FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-17736
-------
ESELCO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2785176
- ---------------------- ----------------------
State of Incorporation (I.R.S. Employer
Identification Number)
725 East Portage Avenue
Sault Ste. Marie, Michigan 49783
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(906) 632-2221
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the 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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
1,593,180 shares of Common Stock, par value $.01 per share,
outstanding as of June 30, 1997
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
E S E L C O, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
June 30, December 31,
1997 1996
----------- -----------
ASSETS:
ELECTRIC PLANT, at original cost $73,852,064 $71,802,321
Less - Accumulated depreciation 31,041,007 29,671,038
----------- -----------
$42,811,057 $42,131,283
Asset acquired under capital lease 2,815,065 2,851,622
----------- -----------
$45,626,122 $44,982,883
----------- -----------
CURRENT ASSETS:
Cash $74,844 $293,883
Accounts receivable, less reserve of $39,151
and $32,000 respectively 3,701,942 2,999,783
Unbilled revenue 1,474,430 1,693,826
Materials and supplies, at average cost 1,305,028 1,148,046
Prepayments 1,293,987 1,966,932
----------- -----------
$7,850,231 $8,102,470
----------- -----------
OTHER ASSETS:
Debt expense, being amortized $25,372 $28,972
Regulatory asset 3,334,381 3,510,181
Other 891,762 531,193
----------- -----------
$4,251,515 $4,070,346
----------- -----------
$57,727,868 $57,155,721
----------- -----------
STOCKHOLDERS' INVESTMENT AND LIABILITIES:
CAPITALIZATION (See Statement):
Common Equity $21,454,303 $20,234,722
Preferred stock 0 0
Long-term debt (less current portion) 14,958,420 16,898,187
----------- -----------
$36,412,723 $37,132,909
----------- -----------
OTHER NONCURRENT LIABILITIES:
Obligation under capital lease $2,733,956 $2,775,905
----------- -----------
CURRENT LIABILITIES:
Notes payable $741,500 $1,119,000
Current portion of long-term debt 3,300,660 2,877,323
Current portion of lease obligation 81,109 75,717
Accounts payable 3,331,196 2,143,082
Dividends declared 446,090 415,960
Accrued taxes 1,455,259 1,754,101
Current deferred income taxes 61,955 66,755
Accrued interest 164,773 166,215
Other 306,214 270,116
----------- -----------
$9,888,756 $8,888,269
----------- -----------
DEFERRED CREDITS:
Deferred income taxes $4,316,446 $4,454,626
Net regulatory liability 1,199,526 1,193,526
Unamortized investment tax credit 839,581 873,181
Other 2,336,880 1,837,305
----------- -----------
$8,692,433 $8,358,638
----------- -----------
$57,727,868 $57,155,721
----------- -----------
----------- -----------
1
E S E L C O, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
June 30, December 31,
1997 1996
---------------- ----------------
AMOUNT % AMOUNT $
----------- ---- ---------- ----
COMMON EQUITY:
COMMON STOCK, par value $.01 per share
1997 1996
--------- ---------
Authorized shares 9,840,000 3,000,000
--------- ---------
--------- ---------
Outstanding shares 1,593,180 1,540,592 $15,932 $15,406
--------- ---------
--------- ---------
Capital surplus 19,256,710 17,331,579
Retained earnings 3,176,178 4,204,585
Unearned compensation - ESOP and
Restricted Stock Bonus Plan (994,517) (1,316,848)
---------- ----------
$21,454,303 59% $20,234,722 54%
---------- ----------
PREFERRED STOCK, value $.01
per share, authorized 160,000 shares $0 0% $0 0%
---------- ----------
LONG-TERM DEBT of Subsidiaries (less current portion)
First Mortgage Bonds: $0 $855,000
Series D, 7.00%, due 1998 900,000 1,200,000
Series F, 10.31%, due 2001 4,070,000 4,440,000
Series G, 10.25%, due 2009 1,200,000 1,500,000
Series H, 7.90%, due 2002 5,567,000 5,355,000
Energy Thrift Notes, 5.8%-10%, due 1998-2007
Equipment Loan, Floating Rate, due 1998 119,382 147,786
ESOP Loans of the Corporation,
floating rate, due 2000-2001 230,336 421,110
Term Loan, floating rate, due 1999 2,871,702 2,979,291
---------- ----------
$14,958,420 41% $16,898,187 46%
---------- --- ---------- ---
TOTAL CAPITALIZATION $36,412,723 100% $37,132,909 100%
---------- --- ---------- ---
---------- --- ---------- ---
2
E S E L C O, INC.
