses contributed in
large part to these increases compared to the second quarter of 1998.
Electric Utility Revenues, Gross Margins and Sales
WISCONSIN ENERGY: Primarily due to an increase in total electric kilowatt-hour
sales, total electric operating revenues increased by $16 million or 3.8% during
the second quarter of 1999 compared to the second quarter of 1998. The gross
margin on electric operating revenues (electric operating revenues less fuel and
purchased power expenses) increased by $21 million or 7.1%. The following table
summarizes Wisconsin Energy's total electric operating revenues, gross margin
and electric kilowatt-hour sales during the second quarters of 1999 and 1998.
Three Months Ended June 30
--------------------------
Electric Utility Operations-Wisconsin Energy 1999 1998 % Change
---------------------------------------------- ---- ---- --------
Electric Gross Margin ($000)
Electric Operating Revenues $424,395 $408,737 3.8%
Fuel & Purchased Power 112,453 117,456 (4.3%)
-------- --------
Gross Margin $311,942 $291,281 7.1%
======== ========
Total Electric Sales (Megawatt-hours) 7,786,654 7,213,018 8.0%
The following discussion reflects Wisconsin Electric's contribution to Wisconsin
Energy's second quarter electric utility revenues, gross margin and sales.
WISCONSIN ELECTRIC: Wisconsin Electric's total electric operating revenues
increased by $11 million or 2.7% during the second quarter of 1999 compared to
the second quarter of 1998, and the gross margin on electric operating revenues
increased by $18 million or 6.1%. Wisconsin Electric attributes these increases
to lower fuel and purchased power expenses and to an increase in total electric
kilowatt-hour sales during the second quarter of 1999.
Three Months Ended June 30
--------------------------
Electric Utility Operations-Wisconsin Electric 1999 1998 % Change
---- ---- --------
Electric Gross Margin ($000)
Electric Operating Revenues $416,437 $405,540 2.7%
Fuel & Purchased Power 109,269 116,000 (5.8%)
-------- --------
Gross Margin $307,168 $289,540 6.1%
======== ========
As a result of higher availability of low cost generation during the second
quarter of 1999, especially at its Point Beach Nuclear Plant, Wisconsin Electric
reduced its total fuel and purchased power expenses by $7 million or 5.8%
compared to the second quarter of 1998. Even with higher electric sales noted
below and a 12% increase in net generation, Wisconsin Electric was able to
substitute lower cost per unit generation during the three months ended June 30,
1999 for the higher cost per unit generation and power purchases used to meet
its demand for electric energy during the three months ended June 30, 1998.
During the second quarter of 1999, Wisconsin Electric reduced its fuel costs by
6.1%, its megawatt-hours of power purchases by 23.4% and its purchased power
expenses by 5.1% compared to the same period during 1998.
Wisconsin Electric's total electric sales increased 6.9% between the comparative
periods.
Three Months Ended June 30
--------------------------
Electric Utility Operations - Wisconsin Electric 1999 1998 % Change
------------------------------------------------ ---- ---- --------
Electric Sales (Megawatt-hours)
Residential 1,716,795 1,666,559 3.0%
Small Commercial/Industrial 1,957,467 1,898,768 3.1%
Large Commercial/Industrial 2,945,578 2,825,904 4.2%
Other-Retail/Municipal 313,631 324,390 (3.3%)
Resale-Utilities 704,485 432,002 63.1%
--------- ---------
Total Electric Sales 7,637,956 7,147,623 6.9%
========= =========
Electric energy sales to the Empire and Tilden ore mines, Wisconsin Electric's
two largest electric retail customers, increased 12.6% during the second quarter
of 1999 compared to the second quarter of 1998. Excluding the Empire and Tilden
ore mines, total electric sales increased 6.4% and sales to the remaining large
commercial/industrial customers increased 2.0%. Sales for resale to other
utilities increased 63.1% primarily due to higher opportunity sales during the
second quarter of 1999.
Gas Utility Revenues, Gross Margins and Sales
Due to an increase in higher margin residential gas sales during the second
quarter of 1999, Wisconsin Electric's gross margin on gas operating revenues
(gas operating revenues less cost of gas sold) increased by $0.4 million or 2.1%
compared to the second quarter of 1998.
Three Months Ended June 30
-----------------------------
Gas Utility Operations-Wisconsin Electric 1999 1998 % Change
------------------------------------------ ---- ---- --------
Gas Gross Margin ($000)
Gas Operating Revenues $49,496 $52,414 (5.6%)
Cost of Gas Sold 27,746 31,105 (10.8%)
------- -------
Gross Margin $21,750 $21,309 2.1%
======= =======
Despite an increase in total gas sales, the cost of gas sold decreased by
$3 million or 10.8% during the second quarter of 1999 due to a decrease in the
per unit cost of purchased gas. Because changes in the cost of natural gas
purchased at market prices are included in customer rates through the purchased
gas adjustment mechanism, gas operating revenues change at the same rate as the
cost of gas sold and gross margin is unaffected by such changes.
The following table summarizes Wisconsin Electric's comparative gas sales and
total therm deliveries during the three months ended June 30, 1999 and 1998.
Three Months Ended June 30
-----------------------------
Gas Utility Operations-Wisconsin Electric 1999 1998 % Change
- ------------------------------------------- ---- ---- --------
Gas Deliveries (000's of Therms)
Residential 43,707 38,331 14.0%
Commercial/Industrial 26,583 28,634 (7.2%)
Interruptible 3,882 4,798 (19.1%)
------- -------
Total Gas Sales 74,172 71,763 3.4%
Transported Customer Owned Gas 75,561 82,991 (9.0%)
Other-Interdepartmental 17,482 26,662 (34.4%)
------- -------
Total Gas Deliveries 167,215 181,416 (7.8%)
======= =======
Between the comparative periods, total natural gas therm deliveries decreased
7.8% due to a significant decrease in deliveries of transported customer owned
gas and in interdepartmental deliveries. However, total retail gas sales
increased 3.4% during the second quarter of 1999 as a result of a 14.0% increase
in higher margin sales to residential customers. Residential sales increased
due to a combination of an increase in the number of residential customers and
an increase in sales per residential customer.
During the second quarter of 1999, a 28.1% decrease in therm deliveries to the
Whitewater Cogeneration Facility, owned by an unaffiliated independent power
producer, contributed to much of the 9.0% decrease in transported customer owned
gas deliveries. The Whitewater Cogeneration Facility, a gas-fired electric
cogeneration plant, went into commercial operation in September 1997. Wisconsin
Electric purchases the majority of the electricity generated by the Whitewater
Cogeneration Facility under a long-term power purchase contract. Also during
the second three months of 1999, total interdepartmental therm deliveries
decreased 34.4%. Most interdepartmental therm deliveries are to company-owned,
gas-fired generating facilities. As noted above, higher availability of
company-owned, low cost generation during the second quarter of 1999, especially
at Point Beach Nuclear Plant, allowed Wisconsin Electric to change its power
supply mix during the second quarter of 1999 away from higher cost per unit
power purchases from the Whitewater Cogeneration Facility and away from higher
cost per unit company-owned, gas-fired generating facilities. Excluding
deliveries to the Whitewater Cogeneration Facility as well as total
interdepartmental therm deliveries, total gas deliveries increased 0.6%
during the three months ended June 30, 1999 compared to the same period in 1998.
Weather was not a factor between the comparative periods. As measured by
heating degree days, the second quarter of 1999 was only 0.1% colder than the
second quarter of 1998. However the second quarters of 1999 and 1998 were both
significantly warmer than normal.
Utility Operating Expenses
OTHER OPERATIONS AND MAINTENANCE: Compared to the second quarter of 1998,
other operation and maintenance expenses in Wisconsin Energy's utility business
segment decreased by $10 million or 6.0% during the second quarter of 1999,
including an $11 million or 6.5% decrease at Wisconsin Electric. At Wisconsin
Electric, nuclear non-fuel expenses decreased $21 million while administrative
and general expenses increased $7 million and steam power generation expenses
increased $2 million. Administrative and general expenses increased during 1999
primarily as a result of efforts to prepare for Year 2000 technology issues,
various other corporate technology improvement efforts, and increased staffing.
For further information, see "Year 2000 Technology Issues" below in "Factors
Affecting Results of Operations." Steam power generation expenses increased
during 1999 as a result of an increase in the number of maintenance outages at
Wisconsin Electric's fossil-fuel power plants in anticipation of higher electric
demand during the summer of 1999.
DEPRECIATION AND AMORTIZATION: As a result of an increase in decommissioning
expenses at Wisconsin Electric due to higher decommissioning trust fund earnings
during the second quarter of 1999, Wisconsin Energy's utility depreciation and
amortization expense increased by $4 million or 6.6% and Wisconsin Electric's
depreciation and amortization increased by $3 million or 5.6% compared to the
second quarter of 1998.
NON-UTILITY OPERATING RESULTS
Primarily due to the mid-April 1999 acquisition of two fossil-fueled power
plants in the State of Connecticut by Wisvest-Connecticut, LLC, Wisconsin
Energy's pretax non-utility operating income increased by $9 million or 631.2%
during the second quarter of 1999 compared to the second quarter of 1998.
