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 ELECTRIC POWER COMPANY
FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1999
EXHIBIT INDEX
The following exhibits are filed with this report:
Exhibit No.
- -----------
(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.