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UNITED STATES
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 March 31, 2001
Commission Registrant; State of Incorporation IRS Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------- ------------------
[LOGO APPEARS HERE]
001-01245 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 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 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 (April 30, 2001):
Common Stock, $10 Par Value 33,289,327 shares outstanding.
Wisconsin Energy Corporation is the sole holder of Wisconsin Electric Power
Company Common Stock.
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WISCONSIN ELECTRIC POWER COMPANY
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FORM 10-Q REPORT FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
Item Page
- ---- ----
Introduction...................................................................................... 2
Part I - Financial Information
------------------------------
1. Financial Statements
Condensed Income Statement...................................................................... 3
Condensed Balance Sheet......................................................................... 4
Condensed Statement of Cash Flows............................................................... 5
Notes to Condensed Financial Statements......................................................... 6
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................... 10
3. Quantitative and Qualitative Disclosures About Market Risk........................................ 17
Part II - Other Information
---------------------------
1. Legal Proceedings................................................................................. 17
4. Submission of Matters to a Vote of Security Holders............................................... 18
6. Exhibits and Reports on Form 8-K.................................................................. 18
Signatures........................................................................................ 19
INTRODUCTION
Wisconsin Electric Power Company ("Wisconsin Electric" or "the Company"), a
wholly-owned subsidiary of Wisconsin Energy Corporation ("Wisconsin Energy"), is
an electric, gas and steam utility with operations in Wisconsin and the Upper
Peninsula of Michigan. The unaudited interim financial statements presented in
this Form 10-Q have been prepared by Wisconsin Electric pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note 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. Wisconsin Electric's financial
statements should be read in conjunction with the financial statements and notes
thereto included in Wisconsin Electric's 2000 Annual Report on Form 10-K.
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED INCOME STATEMENT
(Unaudited)
Three Months Ended March 31
--------------------------------------------
2001 2000
------------------ ------------------
(Millions of Dollars)
Operating Revenues $706.6 $540.8
Operating Expenses
Fuel and purchased power 131.9 105.4
Cost of gas sold 189.7 69.1
Other operation and maintenance 177.9 161.0
Depreciation, decommissioning and amortization 65.5 66.5
Property and revenue taxes 18.3 17.4
------------------ ------------------
Total Operating Expenses 583.3 419.4
------------------ ------------------
Operating Income 123.3 121.4
Other Income and Deductions
Interest income 0.6 2.9
Allowance for other funds used during construction 0.3 0.9
Equity in unconsolidated subsidiary 8.4 -
Other (0.3) (0.3)
------------------ ------------------
Total Other Income and Deductions 9.0 3.5
Financing Costs
Interest expense 29.2 29.2
Allowance for borrowed funds used during construction (0.1) (0.4)
------------------ ------------------
Total Financing Costs 29.1 28.8
------------------ ------------------
Income Before Income Taxes 103.2 96.1
Income Taxes 40.5 37.3
------------------ ------------------
Net Income 62.7 58.8
Preferred Stock Dividend Requirement 0.3 0.3
------------------ ------------------
Earnings Available for Common Stockholder $ 62.4 $ 58.5
=================== ===================
The accompanying notes are an integral part of these financial statements.
3
WISCONSIN ELECTRIC POWER COMPANY
CONDENSED BALANCE SHEET
(Unaudited)
March 31, 2001 December 31, 2000
-------------- -----------------
(Millions of Dollars)
Assets
------
Property, Plant and Equipment
Electric $ 4,930.4 $ 5,300.7
Gas 582.4 578.2
Steam 64.9 64.4
Common 379.3 372.9
Other 7.2 7.3
Accumulated depreciation (3,184.9) (3,339.2)
-------------- -----------------
2,779.3 2,984.3
Construction work in progress 88.9 106.8
Leased facilities, net 120.2 121.7
Nuclear fuel, net 85.5 93.1
-------------- -----------------
Net Property, Plant and Equipment 3,073.9 3,305.9
Investments 874.8 642.2
Current Assets
Cash and cash equivalents 31.5 10.6
Accounts receivable 266.9 232.7
Accrued revenues 109.2 163.0
Materials, supplies and inventories 153.0 197.4
Prepayments and other assets 105.2 105.2
-------------- -----------------
Total Current Assets 665.8 708.9
Deferred Charges and Other Assets 380.4 368.1
-------------- -----------------
Total Assets $ 4,994.9 $ 5,025.1
============== =================
Capitalization and Liabilities
------------------------------
Capitalization
Common equity $ 1,889.0 $ $1,864.8
Preferred stock 30.4 30.4
Long-term debt 1,671.6 1,679.6
-------------- -----------------
Total Capitalization 3,591.0 3,574.8
Current Liabilities
Long-term debt due currently 30.3 28.1
Short-term debt 193.1 257.0
Accounts payable 176.3 213.5
Accrued liabilities 137.1 84.4
Other 70.1 84.2
-------------- -----------------
Total Current Liabilities 606.9 667.2
Deferred Credits and Other Liabilities
Accumulated deferred income taxes 460.7 466.1
Other 336.3 317.0
-------------- -----------------
Total Deferred Credits and Other Liabilities 797.0 783.1
-------------- -----------------
Total Capitalization and Liabilities $ 4,994.9 $ 5,025.1
============== =================
The accompanying notes are an integral part of these financial statements.