Three Months Ended June 30
-------------------------------
Non-Utility Operations ($000) 1999 1998 % Change
----------------------------- ---- ---- --------
Operating Revenues
Independent Power Production $36,097 $ - -
Energy Marketing, Trading & Services 16,776 4,100 309.2%
Other 8,236 6,509 26.5%
------- -------
Total Operating Revenues 61,109 10,609 476.0%
Operating Expenses
Fuel and Purchased Power 34,797 4,214 725.7%
Other 18,950 7,781 143.5%
------- -------
Total Operating Expenses 53,747 11,995 348.1%
------- -------
Pretax Operating Income $7,362 ($1,386) 631.2%
======= =======
For further information concerning Wisvest-Connecticut, LLC's recent power plant
acquisitions, see Item 1. Financial Statements - "Notes To Financial Statements"
in Part I of this report.
OPERATING REVENUES: Following their acquisition, operation of the Wisvest-
Connecticut, LLC power plants resulted in $36 million of operating revenues
during the second quarter of 1999 through the sale of 960,000 megawatt-hours of
net generation to customers in the New England region. Increased activity
during the second quarter of 1999 by Griffin Energy Marketing LLC, another
wholly owned subsidiary of Wisvest Corporation ("Griffin"), contributed to a
$13 million increase in operating revenues for energy marketing, trading and
services compared to the second quarter of 1998.
OPERATING EXPENSES: Fuel and purchased power expenses increased $31 million
during the second quarter of 1999 as a result of electric generation at Wisvest-
Connecticut, LLC's newly acquired power plants and increased activities by
Griffin. Other operating expenses increased $11 million primarily as a result
of operation of Wisvest-Connecticut, LLC's plants since mid-April 1999.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS: Due to the gain on the sale of certain properties
at Wisconsin Electric, Wisconsin Energy's and Wisconsin Electric's other net
other income and deductions increased by $3 million during the second quarter of
1999 compared to the second quarter of 1998.
INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense increased by
$5 million between the comparative periods of which $3 million is related to the
acquisition of the Wisvest-Connecticut, LLC power plants in mid-April 1999.
INCOME TAXES: Compared to the second quarter of 1999, Wisconsin Energy's
income taxes increased $12 million primarily due to increased pretax income at
Wisconsin Electric during the second quarter of 1999.
RESULTS OF OPERATIONS - 1999 YEAR-TO-DATE
EARNINGS
During the first half of 1999, Wisconsin Energy's consolidated net income and
earnings per share of common stock were $102 million and $0.88, respectively,
compared to $78 million and $0.69, respectively, during the first half of 1998.
For the same periods, Wisconsin Electric's earnings increased to $104 million
during 1999 compared to $81 million during 1998. A summary of contributions to
Wisconsin Energy's earnings per share (basic and diluted) as well as a review of
operating results during the comparative periods by the utility and non-utility
business segments follows.
Six Months Ended June 30
----------------------------
Earnings Per Share - Wisconsin Energy 1999 1998 % Change
------------------------------------- ---- ---- --------
Utility Operations $0.909 $0.718 26.6%
Non-Utility Operations
Energy (0.005) (0.017) 70.6%
Other (0.023) (0.013) (76.9%)
------- -------
Total $0.881 $0.688 28.1%
======= =======
UTILITY OPERATING RESULTS
During the first half of 1999, Wisconsin Energy's pretax utility operating
income increased $36 million or 21.9% and Wisconsin Electric's pretax operating
income increased $33 million or 20.0%. An increase in electric and gas utility
gross margins contributed in large part to these increases compared to the first
half of 1998.
Electric Utility Revenues, Gross Margins and Sales
WISCONSIN ENERGY: Primarily due to an increase in total 1999 electric
kilowatt-hour sales and, to a lesser extent, to a Wisconsin Electric retail
electric increase effective May 1, 1998 in the Wisconsin jurisdiction, total
electric operating revenues increased by $39 million or 4.9% during the first
half of 1999 compared to the first half of 1998. The gross margin on electric
operating revenues (electric operating revenues less fuel and purchased power
expenses) increased by $48 million or 8.6%. The following table summarizes
Wisconsin Energy's total electric operating revenues, gross margin and electric
kilowatt-hour sales during the first halves of 1999 and 1998.
Six Months Ended June 30
-------------------------------
Electric Utility Operations - Wisconsin Energy 1999 1998 % Change
- ---------------------------------------------- ---- ---- --------
Electric Gross Margin ($000)
Electric Operating Revenues $830,950 $792,376 4.9%
Fuel & Purchased Power 218,173 227,948 (4.3%)
-------- --------
Gross Margin $612,777 $564,428 8.6%
======== ========
Total Electric Sales (Megawatt-hours) 15,179,859 14,170,452 7.1%
The following discussion reflects Wisconsin Electric's contribution to Wisconsin
Energy's first half electric utility revenues, gross margin and sales.
WISCONSIN ELECTRIC: Compared to the first half of 1998, Wisconsin Electric's
total electric operating revenues increased by $25 million or 3.2% during the
first half of 1999 and the gross margin on electric operating revenues increased
by $40 million or 7.2%. Wisconsin Electric attributes these increases to lower
fuel and purchased power expenses, to an increase in total electric kilowatt-
hour sales during the first half of 1999 and, to a lesser extent, to a retail
electric increase, effective May 1, 1998 in the Wisconsin jurisdiction.
Six Months Ended June 30
---------------------------
Electric Utility Operations - Wisconsin Electric 1999 1998 % Change
----------------------------------------------- ---- ---- --------
Electric Gross Margin ($000)
Electric Operating Revenues $814,111 $789,180 3.2%
Fuel & Purchased Power 211,057 226,492 (6.8%)
-------- --------
Gross Margin $603,054 $562,688 7.2%
======== ========
As a result of the higher availability of lower cost generation during the first
half of 1999 noted above, especially at its Point Beach Nuclear Plant, Wisconsin
Electric reduced its total fuel and purchased power expenses by $15 million or
6.8% compared to the first half of 1998. Even with the higher electric sales
noted below and a 12% increase in net generation, Wisconsin Electric was able to
substitute lower cost per unit generation during the six months ended June 30,
1999 for the higher cost per unit generation and power purchases used to meet
its demand for electric energy during the six months ended June 30, 1998.
During the first half of 1999, Wisconsin Electric reduced its fuel costs by
5.2%, its megawatt-hours of power purchases by 23.7% and its purchased power
expenses by 10.2% compared to the same period during 1998.
Wisconsin Electric's total electric sales increased 5.4% between the comparative
periods.
Six Months Ended June 30
------------------------
Electric Utility Operations - Wisconsin Electric 1999 1998 % Change
- ------------------------------------------------ ---- ---- --------
Electric Sales (Megawatt-hours)
Residential 3,509,047 3,475,279 1.0%
Small Commercial/Industrial 3,905,902 3,744,137 4.3%
Large Commercial/Industrial 5,706,218 5,515,395 3.5%
Other-Retail/Municipal 622,871 651,112 (4.3%)
Resale-Utilities 1,119,984 719,134 55.7%
---------- ----------
Total Electric Sales 14,864,022 14,105,057 5.4%
========== ==========
Electric energy sales to the Empire and Tilden ore mines increased 10.3% during
the first half of 1999 compared to the first half of 1998. Excluding the Empire
and Tilden ore mines, total electric sales increased 4.9% and sales to the
remaining large commercial/industrial customers increased 1.7%. Sales for
resale to other utilities increased 55.7% primarily due to higher opportunity
sales during the first half of 1999.
Gas Utility Revenues, Gross Margins and Sales
Due to an increase in higher margin gas sales during the first half of 1999,
Wisconsin Electric's gross margin on gas operating revenues (gas operating
revenues less cost of gas sold) increased by $6 million or 9.4% compared to the
first half of 1998.
Six Months Ended June 30
----------------------------
Gas Utility Operations - Wisconsin Electric 1999 1998 % Change
------------------------------------------- ---- ---- --------
Gas Gross Margin ($000)
Gas Operating Revenues $171,479 $171,825 (0.2%)
Cost of Gas Sold 96,606 103,406 (6.6%)
-------- --------
Gross Margin $ 74,873 $ 68,419 9.4%
======== ========
Despite an increase in total gas sales, the cost of gas sold decreased by
$7 million or 6.6% during the first half of 1999 due to a decrease in the per
unit cost of purchased gas. Because changes in the cost of natural gas
purchased at market prices are included in customer rates through the purchased
gas adjustment mechanism, gas operating revenues change at the same rate as the
cost of gas sold and gross margin is unaffected by such changes.
The following table summarizes Wisconsin Electric's comparative gas sales and
total therm deliveries during the six months ended June 30, 1999 and 1998.
Six Months Ended June 30
------------------------
Gas Utility Operations - Wisconsin Electric 1999 1998 % Change
- ------------------------------------------ ---- ---- --------
Gas Deliveries (000's of Therms)
Residential 195,441 172,160 13.5%
Commercial/Industrial 120,816 112,449 7.4%
Interruptible 10,495 12,509 (16.1%)
------- -------
Total Gas Sales 326,752 297,118 10.0%
Transported Customer Owned Gas 183,761 182,187 0.9%
Other - Interdepartmental 21,968 35,154 (37.5%)
------- -------
Total Gas Deliveries 532,481 514,459 3.5%
======= =======
Compared to the same period in 1998, total natural gas therm deliveries
increased 3.5% during the first half of 1999 due in part to colder winter
weather. As measured by heating degree days, the winter months of January
through March 1999 were 10.8% colder than the same period in 1998. However, the
winter months of 1999 were still 4.1% warmer than normal. Increased therm
deliveries during the first half of 1999 were primarily to residential and
commercial customers, who are more sensitive to weather variations and who
contribute higher margins to earnings than other customer classes.