CONSOLIDATED STATEMENT OF INCOME
The Three Months The Six Months The Twelve Months
Ended June 30, Ended June 30, Ended June 30,
-------------------- ------------------- ---------------------
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ------- ------
OPERATING REVENUES $9,429,787 $8,947,935 $19,345,122 $18,725,187 $38,119,866 $37,503,321
---------- ---------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Operation - Purchased power $4,270,580 $4,346,701 $9,244,697 $9,667,957 $18,427,775 $19,581,393
- Other 1,854,521 1,621,286 3,768,765 3,309,360 7,202,678 6,335,548
Maintenance 546,732 539,001 1,063,837 1,149,176 2,056,820 2,079,690
Depreciation and amortization 700,229 646,931 1,400,438 1,315,826 2,699,007 2,552,495
Property and other taxes 400,312 397,268 805,066 766,236 1,595,181 1,559,438
Income taxes 381,200 302,400 686,400 525,400 1,408,196 1,212,584
---------- ---------- ----------- ----------- ----------- -----------
Total operating expenses $8,157,574 $7,853,587 $16,969,203 $16,733,955 $33,389,657 $33,321,148
---------- ---------- ----------- ----------- ----------- -----------
Net operating income $1,272,213 $1,094,348 $2,375,919 $1,991,232 $4,730,209 $4,182,173
---------- ---------- ----------- ----------- ----------- -----------
OTHER INCOME (DEDUCTIONS), NET ($15,048) ($30,304) ($30,961) ($46,722) ($31,833) ($58,568)
---------- ---------- ----------- ----------- ----------- -----------
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION $39,900 $0 $79,800 $0 $79,800 $0
---------- ---------- ----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt $393,545 $338,136 $784,053 $665,198 $1,486,242 $1,312,592
Other interest 33,776 40,827 48,999 63,314 118,141 207,748
---------- ---------- ----------- ----------- ----------- -----------
Total interest charges $427,321 $378,963 $833,052 $728,512 $1,604,383 $1,520,340
---------- ---------- ----------- ----------- ----------- -----------
NET INCOME AVAILABLE FOR
COMMON STOCK $869,744 $685,081 $1,591,706 $1,215,998 $3,173,793 $2,603,265
---------- ---------- ----------- ----------- ----------- -----------
EARNINGS PER AVERAGE SHARE OF
COMMON STOCK $0.55 $0.44 $1.00 $0.79 $2.00 $1.70
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
CASH DIVIDENDS DECLARED PER
SHARE OF COMMON STOCK $0.28 $0.26 $0.55 $0.52 $1.08 $1.01
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
AVERAGE COMMON SHARES OUTSTANDING 1,593,180 1,539,538 1,591,251 1,535,473 1,583,419 1,528,305
---------- ---------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- -----------
3
E S E L C O, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
1997 1996
---- ----
NET CASH FLOWS FROM (USED BY):
OPERATING ACTIVITIES:
Net income $1,591,706 $1,215,998
Noncash expenses, revenue, losses and gains
included in income
Depreciation and amortization 1,437,137 1,364,353
Deferred taxes and charge equivalent to
investment tax credit, net of amortization (170,580) 446,388
Net decrease (increase) in receivables and
unbilled revenue (482,763) 691,626
Net decrease (increase) in materials and
supplies and prepayments 515,963 862,039
Net increase (decrease) in accounts payable,
accrued taxes, and other current liabilities 925,370 (1,846,409)
Increase (decrease) in interest accrued
but not paid (1,442) (92,138)
Other 410,583 86,578
---------- ----------
Net cash from operating activities $4,225,974 $2,728,435
---------- ----------
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ($2,170,664) ($1,605,611)
Proceeds from disposals of property, plant
and equipment 57,353 16,120
---------- ----------
Net cash used by investing activities ($2,113,311) ($1,589,491)
---------- ----------
FINANCING ACTIVITIES:
Proceeds of short-term debt $3,576,000 $5,923,500
Payments to settle short-term debt (3,953,500) (7,252,500)
Issuance of long-term debt (net) 534,000 1,609,000
Payments on long-term debt (1,815,699) (1,241,679)
Proceeds from sale of common stock 206,844 405,664
Dividends paid (879,347) (803,460)
---------- ----------
Net cash used by financing activities ($2,331,702) ($1,359,475)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ($219,039) ($220,531)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 293,883 302,845
---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $74,844 $82,314
---------- ----------
---------- ----------
INTEREST PAID $897,955 $881,358
---------- ----------
---------- ----------