4
WISCONSIN ELECTRIC POWER COMPANY
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
--------------------------------------
2001 2000
--------------- ---------------
(Millions of Dollars)
Operating Activities
Net income $ 62.7 $ 58.8
Reconciliation to cash
Depreciation, decommissioning and amortization 69.1 70.2
Nuclear fuel expense amortization 8.4 7.2
Deferred income taxes, net (1.4) (2.5)
Investment tax credit, net (1.1) (1.1)
Allowance for other funds
used during construction (0.3) (0.9)
Change in - Accounts receivable and accrued revenues 19.6 26.0
Inventories 44.4 29.7
Other current assets - 35.1
Accounts payable (37.2) (4.0)
Other current liabilities 38.6 52.1
Other (4.8) (7.3)
--------------- ---------------
Cash Provided by Operating Activities 198.0 263.3
Investing Activities
Capital expenditures (64.6) (87.0)
Allowance for borrowed funds
used during construction (0.1) (0.4)
Nuclear fuel (1.0) (10.6)
Nuclear decommissioning funding (4.4) (4.4)
Other (3.4) (3.6)
--------------- ----------------
Cash Used in Investing Activities (73.5) (106.0)
Financing Activities
Retirement of long-term debt (6.9) (7.5)
Change in short-term debt (63.9) (147.6)
Dividends paid on common stock (32.5) (44.9)
Dividends paid on preferred stock (0.3) (0.3)
--------------- ----------------
Cash Used in Financing Activities (103.6) (200.3)
--------------- ---------------
Change in Cash and Cash Equivalents 20.9 (43.0)
Cash and Cash Equivalents at Beginning of Period 10.6 49.9
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 31.5 $ 6.9
=============== ===============
Supplemental Information - Cash Paid (Received) For
Interest (net of amount capitalized) $ 25.3 $ 25.4
Income taxes 8.2 (26.0)
The accompanying notes are an integral part of these financial statements.
5
WISCONSIN ELECTRIC POWER COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
GENERAL INFORMATION
1. The accompanying unaudited financial statements for Wisconsin Electric
Power Company should be read in conjunction with Item 8, Financial
Statements and Supplementary Data, in Wisconsin Electric's 2000 Annual
Report on Form 10-K for the year ended December 31, 2000. In the opinion of
management, all adjustments, normal and recurring in nature, necessary to a
fair statement of the results of operations, cash flows and financial
position of Wisconsin Electric, have been included in the accompanying
income statements, statements of cash flows and balance sheets. The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative, however, of the results which may be expected for the entire
year 2001 because of seasonal and other factors.
2. Certain prior year financial statement amounts have been reclassified to
conform to their current year presentation. These reclassifications had no
effect on net income.
3. On April 26, 2000, Wisconsin Energy Corporation, the parent company of
Wisconsin Electric, acquired WICOR, Inc. ("WICOR") in a business
combination that was accounted for as a purchase. WICOR was a diversified
utility holding company with utility and non-utility energy subsidiaries as
well as pump manufacturing subsidiaries. Following the merger, WICOR and
its subsidiaries, including Wisconsin Gas Company ("Wisconsin Gas"), the
largest natural gas distribution public utility in Wisconsin, became
subsidiaries of Wisconsin Energy. Wisconsin Energy has integrated the gas
operations of Wisconsin Electric and Wisconsin Gas as well as many
corporate support areas and expects to integrate customer billing systems
in the third quarter of 2001. On November 1, 2000, Wisconsin Electric and
Wisconsin Gas filed an application with the PSCW for authority to transfer
Wisconsin Electric's gas utility assets together with certain identified
liabilities associated with such assets (with a net book value of
approximately $365 million as of December 31, 2000) to Wisconsin Gas in a
tax free exchange for shares of Wisconsin Gas which have a fair value equal
to the fair value of the assets transferred and represent at least 80% of
the total combined voting power of all classes of stock that is entitled to
vote. The asset transfer matter is pending.