During the first half of 1999, therm deliveries to the Whitewater Cogeneration
Facility, owned by an unaffiliated independent power producer, decreased 3.4%
compared to the first half of 1998. Also during the first six months of 1999,
total interdepartmental therm deliveries decreased 37.5%. As noted above,
higher availability of company-owned low cost generation during the first half
of 1999 allowed Wisconsin Electric to change its power supply mix during the
first half of 1999 away from higher cost per unit power purchases from the
Whitewater Cogeneration Facility and away from higher cost per unit company-
owned, gas-fired generating facilities. Excluding deliveries to the Whitewater
Cogeneration Facility as well as total interdepartmental therm deliveries, total
gas deliveries increased 7.4% during the six months ended June 30, 1999 compared
to the same period in 1998.
Utility Operating Expenses
OTHER OPERATIONS AND MAINTENANCE: Compared to the first half of 1998, other
operation and maintenance expenses in Wisconsin Energy's utility business
segment increased by $9 million or 2.7% during the first half of 1999, including
a $6 million or 1.9% increase at Wisconsin Electric. At Wisconsin Electric,
nuclear non-fuel expenses decreased $17 million while administrative and general
expenses increased $16 million and steam power generation expenses increased
$4 million. Administrative and general expenses increased during 1999 primarily
as a result of efforts to prepare for Year 2000 technology issues, various other
corporate technology improvement efforts, and increased staffing. For further
information, see "Year 2000 Technology Issues" below in "Factors Affecting
Results of Operations." Steam power generation expenses increased during 1999
as a result of an increase in the number of maintenance outages at Wisconsin
Electric's fossil-fuel power plants in anticipation of higher electric demand
during the summer of 1999.
DEPRECIATION AND AMORTIZATION: As a result of an increase in amortizable
software during 1999 at Wisconsin Electric, partially offset by a decrease in
decommissioning expenses at Wisconsin Electric due to lower decommissioning
trust fund earnings during the first half of 1999, depreciation and amortization
expense in Wisconsin Energy's utility business segment increased by $7 million
or 5.6% and Wisconsin Electric's depreciation and amortization increased by
$5 million or 4.5% compared to the first half of 1998.
NON-UTILITY OPERATING RESULTS
Primarily due to the mid-April 1999 acquisition of the two fossil-fueled power
plants in the State of Connecticut by Wisvest-Connecticut, LLC noted above,
Wisconsin Energy's pretax non-utility operating income increased by $6 million
or 218.2% during the first six months of 1999 compared to the first six months
of 1998.
Six Months Ended June 30
------------------------
Non-Utility Operations ($000) 1999 1998 % Change
----------------------------- ---- ---- --------
Operating Revenues
Independent Power Production $36,097 $ - -
Energy Marketing, Trading & Services 30,782 5,317 478.9%
Other 14,227 10,287 38.3%
------- -------
Total Operating Revenues 81,106 15,604 419.8%
Operating Expenses
Fuel and Purchased Power 49,472 5,444 808.7%
Other 28,272 13,005 117.4%
------- -------
Total Operating Expenses 77,744 18,449 321.4%
------- -------
Pretax Operating Income $ 3,362 ($2,845) 218.2%
======= =======
OPERATING REVENUES: Following their acquisition, operation of the Wisvest-
Connecticut, LLC power plants resulted in $36 million of operating revenues
during the first half of 1999 through the sale of 960,000 megawatt-hours of net
generation to customers in the New England region. Increased activity during
the first half of 1999 by Griffin contributed to a $25 million increase in
operating revenues for energy marketing, trading and services compared to the
first half of 1998.
OPERATING EXPENSES: Fuel and purchased power expenses increased $44 million
during the first half of 1999 as a result of electric generation at Wisvest-
Connecticut, LLC's newly acquired power plants and increased activities by
Griffin. Other operating expenses increased $15 million primarily as a result
of operation of Wisvest-Connecticut, LLC's plants since mid-April 1999.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS: Due to the gain on the sale of certain properties
at Wisconsin Electric, Wisconsin Energy's and Wisconsin Electric's other net
other income and deductions increased by $3 million during the first half of
1999 compared to the first half of 1998.
INTEREST CHARGES AND OTHER: Wisconsin Energy's interest expense increased by
$7 million between the comparative periods, of which $3 million was related to
the acquisition of the Wisvest-Connecticut, LLC power plants in mid-April 1999.
INCOME TAXES: Compared to the first half of 1999, Wisconsin Energy's income
taxes increased $14 million primarily due to increased pretax income at
Wisconsin Electric during the first half of 1999.
FACTORS AFFECTING RESULTS OF OPERATIONS
ETSM PROPERTY / CITY OF WEST ALLIS LAWSUITS
See Item 1. Legal Proceedings - "Environmental Matters" below in Part II of this
report for information concerning a July 1999 jury verdict against Wisconsin
Electric awarding the plaintiffs $4.5 million of actual damages and $100 million
in punitive damages in a lawsuit alleging that Wisconsin Electric had placed
contaminated wastes at two sites in the City of West Allis, Wisconsin.
INDUSTRY RESTRUCTURING AND COMPETITION
MPSC ELECTRIC RESTRUCTURING: In 1998, the Michigan Public Service Commission
("MPSC") continued to move toward implementation of direct access for retail
markets beginning on January 1, 2002. In February 1998, the MPSC issued an
order clarifying restructuring issues and directing Detroit Edison and Consumers
Energy, the two largest utilities in the State of Michigan, to file tariff
sheets and draft implementation plans for direct access. Following company
submittals in late February 1998, the MPSC staff held several public meetings to
discuss the plans with stakeholders. In June 1998, the two companies filed
revised implementation plans reflecting some of the issues raised during the
meetings. In June 1999, the Michigan Supreme Court ruled that the MPSC did not
have the authority to mandate direct access plans. Detroit Edison and Consumers
Energy have since indicated their willingness to proceed on a voluntary basis
with commencement of a phase-in of direct access in late 1999 that will result
in full access by January 1, 2002.
Following meetings with the MPSC staff and the opening of dockets to begin the
process of electric restructuring for smaller Michigan utilities, these smaller
utilities, including Wisconsin Electric and Edison Sault, filed proposals with
the MPSC for implementing retail direct access on January 1, 2002 without a
phase-in program. On February 2, 1999, the MPSC issued an order closing the
above dockets, citing the progress made to date. Issues requiring further
resolution will be the subject of future dockets for the smaller companies.
Following the Michigan Supreme Court decision noted above, the MPSC requested
that the smaller Michigan utilities provide comments in August 1999 on the court
decision and on implementation of direct access programs. The MPSC is expected
to address access programs for smaller utilities in late 1999.
RATES AND REGULATORY MATTERS
See Item 1. Legal Proceedings -"Rates and Regulatory Matters" in Part II of this
report for information concerning 1999 test year information for Wisconsin
Electric that was filed with the PSCW in July 1999 and for information
concerning the non-utility asset cap to which Wisconsin Energy is subject under
provisions of the State of Wisconsin's public utility holding company law.
YEAR 2000 TECHNOLOGY ISSUES
The Company is working to resolve the potential impact of the Year 2000 on its
ability to operate critical systems and to accurately process information that
may be date sensitive.
YEAR 2000 PROJECT: During 1997, the Company created Year 2000 program teams,
overseen by executives of the Company, to address its Year 2000 issues. The
teams, comprised of representatives with subject matter expertise, are
addressing business applications, voice and data infrastructure, process control
and embedded systems, and supplier readiness.
The Year 2000 teams are following a structured process of inventorying and
assessing potential Year 2000 problems, of remediating, testing, and certifying
Year 2000 readiness and of developing and implementing Year 2000 risk management
contingency plans. Although additional systems or processes may be identified
as the program winds down, the Company has substantially completed an inventory
of potential Year 2000 problems across all operating areas and completed its
assessment of critical areas in the fourth quarter of 1998. The remediation and
testing phases are currently in progress and contacts with critical third party
suppliers are ongoing. Based upon an initial assessment of critical supplier
Year 2000 readiness that was completed in the third quarter of 1998, the Company
is continuing to implement supplier risk mitigation actions. Contact with
significant customers to evaluate the potential impact of their Year 2000
actions on Wisconsin Energy will continue throughout 1999.
The Company has structured its Year 2000 program to identify, prioritize, and
address critical business functions within the Company. With the exception of
those projects that are dependent upon activities such as vendor delivery of
upgrades or scheduled power plant maintenance outages later in 1999, the
Company's core, critical business functions are "Year 2000 Ready." However,
additional refinements and testing will continue through the end of 1999. Based
upon the Nuclear Energy Institute's standard definition, which has been adopted
by Wisconsin Energy, "Year 2000 Ready" systems or applications will be suitable
for continued use into the Year 2000 even though the system or application may
not be fully "Year 2000 Compliant."
Wisconsin Electric participates in monthly reporting conducted by the North
American Electric Reliability Council ("NERC"). As of June 30, 1999, Wisconsin
Electric reported to NERC the readiness of those critical systems needed to
support the generation, transmission and distribution of electricity with minor
exceptions consisting of previously tested upgrades scheduled for implementation
during fall maintenance activities.
POTENTIAL RISKS AND CONTINGENCY PLANNING: The Company is continuing an ongoing
process of assessing potential Year 2000 risks and uncertainties. Internal and
external risks are included in the Company's assessment and identification of
mitigation strategies. Wisconsin Energy expects to successfully mitigate its
controllable internal Year 2000 problems.