INCOME TAXES PAID $330,000 $645,000
---------- ----------
---------- ----------
4
ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
(1) These consolidated financial statements include the accounts of ESELCO,
Inc. (ESELCO) and its wholly owned subsidiaries, Edison Sault Electric
Company (Edison Sault), ESEG, Inc. and Northern Tree Service, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements as of June 30, 1997
and 1996 included herein, which are unaudited, reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for the
periods presented. Sales of electricity by Edison Sault, ESELCO's major
subsidiary, are affected to some degree by variations in weather
conditions, and results of operations for interim periods are not
necessarily indicative of results to be expected for the entire year.
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 rules and regulations
of the Securities and Exchange Commission, although ESELCO believes that
the disclosures which are made are adequate to make the information
presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in ESELCO, Inc. 1996 Annual
Report on Form 10K, which incorporates by reference the financial
statements in the 1996 Annual Report to Shareholders.
(2) On March 12, 1997, the Board of Directors of ESELCO declared a 3% stock
dividend for shareholders of record May 1, 1997. The outstanding number of
common shares of ESELCO previously reported in the Consolidated Statement
of Capitalization in the Form 10-Q for the period ended March 31, 1997 to
reflect the effect of this 3% stock dividend did not take into account the
reduction for the number of fractional shares for which ESELCO was to pay
cash in lieu of fractional shares. Accordingly, after taking into account
this reduction, the number of shares outstanding after the 3% stock
dividend was declared and cash was paid in lieu of fractional shares is
1,593,180 shares.
(3) On August 22, 1995, Edison Sault filed an application with the Michigan
Public Service Commission (MPSC) for authority to implement price cap
regulation. In the application Edison Sault proposed that its base rates
be capped at present levels, that its existing power supply cost recovery
(PSCR) factor be rolled into base rates, and that its existing PSCR Clause
be suspended. Edison Sault published the required notice of opportunity to
comment or request a hearing. No comments were received and on
September 21, 1995, the MPSC approved Edison Sault's application subject to
the modification that Edison Sault give 30 days notice rather than 2 weeks
notice for rate decreases and that Edison Sault file an
5
application by October 1, 2000, to address its experience under the price
cap mechanism. With the latter modification the price cap authorization
represents an experimental regulatory mechanism. The order also allows
Edison Sault to file an application seeking an increase in rates only under
extraordinary circumstances.
On October 23, 1995, the Attorney General for the State of Michigan filed
an intervention and petition for rehearing in Edison Sault's price cap
order. The Attorney General's intervention was based on the grounds that
the MPSC did not have authority to approve price cap regulation. On
December 21, 1995, the MPSC rejected the Attorney General's petition for
rehearing. On January 19, 1996, the Attorney General filed an appeal with
the Michigan Court of Appeals.
Legal counsel for Edison Sault believes that the Attorney General's appeal
is without merit and that Edison Sault will prevail. A decision in this
case is not expected until mid to late 1997. Edison Sault implemented the
price cap order on January 1, 1996.
(4) In 1993, Edison Sault received notification from the U.S. Environmental
Protection Agency (U.S. EPA) that it was being named a "Potentially
Responsible Party" at the Manistique River/Harbor Area of Concern (AOC) in
Manistique, Michigan. There were a number of other potentially responsible
parties, some of whom have been notified by the U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of
Concern" (AOC) due to PCBs which have been found in that area. An
Environmental Engineering/Cost Analysis (EECA) was submitted to the
U.S. EPA which provided an analysis of various methods of remediation for
the harbor. The EECA presented six alternatives of remediation action and
ultimately recommended a remediation method of in-place capping.