AMERICAN TRANSMISSION COMPANY
4. Effective January 1, 2001 Wisconsin Electric transferred electric utility
transmission system assets with a net book value of approximately
$222 million to the American Transmission Company LLC ("ATC") in exchange
for approximately a 42% equity interest in this new company.
In April 2001, the ATC issued debt and distributed approximately
$82 million of cash back to Wisconsin Electric as a return of the original
equity contribution. The Company expects to receive additional cash
distributions of $20 million from the ATC prior to the end of 2001 subject
to final audit.
6
The Company anticipates that transfer of its electric transmission assets
to the ATC will be earnings neutral. However, transfer of the assets has
resulted in a change in where earnings are reflected on the income
statement. Prior to the asset transfer, transmission-related costs were
recorded in Other Operation and Maintenance expense, Depreciation expense
and Interest expense. Following transfer of the transmission assets, the
Company reports fees paid to the ATC for electric transmission service in
Other Operation and Maintenance and recognizes an equity interest in the
ATC's reported earnings in Other Income, Net.
RESERVE FOR NON-RECURRING CHARGES
5. In connection with the WICOR merger, Wisconsin Electric recorded certain
reserves in the fourth quarter of 2000 for approximately 170 employees who
were to receive benefits under severance agreements and enhanced retirement
initiatives. As of March 31, 2001, approximately $4.8 million of severance
benefits related to 134 employees remained as an outstanding liability on
the balance sheet.
COMMON EQUITY
6. Comprehensive Income includes all changes in equity during a period except
those resulting from investments by and distributions to owners. Prior to
January 2001, Wisconsin Electric had no items of Other Comprehensive Income
to report. However, as a result of the adoption of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities ("FAS 133") in January 2001 (see Note 7), Wisconsin
Electric had the following total Comprehensive Income during the three
months ended March 31, 2001 and 2000:
Three Months Ended March 31
---------------------------
Comprehensive Income 2001 2000
------------------------------------------- ---- ----
(Millions of Dollars)
Net Income $62.7 $58.8
Other Comprehensive Income (Loss)
Unrealized Losses During the Period
on Derivatives Qualified as Hedges
Unrealized losses due to cumulative
effect of change in accounting principle (5.1) -
Less: Reclassification for gains
included in net income - -
Other unrealized losses (0.6) -
----- -----
Net Unrealized Losses During the Period (5.7) -
----- -----
Other Comprehensive Income (Loss) (5.7) -
----- -----
Total Comprehensive Income $57.0 $58.8
===== =====
DERIVATIVE INSTRUMENTS
7. In June 1998, the Financial Accounting Standards Board issued FAS 133,
which has been amended by FAS 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS 133, an
amendment of FAS 133, and by FAS 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FAS 133.
FAS 133 requires that every derivative instrument be recorded on the
balance sheet as an asset or liability measured at its fair value and that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
7
As of the date of initial adoption, FAS 133 requires that the difference
between the fair value of derivative instruments recorded on the balance
sheet and the previous carrying amount of those derivatives be reported in
Net Income or Accumulated Other Comprehensive Income, as appropriate, as a
cumulative effect of a change in accounting principle.
Wisconsin Electric has a limited number of physical commodity contracts
that are defined as derivatives under FAS 133 and that qualify for cash
flow hedge accounting. These cash flow hedging instruments are electric
forward contracts which are used to manage the supply and demand for
electricity. With the adoption of FAS 133 on January 1, 2001, the fair
market values of these derivative instruments have been recorded as assets
and liabilities on the balance sheet and as a cumulative effect of a change
in accounting principle in Accumulated Other Comprehensive Income in
accordance with the transition provisions of FAS 133. The impact of this
transition as of January 1, 2001 was a $5.1 million reduction in
Accumulated Other Comprehensive Income, which will be reclassified into
earnings within the twelve months between January 1, 2001 and December 31,
2001.