For its core operation, Wisconsin Energy also relies upon third parties such as
other power providers to and operators of the integrated electric transmission
and distribution grid, fuel suppliers, producers of natural gas and suppliers of
interstate natural gas transportation services, and providers of external
infrastructure such as telecommunications, municipal sewer and water as well as
emergency services. Failure of these critical third parties to identify and
remediate their Year 2000 problems could have a material impact on the Company's
operation and financial condition. The Company's Year 2000 program is
structured to identify, assess and mitigate these third party risks where
possible. At this time, Wisconsin Energy believes that mitigation efforts will
be successful.
As part of its normal business practice, the Company maintains and periodically
initiates various contingency plans to maintain and restore its energy services
during emergency circumstances, some of which could arise from Year 2000 related
problems. During 1999, Wisconsin Energy is using this experience as a basis for
the development and implementation of Year 2000 related contingency and business
continuity plans. As part of this effort, the Company is coordinating its
Year 2000 readiness program with various trade associations and industry groups
and is working with the Mid-America Interconnected Network, Inc. ("MAIN"), NERC,
the Wisconsin Reliability Assessment Organization and the New England Pool
("NEPOOL") to develop and implement regional electric reliability contingency
plans. Wisconsin Electric is participating with other utilities in MAIN to
develop reasonably likely worst case scenarios for the region. Scenarios that
have been jointly identified and assessed are:
* Loss or unavailability of some generation.
* Partial loss of system monitoring and control functions, including data
communication.
* Partial loss of voice communications.
* Loss of transmission facilities.
* Loss of load and/or uncharacteristic loads.
Wisconsin Electric agrees with MAIN's assessment that the probability of these
scenarios occurring due to Year 2000 is not significantly in excess of normal
expectations. The Company's current operating and contingency plans are
expected to adequately handle the above scenarios. The Company is reviewing its
operating and contingency plans to identify further enhancements or updates
specifically addressing Year 2000 issues.
FINANCIAL IMPLICATIONS: Wisconsin Energy currently estimates that it will
incur $40 million of expenses during 1998 through 2000 for its Year 2000 program
of which $26 million has been incurred as of June 30, 1999. In addition, the
Company expects to capitalize costs of approximately $18 million to replace
certain existing infrastructure and process control systems of which $16 million
has been capitalized as of June 30, 1999.
For additional information concerning Year 2000 Technology Issues, see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Factors Affecting Results of Operations" in Part II of Wisconsin
Energy's and Wisconsin Electric's combined Annual Report on Form 10-K for the
year ended December 31, 1998 and Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results of
Operations in Part I of Wisconsin Energy's and Wisconsin Electric's combined
quarterly Report on Form 10-Q for the period ended March 31, 1999.
The discussion above includes many forward looking statements concerning
potential schedules, plans, costs, risks and uncertainties facing Wisconsin
Energy as a result of the Year 2000 problem. Based upon its activities to date,
the Company expects to successfully implement the remaining actions necessary to
become "Year 2000 Ready" by the end of 1999. However, the Year 2000 problem has
many elements and potential consequences, some of which may not be reasonably
foreseeable, and there can be no assurances that every Year 2000 problem will be
identified and addressed or that unforeseen consequences will not arise.
Unanticipated factors while implementing the changes necessary to mitigate
Year 2000 problems, including the ongoing availability and costs of trained
personnel, the ability to locate and correct all relevant codes in computer and
embedded systems, or the failure of critical third parties to communicate about
and to mitigate their Year 2000 problems could result in unanticipated
interruptions in certain core business activities or operations of Wisconsin
Energy.
MARKET RISKS
INTEREST RATE RISK: Wisvest-Connecticut, LLC has entered into an interest rate
swap agreement to exchange fixed rate payment obligations for variable rate
receipt rights without exchanging the underlying notional amounts. This
agreement, which expires on December 31, 2005, serves to convert variable rate
debt under Wisvest-Connecticut, LLC's long-term nonrecourse notes to fixed rate
debt to reduce the impact of interest rate fluctuations. The variable rate debt
is based upon a three-month LIBOR rate; the fixed rated debt is 5.99%. The
notional amounts parallel a portion of the underlying debt levels and are used
to measure interest to be paid or received and do not represent the exposure to
credit loss. The notional amount of Wisvest-Connecticut, LLC's interest rate
swaps was $77.5 million at June 30, 1999. This notional amount decreases on a
quarterly basis over the remaining term of the agreement. The difference
between the amounts paid and received under the interest rate swap is accrued as
interest rates change and is recorded as an adjustment to interest expense over
the life of the hedged agreement.
The fair value of the interest rate swap is the amount that Wisvest-Connecticut,
LLC would receive or pay to terminate the outstanding contract at the reporting
date. Wisvest-Connecticut, LLC would have received $1.2 million to terminate
the contract at June 30, 1999. A 10% increase or decrease in the market value
of the swap would change this amount by approximately $0.1 million.
OUTLOOK
EARNINGS: Results during the first half of 1999 indicate that the Company is
on course to meet currently anticipated earnings in the range of $1.85 to $2.05
per share during 1999. This earnings forecast is a forward-looking statement
subject to certain risks, uncertainties and assumptions. Actual results may
materially vary. Factors that could cause actual results to differ materially
include, but are not limited to: business and competitive conditions in the
energy industry, in general, and in the Company's utility service territories;
availability of the Company's generating facilities; changes in purchased power
costs; and the economy, weather, the restructuring of the electric and gas
utility industries, and unforeseen problems with non-utility diversification
efforts. See "Cautionary Factors" below.
MERGER AGREEMENT WITH WICOR, INC.
On June 27, 1999, Wisconsin Energy and WICOR entered into an Agreement and Plan
of Merger providing for a strategic business combination of Wisconsin Energy and
WICOR. The transaction is intended to qualify as a tax-free reorganization to
the extent that shares of Wisconsin Energy Common Stock are issued in the merger
and will be accounted for as a purchase transaction. The merger agreement has
been approved by the boards of directors of Wisconsin Energy and WICOR.
Consummation of the merger is subject to the satisfaction of certain closing
conditions including approval by the shareholders of Wisconsin Energy and WICOR
and by federal and state regulators. The regulatory approval process is
expected to be completed in time for the transaction to be consummated by the
spring of 2000. For additional information, see Item 5. Other Information -
"Merger Agreement With WICOR, Inc." in Part II of this report.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES: Cash provided by operating activities totaled
$229 million at Wisconsin Energy and $269 million at Wisconsin Electric during
the first six months of 1999. This compares to $255 million at Wisconsin Energy
and $299 million at Wisconsin Electric during the same period in 1998.
INVESTING ACTIVITIES: Net investing activities totaled $573 million at
Wisconsin Energy and $220 million at Wisconsin Electric during the first half of
1999 compared to $175 million at Wisconsin Energy and $147 million at Wisconsin
Electric during the same period in 1998. In April 1999, Wisvest-Connecticut,
LLC completed the acquisition of two fossil-fueled power plants for $277 million
from The United Illuminating Company. For additional information, see the
"Notes To Financial Statements" above in Part I of this report. Remaining
investments during the first half of 1999 included $237 million for the
acquisition or construction of new or improved facilities of which $183 million
was for a number of projects related to utility plant at Wisconsin Electric.
During the first six months of 1999, Wisconsin Electric recorded $19 million of
payments to and earnings of the Nuclear Decommissioning Trust Fund for the
eventual decommissioning of Point Beach Nuclear Plant and $11 million for the
acquisition of nuclear fuel.
FINANCING ACTIVITIES: During the first half of 1999, Wisconsin Energy received
a net of $363 million through financing activities compared to using a net of
$85 million for financing activities during the first half of 1998. Wisconsin
Electric used a net of $52 million for financing activities during the first six
months of 1999 compared to using a net of $154 million for financing activities
during the first six months of 1998.
On March 25, 1999, WEC Capital Trust I, a Delaware business trust of which
Wisconsin Energy owns all of the outstanding common securities, issued
$200 million of 6.85% trust preferred securities due March 31, 2039. WEC
Capital Trust I used the proceeds from the sale of the trust preferred
securities to purchase corresponding junior subordinated debentures due
March 31, 2039 from Wisconsin Energy. Wisconsin Energy used the proceeds from
the sale of its junior subordinated debentures to fund a capital contribution of
approximately $105 million to Wisvest-Connecticut, LLC for acquisition in mid-
April 1999 of the two fossil-fueled power plants from The United Illuminating
Company and for repayment of short-term borrowings. For additional information
concerning the acquisition of The United Illuminating Company's electric
generating plants and related financing, see the "Notes To Financial Statements"
above in Part I of this report.
During the six months ended June 30, 1999, Wisconsin Energy issued 1,385,878 new
shares of common stock which were purchased by participants in the Company's
stock plans with cash investments and reinvested dividends aggregating
approximately $37 million.
CAPITAL REQUIREMENTS AND RESOURCES: Capital requirements for the remainder of
1999 are expected to be principally for construction expenditures and for other
investments, for long-term debt maturity and sinking fund requirements and for
payments to the Nuclear Decommissioning Trust Fund for the eventual
decommissioning of Point Beach Nuclear Plant. These cash requirements are
expected to be met through a combination of several of the following resources:
internal sources of funds from operations, short-term borrowings, the issuance
of intermediate or long-term debt, the issuance of additional trust preferred
securities, and proceeds from the sale of new issue common stock under Wisconsin
Energy's stock plans. Wisconsin Electric plans to issue up to $150 million of
debentures during the remainder of 1999.