Management believed this to be the most prudent course of action. Although
the total ultimate cost of specific remedial action and Edison Sault's
potential liability were not known at that time, management had estimated
Edison Sault's minimum cost of this remedy to be $2.9 million. That figure
represented an increase of $1.9 million from the amount recorded during
1994. Certain other expenditures for investigation of any necessary
remedial action were incurred and are reflected in the accompanying
financial statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to remediate
the harbor through in-place capping at a total cost of $6.4 million, with
the Edison Sault portion costing $3.2 million. Through further
negotiations, the U.S. EPA and the PRPs agreed to a cash-out settlement
whereby the PRPs would pay to the U.S. EPA the $6.4 million cost of capping
for the right to be absolved from any future legal actions concerning PCB
pollution. To effect this settlement, an Administrative Order on Consent
was executed by all parties in December, 1996 with payments made to the
U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on this
project. Edison Sault filed an action on February 4, 1997 in the Circuit
Court for the County of Schoolcraft,
6
Michigan against certain insurance carriers to recover unreimbursed defense
costs and expenses associated with defending this matter of approximately
$350,000 and indemnification for its costs of approximately $3.2 million in
settling the matter with the U.S. EPA and obtaining a release of the
property damage claims asserted by the U.S. EPA. The certainty and
magnitude of any insurance recovery is unknown at this time. On April 28,
1997, Michigan Mutual Insurance Company filed a counterclaim for
approximately $1.7 million for previously paid defense costs. Legal counsel
for Edison Sault believes, based on the information currently available,
that the counterclaim lacks merit.
In November 1993, the MPSC issued an order authorizing Edison Sault to
defer and amortize, over a period not to exceed ten years, environmental
assessment and remediation costs associated with the Manistique River AOC.
Therefore, Edison Sault has recorded a regulatory asset in the amount of
$3.2 million, plus unreimbursed costs of $350,000, for a total of
$3.55 million, which it began amortizing in 1997.
(5) On May 14, 1997 ESELCO, Inc. and Wisconsin Energy Corporation (Wisconsin
Energy) announced that they had entered into a definitive agreement
regarding the acquisition of ESELCO by Wisconsin Energy. The terms of the
definitive agreement were approved by both companies' boards. Upon
completion of the acquisition, ESELCO would continue to operate from Sault
Ste. Marie, Michigan.
All outstanding shares of ESELCO common stock would be converted into
shares of Wisconsin Energy common stock based on a value of $44.50 for each
share of ESELCO common stock in a transaction proposed to be structured as
a tax-free reorganization. The total purchase price would be approximately
$71.0 million. The exact number of shares of Wisconsin Energy common stock
to be issued in the transaction would be determined by dividing $44.50 by
the average closing prices of Wisconsin Energy common stock for the ten
trading days immediately preceding the closing date. Pursuant to the
definitive agreement, Wisconsin Energy will be paid a fee of $2.0 million
if ESELCO consummates or enters into an agreement with respect to, a
business combination with a party unrelated to Wisconsin Energy or ESELCO
terminates the definitive agreement to pursue a business combination with a
party unrelated to Wisconsin Energy prior to the end of the period
specified in the agreement.
The transaction is contingent upon several conditions, including the
approval by the shareholders of ESELCO, receipt of all appropriate
regulatory approvals and the effectiveness of a registration statement to
be filed with the Securities and Exchange Commission covering the Wisconsin
Energy shares to be issued in the transaction. Shareholders of ESELCO will
be provided a proxy statement describing the terms of the transaction prior
to being asked to vote on the transaction at a special meeting of
shareholders, which is expected to take place later in 1997. There can be
no assurance that the conditions will be satisfied or that the transaction
will be consummated.
7
ESELCO, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Operating revenues for the second quarter of 1997 were 5% higher than the
corresponding period in 1996, while total kilowatthour sales increased 2%.