Future changes in the fair market values of these cash flow hedging
instruments, to the extent that the hedges are effective at mitigating the
underlying commodity risk, will be recorded in Accumulated Other
Comprehensive Income. At the date the underlying transaction occurs, the
amounts in Accumulated Other Comprehensive Income will be reported in
earnings. The ineffective portion of the derivative's change in fair value
will be recognized in earnings immediately.
For the period ended March 31, 2001, the amount of hedge ineffectiveness
was immaterial. Wisconsin Electric did not exclude any components of
derivative gains or losses from the assessment of hedge effectiveness and
there were no reclassifications into earnings as a result of the
discontinuance of hedges. As of March 31, 2001, the maximum length of time
over which Wisconsin Electric is hedging its exposure to the variability in
future cash flows forecasted transactions is nine months, and Wisconsin
Electric estimates that losses of $0.6 million will be reclassified from
Accumulated Other Comprehensive Income into earnings within the twelve
months between April 1, 2001 and March 31, 2002 as the hedged transactions
affect earnings.
The Company believes that its electric capacity contracts qualify for and
have been designated as normal under the normal purchase and sale exception
of FAS 133 and, therefore, are not derivative instruments. The Financial
Accounting Standards Board is currently reviewing whether to allow electric
capacity option contracts to qualify for the normal purchase and sale
exception. The Financial Accounting Standards Board's final conclusion may
impact the Company's ongoing application of FAS 133 related to its electric
capacity contracts.
8
SEGMENT INFORMATION
8. Summarized financial information concerning Wisconsin Electric's reportable
operating segments for the three month periods ended March 31, 2001 and
2000 is shown in the following table.
Reportable Operating Segments
Wisconsin Electric --------------------------------
Power Company Electric Gas Steam Total
------------------- -------- --------- -------- -----
(Millions of Dollars)
Three Months Ended
------------------
March 31, 2001
Operating Revenues (a) $448.8 $248.7 $9.1 $706.6
Operating Income 89.5 30.1 3.7 123.3
March 31, 2000
Operating Revenues (a) $414.9 $118.5 $7.4 $540.8
Operating Income 97.4 21.8 2.2 121.4
(a) Wisconsin Electric accounts for intersegment revenues at tariff rates
established by the Public Service Commission of Wisconsin.
Intersegment revenues are not material.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Wisconsin Electric Power Company, a wholly-owned subsidiary of Wisconsin Energy
Corporation, is an energy utility with electric, natural gas and steam 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."
RESULTS OF OPERATIONS - 2001 FIRST QUARTER
EARNINGS
Earnings increased by $3.9 million between the comparative periods primarily due
to higher electric utility gross margin (electric utility operating revenues
less fuel and purchased power expenses) and to higher gas utility gross margin
(gas utility operating revenues less cost of gas sold) during the first quarter
of 2001. The Company attributes the increases in electric and gas utility gross
margins primarily to rate increases that were in effect during the first quarter
of 2001 but not during the first quarter of 2000, and, to a lesser extent, to
cooler winter weather during the first quarter of 2001.
Electric Utility Revenues, Gross Margins and Sales
The following table compares Wisconsin Electric's total electric utility
operating revenues and gross margin during the first quarter of 2001 with
similar information for the first quarter of 2000.
Three Months Ended March 31
-----------------------------------
Electric Utility Operations 2001 2000 % Change
---------------------------- ---- ---- --------
(Millions of Dollars)
Electric Operating Revenues $448.8 $414.9 8.2%
Fuel and Purchased Power
Fuel 79.5 73.4 8.3%
Purchased Power 50.5 30.1 67.8%
------ ------
Total Fuel and Purchased Power 130.0 103.5 25.6%
------ ------
Gross Margin $318.8 $311.4 2.4%
====== ======
During the first quarter of 2001, total electric utility operating revenues
increased by $33.9 million or 8.2% when compared with the first quarter of 2000.
Wisconsin Electric estimates that approximately $29.5 million of this growth was
due to electric retail rate increases that became effective in April 2000, in
August 2000 and on January 1, 2001 and to an interim rate increase that became
effective in February 2001 under Wisconsin's fuel cost adjustment procedure. In
May 2001, the interim fuel rates were increased again by a final order. For
additional information, see Item 1, Legal Proceedings - "Utility Rates and
Regulatory Matters," in Part II of this report.