Wisconsin Energy is reviewing additional non-utility growth opportunities on an
ongoing basis, primarily in the areas of power generation development and
acquisitions, waste to energy recycling technologies and real estate
investments. The Company may make further investments and/or acquisitions from
time to time.
With respect to the pending acquisition of WICOR, Inc., Wisconsin Energy plans
to fund the portion of the WICOR acquisition price not paid with Wisconsin
Energy Common Stock from bank borrowing arrangements or from securities to be
issued in the capital markets. The amount and timing of bank borrowings and
securities to be issued in the capital markets have not yet been determined.
For additional information concerning the merger with WICOR, see Item 5. Other
Information - "Merger Agreement with WICOR, Inc." in Part II of this report.
Wisconsin Electric currently has senior secured debt ratings of AA+ by Standard
& Poors Corporation ("S&P") and Duff & Phelps Inc. ("D&P"), Aa2 by Moody's
Investors Service ("Moody's") and AA by Fitch Investors Service ("Fitch"). In
addition, Wisconsin Electric currently has unsecured debt ratings of AA by S&P
and D&P, Aa3 by Moody's and AA- by Fitch. Wisconsin Electric's preferred stock
has ratings of AA- by S&P and Fitch, aa3 by Moody's and AA by D&P. Moody's has
assigned a rating on Wisconsin Energy Capital Corporation's unsecured debt of A1
and S&P an AA. Wisconsin Energy's and Wisconsin Electric's commercial paper are
rated A-1+ by S&P and P-1 by Moody's. D&P has rated Wisconsin Energy and
Wisconsin Electric commercial paper D-1 and D-1+, respectively. The Trust
Preferred securities of WEC Capital Trust I are rated A by D&P, a1 by Moody's
and A+ by S&P. Following the announcement of the proposed merger with WICOR,
D&P, Fitch and Moody's affirmed their previous ratings of Wisconsin Energy's and
Wisconsin Electric's securities and S&P placed its ratings of certain of
Wisconsin Energy's securities on credit watch with negative implications.
At June 30, 1999, Wisconsin Energy had $383 million of unused lines of bank
credit on a consolidated basis of which $128 million was at Wisconsin Electric.
Effective with the August 1999 renewal of its commercial paper agreement,
Wisconsin Energy's unused lines of bank credit totaled $433 million on a
consolidated basis with $128 million attributable to Wisconsin Electric.
For certain other information which may impact Wisconsin Energy's and Wisconsin
Electric's future financial condition or results of operations, see Item 1.
Financial Statements - "Notes to Financial Statements" in Part I of this report
as well as Item 1. Legal Proceedings and Item 5. Other Information in Part II
of this report.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of Wisconsin Energy or Wisconsin
Electric. Such statements are based upon management's current expectations and
are subject to risks and uncertainties that could cause Wisconsin Energy's or
Wisconsin Electric's actual results to differ materially from those contemplated
in the statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "possible," "potential," "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause Wisconsin Energy's or Wisconsin Electric's
actual results to differ materially from those contemplated in any forward-
looking statements include, among others, the following:
OPERATING, FINANCIAL AND INDUSTRY FACTORS
* Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of Wisconsin Electric's,
Edison Sault's or Wisvest-Connecticut, LLC's generating facilities;
unscheduled generation outages, maintenance or repairs; unanticipated
changes in fossil fuel, nuclear fuel, purchased power, gas supply or water
supply costs or availability due to higher demand, shortages, transportation
problems or other developments; nonperformance by electric energy or natural
gas suppliers under existing power purchase or gas supply contracts; nuclear
or environmental incidents; resolution of spent nuclear fuel storage and
disposal issues; electric transmission or gas pipeline system constraints;
unanticipated organizational structure or key personnel changes; collective
bargaining agreements with union employees or work stoppages; inflation
rates; or demographic and economic factors affecting utility service
territories or operating environment.
* Regulatory factors such as unanticipated changes in rate-setting policies or
procedures; unanticipated changes in regulatory accounting policies and
practices; industry restructuring initiatives; transmission system operation
and/or administration initiatives; recovery of costs of previous investments
made under traditional regulation; required approvals for new construction;
changes in the United States Nuclear Regulatory Commission's regulations
related to Point Beach Nuclear Plant; changes in the United States
Environmental Protection Agency's as well as the Wisconsin or Michigan
Department of Natural Resources' regulations related to emissions from
fossil-fuel-fired power plants; or the siting approval process for new
generation and transmission facilities.
* The rapidly changing and increasingly competitive electric and gas utility
environment as market-based forces replace strict industry regulation and
other competitors enter the electric and gas markets resulting in increased
wholesale and retail competition.
* Consolidation of the industry as a result of the combination and acquisition
of utilities in the Midwest, nationally and globally.
* Restrictions imposed by various financing arrangements and regulatory
requirements on the ability of Wisconsin Electric or other subsidiaries to
transfer funds to Wisconsin Energy in the form of cash dividends, loans or
advances.
* Changes in social attitudes regarding the utility and power industries.
* Customer business conditions including demand for their products or services
and supply of labor and material used in creating their products and
services.
* The cost and other effects of legal and administrative proceedings,
settlements, and investigations, claims and changes in those matters.
* Factors affecting the availability or cost of capital such as changes in
interest rates; market perceptions of the utility industry, the Company or
any of its subsidiaries; or security ratings.
* Federal, state or local legislative factors such as changes in tax laws or
rates; changes in trade, monetary and fiscal policies, laws and regulations;
electric and gas industry restructuring initiatives; or changes in
environmental laws and regulations.
* Authoritative generally accepted accounting principle or policy changes from
such standard setting bodies as the Financial Accounting Standards Board and
the Securities and Exchange Commission.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
* Unanticipated developments while implementing the modifications necessary to
mitigate Year 2000 compliance problems, including the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes in computer and embedded systems, the indirect
impacts of third parties with whom the Company does business and who do not
mitigate their Year 2000 compliance problems, and similar uncertainties.
* Possible risks associated with non-utility diversification such as
competition; operating risks; dependence upon certain suppliers and
customers; the cyclical nature of property values that could affect real
estate investments; risks associated with international investments,
including foreign currency valuations; unanticipated changes in
environmental or energy regulations; timely regulatory approval without
onerous conditions of potential acquisitions; risks associated with minority
investments, where there is a limited ability to control the development,
management or operation of the project; and the risk of higher interest
costs associated with potentially reduced securities ratings by independent
rating agencies as a result of these and other factors.
* Legislative or regulatory restrictions or caps on non-utility acquisitions,
investments or projects, including the State of Wisconsin's public utility
holding company law, which could limit the Company's diversification and
growth opportunities or require the Company to divest of certain existing
non-utility assets.
* Factors affecting foreign non-utility operations including foreign
governmental actions; foreign economic and currency risks; political
instability; and unanticipated changes in foreign environmental or energy
regulations.
* Other business or investment considerations that may be disclosed from time
to time in Wisconsin Energy's or Wisconsin Electric's Securities and
Exchange Commission filings or in other publicly disseminated written
documents.
BUSINESS COMBINATION FACTORS
* Consummation of the merger with WICOR, which will have a significant effect
on the future operations and financial position of Wisconsin Energy.
Specific factors include:
* The ability to obtain the requisite approvals of shareholders.
* Regulatory delays or conditions imposed by regulatory bodies in
approving the merger, or adverse regulatory treatment of the merger.
* Unanticipated costs or difficulties related to the integration of the
businesses of Wisconsin Energy and WICOR, or unexpected difficulties or
delays in realizing anticipated net cost savings or receiving
regulatory authorization to retain the benefit of those savings for the
shareholders of the combined company.
* Legislative or regulatory restrictions or caps on non-utility
acquisitions, investments or projects, including Wisconsin's public
utility holding company law, which could limit Wisconsin Energy's or
WICOR's diversification and growth opportunities after the merger or
require Wisconsin Energy or WICOR to divest of certain existing non-
utility assets.
Wisconsin Energy and Wisconsin Electric undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For discussion of an interest rate swap agreement recently entered into by
Wisvest-Connecticut, LLC, see Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors Affecting Results of
Operations" in Part I above of this report. For information concerning
Wisconsin Energy's and Wisconsin Electric's other market risk exposures, see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Factors Affecting Results of Operations - Market Risks" in
Part II of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on
Form 10-K for the year ended December 31, 1998.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 3. Legal Proceedings in
Part I of Wisconsin Energy's and Wisconsin Electric's combined Annual Report on
Form 10-K for the year ended December 31, 1998 and Item 1. Legal Proceedings in
Part II of Wisconsin Energy's and Wisconsin Electric's combined Quarterly Report
on Form 10-Q for the period ended March 31, 1999.
RATES AND REGULATORY MATTERS
2000 TEST YEAR: The Public Service Commission of Wisconsin requires that rate
cases be conducted once every two years. On July 6, 1999, Wisconsin Electric
provided the PSCW with its biennial year-end financial information for 1999 and
2000. In that filing, Wisconsin Electric is not seeking any changes in rates
for electric, natural gas or steam service. Also in that filing, Wisconsin
Electric indicated that by September 1, 1999, should any rate changes be
required, it will file rate changes incorporating performance-based measures and
incentives as an alternative to cost of service ratemaking.