Residential and resale sales are up about 2% while industrial sales were up 4%
based on increased sales to three of our four industrial customers. Commercial
sales were the same as last year.
Purchased power expense decreased 2% because of increased hydro generation
and lower costs of power purchased from Consumers Power Company.
Other operating and maintenance expenses increased 11% during the second
quarter of 1997 due to an increase in payroll and associated employee benefits
costs as well as the ten year write-off of costs associated with the Manistique
Harbor EPA Project.
Depreciation and amortization expenses increased 8% due to Edison Sault's
ongoing construction program.
Income taxes increased $79,000 due to the increase in taxable income.
Interest expense increased 13%, primarily due to an increase in borrowings
which included a term loan to cover the payment to the U.S. EPA in connection
with the Manistique Harbor EPA Project.
Based on the above changes, net income available for common stock increased
27% from last year.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Operating revenues for the first half of 1997 were 3% higher than last
year, while total kilowatthour sales increased 1%. Residential and commercial
sales are down from last year reflecting warmer weather in 1997. Industrial
sales were up 3% based on increased sales to three of our four industrial
customers. Resale sales are up slightly, however, revenue is higher due to the
pass through of cost from the new Consumers Power Company purchased power
contract.
8
Purchased power expense decreased 4% due to lower requirements resulting
from a net increase in hydro generation.
Other operating and maintenance expenses increased 8% during the first half
of 1997 due to an increase in payroll and associated employee benefits costs as
well as the ten year write-off of costs associated with the Manistique Harbor
EPA Project.
Income taxes increased $161,000 due to the increase in taxable income.
Interest expense increased 14%, primarily due to an increase in borrowings
which included a term loan to cover the payment to the U.S. EPA in connection
with the Manistique Harbor EPA Project.
Based on the above changes, net income available for common stock increased
31% from last year.
TWELVE MONTHS ENDED JUNE 30, 1997 AND 1996
Operating revenues during the current twelve month period were 2% higher
than a year ago. Total electric sales increased 1% during the current twelve
month period. Residential and commercial sales were down during the period
while industrial sales increased a net of 2%. Resale sales were up 3% for the
period.
Purchased power expense decreased 6% due to decreased requirements
reflecting an increase in hydro generation. In addition, higher cost energy
purchases were replaced with lower cost energy from American Electric Power
Company during the period.
Other operating and maintenance expenses were up 10% during the current
twelve month period, due to increased payroll and associated employee benefit
costs and higher water costs reflecting higher rates and additional water
available for generation at Edison Sault's hydro plant. In addition, the
current period includes the write off of costs associated with the Manistique
Harbor EPA Project.
Depreciation and amortization expenses increased 6% due to Edison Sault's
ongoing construction program.
Based on an increase in taxable income, income taxes increased 16% during
the period.
Based on the above changes, net income available for common stock increased
22% from the prior twelve month period.
9
LIQUIDITY AND CAPITAL COMMITMENTS
INVESTING ACTIVITIES ESELCO invested $2,171,000 in property, plant, and
equipment in the six month period ending June 30, 1997. For the same period in
1996, ESELCO invested approximately $1,606,000 in property, plant, and
equipment.
Investment expenditures during both periods included costs associated with
the planned construction of a new 138 KV interconnection with Wisconsin Electric
Power Company. This project has a planned completion date of 1999. Edison
Sault's projected share of the cost of this project is $9.3 to $13.0 million.
Most of these expenditures are expected to be made in late 1997 and 1998.
In December, 1996 ESEG, Inc. ("ESEG") signed a purchase agreement with
Consumers Power Company for the purchase of a 138 KV submarine circuit across
the Straits of Mackinac. Since 1990, Edison Sault has leased these cables at an
annual net lease cost of approximately $466,000. ESEG, a wholly-owned
subsidiary of ESELCO, has been an inactive subsidiary of ESELCO. ESEG will
lease the cables to Edison Sault under an operating lease arrangement. The
purchase and lease are subject to approval by the Federal Energy Regulatory
Commission (FERC). The cost of the purchase, which is expected to be
consummated in 1997, will be approximately $3.8 million.