Between the comparative periods, total fuel and purchased power expenses
increased by $26.5 million or 25.6% primarily due to significantly higher
natural gas prices during 2001 and, to a lesser extent, due to higher fixed
demand charges associated with long-term power purchase contracts in effect
during 2001. The higher fuel and purchased power expenses offset much of the
impact on electric revenues of the
10
electric rate increases noted above such that total gross margin on electric
operating revenues increased by $7.4 million or 2.4% during the first quarter of
2001.
Total electric megawatt-hour sales increased by 0.9% during the first quarter of
2001 due to a 5.5% increase in sales to the Empire and Tilden iron ore mines,
Wisconsin Electric's two largest retail customers. Excluding the Empire and
Tilden mines, Wisconsin Energy's total electric megawatt-hour sales grew by 0.5%
between the comparative periods. The following table compares Wisconsin
Electric's electric utility operating revenues and megawatt-hour sales by
customer class during the first quarter of 2001 with similar information for the
first quarter of 2000.
Operating Revenues Megawatt-Hour Sales
Three Months Ended March 31 Three Months Ended March 31
---------------------------------- -------------------------------
Electric Utility Operations 2001 2000 % Change 2001 2000 % Change
- ------------------------------- ---------- ------- -------- -------- -------- --------
(Millions of Dollars) (Thousands)
Customer Class
Residential $ 156.7 $144.8 8.2% 1,882.7 1,850.4 1.7%
Small Commercial/Industrial 139.6 125.0 11.7% 2,095.4 1,986.7 5.5%
Large Commercial/Industrial 115.2 111.5 3.3% 2,785.3 2,813.3 (1.0%)
Other-Retail/Municipal 15.0 13.1 14.5% 401.2 364.0 10.2%
Resale-Utilities 18.6 14.5 28.3% 527.3 606.8 (13.1%)
Other-Operating Revenues 3.7 6.0 (38.3%) - - -
------- ------ -------- -------
Total $ 448.8 $414.9 8.2% 7,691.9 7,621.2 0.9%
======= ====== ======== =======
Weather - Degree Days (a)
Heating (3,306 Normal) 3,395 2,931 15.8%
Cooling (0 Normal) - - -
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
As noted above, total electric megawatt-hour sales grew by 0.5% between the
comparative periods excluding the Empire and Tilden mines. The upward impact on
electric sales of cooler winter weather and customer growth in the residential
and small commercial/industrial customer classes during the first quarter of
2001 was offset to some extent by the downward impact on electric sales of a
weakening economy during the first quarter of 2001. As measured by heating
degree days, the first quarter of 2001 was 15.8% cooler than the first quarter
of 2000 and 2.7% cooler than normal, increasing electric sales to
weather-sensitive customers in the residential and small commercial/industrial
customer classes. However, sales to large commercial/industrial customers
excluding the Empire and Tilden mines decreased by 2.7% during the first quarter
of 2001, reflecting the softening economy.
Gas Utility Revenues, Gross Margins and Therm Deliveries
The following table compares Wisconsin Electric's gas utility operating revenues
and gross margin during the first quarters of 2001 and 2000. Gross margin is a
better performance indicator than revenues because changes in the cost of gas
sold flow through to revenue under the gas cost recovery mechanism that does not
impact gross margin.
11
Three Months Ended March 31
-------------------------------------
Gas Utility Operations 2001 2000 % Change
---------------------------- ------- ------ --------
(Millions of Dollars)
Gas Operating Revenues $248.7 $118.5 109.9%
Cost of Gas Sold 189.7 69.1 174.5%
------ ------ -----
Gross Margin $59.0 $49.4 19.4%
====== ====== =====
Gross margin on gas utility operating revenues increased by $9.6 million or
19.4% during the first quarter of 2001 when compared with the first quarter of
2000. Wisconsin Electric attributes most of this increase to higher therm
deliveries to weather sensitive customers as a result of cooler winter weather
during the first quarter of 2001, and, to a lesser extent, to retail gas rate
increases that became effective in August 2000.