NON-UTILITY ASSET CAP: Wisconsin Energy is subject to certain current
restrictions which may limit diversification into non-utility activities. Under
a formula included in the provisions of Wisconsin's public utility holding
company law, the sum of the assets of all non-utility affiliates in a holding
company system may not exceed 25% of the assets of all public utility
affiliates. Wisconsin Energy reports to the PSCW regarding the net book value
of its non-utility affiliates as of December 31 of each year. At December 31,
1998, the net book value of the assets of Wisconsin Energy's non-utility
affiliates was approximately 12% of the net book value of all of Wisconsin
Energy's electric utility affiliates. At June 30, 1999 (after acquisition of
the United Illuminating generating assets by Wisvest-Connecticut, LLC), the
assets of Wisconsin Energy's non-utility affiliates approximated 21% of the
assets of its public utility affiliates.
Wisconsin Energy is currently working with a broad-based group in an effort to
modify the asset cap provisions of Wisconsin's public utility holding company
law. Recently, the governor of the State of Wisconsin proposed in his budget
that a voluntary state electric transmission company ("Transco") be set up by
November 2000 that would be part of the Midwest Independent System Operator
("Midwest ISO"). Under the terms of the proposal, if a utility in a holding
company system transferred electric transmission facilities and rights of way to
the Transco and committed to certain spending levels for low-income residents
and for conservation programs, non-utility entities in the same holding company
system could increase certain types of energy-related assets without counting
against the asset cap. Asset cap limits would continue to apply to other non-
utility operations. The matter is pending in the Wisconsin State Legislature.
Wisconsin Electric has indicated that it would transfer its electric
transmission assets to such a Transco and is an active participant in the
Midwest ISO. However, there can be no assurance that the current asset cap
restrictions will be modified or that the restrictions will not affect Wisconsin
Energy's future non-utility diversification activities.
ENVIRONMENTAL MATTERS
ETSM PROPERTY/CITY OF WEST ALLIS LAWSUIT: As previously reported, iron
cyanide-bearing wastes, believed to be manufactured gas plant process wastes,
were found at two sites in West Allis, Wisconsin. One site is on property
formerly owned by Kearney & Trecker Corporation, which was sold to others,
including Wisconsin Electric prior to the discovery of the wastes. The other is
the "Greenfield Avenue" site owned by the City of West Allis. Several years ago
materials were removed from the Kearney & Trecker site, with Wisconsin Electric
and the other current owners paying for disposal of materials found on their
respective portions of the site.
On July 25, 1996, Giddings & Lewis Inc., Kearney & Trecker and the City of West
Allis filed an action for damages in the Milwaukee County Circuit Court against
Wisconsin Electric, alleging that Wisconsin Electric was responsible for the
deposition of the material and liable to the plaintiffs. Investigations into
the potential source of the waste lead Wisconsin Electric to believe that it was
not the source of this waste.
A trial was held and on July 14, 1999, a jury verdict was rendered against
Wisconsin Electric awarding the plaintiffs $4.5 million as actual damages for
clean-up costs and loss of property value. The jury further awarded the
plaintiffs $100 million in punitive damages against Wisconsin Electric.
Post-trial motions are scheduled to be heard in October 1999. Wisconsin
Electric is preparing to file post trial motions on the grounds that the jury
verdict is not supported by the evidence or the law and that the award of
punitive damages was unwarranted and, in the opinion of management, based in
part on the advice of legal counsel, should be reversed. As such, Wisconsin
Electric has recorded no reserve for potential damages from this suit.
Wisconsin Electric also intends to take all other actions available to have the
verdict overturned.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
WISCONSIN ENERGY CORPORATION
At Wisconsin Energy's 1999 Annual Meeting of Stockholders held on June 2, 1999,
the board of directors' nominees named below were elected as directors by the
indicated votes and percentages cast for each nominee. Directors are elected by
a plurality of the votes cast by the shares entitled to vote. Any shares not
voted, whether by withheld authority, broker non-votes or otherwise, have no
effect in the election of directors. There was no solicitation in opposition to
the nominees proposed in the Proxy Statement.
Election of Directors for Terms Expiring in 2002
- ------------------------------------------------
Name of Nominee For Withheld
--------------- ------ --------
Richard A. Abdoo 95,750,519 (96.8%) 3,185,893 (3.2%)
John F. Ahearne 96,507,689 (97.5%) 2,428,723 (2.5%)
Julia B. North 96,443,857 (97.5%) 2,492,555 (2.5%)
Of 116,295,956 voting shares outstanding as of the March 25, 1999 record date
for the annual meeting, 98,936,412 shares (85.1% of the shares outstanding) were
represented at the meeting.
Further information concerning these matters, including the names of directors
whose terms as a director continued after the meeting, is contained in Wisconsin
Energy's Proxy Statement dated April 16, 1999 with respect to the 1999 Annual
Meeting of Stockholders.
WISCONSIN ELECTRIC POWER COMPANY
At Wisconsin Electric's 1999 Annual Meeting of Stockholders held on May 26, 1999
for which Wisconsin Electric did not solicit proxies, ten incumbent directors,
as listed in Wisconsin Electric's Information Statement dated April 22, 1999,
were elected for one year terms. Each director received 33,289,327 votes (100%
of votes cast). Directors are elected by a plurality of the votes cast by the
shares entitled to vote. Any shares not voted, whether by withheld authority,
broker non-votes or otherwise, have no effect in the election of directors.
There was no solicitation in opposition to the nominees proposed in the
Information Statement.
Further information concerning these matters is contained in Wisconsin
Electric's Information Statement.
ITEM 5. OTHER INFORMATION
MERGER AGREEMENT WITH WICOR, INC.
As previously reported, on June 27, 1999, Wisconsin Energy and WICOR, Inc., a
Wisconsin corporation [NYSE: WIC], entered into an Agreement and Plan of Merger
providing for a strategic business combination of Wisconsin Energy and WICOR.
WICOR is a diversified holding company with investments in utility and non-
utility energy subsidiaries as well as in pump manufacturing subsidiaries.
Following the merger, WICOR will become a wholly owned subsidiary of Wisconsin
Energy. The merger agreement has been approved by the boards of directors of
Wisconsin Energy and WICOR.
Under the terms of the agreement, Wisconsin Energy will acquire all of the
outstanding shares of WICOR Common Stock for a fixed price of $31.50 for each
WICOR share. At least 40% of the price will be paid in Wisconsin Energy Common
Stock, and Wisconsin Energy has the option to increase the percentage to 60%;
the balance will be paid in cash. The exchange ratio for the Wisconsin Energy
Common Stock will be set based upon the average closing prices of Wisconsin
Energy stock immediately prior to closing. If the average is less than $22.00
per share, Wisconsin Energy may elect to pay all cash. Each WICOR shareholder
will be able to elect to receive cash, stock, or a combination thereof, subject
to proration.
It is anticipated that Wisconsin Energy will maintain its normal quarterly
dividend of $0.39 and dividend payment schedule following completion of the
transaction. Both Wisconsin Energy and WICOR will maintain their current
dividend policy until the close of the transaction.
Following the merger, Mr. Richard A. Abdoo will continue as chairman of the
board, president and CEO of Wisconsin Energy, and Mr. George E. Wardeberg,
currently chairman and CEO of WICOR, will become vice chairman of the board of
Wisconsin Energy. Mr. Wardeberg will continue in this position for 24 months,
after which he plans to retire. Following Mr. Wardeberg's retirement, he will
remain a member of Wisconsin Energy's board of directors. After closing, in
addition to Mr. Wardeberg, one other member of the current WICOR board will join
Wisconsin Energy's board of directors.
Consummation of the merger is subject to the satisfaction of certain closing
conditions including approval by the shareholders of Wisconsin Energy and WICOR,
approval by the PSCW, approval by the Securities and Exchange Commission under
the Public Utility Holding Company Act of 1935, as amended, and expiration or
termination of the waiting period applicable to the merger under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended. The regulatory approval
process is expected to be completed in time for the transaction to be
consummated by the Spring of 2000.
Assuming timely realization of estimated cost savings and avoidances expected to
result from the merger, and assuming favorable regulatory treatment, Wisconsin
Energy expects the business combination to result in increased earnings per
share beginning in the first full year following the merger. While no
definitive synergies study has been done, net merger-related cost savings are
anticipated to be approximately $35 million annually beginning in the first full
year after the merger. Savings are expected from lower costs for fuel,
materials and services through enhanced purchasing power, elimination of
duplication through attrition, and through sharing of resources. Additional
cost savings are anticipated from logical consolidation of common functions over
time as well as from savings in areas such as insurance and regulatory costs and
legal, audit and consulting fees. In its merger application, Wisconsin Energy
has asked the PSCW to permit it to recover the portion of the acquisition
premium that Wisconsin Energy will pay in the merger which is attributable to
WICOR's regulated utility assets. Recovery of the acquisition premium would not
require any increase in rates. Instead, Wisconsin Energy is requesting that it
be allowed to retain the anticipated net cost savings that result from the
merger over a period of time adequate to recover the acquisition premium it is
paying to make those savings possible.
On July 2, 1999, an action was filed by a shareholder of WICOR in the Circuit
Court of Milwaukee County, Wisconsin against WICOR, all of the members of its
board of directors, and Wisconsin Energy. The complaint alleges that the
consideration to be received by WICOR shareholders in the proposed merger is
inadequate and unfair to WICOR shareholders. The complaint also alleges that
Wisconsin Energy aided, abetted and assisted in the alleged breaches of the
fiduciary duties of the individual defendants. The complaint seeks
certification as a class action on behalf of all WICOR shareholders, an
injunction against proceeding with the merger, an auction or open bidding
process for the sale of WICOR, and unspecified damages. On August 11, 1999, the
shareholder plaintiff filed a motion requesting a preliminary injunction to
enjoin a new WICOR, Inc. Shareholder Rights Plan adopted on July 27, 1999. In
conjunction with the motion, the shareholder plaintiff is also seeking expedited
discovery and an expeditious decision on the motion. WICOR and Wisconsin
Energy believe that the complaint and the injunction request are without merit
and intend to pursue a vigorous defense.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information for
the combined company after the merger are based upon the historical consolidated
financial statements of Wisconsin Energy and WICOR, combined and adjusted to
give effect to the merger and related transactions (including the related
financing), as described in the notes to this information. Certain amounts in
the WICOR financial statements have been reclassified to conform to Wisconsin
Energy's presentation. This information should be read in conjunction with the
historical financial statements and related notes of Wisconsin Energy and WICOR.