CASH PROVIDED BY OPERATING AND FINANCE ACTIVITIES Cash provided by operating
activities for the six month periods ending June 30, 1997, and June 30, 1996,
totalled $4,226,000 and $2,728,000, respectively. After payment of dividends,
internal sources of funds exceeded the capital requirements of ESELCO for the
six months ending June 30, 1997. Dividend payments for the six months ending
June 30, 1997, totalled $897,000 which represented a 56% payout ratio. For the
same period in 1996, dividends totalled $803,000 which represented a 66%
dividend payout ratio.
During 1996, Edison Sault borrowed $3.2 million under a bank term loan
agreement. The proceeds from this loan were used for payment to the U.S. EPA in
settlement of the Manistique Harbor Project. In addition, ESEG has arranged
bank secured term loan financing for its planned acquisition of the 138 KV
submarine cables described above.
Edison Sault has authority to issue up to $10 million in short-term
obligations. Included in this authority is a line of credit in the amount of
$4 million at the prime rate. In addition, Edison Sault has authority to issue
short-term thrift notes to Michigan residents. Edison Sault's short-term
financing requirements relate primarily to financing customer accounts
receivable, unbilled revenue resulting from cycle billing, and capital
expenditures until permanently financed.
At June 30, 1997, Edison Sault had approximately $7.8 million of unused
bank line of credit and additional energy thrift notes. These two sources of
short-term financing should be sufficient to meet Edison Sault's short-term
capital requirements.
10
ESELCO's shareholders reinvested approximately $207,000 through the
dividend reinvestment plan (DRP) in the first half of 1997. For the six month
period ending June 30, 1996, the DRP provided $406,000 of capital.
Effective March 24, 1997 the Board of Directors of ESELCO, Inc. declared
the suspension of the DRP. The DRP has been suspended pending the potential
acquisition of ESELCO, Inc. by Wisconsin Energy Corporation.
At June 30, 1997, the long-term portion of first mortgage bonds totalled
$6,170,000 which is a decrease of $1,825,000 from the December 31, 1996 amount.
First mortgage bonds are secured by the utility plant of Edison Sault. At
December 31, 1996, there was approximately $10.4 million of unutilized bond
financing capability resulting from plant additions and bond retirements.
Edison Sault also has authority to issue up to $10 million in long-term
energy thrift notes to Michigan residents. At June 30, 1997, the long-term
portion of energy thrift notes outstanding was $5,567,000 which is an increase
of $212,000 over the December 31, 1996 amount.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Notes to Financial Statements in Item 1 Part I
herein. Edison Sault filed an action on February 4, 1997 in the Circuit
Court for the County of Schoolcraft, Michigan against certain insurance
carriers to recover unreimbursed defense costs and expenses associated with
defending this matter of approximately $350,000 and indemnification for its
costs of approximately $3.2 million in settling the matter with the
U.S. EPA and obtaining a release of the property damage claims asserted by
the U.S. EPA. The certainty and magnitude of any insurance recovery is
unknown at this time. On April 28, 1997, Michigan Mutual Insurance Company
filed a counterclaim for approximately $1.7 million for previously paid
defense costs. Legal counsel for Edison Sault believes, based on the
information currently available, that the counterclaim lacks merit.
Item 2. Changes in Securities
(c) On July 31, 1997, ESELCO sold thirty-six shares of ESELCO Common
Stock, par value of $.01 per share, to an existing shareholder of ESELCO in
a private placement pursuant to Section 4(2) of the Securities Act of 1933
and/or Regulation D thereunder. The Common Stock was sold directly by
ESELCO without the use of an underwriter or placement agent. The aggregate
offering price of the Common Stock was $1,373.92.
Item 4. Submission of Matters to a Vote of Security Holders.
At ESELCO's Annual Meeting of Stockholders held on May 6, 1997 the
Board of Directors' nominees listed below were elected as directors, each
for a term expiring in 2000, by the indicated votes and percentages cast
for and withheld with respect to each nominee. There was no solicitation
in opposition to the nominees proposed in the proxy statement and there
were no abstentions or broker non-votes with respect to the election of
directors.