Significantly higher prices for natural gas since the first quarter of 2000
primarily drove a 109.9% increase in gas utility operating revenues and a 174.5%
increase in the cost of gas sold during the first quarter of 2001. The cost of
natural gas rose approximately 86% between the first quarter of 2000 and the
first quarter of 2001, affecting Wisconsin Electric's gas as well as electric
utility operations. Based upon March closing prices for natural gas futures on
the New York Mercantile Exchange, the cost of gas increased from $2.900 per
decatherm in April 2000 to $5.384 per decatherm in April 2001. As noted above,
such gas cost increases do not affect the margin earned on each therm of gas
delivered as a result of the Company's gas cost recovery mechanism. However,
higher gas prices can adversely affect the Company's therm deliveries to the
extent that customers reduce consumption through lower thermostat settings or
through fuel switching.
The following table compares Wisconsin Electric's gas utility operating revenues
and natural gas therm deliveries by customer class during the first quarter of
2001 with similar information for the first quarter of 2000.
Operating Revenues Therm Deliveries
Three Months Ended March 31 Three Months Ended March 31
--------------------------------- ---------------------------------
Gas Utility Operations 2001 2000 % Change 2001 2000 % Change
-------------------------- ------ ------ -------- ------ ------ --------
(Millions of Dollars) (Millions)
Customer Class
Residential $164.2 $78.2 110.0% 165.7 139.6 18.7%
Commercial/Industrial 86.1 41.7 106.5% 91.7 85.5 7.3%
Interruptible 2.9 1.4 107.1% 3.8 4.3 (11.6%)
------ ------- ------ ------
Total Retail Gas Sales 253.2 121.3 108.7% 261.2 229.4 13.9%
Transported Customer-Owned Gas 4.9 5.3 (7.5%) 93.0 109.2 (14.8%)
Transported - Interdepartmental 0.3 0.4 (25.0%) 3.2 8.1 (60.5%)
Other-Operating Revenues (9.7) (8.5) (14.1%) - - -
------ ------- ------ ------
Total Operating Revenues $248.7 $118.5 109.9% 357.4 346.7 3.1%
====== ======= ====== ======
Weather - Degree Days (a)
Heating (3,306 Normal) 3,395 2,931 15.8%
(a) As measured at Mitchell International Airport in Milwaukee, Wisconsin.
Normal degree days are based upon a twenty-year moving average.
Total therm deliveries of natural gas increased by 3.1% during the first quarter
of 2001 primarily due to a weather-related 18.7% increase in deliveries to
higher-margin residential customers, who tend to be more weather sensitive than
other customer classes. As noted above, the first quarter of 2001 was 15.8%
cooler than the first quarter of 2000 and 2.7% cooler than normal. During the
first quarter of 2001,
12
however, residential therm deliveries were lower than anticipated, reflecting
the adverse effects of significantly higher gas prices. Deliveries to the
interruptible and transportation customer classes decreased during the first
quarter of 2001 in large part due to fuel switching and to a weakening economy
during the first quarter of 2001.
Other Items
Other Operation and Maintenance Expenses: Other operation and maintenance
expenses increased by $16.9 million or 10.5% during the first quarter of 2001
when compared with the first quarter of 2000. The most significant changes in
other operation and maintenance expenses include $3.7 million of higher customer
account expenses due in large part to an increase in bad debts and approximately
$11.0 million of higher electric transmission expenses due to a change in how
electric transmission costs are recorded. On January 1, 2001, Wisconsin Electric
transferred all of its electric utility transmission assets to the ATC in
exchange for an equity interest in this new company. The transfer of these
assets is expected to be earnings neutral to the Company. However, because all
costs related to electric transmission operations, including associated
depreciation and financing costs, are now billed to the Company by the ATC, all
of these costs are being reported in other operation and maintenance expenses
rather than in other lines on the income statement. For additional information,
see Note 4 in Item 1, Financial Statements - "Notes to Condensed Financial
Statements," in Part I of this report.
Other Income, Net: Other income, net increased $5.5 million during the first
quarter of 2001 due to recognition of equity in the earnings of the ATC during
the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following summarizes Wisconsin Electric's cash flows during the first three
months of 2001 and 2000:
Three Months Ended March 31
Wisconsin Electric ----------------------------
Power Company 2001 2000
-------------------------- ----------- -----------
(Millions of Dollars)
Cash Provided by (Used in):
Operating Activities $198.0 $263.3
Investing Activities (73.5) (106.0)
Financing Activities (103.6) (200.3)
Operating Activities
Cash provided by operating activities decreased to $198.0 million during the
first three months of 2001 compared with $263.3 million during the same period
in 2000, primarily reflecting (1) an increase in working capital requirements
associated with higher gas costs and with the seasonal nature of gas utility
operations, (2) a $35 million tax refund received in the first quarter of 2000
related to litigation, and (3) a $16 million contribution to the Wisconsin
Energy Foundation in the first quarter of 2001. The Company expects that its
working capital requirements will be reduced during the second quarter of 2001
as it collects its winter heating receivables.