The allocation of the estimated cost savings from the merger, net of costs
incurred to achieve such estimated cost savings, will be subject to regulatory
review and approval. None of the estimated cost savings, the costs to achieve
such savings, nor transaction costs (other than estimated debt issue costs) are
reflected in the unaudited pro forma combined condensed income statement
information.
The unaudited pro forma combined condensed income statements for the year ended
December 31, 1998 and for the six months ended June 30, 1999 and 1998 present
the results for Wisconsin Energy and WICOR as if the merger had occurred on
January 1, 1998. The unaudited pro forma combined condensed balance sheet as of
June 30, 1999 gives effect to the merger as of that date.
We have assumed that the merger consideration will consist of 40% stock and 60%
cash and have described in the footnotes the pro forma differences that would
occur should the merger consideration consist of either 60% stock and 40% cash
or of 100% cash. We have also assumed (a) the exercise prior to the merger of
all outstanding options to purchase WICOR Common Stock; and (b) that the
exchange ratio is 1.2569 Wisconsin Energy shares per each WICOR share, which is
$31.50 divided by the $25.0625 closing price of Wisconsin Energy Common Stock on
June 30, 1999. The actual exchange ratio will depend upon the average closing
prices of Wisconsin Energy Common Stock on the New York Stock Exchange during a
valuation period consisting of the 10 trading days ending with the fifth trading
day prior to the merger. Therefore, the actual exchange ratio will not be
determined until shortly before the closing.
The pro forma adjustments are based upon preliminary estimates, information
currently available and assumptions that management believes are reasonable
under the circumstances. Wisconsin Energy's actual consolidated financial
statements will reflect the results of the merger on and after its effective
date rather than the dates indicated above. You should not rely on the
unaudited combined condensed pro forma financial data as an indication of the
results of operations or financial position that would have been achieved if the
merger had taken place earlier nor an indication of the results of operations or
financial position of the combined company after completion of the merger.
The merger will be accounted for by the purchase method and, therefore, the
assets and liabilities of WICOR will be recorded at their fair values. The
excess of the purchase price over the fair value of the net assets at the
effective time of the merger will be recorded as goodwill. Allocations included
in the pro forma information are based upon analysis which is not yet completed.
Accordingly, the final allocation of the purchase price may differ, perhaps
significantly, from the amounts shown in this pro forma information.
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER
Six Months Ended June 30, 1999
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
---------- ------ ----------- ---------
(In Thousands, Except Per Share Amounts)
Operating Revenues $1,095,725 $529,573 $ - $1,625,298
Operating Expenses
Fuel 164,944 - - 164,944
Purchased power 102,701 - - 102,701
Cost of gas sold 96,606 159,380 - 255,986
Cost of goods sold - 178,788 - 178,788
Other operation and maintenance 360,855 103,599 500 (c)
1,757 (b) 466,711
Depreciation and amortization 131,399 18,313 8,616 (d)
4,350 (e) 162,678
Property and revenue tax 36,873 4,223 (1,757)(b) 39,339
---------- ------- ---------- ---------
Pretax Operating Income 202,347 65,270 (13,466) 254,151
Other Income and Deductions 23,434 (119) - 23,315
Interest Charges and Other (69,514) (8,173) (22,835)(f) (100,522)
---------- ------- --------- ---------
Income Before Income Taxes 156,267 56,978 (36,301) 176,944
Provision (Benefit) for Income Taxes 53,853 22,120 (10,520)(g) 65,453
---------- ------- --------- --------
Net Income $102,414 $34,858 ($25,781) $111,491
========== ======= ========= ========
Weighted Average Common Shares 116,272 20,348 (h) 136,620
Earnings Per Share (Basic and Diluted) $0.88 $0.82 (i)
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER
Six Months Ended June 30, 1998
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
---------- ------ ------------ ----------
(In Thousands, Except Per Share Amounts)
Operating Revenues $991,253 $523,206 $ - $1,514,459
Operating Expenses
Fuel 154,108 - - 154,108
Purchased power 79,283 - - 79,283
Cost of gas sold 103,406 171,498 - 274,904
Cost of goods sold - 174,818 - 174,818
Other operation and maintenance 340,792 97,770 500 (c)
1,888 (b) 440,950
Depreciation and amortization 122,021 17,404 8,616 (d)
4,350 (e) 152,391
Property and revenue tax 31,276 4,827 (1,888)(b) 34,215
-------- -------- ------- ----------
Pretax Operating Income 160,367 56,889 (13,466) 203,790
Other Income and Deductions 15,824 1,666 - 17,490
Interest Charges and Other (58,964) (8,585) (22,835)(f) (90,384)
-------- -------- ------- ----------
Income Before Income Taxes 117,227 49,970 (36,301) 130,896
Provision (Benefit) for Income Taxes 39,325 18,983 (10,520)(g) 47,788
-------- -------- -------- ----------
Net Income $77,902 $30,987 ($25,781) $83,108
======== ======== ======== ========
Weighted Average Common Shares 113,279 20,348 (h) 133,627
Earnings Per Share (Basic and Diluted) $0.69 $0.62 (i)
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
REFLECTING COMPLETION OF THE MERGER
Year Ended December 31, 1998
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
--------- ------ ----------- ---------
(In Thousands, Except Per Share Amounts)
Operating Revenues $2,039,433 $944,183 $ - $2,983,616
Operating Expenses
Fuel 308,385 - - 308,385
Purchased power 177,852 - - 177,852
Cost of gas sold 175,475 295,601 - 471,076
Cost of goods sold - 329,248 - 329,248
Other operation and maintenance 691,535 190,674 1,000 (c)
3,295 (b) 886,504
Depreciation and amortization 248,337 35,038 17,232 (d)
8,700 (e) 309,307
Property and revenue tax 63,095 9,039 (3,295)(b) 68,839
---------- -------- -------- ---------
Pretax Operating Income 374,754 84,583 (26,932) 432,405
Other Income and Deductions 26,765 3,706 - 30,471
Interest Charges and Other (121,221) (16,746) (45,669)(f) (183,636)
---------- -------- --------- ---------
Income Before Income Taxes 280,298 71,543 (72,601) 279,240
Provision (Benefit) for Income Taxes 92,166 26,048 (21,040)(g) 97,174
---------- -------- --------- ---------
Net Income $188,132 $45,495 ($51,561) $182,066
========== ======== ======== =========
Weighted Average Common Shares 114,315 20,348 (h) 134,663
Earnings Per Share (Basic and Diluted) $1.65 $1.35 (i)
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
WISCONSIN ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
REFLECTING COMPLETION OF THE MERGER
June 30, 1999
Wisconsin Pro Forma Pro Forma
Energy (a) WICOR Adjustments Combined
---------- ------- ----------- ----------
(In Thousands)
Assets
------
Property, Plant & Equipment $3,798,985 $445,976 $87,000 (j) $4,331,961
Other Property and Investments 864,800 - 7,737 (b) 872,537
Current Assets
Cash & cash equivalents 35,369 8,752 - 44,121
Accounts receivable-net, including
accrued utility revenues 305,882 162,480 - 468,362
Materials, supplies and inventory 209,852 102,915 12,700 (j)
6,798 (b) 332,265
Prepayments and other current assets 79,988 32,939 (6,798) (b) 106,129
---------- -------- -------- ----------
Total Current Assets 631,091 307,086 12,700 950,877
Deferred Charges and Other Assets
Goodwill - 83,024 689,297 (k) 772,321
Regulatory assets 208,384 56,082 - 264,466
Accumulated deferred income taxes 206,010 - 20,056 (b) 226,066
Other assets, including prepaid pension costs 107,307 90,687 54,900 (l)
(7,737) (b) 245,157
--------- -------- -------- ---------
Total Deferred Charges and Other Assets 521,701 229,793 756,516 1,508,010
---------- -------- -------- ---------
Total Assets $5,816,577 $982,855 $863,953 $7,663,385
========= ======== ======== =========
Capitalization and Liabilities
------------------------------
Capitalization
Common stock equity $1,951,907 $423,826 $80,135 (m) $2,455,868
Preferred stock 30,450 - - 30,450
Long-term debt 1,979,368 204,524 722,062 (m) 2,905,954
Wisconsin Energy obligated redeemable
preferred securities of subsidiary trust 200,000 - - 200,000
---------- -------- -------- ----------
Total Capitalization 4,161,725 628,350 802,197 5,592,272
Current Liabilities
Short-term debt, including long-term
debt due currently 403,842 19,209 - 423,051
Accounts payable 162,182 73,999 - 236,181
Accrued liabilities and other 152,522 92,451 20,500 (j) 265,473
---------- -------- -------- ----------
Total Current Liabilities 718,546 185,659 20,500 924,705
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 582,080 49,347 68,900 (j)
20,056 (b) 720,383
Regulatory liabilities 142,478 29,553 - 172,031
Other, including postretirement benefit obligation 211,748 89,946 (47,700) (j) 253,994
---------- -------- -------- ----------
Total Deferred Credits and Other Liabilities 936,306 168,846 41,256 1,146,408
---------- -------- -------- ----------
Total Capitalization and Liabilities $5,816,577 $982,855 $863,953 $7,663,385
========== ======== ======== ==========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
WISCONSIN ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
(In Thousands)
The unaudited pro forma financial information gives effect to the acquisition by
Wisconsin Energy of WICOR in a transaction to be accounted for as a purchase.