---------------------------------------------------------------------
---------------------------------------------------------------------
Name of Nominee For Withheld
---------------------------------------------------------------------
William R. Gregory 1,259,540 (81%) 10,885 (1%)
---------------------------------------------------------------------
James S. Clinton 1,195,403 (77%) 10,885 (1%)
---------------------------------------------------------------------
---------------------------------------------------------------------
An Amendment to ESELCO's Articles of Incorporation to increase the
number of authorized common shares from 3,000,000 to 9,840,000 shares was
approved by the Shareholders by a vote of 1,046,709 shares FOR and 213,589
shares AGAINST such approval. There were 36,096 abstentions and no broker
non-votes with respect to such matter.
Of the 1,547,345 shares of common stock outstanding and entitled to
vote on the record date of March 20, 1997, 84% of the shares were
represented at the meeting.
Further information regarding these matters, including the name of
each other director whose term of office as a director continued after the
meeting and will expire in 1998 and 1999 is contained in ESELCO's Proxy
Statement dated March 31, 1997 with respect to the Annual Meeting of
Stockholders held on May 6, 1997.
12
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits.
Filed
Exhibit ----------------------
No. Description of Exhibit Herewith By Reference
- ------- -------------------------------------------- -------- ------------
(2) Amended and Restated Agreement and Plan of
Reorganization by and among Wisconsin Energy
Corporation and ESELCO, Inc. and ESL Acquisition, *
Inc., dated as of May 13, 1997, as amended and
restated as of July 11, 1997
(3) (a) Articles of Incorporation as filed on
January 6, 1989 *
(b) Amendment to Articles of Incorporation as
filed on August 7, 1997 *
(c) Bylaws *
(4) Instruments defining the rights of
security holders, including indentures:
(a) Mortgage and Deed of Trust as of March 1,
1952. (1) *
(b) Supplemental Indenture dated as of
February 1, 1957. (1) *
(c) Second Supplemental Indenture dated as of
January 1, 1964. (1) *
(d) Third Supplemental Indenture dated as of
February 1, 1968. (1) *
(e) Fourth Supplemental Indenture dated as of
September 15, 1975. (1) *
(f) Fifth Supplemental Indenture dated as of
October 1, 1986. (2) *
(g) Sixth Supplemental Indenture dated as of
April 1, 1989. (4) *
(h) Seventh Supplemental Indenture dated as of
February 15, 1992. (5) *
(i) Debenture Indenture dated as of August 1,
1973. (1) *
(j) Form of Long-Term Energy Thrift Note. (3) *
(10) (a) Form of Executive Severance Agreement *
(b) 1996 ESELCO, Inc. Restricted Stock Bonus Plan *
(c) ESELCO, Inc. Director's Retirement Plan, as
amended January 1, 1995 *
(d) Edison Sault Electric Company Director's Fee
Deferral Plan, October 1, 1989 *
(e) Edison Sault Electric Company ESELCO Director's
Fee Deferral Plan, January 1, 1986 *
(f) Supplemental Executive Retirement Plan of
Edison Sault Electric Company, as amended as
of August 17, 1995 *
(27) Financial Data Schedule *
13
Key to Exhibits Incorporated by Reference:
1 Filed with the Company's Registration Statement, Form S-16,
No. 2-67191, filed April 2, 1980.
2 Filed with the Company's Form 10-K for 1986, dated March 30, 1987,
File No. 0-1158.
3 Filed with the Company's Registration Statement, Amendment No. 2 to
Form S-3, No. 2-67191, filed February 16, 1988.
4 Filed with the Company's Form 10-Q for June 30, 1989, dated
August 11, 1989, File No. 0-17736.
5 Filed with the Company's Form 10-Q for March 31, 1992, dated May 13,
1992, File No. 0-17736.
Item 6. (b) Reports on Form 8-K
The following reports on Form 8-K were filed during the three
months ended June 30, 1997.
Item Reported Financial Statements Filed Date of Report
------------- -------------------------- --------------
5. Other Events No May 13, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESELCO, INC.
(Registrant)
/s/ William R. Gregory
Date August 11, 1997 ----------------------------------------
WILLIAM R. GREGORY
Its President
/s/ David R. Hubbard
Date August 11, 1997 ----------------------------------------
DAVID R. HUBBARD
Its Vice President-Finance
14