13
Investing Activities
During the first three months of 2001, Wisconsin Electric spent $73.5 million on
investing activities, including capital expenditures of $64.6 million. Due to
the timing of refueling outages at Point Beach Nuclear Plant, the Company spent
$9.6 million less during the first quarter of 2001 on the acquisition of nuclear
fuel compared with the first quarter of 2000.
Financing Activities
During the first three months of 2001, Wisconsin Electric used $103.6 million of
net cash for financing activities including approximately $63.9 million to
reduce short-term debt and $32.5 million for the payment of dividends to
Wisconsin Energy.
CAPITAL RESOURCES AND REQUIREMENTS
Capital Resources
Cash requirements during the remaining three quarters of 2001 are expected to be
met through a combination of internal sources of funds from operations, cash
distributions from the ATC and short-term borrowings. In April 2001, Wisconsin
Electric received approximately $82 million of cash distributions from the ATC
and anticipates receiving an additional $20 million prior to the end of 2001.
The Company has access to outside capital markets and has been able to generate
funds internally and externally to meet its capital requirements. Wisconsin
Electric's ability to attract the necessary financial capital at reasonable
terms is critical to the Company's overall strategic plan. Wisconsin Electric
believes that it has adequate capacity to fund its operations for the
foreseeable future through its borrowing arrangements and internally generated
cash.
On March 31, 2001, Wisconsin Electric had approximately $207 million of
available unused lines of bank credit. The Company has historically used these
lines primarily to support its outstanding commercial paper and other short-term
borrowings.
The following table shows Wisconsin Electric's capitalization structure at
March 31, 2001 and at December 31, 2000:
Capitalization Structure March 31, 2001 December 31, 2000
------------------------ --------------------- ---------------------
(Millions of Dollars)
Common Equity $1,889.0 49.5% $1,864.8 48.3%
Preferred Stock 30.4 0.8% 30.4 0.8%
Long-Term Debt (including
current maturities) 1,701.9 44.6% 1,707.7 44.2%
Short-Term Debt 193.1 5.1% 257.0 6.7%
-------- ------ -------- ------
Total $3,814.4 100.0% $3,859.9 100.0%
======== ====== ======== ======
Access to capital markets at a reasonable cost is determined in large part by
credit quality. The following table summarizes the current ratings of the debt
securities of Wisconsin Electric by Standard & Poors Corporation ("S&P"),
Moody's Investors Service ("Moody's") and Fitch.
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Wisconsin Electric Power Company S&P Moody's Fitch
-------------------------------- --- ------- -----
Commercial Paper A-1+ P-1 F1+
Secured Senior Debt AA- Aa2 AA
Unsecured Debt A+ Aa3 AA-
Preferred Stock A aa3 AA-
S&P's current outlook for Wisconsin Energy and its subsidiaries is negative.
Currently, Fitch's outlook for Wisconsin Electric is stable, and Moody's outlook
for Wisconsin Energy and its subsidiaries is stable.
These ratings provide a significant degree of flexibility in obtaining funds on
competitive terms and reflect the views of the rating agencies. An explanation
of the significance of these ratings may be obtained from each rating agency.
Such ratings are not a recommendation to buy, sell or hold securities, but
rather an indication of creditworthiness. Any rating can be revised upward or
downward or withdrawn at any time by a rating agency if it decides that the
circumstances warrant the change. Each rating should be evaluated independently
of any other rating.
Capital Requirements
Capital requirements during the remainder of 2001 are expected to be principally
for capital expenditures, for long and short-term debt retirements, maturities
and sinking fund requirements and for payments to the Nuclear Decommissioning
Trust Fund for the eventual decommissioning of Point Beach Nuclear Plant.
Wisconsin Electric's total capital expenditure budget for the remainder of 2001
is approximately $332 million.