Wisconsin Energy's Unaudited Pro Forma Combined Condensed Financial Information
assumes the WICOR acquisition occurred (1) as of January 1, 1998, for purposes
of the Unaudited Pro Forma Combined Condensed Income Statements and (2) on
June 30, 1999 for purposes of the Unaudited Pro Forma Combined Condensed Balance
Sheet.
a. Due to recent acquisitions by Wisconsin Energy that have increased the size
of Wisconsin Energy's non-utility operations, Wisconsin Energy has modified
its income statement and balance sheet presentations. The primary
modification includes reclassifying the results of the non-utility
operations from Other Income and Deductions to the various lines within
operating income (i.e. Operating Revenues and Operating Expenses). This
modification does not change net income. The primary balance sheet
modification includes reclassifying the non-utility property, plant and
equipment and related accumulated provision for depreciation from
investments to inclusion with utility property, plant and equipment. This
modification does not change total assets.
b. Reclassification of amounts to conform the companies' historical
presentation.
c. Based upon revised actuarial information, WICOR's annual pension income will
increase by $1.5 million and will be offset by an additional $2.5 million of
annual postretirement benefit expense.
d. Amortization of goodwill over 40 years
($689.3 million/40 years = $17.2 million per year or $4.3 million per
quarter).
e. Additional depreciation resulting from the increased fair value of
machinery, equipment and buildings acquired based on estimated useful lives
of 10 years ($87 million/10 years = $8.7 million per year or $2.2 million
per quarter).
f. Incremental interest expense based upon an assumed rate of 6.25%
($722.1 million x 6.25% = $45.1 million per year or $11.3 million per
quarter). A 1/8 percent increase (or decrease) in the interest rate would
increase (or decrease) annual interest expense by approximately
$0.9 million. Estimated debt issue cost of $5.4 million will be amortized
over ten years.
g. Reduction of income taxes relating to the foregoing adjustments.
h. Shares to be issued assuming the purchase price is paid with 40% stock,
including outstanding stock options. The closing price of Wisconsin
Energy's Common Stock on June 30, 1999 was $25-1/16.
i. Assuming the purchase price is paid with 100% cash or 60% stock and 40%
cash, pro forma earnings per share for the year ended December 31, 1998
would approximate $1.42 and $1.33 per share, respectively. Assuming the
purchase price is paid with 100% cash or 60% stock and 40% cash, pro forma
earnings per share would approximate $0.87 and $0.79 for the six months
ended June 30, 1999, respectively, and $0.64 and $0.61 per share,
respectively, for the six months ended June 30, 1998.
j. Adjustments to net assets of WICOR to reflect fair value, purchase
accounting adjustments and related tax effects.
k. The excess of cost over fair value of net assets acquired resulting from the
preliminary purchase price allocation is assumed to be as follows:
Pro forma purchase price $1,220,623
Pro forma historical net book value of assets acquired 423,826
----------
Excess of purchase price over net book value of assets acquired 796,797
Allocated to:
Inventories (12,700)
Property, plant and equipment (87,000)
Prepaid pension asset (49,500)
Deferred tax liabilities 68,900
Other current liabilities 20,500
Postretirement obligation (47,700)
----------
Remaining excess of cost over fair value of net assets
acquired (goodwill) $689,297
==========
The foregoing preliminary purchase price allocation is based on available
information and certain assumptions Wisconsin Energy considers reasonable.
The final purchase price allocation will be based upon a determination of the
fair value of the net assets acquired at the date of the acquisition. The
final purchase price allocation may differ from the preliminary allocation.
l. Amount consists of an adjustment of $49.5 million to fair value WICOR's
prepaid pension asset and $5.4 million in estimated debt issue costs.
m. Purchase price is assumed to be financed with 40% stock and 60% debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed with or incorporated by reference in the
applicable Form 10-Q report:
Exhibit No.
-----------
WISCONSIN ENERGY CORPORATION EXHIBITS
(2)-1 Agreement and Plan of Merger, dated as of June 27, 1999, by and among
Wisconsin Energy Corporation, WICOR, Inc. and CEW Acquisition, Inc.
(Incorporated by reference to Exhibit 2.1 to Wisconsin Energy's
Current Report on Form 8-K dated as of June 27, 1999, File No. 1-
9057.)
(10)-1 Supplemental Executive Retirement Plan of Wisconsin Energy Corporation
(as amended and restated as of June 2, 1999).
(10)-2 Executive Deferred Compensation Plan of Wisconsin Energy Corporation
effective January 1, 1989, as amended and restated as of June 2, 1999.
(10)-3 Short-Term Performance Plan of Wisconsin Energy Corporation effective
January 1, 1999, as amended and restated as of June 2, 1999.
(10)-4 Senior Officer Change in Control Agreement between Wisconsin Energy
Corporation and Richard A. Abdoo effective July 29, 1999.
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for the six
months ended June 30, 1999.
(27)-2 Wisconsin Energy Corporation Restated Financial Data Schedule for the
fiscal year ended December 31, 1998, which reflects the
reclassification of certain amounts to conform to Wisconsin Energy's
current financial statement presentation.
(27)-3 Wisconsin Energy Corporation Restated Financial Data Schedule for the
six months ended June 30, 1998, which reflects the reclassification of
certain amounts to conform to Wisconsin Energy's current financial
statement presentation.
WISCONSIN ELECTRIC POWER COMPANY EXHIBITS
(27)-4 Wisconsin Electric Power Company Financial Data Schedule for the six
months ended June 30, 1999.
(27)-5 Wisconsin Electric Power Company Restated Financial Data Schedule for
the fiscal year ended December 31, 1998, which reflects the
reclassification of certain amounts to conform to Wisconsin Electric's
current financial statement presentation.
(27)-6 Wisconsin Electric Power Company Restated Financial Data Schedule for
the six months ended June 30, 1998, which reflects the
reclassification of certain amounts to conform to Wisconsin Electric's
current financial statement presentation.
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated as of June 27, 1999 was filed by Wisconsin
Energy on June 30, 1999 announcing Wisconsin Energy's merger agreement with
WICOR, Inc. and filing as exhibits copies of the merger agreement and a joint
press release with respect to the merger agreement.
A Current Report on Form 8-K dated as of June 29, 1999 was filed by Wisconsin
Energy on June 30, 1999 to disclose presentation materials used at analysts'
meetings in connection with the announcement of the merger agreement between
Wisconsin Energy and WICOR, Inc. dated June 27, 1999.
No other reports on Form 8-K were filed by Wisconsin Energy or by Wisconsin
Electric during the quarter ended June 30, 1999.
A Current Report on Form 8-K dated as of July 14, 1999 was filed separately
by Wisconsin Energy and by Wisconsin Electric disclosing the results of a
July 14 jury verdict against Wisconsin Electric in a lawsuit concerning the
placement of contaminated wastes on two properties in the City of West Allis,
Wisconsin.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN ENERGY CORPORATION
----------------------------
(Registrant)
/s/ Calvin H. Baker
---------------------------------
Date: August 13, 1999 Calvin H. Baker, Treasurer,
Chief Financial Officer and
duly authorized officer
WISCONSIN ELECTRIC POWER COMPANY
--------------------------------
(Registrant)
/s/ Calvin H. Baker
-----------------------------------------
Date: August 13, 1999 Calvin H. Baker, Vice President - Finance,
Chief Financial Officer
and duly authorized officer
WISCONSIN ENERGY CORPORATION
FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1999
EXHIBIT INDEX
The following exhibits are filed with or incorporated by reference in
this report:
Exhibit No.
- -----------
(2)-1 Agreement and Plan of Merger, dated as of June 27, 1999,
by and among Wisconsin Energy Corporation, WICOR, Inc. and
CEW Acquisition, Inc. (Incorporated by reference to
Exhibit 2.1 to Wisconsin Energy's Current Report on Form 8-K
dated as of June 27, 1999, File No. 1-9057.)
(10)-1 Supplemental Executive Retirement Plan of Wisconsin Energy
Corporation (as amended and restated as of June 2, 1999).
(10)-2 Executive Deferred Compensation Plan of Wisconsin Energy
Corporation effective January 1, 1989, as amended and
restated as of June 2, 1999.
(10)-3 Short-Term Performance Plan of Wisconsin Energy Corporation
effective January 1, 1999, as amended and restated as of
June 2, 1999.
(10)-4 Senior Officer Change in Control Agreement between Wisconsin
Energy Corporation and Richard A. Abdoo effective July 29,
1999.
(27)-1 Wisconsin Energy Corporation Financial Data Schedule for
the six months ended June 30, 1999.
(27)-2 Wisconsin Energy Corporation Restated Financial Data Schedule
for the fiscal year ended December 31, 1998, which reflects
the reclassification of certain amounts to conform to
Wisconsin Energy's current financial statement presentation.
(27)-3 Wisconsin Energy Corporation Restated Financial Data Schedule
for the six months ended June 30, 1998, which reflects the
reclassification of certain amounts to conform to Wisconsin
Energy's current financial statement presentation.