FACTORS AFFECTING RESULTS OF OPERATIONS
UTILITY RATES AND REGULATORY MATTERS
See Item 1. Legal Proceedings - "Utility Rates and Regulatory Matters" in Part
II of this report for information related to the Company's fuel cost adjustment
procedure.
CAUTIONARY FACTORS
This report and other documents or oral presentations contain or may contain
forward-looking statements made by or on behalf of Wisconsin Electric. Such
statements are based upon management's current expectations and are subject to
risks and uncertainties that could cause 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 Electric's actual results to differ materially from those contemplated
in any forward-looking statements include, among others, the following.
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Operating, Financial and Industry Factors
. Factors affecting utility operations such as unusual weather conditions;
catastrophic weather-related damage; availability of electric generating
facilities; unscheduled generation outages, or unplanned 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 used 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 regulations as well as regulations
from the Wisconsin or Michigan Departments of Natural Resources related to
emissions from fossil-fueled 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.
. 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, investigations and claims, and changes in those matters,
including the final outcome of the Giddings & Lewis, Inc./City of West
Allis lawsuit against Wisconsin Electric.
. Factors affecting the availability or cost of capital such as: changes in
interest rates; the Company's capitalization structure; market perceptions
of the utility industry or the Company; 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.
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. Factors which impede execution of Wisconsin Energy's "Power the Future"
strategy announced in September 2000 and revised in February 2001,
including receipt of necessary state and federal regulatory approvals and
amendment of applicable laws in the state of Wisconsin, and obtaining the
investment capital from outside sources necessary to implement the
strategy.
. Other business or investment considerations that may be disclosed from time
to time in Wisconsin Electric's Securities and Exchange Commission filings
or in other publicly disseminated written documents.
Business Combination Factors
. Unanticipated costs or difficulties related to the integration of the
businesses of Wisconsin Energy and WICOR.
. Unexpected difficulties or delays in realizing anticipated net cost savings
or unanticipated effects of the qualified five-year electric and gas rate
freeze ordered by the Public Service Commission of Wisconsin ("PSCW") as a
condition of approval of the merger.
Wisconsin Electric undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
*****
For certain other information which may impact 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, in Part II of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning Wisconsin Electric's 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 Electric's 2000 Annual Report on Form 10-K.
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 Electric's 2000 Annual Report on Form 10-K.
UTILITY RATES AND REGULATORY MATTERS
Wisconsin Retail Jurisdiction
Fuel Cost Adjustment Procedure: As previously reported, Wisconsin Electric
operates under a fuel cost adjustment clause for its fuel and purchased power
costs associated with the generation and delivery of electricity. On December 8,
2000, Wisconsin Electric submitted an application with the PSCW seeking a
$51.4 million increase in rates on an expedited basis to recover increased costs
of fuel and
17
purchased power in 2001. Wisconsin Electric revised its projected fuel cost
shortfall on January 10, 2001 to reflect updated natural gas cost projections
for 2001. This update resulted in a request for an additional $11.1 million in
2001, bringing the total requested increase to $62.5 million. Hearings on this
matter were held in mid-January 2001. On February 9, 2001, the PSCW issued an
interim order authorizing a $37.8 million increase in rates for 2001 fuel costs.
Hearings on the final phase of the case were held in late March and early April
2001. The PSCW issued a final order on May 3, 2001, effective immediately,
authorizing a total increase in rates of $58.7 million for 2001 fuel costs,
subject to refund. Assuming normal weather for the remainder of the year, the
Company estimates that it will under recover a total of $15 million of fuel
costs as a result of increased fuel and purchased power costs during 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Wisconsin Electric's 2001 Annual Meeting of Stockholders held on April 27,
2001 for which Wisconsin Electric did not solicit proxies, nine incumbent
directors, as listed in Wisconsin Electric's Information Statement dated
March 20, 2001, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibits are filed with or incorporated by reference in this
Form 10-Q report:
Exhibit No.
----------
None
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated as of March 8, 2001 was filed by
Wisconsin Electric on March 15, 2001 to report a change in accountants.
No other reports on Form 8-K were filed by Wisconsin Electric during the
quarter ended March 31, 2001.
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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.
WISCONSIN ELECTRIC POWER COMPANY
-------------------------------------------
(Registrant)
/s/ STEPHEN P. DICKSON
------------------------------------------------
Date: May 14, 2001 Stephen P. Dickson, Controller, Chief Accounting
Officer and duly authorized officer
19